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Managerial Accounting: The Corners...

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

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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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The following balance sheets were taken from the records of Blalock Company:

Chapter 14, Problem 57P, The following balance sheets were taken from the records of Blalock Company: Additional transactions

 Additional transactions were as follows:

  1. a. Sold equipment costing $12,000, with accumulated depreciation of $9,000, for $2,000.
  2. b. Retired bonds at a price of $60,000 on December 31.
  3. c. Earned net income for the year of $68,000; paid cash dividends of $20,000.

 Required:

 Prepare a statement of cash flows using the worksheet approach. 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 B Corporation is shown in the table below:

Worksheet: B Company
For the year ending December 31
Transactions
ParticularsBeginning Balance ($)Debit ($)Credit ($)Ending Balance ($)
Assets:
Cash150,000(1) 35,000 185,000
Accounts receivable70,000(2) 10,0001(2) 12,00080,000
Investments-(3) 30,000 30,000
Plant and equipment100,000(4) 17,000(5) 12,000105,000
Accumulated depreciation(30,000)(5) 9,000(6) 11,0002(32,000)
Land20,000(7) 10,000 30,000
    Total assets310,000  398,000
 
Liabilities and stockholder’s equity:
Accounts payable40,000 (8) 10,000350,000
Bonds payable60,000(9) 60,000 -
Mortgage payable- (10) 50,00050,000
Preferred stock20,000(11) 20,000 -
Common stock100,000 (12) 60,0007160,000
Retained earnings90,000(13) 20,000(14) 68,000138,000
    Total liabilities and stockholder’s equity310,000  398,000
  
 Debit ($)Credit ($)
Cash flows from operating activities:  
Net income (loss)(14) 68,000 
    Depreciation expense(6) 11,000 
    Loss on sale of equipment(5) 1,0004 
    Increase in accounts receivable (2) 10,000
    Increase in accounts payable(8) 10,000 
Cash flows from investing activities:  
    Sale of equipment(5) 2,000 
    Purchase of equipment (4) 17,0005
    Purchase of land (7) 10,0006
    Purchase of investments (3) 30,000
Cash flows from financing activities:  
    Retirement of bonds (9) 60,000
    Retirement of preferred stock (11) 20,000
    Receipt of mortgage(10) 50,000 
    Issuance of common stock(12) 60,000 
    Payment of dividends (13) 20,000
Net increase in cash (1) 35,000

Table (1)

The analysis of transactions is as follows:

(1). Change in cash:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Cash35,000 
      Net increase in cash 35,000
 (Being the change in cash recorded)  

Table (2)

Increase in accrual cash balance by $35,000 from the beginning to the end of the year is recorded.

(2). Change in accounts receivable:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Accounts receivable10,000 
      Operating cash 10,000
 (Being the increase in accounts receivable recorded)  

Table (3)

Increase in accounts receivable by $10,000 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

($)

 Investments30,000 
      Operating cash 30,000
 (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 equipment17,000 
      Operating cash 17,000
 (Being the purchase value of plant and equipment recorded)  

Table (5)

The purchase value of the equipment which is $17,000 is debited and the operating cash account is credited.

(5). Loss on sale of equipment:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Cash from investing activities2,000 
 Accumulated depreciation9,000 
 Loss on sale of equipment1,000 
      Plant and equipment 12,000
 (Being the loss on sale of equipment recorded)  

Table (6)

The cash from investing activities records the value at which the equipment is sold which is $2,000. The accumulated depreciation is debited to record the expense. The plant and equipment account is credited to record the original cost of the equipment. The loss value on the sale of equipment is debited.

(6). Accumulated depreciation expense:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Depreciation expense11,0001 
      Accumulated depreciation 11,000
 (Being the accumulated depreciation recorded)  

Table (7)

The accumulated depreciation of $11,000 is credited to record the depreciation expense.

(7). Value of land:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Land10,000 
      Operating cash 10,000
 (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.

(8). Accounts payable:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Operating cash10,000 
      Accounts payable 10,000
 (Being the increase in accounts payable recorded)  

Table (9)

The increase in accounts payable by $10,000 shows that all the purchases were not from cash. The increase in accounts payable should be deducted from the net income. The increase in liability is recorded, hence it is credited.

(9). Bonds payable:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Bonds payable60,000 
      Operating cash 60,000
 (Being the decrease in bonds payable recorded)  

Table (10)

The decrease in bonds payable shows that the cash inflow is less than the expense recognized in the year by $60,000. The decrease in liability is recorded, hence bonds payable is debited and operating cash is credited.

(10). Mortgages payable:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Operating cash50,000 
      Mortgages payable 50,000
 (Being the increase in mortgage payable recorded)  

Table (11)

The increase in mortgage payable shows that the cash inflow is more than the expense recognized in the year by $50,000. The increase in liability is recorded, hence mortgage payable is credited and operating cash is debited.

(11). Preferred stock:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Preferred stock20,000 
     Cash flow from financing activities 20,000
 (Being the retirement of preference stock recorded)  

Table (12)

The cash flow from financing activities records an outflow with the retirement of preferred stock.

(12). Common stock:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Noncash investing activities60,000 
      Common stock 60,000
 (Being the issuance of common stock recorded)  

Table (12)

The noncash investing activity is recorded with the value at which common stock is issued. The amount which is obtained by issuing the common stock is credited.

(13). Payment of dividends:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Retained earnings20,000 
      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...

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