Chapter 14, Problem 24BEA

During 20X2, Norton Company had the following transactions:

1. a. Cash dividends of $20,000 were paid.
2. b. Equipment was sold for $9,600. It had an original cost of $36,000 and a book value of $18,000. The loss is included in operating expenses.
3. c. Land with a fair market value of $50,000 was acquired by issuing common stock with a par value of $12,000.
4. d. One thousand shares of preferred stock (no par) were sold for $14 per share.

Norton provided the following income statement (for 20X2) and comparative balance sheets:

 Required:

Prepare a worksheet for Norton Company.

To determine

Construct a worksheet for the N Company.

Explanation of Solution

Worksheet:

The chart prepared in a spreadsheet format as a helping tool in accounting is known as worksheet. With the help of worksheet, a cash flow statement can be prepared with less confusion and complexity.

The worksheet for the N Company is shown in the table below:

Worksheet: N Company
At December 31, 20X2
Transactions
Particulars	20X1 ($)	Debit ($)	Credit ($)	20X2 ($)
Assets:
Cash	108,000	(1) 114,000		222,000
Accounts receivable	66,000	(2) 7,600		73,600
Inventory	96,000		(3) 30,000	66,000
Plant and equipment	156,000		(4) 36,000	120,000
Accumulated depreciation	(78,000)	(4) 18,000	(5) 12,000	(72,000)
Land	30,000	(6) 50,000		80,000
Total assets	378,000			489,600
Liabilities and stockholder’s equity:
Accounts payable	48,000		(7) 24,000	72,000
Wages payable	6,000	(8) 2,400		3,600
Bonds payable	36,000	(9) 14,000		22,000
Preferred stock	6,000		(10) 14,000	20,000
Common stock	60,000		(11) 12,000	72,000
Paid-in capital in excess of par	60,000		(11) 38,000	98,000
Retained earnings	162,000	(13) 20,000	(12) 60,000	202,000
Total liabilities and stockholder’s equity	378,000			489,600

Table (1)

The analysis of transactions is as follows:

(1). Change in cash:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Cash	114,000
	Net increase in cash		114,000
	(Being the change in cash recorded)

Table (2)

Increase in accrual cash balance by $114,000 from the beginning to the end of the year is recorded.

(2). Change in accounts receivable:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Accounts receivable	7,600
	Operating cash		7,600
	(Being the increase in accounts receivable recorded)

Table (3)

Increase in accounts receivable by $7,600 is recognized on the income statement but is not collected. This cash inflow should be adjusted in the net income.

(3). Decrease in inventory:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Operating cash	30,000
	Inventory		30,000
	(Being the increase in inventory recorded)

Table (4)

With decrease in inventory by $30,000, the operating cash is increased. The decrease in inventory does not show an outflow of cash.

(4). Sale of equipment:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Operating cash	8,400
	Cash from investing activities	9,600
	Accumulated depreciation	18,000
	Plant and equipment		36,000
	(Being the loss on sale of equipment recorded)

Table (5)

The operating cash flows are increased by $8,400; so, the loss on sale should be added back to the net income for the adjustment. The cash from investing activities records the value at which the equipment is sold which is $9,600. The accumulated depreciation is debited to record the expense. The plant and equipment account is credited to record the original cost of the equipment.

(5). Accumulated depreciation expense:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Operating cash	6,000
	Accumulated depreciation		6,000
	(Being the accumulated depreciation recorded)

Table (6)

There is net decrease in accumulated depreciation of $6,000$\left(\$18,000-\$12,000\right)$.

(6). Land for common stock:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Land	50,000
	Noncash investing activities		50,000
	(Being fair value of land recorded)

Table (7)

Land account is debited with the fair value at which land is acquired. The noncash investing activities is credited with the amount to record the cash inflow by investing activities.

(7). Accounts payable:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Operating cash	24,000
	Accounts payable		24,000
	(Being the increase in accounts payable recorded)

Table (8)

The increase in accounts payable by $24,000 shows that all the purchases were not from cash. The increase in accounts payable should be added back to the net income. The increase in liability is recorded, hence it is credited.

(8). Wages payable:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Wages payable	2,400
	Operating cash		2,400
	(Being the decrease in wages payable recorded)

Table (9)

The decrease in accounts payable shows that the cash outflow is more than the wages expense recognized in the year by $2,400. The decrease in liability is recorded, hence wages payable is debited and operating cash is credited.

(9). Bonds payable:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Bonds payable	14,000
	Cash flow from financing activities		14,000
	(Being the decrease in bonds payable recorded)

Table (10)

The decrease in bonds payable by $14,000 shows a cash outflow from financing activities. With the decrease in bonds payable there is a reduction in debt.

(10). Preferred stock:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Cash flow from financing activities	14,000
	Preferred stock		14,000
	(Being the issuance of preferred stock recorded)

Table (11)

The cash flow from financing activities records an inflow with the issuance of preferred stock.

(11). Land for common stock:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Noncash investing activities	50,000
	Common stock		12,000
	Paid-in capital in excess of par		38,000
	(Being the amount of acquisition of land recorded)

Table (12)

The noncash investing activity is recorded with the fair value of the land. The amount which is obtained by issuing the common stock is credited and the excess amount is credited in the paid-in capital.

(12). Net income:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Operating cash	60,000
	Retained earnings		60,000
	(Being the amount of net income recorded)

Table (13)

The value of net income is recorded in the section of operating cash flows.

(13). Payment of dividends:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Retained earnings	20,000
	Cash flow from financing activities		20,000
	(Being the payment of dividends recorded)

Table (14)

The amount by which payment of dividends is made is debited from the retained earnings. As payment of dividends is a cash outflow as financing activity, cash flow from financing activity is credited.

The final step is the cash flow statement which is prepared from the worksheet. The worksheet derived statement is shown in the table below:

N Company
Statement of Cash Flows
For the year ended December 31, 20X2
Cash flows from operating activities:
	Debit ($)	Credit ($)
Net income	(12) 60,000
Depreciation expense	(5) 12,000
Loss on sale of equipment	(4) 8,400
Decrease in inventory	(3) 30,000
Increase in accounts payable	(7) 24,000
Increase in accounts receivable		(2) 7,600
Decrease in wages payable		(8) 2,400
Cash flows from investing activities:
Sale of equipment	(4) 9,600
Cash flows from financing activities:
Reduction in bonds payable		(9) 14,000
Payment of dividends		(13) 20,000
Issuance of preferred stock	(10) 14,000
Net increase in cash		(1) 114,000
Noncash investing and financing activities:
Land acquired with common stock	(11) 50,000	(6) 50,000

Table (15)