solution 3g to accounting principles hermanson (ch 19)

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Solution 3G to Accounting Principles Hermanson

Exercise 19-1

Indicate how the following data should be reported in a statement of cash flows-

A company paid $120,000 cash for land.

A building was acquired for $240,000 by assuming a mortgage on the building.

Solution to Exercise 19-1

A company paid $120,000 cash for land. This item will be reported in the cash flow from investing activities in statement of cash flows. This is a cash outflow.

A building was acquired for $240,000 by assuming a mortgage on the building. This item will not be reported in statement of cash flows. This item will be reported in a separate schedule named schedule of noncash financing & investing activities.



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The situation will be clear from the journal entry

New auto is traded for an old one. New auto will be debited & old one be credited.

Accumulated depreciation- Auto should be dissolved as depreciation is nil for new auto.

Loss should be debited & the difference in values now should be credited as cash

Now, place the amounts in the relevant locations of

Exercise 19-2

The following data are from the automobile & the accumulated depreciation- Automobile accounts of a certain company.

Automobile

Date Debit Credit Balance

Jan.1 Balance brought forward

8,000

Jul. 1 Traded for new auto 8,000 -0-

New auto 8,800 8,800 Accumulated Depreciation- Automobile

Jan.1 Balance brought forward

6,000

Jul. 1 One-half

year’s depreciation

1,000 7,000

Auto traded 7,000 -0-

Dec.31 One-half

year’s depreciation

1,100 1,100

The old auto was traded for a new one, with the difference in values paid in cash. The income statement for the year shows a loss on the exchange of autos of $600.

Indicate the dollar amounts, the descriptions of these amounts, & their exact locations in a statement of cash flows- indirect method.


The situation will be clear from the journal entry:

New auto 8,800 Accumulated Depreciation- Auto 7,000 Loss on disposal of plant assets 600

Old auto 8,000 Cash 8,400

Partial statement of Cash flows Indirect Method

Cash flow from operating activities: Net income

Adjustments: Loss on disposal of old auto

Cash flow from investing activities: Purchase of new auto

***

600

(8,400)



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Cash spent to purchase plant assets = Current balance – Previous balance+ Accumulated depreciation

Exercise 19-3

Following are balance sheet data for Batroos Corporation-

1995 1994 Cash 23,500 13,000 Accounts receivable, net

70,500 67,000

Merchandise Inventory

41,500 51,000

Prepaid expenses 4,500 5,500 Plant assets (net of accumulated depreciation)

117,500 115,000

Accounts payable 61,000 63,500 Accrued liabilities payable

20,000 20,500

Capital stock 150,000 150,000 Retained earnings 26,5000 17,500

Assume that the depreciation recorded in 1995 was $7,500. Compute the cash spent to purchase plant assets, assuming no assets were sold or scrapped in 1995.


Cash spent to purchase plant assets

=Current balance – Previous balance+ Accumulated depreciation

= 117,500 – 115,000 + 7,500

= 10,000



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Exercise 19-4

1995 1994 Cash 23,500 13,000 Accounts receivable, net

70,500 67,000


41,500 51,000

Prepaid expenses 4,500 5,500 Plant assets (net of accumulated depreciation)

117,500 115,000

Accounts payable 61,000 63,500 Accrued liabilities payable

20,000 20,500

Capital stock 150,000 150,000 Retained earnings 26,5000 17,500

Use the data in Exercise 19-3, assume the net income for 1995 was $12,000; depreciation was $7,500, & dividends declared & paid were $3,000. Prepare a statement of cash flows – indirect method.


Batroos Corporation Statement of cash flows – Indirect Method

For the year ended December 31, 1995

Particulars Amount Amount Cash flows from operating activities Net income 12,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense 7,500 Increase in accounts receivable (70,500 – 67,000) (3,500) Decrease in merchandise inventory (51,000 – 41,500) 9,500 Decrease in prepaid expense (5,500 – 4,500) 1,000 Decrease in accounts payable (63,500 – 61,000)

(2,500)

Decrease in accrued liabilities payable (20,500 – 20,000) (500) Net cash provided by operating activities 23,500 Cash flows from investing activities Purchase of plant assets (117,500 – 115,000) (2,500) Cash flows from financing activities Dividends paid 3000 Net increase in cash 24,000



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Cash paid for merchandise = Cost of goods sold – Decrease in inventory – increase in AccountsPayable

Exercise 19-5

Cost of goods sold in the income statement for the year ended 1993 was $314,000. The balances in Merchandise Inventory and accounts payable were:

January 1, December 31, 1993 1993

Merchandise Inventory 160,000 170,000 Accounts Payable 44,000 36,000

Calculate the amount of cash paid for merchandise in 1993.


