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Question: GROUPWORK (Analysis of Transactions’ Effect on SCF) Each of the following items must be considered in preparing a statement of cash flows for Cruz Fashions Inc. for the year ended December 31, 2017.

1. Fixed assets that had cost \(20,000 6½ years before and were being depreciated on a 10-year basis, with no estimated scrap value, were sold for \)4,750.
2. During the year, goodwill of \(15,000 was considered impaired and was completely written off to expense.
3. During the year, 500 shares of common stock with a stated value of \)25 a share were issued for \(32 a share.
4. The company sustained a net loss for the year of \)2,100. Depreciation amounted to \(2,000 and patent amortization was \)400.
5. Uncollectible accounts receivable in the amount of \(2,000 were written off against Allowance for Doubtful Accounts.
6. Investments (available-for-sale) that cost \)12,000 when purchased 4 years earlier were sold for \(10,600.
7. Bonds payable with a par value of \)24,000 on which there was an unamortized bond premium of $2,000 were redeemed at 101.

Instructions

For each item, state where it is to be shown in the statement and then how you would present the necessary information, including the amount. Consider each item to be independent of the others. Assume that correct entry were made for all transactions as they took place.

Step by step solution

01

Definition of Statement of Cash Flow

The schedule prepared by the business entity for providing a summary of all the transactions, including cash payments and receipts, is known as the statement of cash flow.

02

Sale of fixed asset

Particular	Amount $	Amount $
Sales price		$4,750
Less: Book value
Cost	$20,000
Less: Accumulated depreciation for 6.5 years	(13,000)	(7,000)
(Loss)/Gain on sale of fixed assets		($2,250)

• The cash from the sale will be added to the investing section.

The loss on sale will be added in the adjustment to the net income under the operating section

03

Impairment of goodwill

• Impairment of goodwill are non-cash expenses; therefore, $15,000 will be added in the adjustments to the net income under the operating section.

04

Issue of shares

The cash inflow from the issue of the shares will be added to the section on financing activities. $16,000 will be added to the financing section.

05

Depreciation and patent amortization

Firstly, the net loss of $2,100 will be reported in the statement of cash flow, and then the depreciation expenses of $2,000 and patent amortization of $400 will be added to it, which will give cash flow from the operation of $3,000.

06

Writing off uncollectible accounts against the allowance for doubtful accounts

This transaction will not affect the cash position of the business entity. Therefore, it will not be reported in the statement of cash flow.

07

Sale of investment

$10,600 will be added in the investing section as the sale of investment and a loss of $1,400 will be added in the operating activities section of the statement of cash flow.

08

Redemption of bonds

The retirement of bonds will be deducted $24,000 from the financing section of the cash flow statement. And the gain of $2,260 will be deducted from the cash flow from operation.

$$\begin{gathered} Gainonredemption=\left(\frac{Parvalue+Unamortizedbondpremium}{100}×Redeemedvalueperbond\right)-Parvalue \\ =\left(\frac{\$24,000+\$2,000}{\$100}×\$101\right)-\$24,000 \\ =\$2,260 \end{gathered}$$

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