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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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The following balance sheets and income statement were taken from the records of Rosie-Lee Company:

Chapter 14, Problem 51P, The following balance sheets and income statement were taken from the records of Rosie-Lee Company: , example  1

Chapter 14, Problem 51P, The following balance sheets and income statement were taken from the records of Rosie-Lee Company: , example  2

Additional transactions were as follows:

  1. a. Sold equipment costing $21,600, with accumulated depreciation of $16,200, for $3,600.
  2. b. Issued bonds for $90,000 on December 31.
  3. c. Paid cash dividends of $36,000.
  4. d. Retired mortgage of $108,000 on December 31.

Required:

Prepare a statement of cash flows using a worksheet similar to the one shown in Example 14.8 (p. 804). Use the indirect method to prepare the statement.

To determine

Construct a statement of cash flows with the help of a worksheet.

Explanation

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 PM Company is shown in the table below:

Worksheet: R-L Company
For the year ended June 30, 20X2
Transactions
ParticularsBeginning Balance ($)Debit ($)Credit ($)Ending Balance ($)
Assets:
Cash270,000 (1) 63,000 333,000
Accounts receivable126,000 (2) 18,000 144,000
Investments-(3) 54,000 54,000
Plant and equipment180,000(4) 30,600(5) 21,600189,000
Accumulated depreciation(54,000)(5) 16,200(6) 19,800(57,600)
Land36,000(7) 18,000 54,000
    Total assets558,000  716,400
 
Liabilities and stockholder’s equity:
Accounts payable72,000 (8) 18,00090,000
Mortgage payable108,000(9) 108,000 -
Bonds payable- (10) 90,00090,000
Preferred stock36,000(11) 36,000--
Common stock180,000 (12) 108,000288,000
Retained earnings162,000(13) 36,000(14) 122,400248,400
    Total liabilities and stockholder’s equity252,000  716,400
  
 Debit ($)Credit ($)
Cash flows from operating activities:  
Net income (loss)(14) 122,400 
    Increase in accounts receivable-(2) 18,000
    Increase in accounts payable(8) 18,000 
    Depreciation expense(6) 19,800 
    Loss on sale of equipment(5) 1,800 
Cash flows from investing activities:  
    Sale of equipment(5) 3,600 
    Purchase of equipment (4) 30,600
    Purchase of land (7) 18,000
    Purchase of investments (3) 54,000
Cash flows from financing activities:  
    Retirement of mortgage (9) 108,000
    Retirement of preferred stock (11) 36,000
    Issuance of bonds(10) 90,000 
    Issuance of common stock(12) 108,000 
    Payment of dividends(10) 8,000(13) 36,000
Net increase in cash (1) 63,000

Table (1)

The analysis of transactions is as follows:

(1). Change in cash:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Cash63,000 
      Net increase in cash 63,000
 (Being the change in cash recorded)  

Table (2)

Increase in accrual cash balance by $63,000 from the beginning to the end of the year is recorded.

(2). Change in accounts receivable:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Accounts receivable18,000 
      Operating cash 18,000
 (Being the increase in accounts receivable recorded)  

Table (3)

Increase in accounts receivable by $18,000 is recognized on the income statement but is not collected. This cash inflow should be adjusted in the net income.

(3) Purchase of investments:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Investments54,000 
      Operating cash 54,000
 (Being the purchase value of investments are recorded)  

Table (4)

The purchase value of investments is recorded by debiting the investment account and crediting the operating cash account.

(4) Purchase value of plant and equipment:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Plant and equipment30,6001 
      Operating cash 32,000
 (Being the purchase value of plant and equipment recorded)  

Table (5)

The purchase value of the equipment which is $30,600 is debited and the operating cash account is credited.

(5). Sale value of equipment:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Operating cash1,800 
 Cash from investing activities3,600 
 Accumulated depreciation16,200 
      Plant and equipment 21,600
 (Being the loss on sale of equipment recorded)  

Table (6)

The operating cash flows are increased by $1,800; 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 $3,600. The accumulated depreciation is debited to record the expense. The plant and equipment account is credited to record the original cost of the equipment.

(6). Accumulated depreciation expense:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Operating cash19,8002 
      Accumulated depreciation 19,800
 (Being the accumulated depreciation recorded)  

Table (7)

There is net decrease in accumulated depreciation of $19,800.

(7). Value of land:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Land18,000 
      Operating cash 18,000
 (Being the fair value of land recorded)  

Table (8)

The fair value of the land is recorded by debiting the land account and crediting the operating cash...

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