Cash paid for merchandise in 1993 = Cost of goods sold – Decrease in inventory – increase in Accounts Payable = $314,000 - $10,000 - $8,000 = $296,000



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To prepare “Cash flow from operating activities” section of an income statement (indirect method)

Write Net income

State the adjustments to reconcile net income to net cash provided by operating activities

Sum up & calculate Net cash provided by operating activities

Exercise 19-6

The income statement of a company shows net income of $75,000; Merchandise inventory on January 1 was $76,500 and on December 31 was $94,500; Accounts payable for merchandise purchases were $57,000 on January 1 and $63,000 on December 31.

Compute the cash flows from operating activities under the indirect method.


Partial statement of Cash flows- Indirect Method


Adjustments: Increase in Merchandise inventory (94,500 – 76,500) Increase in Accounts Payable (63,000 – 57,000)

Net cash provided by operating activities

75,000

(18,000)

6,000

63,000



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To prepare “Cash flow from operating activities” section of an income statement (indirect method)

Write Net income

State the adjustments to reconcile net income to net cash provided by operating activities

Sum up & calculate Net cash provided by operating activities

Exercise 19-7

The operating expenses and taxes (including $60,000 of depreciation) of a company for a given year were $600,000. Net income was $300,000. Prepaid insurance decreased from $18,000 to $12,000 during the year, while wages payable increased from $24,000 to $36,000 during the year.

Compute the cash flows from operating activities under the indirect method.


Partial statement of Cash flows- Indirect Method


Adjustments: Depreciation Decrease in prepaid insurance (18,000 – 12,000) Increase in wages payable (36,000 – 24,000)


300,000

60,000

6,000

12,000

378,000



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Exercise 19-8

Dividends payable increased by $6,000 during a year in which total dividends declared were $120,000.

What amount appears for dividends paid in the statement of cash flows?


Dividends payable increased by $6,000.

That means, $6,000 of the current year’s dividends are not paid.

So, dividend paid = $120,000 - $6,000 = $114,000



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Exercise 19-9

Fill in the following chart, showing how increases & decreases in these accounts affect the conversion of accrual basis income to cash basis income.

Add Deduct

Accounts Receivable Merchandise Inventory Prepaid Expenses Accounts Payable Accrued liabilities Payable


Add Deduct Accounts Receivable Decrease Increase Merchandise Inventory Decrease Increase Prepaid Expenses Decrease Increase Accounts Payable Increase Decrease Accrued Liabilities Payable Increase Decrease



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To prepare a working paper to convert Income statement from accrual basis to cash basis

Write down the accounts in accrual basis first

Then make necessary adjustments (add or deduct) for increase or decrease of different accounts

Compute & write down the accounts in cash basis



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To prepare a working paper for statement of cash flows

Horizontally Write down-

the particulars previous year’s balances debit-credit analysis for this

year this year’s balances (adjusted)

Vertically Write down-

The debit accounts The credit accounts Cash flows from operating

activities Cash flows from investing

activities Cash flow from financial

activities Total

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To prepare a statement of cash flows – Indirect method

Write down cash flows from operating activities

Write net income state adjustments to

reconcile net income to net cash provided by operating activities

Compute net cash provided by operating activities

Then, write down cash flows from investing activities & financing activities serially and compute Net increase/decrease in cash



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To prepare a statement of cash flows – Direct method

Write down cash flows from operating activities

Write down revenues such as cash received from customers, interests received etc.

