91Ó°ÊÓ

Question: You have completed the field work in connection with your audit of Alexander Corporation for the year ended December 31, 2017. The balance sheet accounts at the beginning and end of the year are shown below.

	Dec 31, 2017	Dec 31, 2016	Increase or (decrease)
Cash	\(277,900	\)298,000	(\(20,100)
Accounts receivable	469,424	353,000	116,424
Inventory	741,700	610,000	131,700
Prepaid expenses	12,000	8,000	4,000
Investment in subsidiary	110,500	0	110,500
Cash surrender value of life insurance	2,304	1,800	504
Machinery	207,000	190,000	17,000
Buildings	535,200	407,900	127,300
Land	52,500	52,500	0
Patents	69,000	64,000	5,000
Copyrights	40,000	50,000	(10,000)
Bond discount and issue costs	4,502	0	4,502
Total	\)2,522,030	\(2,035,200	\)486,830
Income tax payable	\(90,250	\)79,600	\(10,650
Account payable	299,280	280,000	19,280
Dividend payable	70,000	0	70,000
Bond payable – 8%	125,000	0	125,000
Bond payable – 12%	0	100,000	(100,000)
Allowance for doubtful accounts	35,300	40,000	(4,700)
Accumulated depreciation – building	424,000	400,000	24,000
Accumulated depreciation – machinery	173,000	130,000	43,000
Premium on bond payable	0	2,400	(2,400)
Common stock – no par	1,176,200	1,453,200	(277,000)
Paid-in-capital in excess of par – common stock	109,000	0	109,000
Retained earnings – unappropriated	20,000	(450,000)	470,000
Total	\)2,522,030	\(2,035,200	\)486,830

STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 2017
January 1, 2017	Balance (deficit)	(\(450,000)
March 31, 2017	Net income for first quarter of 2017	25,000
April 1, 2017	Transfer from paid-in capital	425,000
	Balance	0
December 31, 2017	Net income for last three quarters of 2017	90,000
	Dividend declared—payable January 21, 2018	(70,000)
	Balance	\)20,000

Your working papers from the audit contain the following information:

1. On April 1, 2017, the existing deficit was written off against paid-in capital created by reducing the stated value of the nopar stock.

2. On November 1, 2017, 29,600 shares of no-par stock were sold for \(257,000. The board of directors voted to regard \)5 per share as stated capital.

3. A patent was purchased for \(15,000.

4. During the year, machinery that had a cost basis of \)16,400 and on which there was accumulated depreciation of \(5,200 was sold for \)9,000. No other plant assets were sold during the year.

5. The 12%, 20-year bonds were dated and issued on January 2, 2005. Interest was payable on June 30 and December 31. They were sold originally at 106. These bonds were redeemed at 100.9 plus accrued interest on March 31, 2017.

6. The 8%, 40-year bonds were dated January 1, 2017, and were sold on March 31 at 97 plus accrued interest. Interest is payable semiannually on June 30 and December 31. Expense of issuance was \(839.

7. Alexander Corporation acquired 70% control in Crimson Company on January 2, 2017, for \)100,000. The income statement of Crimson Company for 2017 shows a net income of \(15,000.

8. Major repairs to buildings of \)7,200 were charged to Accumulated Depreciation—Buildings. 9. Interest paid in 2017 was \(10,500 and income taxes paid were \)34,000.

Instructions

From the information given, prepare a statement of cash flows using the indirect method. A worksheet is not necessary, but the principal computations should be supported by schedules or general ledger accounts. The company uses straight-line amortization for bond interest.

Step by step solution

01

Definition of Cash Flow Statement

A cash flow statement refers to the part of the financial statement that shows the inflow and outflow of cash related to business operations, investing, and financing activities.

02

Cash flow statement using the indirect method

Particular	Amount $	Amount $
Net income $\left(\$90,000+\$25,000\right)$		$115,000
Add/Less: Adjustments to net income
Loss on sale of machinery	2,200
Gain on redemption of bonds	(1,425)
Depreciation of machinery	48,200
Depreciation of building	31,200
Amortization of patent $\left(\$64,000+\$15,000-\$69,000\right)$	10,000
Amortization of copyrights	10,000
Amortization of bond discount	87
Amortization of bond premium	(75)
Equity in earnings of subsidiary $\left(15,000×70\%\right)$	(10,500)	89,687
Add/Less: changes in current assets and liabilities
Increase in accounts receivables net	($121,124)
Increase in inventory	(131,700)
Increase in prepaid expenses	(4,000)
Increase in income tax payable	10,650
Increase in account payable	19,280	($226,894)
Net cash used by operating activities		($22,207)
Cash flow from investing activities
Sale of machinery	9,000
Investment in subsidiary	(100,000)
Additions to building	(127,300)
Major repair to building	(7,200)
Purchase of machinery	(33,400)
Purchase of patent	(15,000)
Increase in cash surrender value of life insurance	(504)
Net cash used by investing activities		($274,404)
Cash flow from financing activities
Redemption of bonds	(100,900)
Sale of bonds less selling expenses	120,411
Sale of stock	257,000
Net cash provided by financing activities		$276,511
Net changes in cash		($20,100)
Add: opening cash balance		$298,000
Ending cash balance		$277,900

Working note:

1. Calculation of gain on bonds redemption

Particular	Amount $
Face value of bonds	$100,000
Unamortized premium	$2,400
Less: Amortization up to 31 March 2017$\left(\frac{\$6,000}{20}×\frac{1}{4}\right)$	(75)
Book value of bonds	$102,325
Less: Redemption	(100,900)
Gain on redemption	$1,425

1. Analysis of machinery and its depreciation:

Particular	Amount $
Balance on 31 Dec 2016	190,000
Disposed machine	(16,400)
	173,600
Less: Balance on 31 Dec 2017	(207,000)
Acquisition using cash	$33,400

Depreciation:

Particular	Amount $
Accumulated dep on 31 Dec 2016	130,000
Depreciation on disposed machine	(5,200)
	124,800
Less: Balance on 31 Dec 2017	(173,000)
Depreciation expenses	$48,200

1. Depreciation of the building:

Particular	Amount $
Accumulated dep on 31 Dec 2016	$400,000
Less: Charge for major repairs	(7,200)
	$392,800
Less: Balance on 31 Dec 2017	(424,000)
Depreciation expenses	$31,200

1. For 8% bonds:

Particular	Amount $
Face amount	$125,000
Less: Cash from issue	(120,411)
Bonds discount	$4,589
Discount amortized$\left(\frac{\$4,589}{\left(40×12\right)-3}×9\right)$	$87

Unlock Step-by-Step Solutions & Ace Your Exams!

• Full Textbook Solutions

  Get detailed explanations and key concepts

• Unlimited Al creation

  Al flashcards, explanations, exams and more...

• Ads-free access

  To over 500 millions flashcards

• Money-back guarantee

  We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91Ó°ÊÓ!