Then, write down various expenses for operating activities

Now, write down cash flows from investing activities & financing activities serially and compute Net increase/decrease in cash



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Problem 19-1 A

The income statement and other data of Branson Corporation are given below:

Branson Corporation Income statement

For the year ended December 31, 1994 Sales 700,000 Cost of goods sold 250,000 Gross margin 450,000 Operating expenses (other than depreciation) 120,000 Depreciation expense 40,000 160,000 Net income 290,000

Increase Decrease (1) Accounts receivable 20,000 (2) Merchandise inventory 40,000 (3) Prepaid insurance 16,000 (4) Accounts payable 30,000 (5) Accrued liabilities payable

8,000

(i) Prepare a working paper to calculate cash flows from operating activities under the direct method.

Solution to Problem 19-1 A (i)

Branson Company Working paper to convert Income Statement

From Accrual basis to Cash basis For the year ended December 31, 1994

Particulars Accrual basis Add Deduct

Cash Basis (cash flow from

operating activities)

Sales $700,000 20,000 (1) 680,000 Cost of goods sold 250,000 30,000 (4) 40,000 (2) 240,000

Operating expenses 120,000 16,000 (3) 8,000 (5) 128,000

Depreciation expenses 40,000 40,000* -

410,000 368,000 Net income $290,000 312,000

(1) Increase in accounts receivable (2) Decrease in Merchandise inventory (3) Increase in prepaid insurance (4) Decrease in Accounts payable (5) Increase in accrued liabilities payable



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Problem 19-1 A

Branson Company Working paper to convert Income Statement


Particulars Accrual basis Add Deduct Cash Basis

(cash flow from operating activities)

Sales $700,000 20,000 680,000 Cost of goods sold

250,000 30,000 40,000 240,000

Operating expenses

120,000 16,000 8,000 128,000

Depreciation expenses

40,000 40,000 -

410,000 368,000 Net income $290,000 312,000

(ii) Prepare the cash flows from operating activities section of the statement of cash flows under the direct method.

Solution to Problem 19-1 A (ii)

Branscom Corporation Partial Statement of Cash Flows – Direct Method


Particulars Amount Amount

Cash flows from operating activities Cash received from customers 680,000 Cash paid for merchandise (240,000) Operating expenses paid (128,000)

Net cash provided by operating activities 312,000



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Problem 19-1 A

Net income 290,000 Depreciation expense 40,000

Increase Decrease Accounts receivable 20,000 Merchandise inventory 40,000 Prepaid insurance 16,000 Accounts payable 30,000 Accrued liabilities payable 8,000

(iii) Prove that the same cash flows amount will be obtained under the indirect method by preparing the cash flows from operating activities section of the statement of cash flows under the indirect method. you need not prepare a working paper.

Solution to Problem 19-1 A (iii)

Branscom Corporation Partial Statement of Cash Flows – Indirect Method


Particulars Amount Amount Cash flow from operating activities Net income 290,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense 40,000 Increase in accounts receivable (20,000) Decrease in merchandise inventory 40,000 Increase in prepaid insurance (16,000) Decrease in accounts payable (30,000) Increase in accrued liabilities payable

8,000


312,000

Same as of direct method (see ii)

(Proved)



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Problem 19-2 A

Dalton Corporation Comparative balance sheet December 31, 1995 & 1994

1995 1994 Assets Cash 112,280 56,000 Accounts receivable, net 160,200 158,000 Supplies on hand 6,000 6,800 Prepaid rent 2,4000 3,200 Land 720,000 800,000 Equipment 480,000 380,000 Accumulated depreciation- equipment

(200,000) (180,000)

Total assets 1,280,000 1,224,000 Liabilities & Stockholder’s equity Accounts payable 20,880 120,800 Accrued liabilities payable 36,000 30,000 Bonds payable 10%, due 2001 400,000 400,000 Common stock ($20 par) 520,000 440,000 Paid in capital in excess of par 60,000 - Retained earnings 244,000 233,200 Total liabilities & stockholders’ equity

1280,880 1,224,000

Additional data: 1. A land was sold for a gain of $8,000. 2. No equipment was sold. Additional equipment waspurchased for cash. 3. Stock was issued for cash. 4. Dividends declared & paid during 1995 totaled $142,000

Prepare a statement of cash flows under the indirect method. Try to do so without preparing a working paper.

Solution to Problem 19-2 A

Dalton Corporation Statement of cash flows


Particulars Amount Amount Cash flows from operating activities Net income* ( 244,000 + 142,000 – 233,200) 152,800 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense (200,000 – 180,000) 20,000 Increase in accounts receivable (160,200 – 158,00) 2,200 Decrease in supplies (6,800 – 6,000) 800 Decrease in prepaid rent (3,200 -2,400) 800 Gain on sale of land (8,000) Decrease in accounts payable (120,800 – 20,800) (99,200) Increase in accrued liabilities payable (36,000 – 30,000)

6,000

Net cash provided by operating activities 70,280 Cash flows from investing activities Proceeds from sale of land (800,000 – 720,000 + 8,000)

88,000

Purchase of Equipment (480,000 – 380,000) (100,000) Net cash used by investing ativities (12,000) Cash flow from financing activities Proceeds from issuing common stock 140,000 Dividends paid (142,000) Net cash provided by financing activities (2,000) Net increase (decrease) in cash 56,280

*Calculation of Net income= Retained earnings of 1995 + dividend paid in 1995 – Retained earnings of 1994 = 244,000 + 142,00 – 233,200 = 152,800




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Problem 19-3 A

Dodson Corporation Comparative balance sheet December 31, 1995 & 1994

1995 1994 Assets Cash 90,000 120,000 Accounts receivable, net 236,000 240,000 Merchandise Inventory 700,000 480,000 Equipment 1,650,000 1,260,000 Accumulated depreciation- equipment

(480,000) (420,000)

Investments 300,000 60,000 Total assets 2,496,000 1,740,000 Liabilities & Stockholder’s equity Accounts payable 87,000 75,000 Accrued liabilities payable 9,000 15,000 Capital stock- common-($40 par) 1,500,000 1,200,000 Paid in capital in excess of par 600,000 300,000 Retained earnings 300,000 150,000 Total liabilities & stockholders’ equity

2,496,000 1,740,000

Additional data: 1. Net income was $270,000 for the year. 2. Fully depreciated equipment costing $60,000 was sold for $15,000 & equipment costing $450,000 was purchased for cash. 3. Depreciation expense for the year was $120,000. 4. Investments were purchased, $240,000. 5. Additional 7,500 shares of common stock were issued for cash at $80 per share. 6. Cash dividends of $120,000 were declared & paid.

i) Prepare a working paper for a statement of cash flows.


Particulars Accont Balance

31/12/1994

Analysis of transaction Account Balance

31/12/1995 Debit Credit

Debits Cash 120,000 30,000 90,000 Accounts Receivable 240,000 4,000 236,000 Merchandise Inventory 480,000 220,000 700,000 Equipment 1,260,000 450,000 60,000 1,650,000 Investments 60,000 240,000 300,000 Total 2,160,000 2,976,000

Credits Accumulated Depreciation 420,000 60,000 120,000 480,000 Accounts payable 75,000 12,000 87,000 Accrued liabilities payable 15,000 6,000 9,000 Capital stock – Common 1,200,000 300,000 1,500,000 Paid in capital in excess of Par 300,000 300,000 600,000 Retained Earnings 150,000 120,000 270,000 300,000 Total 2,160,000 1,096,000 1,096,000 5,952,000 Cash flows from operating activities Net income 270,000 Decrease accounts receivable 4,000 Increase in merchandise inventory 220,000 Increase in accounts payable 12,000 Increase in accrued liability 6,000 Depreciation expense 120,000 Gain on sale of equipment 15,000 Cash flows from investing activities Proceeds from sales of equipment 15,000 Purchase of Equipment 450,000 Purchase of Investment 240,000 Cash flows from financing activities Procceds from issuing common stock (7,500 × $80) 600,000 Payment of dividend 120,000 Decrease in cash 30,000 Totals 1,051,000 1,051,000



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Problem 19-3 A

Cash flows from operating activities

Net income

270,000 4,000

Decrease accounts receivable Increase in merchandise inventory

220,000

Increase in accounts payable

12,000

Increase in accrued liability

6,000

Depreciation expense 120,000 Gain on sale of equipment

15,000

Cash flows from investing activities

Proceeds from sales of equipment

15,000

Purchase of Equipment 450,000 Purchase of Investment 240,000 Cash flow from financing

activities Procceds from issuing common stock

600,000

Payment of dividend 120,000 Decrease in cash 30,000 Totals 1,051,00

0 1,051,00

0

ii) Prepare a statement of cash flow (indirect method)

Solution to Problem 19-3 A (iii)

Dodson Corporation Statement of cash flows


Particulars Amount Amount Cash flows from operating activities Net income 270,000 Adjustments to reconcile net income to net

cash provided by operating activities Increase in accounts receivable 4,000 Increase in Merchandise Inventory (220,000) Increase in Accounts Payable 12,000 Decrease in accrued liabilities payable (6,000) Depreciation expense 120,000 Gain on sale of equipment (15,000) Net cash provided by operating activities 165,000 Cash flows from investing activities Proceeds from sale of equipment 15,000 Purchase of Equipment (450,000) Purchase of investment (240,000) Net cash used by investing activities (675,000) Cash flows from financing activities Proceeds from issuing common stock 600,000 Dividends paid (120,000) Net cash provided by financing activities (480,000) Net decrease in cash (30,000)



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Problem 19-4 A

Dalton Corporation Comparative balance sheet December 31, 1995 & 1994

1995 1994 Assets Cash 105,000 84,000 Accounts receivable, net 336,000 168,000 Merchandise inventory 168,000 189,000 Prepaid insurance 31,500 52,500 Investment in stock of affiliated company 378,000 315,000 Buildings 798,000 588,000 Accumulated depreciation- building (126,000) (105,000) Equipment 1,029,000 840,000 Accumulated depreciation- equipment (315,000) (252,000) Total assets $2,404,500 1,879,500 Liabilities & Stockholder’s equity Accounts payable 294,000 189,000 Accrued liabilities payable 42,000 63,000 Five year note payable 210,000 -0- Capital stock ($100 par) 1,680,000 1,470,000 Retained earnings 178,500 157,500 Total liabilities & stockholders’ equity 2,404,500 1,879,500

Additional data: 1. Net income for year ended June 30,1995, was $105,000. 2. Additional shares of stock of the affiliated company wereacquired for cash. 3. No equipment or building retirements occurred duringthe year. 4. Equipment was purchased for cash. 5. The five-year-note was issued to pay for a buildingerected on land leased by the company. 6. Stock was issued at par for cash.

7. Dividends declared & paid were $84,000.

i) Prepare a working paper for a statement of cash flows.


Particulars Accont Balance

31.12.1994

Analysis of transaction Account Balance

31.12.1995 Debit Credit

Debits Cash 84,000 21,000 105,000 Accounts Receivable 168,000 168,000 336,000 Merchandise Inventory 189,000 21,000 168,000 Prepaid expenses 52,500 21,000 31,500 Investment in stock 315,000 63,000 378,000 Buildings 588,000 210,000 798,000 Equipment 840,000 189,000 1,029,000 Total 2,236,500 2,845,500

Credits Accumulated Depreciation - Building 105,000 21,000 126,000 Accumulated Depreciation - Equipment 252,000 63,000 315,000 Accounts payable 189,000 105,000 294,000 Accrued liabilities payable 63,000 21,000 42,000 Note Payable - 210,000 210,000 Capital stock 1,470,000 210,000 1,680,000 Retained Earnings 157,500 84,000 105,000 178,500 Total 4,473,000 756,000 756,000 5,691,000 Cash flows from operating activities

Net income 105,000 Increase accounts receivable 168,000 Decrease in merchandise inventory 21,000 Decrease in prepaid expense 21,000 Increase in accounts payable 105,000 Decrease in accrued liabilities payable 21,000 Depreciation expense 84,000 Cash flows from investing activities

Purchase of Equipment 189,000 Investment in stock 63,000

Cash flow from financing activities Procceds from issuing common stock 210,000 Payment of dividend 84,000 Decrease in cash 21,000

546,000 546,000 Total



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Problem 19-4 A

Particulars Analysis of transaction

Debit Credit Cash flows from operating

activities Net income

105,000

Increase accounts receivable 168,000 Decrease in merchandise inventory

21,000

Decrease in prepaid expense 21,000 Increase in accounts payable 105,000 Decrease in accrued liabilities payable

21,000

Depreciation expense 84,000 Cash flows from investing

activities Purchase of Equipment 189,000 Investment in stock 63,000

Cash flow from financing activities

Procceds from issuing common stock

210,000

Payment of dividend 84,000 Decrease in cash 21,000 Totals 546,000 546,000



FIEBELKORN Corporation Statement of cash flows- Indirect Method


Particulars Amount Amount Cash flows from operating activities Net income 105,000 Adjustments to reconcile net income to net

cash provided by operating activities Increase in accounts receivable (168,000) Increase in merchandise inventory 21,000 Decrease in prepaid expense 21,000 Decrease in accounts payable 105,000 Decrease in accrued liabilities payable (21,000) Depreciation expense 84,000 Net cash provided by operating activities 147,000 Cash flows from investing activities Purchase of Equipment (189,000) Investment in stock (63,000) Net cash used by investing activities (252,000) Cash flows from financing activities Proceeds from issuing common stock 210,000 Dividends paid (84,000) Net cash provided by financing activities 126,000 Net increase in cash 21,000




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Problem 19-5 A

Gutman Corporation Comparative balance sheet December 31, 1995 & 1994

Assets 1995 1994 Current Assets Cash 39,000 52,000 Accounts receivable, net 330,200 254,800 Merchandise Inventory 317,200 291,200 Prepaid Insurance 7,800 10,400 Total Current Assets 694,2000 608,400 Property, Plant & Equipment Land 130,000 78,000 Buildings 520,000 260,000 Accumulated Depreciation – buildings

(65,000) (52,000)

Equipment 598,000 559,000 Accumulated Depreciation - Equipment

(325,000) (260,000)

Total Property, Plant &Equipment

858,000 $585,000

Total Assets $1,552,200 $1,193,400

Gutman Corporation Income statement & statement of retained earnings

For the year ended December 31,1995 Sales, net 2,340,000 Cost of goods sold 1,560,000 Gross margin 780,000 Salaries & wages expense

390,000

Depreciation expense 96,2000 Insurance expense 5,200 Other expenses (including interest)

130,000

Loss on sale of equipment

2,600 624,000

Income before federal income taxes

156,000

Deuct: Federal income taxes

67,600

Net income 88,400 Retained earnings, January 1, 1995

83,200

171,600 Less: Dividends earned & paid

62,400

Retained earnings, December 31, 1995

109,200

Additional Data: 1. Cash of $13,000 & all of the additional capital stock issued during this year were exchanged for land & a building. 2. Equipment having an original cost of $26,000 & on which $18,200 of depreciation was recorded was sold at a loss of $2600. Equipment additions were for cash. Prepare-

i) a working paper for a statement of cash flows. iii) a working paper to convert the income statement to a cash basis.

ii) a statement of cash flows under the indirect method.; a separate schedule of noncash investing & financing activities.iv) a statement of cash flows (direct method)

Problem 19-5 A

The Gutman corporation comparative balance sheets as December 31,1995 & 1994 and the statement of income and retained earnings for 1995 are presented below:

Liabilities & Stockholder’s Equity

1995 1994

Current Liabilities Accounts Payable 244,400 234,000

Federal income taxes payable

93,600 78,000

Salaries & wages payable 10,400 7,800 Accrued liabilities payable

15,600 10,400

Total current liabilities 364,000 330,200 Lomg-term liabilities Bonds Payable 260,000 260,000 Total liabilities 624,000 590,200 Stockholder’s Equity Capital stock- common, $100 par

780,000 520,000

Paid in capital in excess of par

39,000 -

Retained Earnings 109,200 83,200 Total Stockholder’s Equity

928,200 603,200

Total liabilities & stockholders’ equity

1,552,200 $1,193,400



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Assets 1995 1994 Liabilities & Stockholder’s Equity

1995 1994

Current Assets Current Liabilities Cash 39,000 52,000 Accounts Payable 244,400 234,000 Accounts receivable, net

330,200 254,800 Federal income taxes payable

93,600 78,000


317,200 291,200 Salaries & wages payable

10,400 7,800

Prepaid Insurance 7,800 10,400 Accrued liabilities payable

15,600 10,400

Total Current Assets

694,2000 608,400 Total current liabilities

364,000 330,200

Property, Plant & Equipment

Lomg-term liabilities

Land 130,000 78,000 Bonds Payable 260,000 260,000 Buildings 520,000 260,000 Total liabilities 624,000 590,200 Accumulated Depreciation – buildings

(65,000) (52,000) Stockholder’s Equity

Equipment 598,000 559,000 Capital stock- common, $100 par

780,000 520,000

Accumulated Depreciation - Equipment

(325,000) (260,000) Paid in capital in excess of par

39,000 -

Total Property, Plant &Equipment

858,000 $585,000 Retained Earnings 109,200 83,200

Total Assets $1,552,200 $1,193,400 Total Stockholder’s Equity

928,200 603,200

Total liabilities & stockholders’ equity

1,552,200 $1,193,400

Sales, net 2,340,000 Cost of goods sold 1,560,000 Gross margin 780,000 Salaries & wages expense 390,000 Depreciation expense 96,2000 Insurance expense 5,200 Other expenses (including interest) 130,000 Loss on sale of equipment 2,600 624,000 Income before federal income taxes 156,000 Deuct: Federal income taxes 67,600 Net income 88,400 Retained earnings, January 1, 1995 83,200

171,600 Less: Dividends earned & paid 62,400 Retained earnings, December 31, 1995 109,200

1. Cash of $13,000 & all of the additional stock issued during this year were exchanged forland & a building. 2. Equipment having an original cost of $26,000 & on which $18,200 of depreciation was

Solution to Problem 19-5 A (i) Particulars Accont

Balance 31.12.1994

Analysis of transaction

Account Balance

31.12.1995 Debit Credit Debits

Cash 52,000 13,000 39,000

Accounts Receivable 254,800 75,400 330,200 Merchandise Inventory 291,200 26,000 317,200 Prepaid insurance 10,400 2,600 7,800 Land 78,000 52.000 130,000 Buildings 260,000 260,000 520,000 Equipment 559,000 65,000 26,000 598,000 Total 1,505,400 1,942,000

Credits Accumulated Depreciation - Building 52,000 13,000 65,000 Accumulated Depreciation - Equipment 260,000 18,200 83,200 325,000 Accounts payable 234,000 10,400 244,400 Federal income taxes payable 78,000 15,600 93,600 Salaries & wages payable 7,800 2,600 10,400 Accrued liabilities payable 10,400 5,200 15,600 Bonds Payable 260,000 260,000 Capital stock – Common 520,000 260,000 780,000 Paid in capital in excess of par - 39,000 39,000 Retained Earnings 83,200 62,400 88,400 109,200 Total 3,010,800 559,000 559,000 3,559,400 Cash flows from operating activities

Net income 88,400

Increase in accounts receivable 75,400 Increase in merchandise inventory 26,000 Decrease in prepaid insurance 2,600 Increase in accounts payable 10,400 Increase in federal income taxes payable 15,600 Increase in salaries & wages payable 2,600 Decrease in accrued liabilities payable 5,200 Depreciation expense 96,200 Loss from sale of equipment 2,600 Cash flows from investing activities

Proceeds from sale of equipment 5,200 Purchase of equipment 65,000 Purchase of Land & Building 13,000

Cash flow from financing activities Payment of dividend 62,400 Decrease in cash 13,000

otals 241,800 241,800

(i) Prepare a working paper for a statement of cash flow

recorded was sold for at a loss of $2,600. Equipment additions were for cash T



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Problem 19-5 A

Cash flows from operating activities Net income

88,400

Increase in accounts receivable 75,400 Increase in merchandise inventory

26,000

Decrease in prepaid insurance 2,600 Increase in accounts payable 10,400 Increase in federal income taxes payable

15,600

Increase in salaries & wages payable

2,600

Decrease in accrued liabilities payable

5,200

Depreciation expense 96,200 Loss from sale of equipment 2,600 Cash flows from investing activities

Proceeds from sale of equipment

5,200

Purchase of equipment 65,000 Purchase of Land & Building 13,000 Cash flow from financing activities Payment of dividend 62,400 Decrease in cash 13,000 Totals 241,800 241,800



Gutman Corporation Statement of cash flows- Indirect Method


Particulars Amount Amount Cash flows from operating activities Net income 88,400 Adjustments to reconcile net income to net cash provided by operating activities Increase in accounts receivable

(75,400)

Increase in merchandise inventory (26,000) Decrease in prepaid insurance 2,600 Decrease in accounts payable 10,400 Decrease in federal income tax payable 15,600 Increase in salaries & wages payable 2,600 Increase in accrued liabilities payable 5,200 Depreciation expense 96,200 Loss from sale of equipment 2,600 Net cash provided by operating activities 122,200 Cash flows from investing activities Proceeds of sale of Equipment 5,200 Purchase of equipment (6,500) Purchase of land (13,000) Net cash used by investing activities (72,800) Cash flows from financing activities Dividends paid (62,400) Net decrease in cash (13,000)



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Sales, net 2,340,000 Cost of goods sold 1,560,000 Gross margin 780,000 Salaries & wages expense

390,000

Depreciation expense 96,2000 Insurance expense 5,200 Other expenses (including interest)

130,000

Loss on sale of equipment

2,600 624,000

Income before federal income taxes

156,000

Deuct: Federal income taxes

67,600

Net income 88,400 Retained earnings, January 1, 1995

83,200

171,600 Less: Dividends earned & paid

62,400

Retained earnings, December 31, 1995

109,200

Cash flows from operating activities Net income

88,400

Increase in accounts receivable 75,400 Increase in merchandise inventory 26,000 Decrease in prepaid insurance 2,600 Increase in accounts payable 10,400 Increase in federal income taxes payable 15,600 Increase in salaries & wages payable 2,600 Decrease in accrued liabilities payable 5,200 Depreciation expense 96,200 Loss from sale of equipment 2,600

Cash flows from investing activities Proceeds from sale of equipment 5,200

Purchase of equipment 65,000 Purchase of Land & Building 13,000

Cash flow from financing activities Payment of dividend 62,400 Decrease in cash 13,000

(iii) Prepare a working paper to convert the income statement to cash basis.


Gutmann Company Working paper to convert Income Statement


Particulars Accrual basis Add Deduct Cash Basis


Sales 2,340,000 (1) 75,400 2,264,600 Cost of goods sold 1,560,000 (2)26,000 (3) 10,400 1,575,600 Salaries & wages payable 390,000 (4) 2,600 387,400

Depreciation expenses 96,200 96,200 0

Insurance expenses 5,200 (5) 2,600 2,600

Other expenses 106,600 (6) 5,200 101,400 2,142,000 Loss on sale of equipment 2,600 2,600 0

Federal Income tax 67,600 (7) 15,600 52,000

Interest expense 23,400 23,400 2,251,600 2,142,400

Net income 88,400 122,200

(1) Increase in accounts receivable (2) Decrease in Merchandise inventory (3) Increase in accounts payable (4) Increase in salaries & wages (5) Decrease in prepaid insurance (6) Increase in accrued liabilities payable (7) Increase in federal income tax payable



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Problem 19-5 A

Particulars Cash Basis


Sales 2,264,600 Cost of goods sold 1,575,600 Salaries & wages payable 387,400

Depreciation expenses 0

Insurance expenses 2,600

Other expenses 101,400 2,142,000 Loss on sale of equipment 0

Federal Income tax 52,000

Interest expense 23,400 2,142,400

Net income 122,200

iv) Prepare a statement of cash flows (direct method)


Gutman Corporation Statement of cash flows- Direct Method For the year ended December 31, 1995

Particulars Amount Amount Cash flows from operating activities Cash received from customers 2,264,600 Cash paid for merchandise (1,575,000) Salaries & wages paid (387,400) Insurance paid (2,600) Federal income tax paid (52,000) Interest paid (23,400) Other expenses paid (101,400) Net cash provided by operating activities 122,200 Cash flows from investing activities Proceeds of sale of Equipment 5,200 Purchase of equipment (6,500) Purchase of land (13,000) Net cash used by investing activities (72,800) Cash flows from financing activities Dividends paid (62,400) Net decrease in cash (13,000)



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Coming soon…

Solution 3G to

Managerial Accounting Hermanson



solution 3g to accounting principles hermanson (ch 19)

Documents

cash outflow

purchase of new auto

disposal of old auto

journal entry new auto

onehalf years depreciation

disposal of plant assets

balance sheet data

income statement