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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Infrequent Transactions The following transactions were recorded on the books of Baxter Company during the current year.

  1. a. Issued a “small” common stock dividend of 400 shares. The par value is $10 per share, and the relevant market price was $20 per share.
  2. b. Exchanged equipment with a cost of $10,000 and a book value of $3,800 for land valued at $12, 000, paring an additional $8, 500 in cash.
  3. c. Converted preferred stock ($100 par) with a total par value of $20, 000 and a book value of $22,800 to 1,500 shares of its $10 par common stock. The book value method was used to account for the conversion.
  4. d. Recorded a loss of $4, 200 as a result of retiring bonds payable with a face value of $3, 000 and a related premium of $5,000 by paying $39,200.
  5. e. Recorded an ordinary gain of $6,000 as a result of a sale of a building costing $100,000 and having an associated book value of $70,000. Cash received from the sale totaled $76, 000.
  6. f. Acquired equipment by entering into a capital lease. The lease required payments of $5,000 in advance; the present value of the lease payments (before the initial payment) was $34,000.

Required:

Next Level For each of the preceding items, discuss if and illustrate how the transaction would be recorded on the spreadsheet to support the statement of cash flows. Use a journal entry format for your illustrations.

To determine

Journalize the transaction recorded on the spreadsheet to support the statement of cash flows.

Explanation

Statement of cash flows: This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities.

Worksheet: A worksheet is a spreadsheet used while preparing a financial statement. It is a type of form having multiple columns and it is used in the adjustment process. The use of a worksheet is optional for any organization. A worksheet can neither be considered as a journal nor a part of the general ledger.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Prepare journal entry to record the stock dividend.

a. Small stock dividend is not considered to be a financing activity and is not reported on the statement of cash flows because it only affects shareholders equity accounts. This entry is made in the portion of the spreadsheet for the stock dividend. 

b.

DateAccounts and ExplanationDebit ($)Credit ($)
Retained Earnings8,000 
 Common Stock, $10 par 4,000
 Additional Paid-in Capital on Common Stock 4,000
 (To record the stock divided)  

Table (1)

  • Retained earnings are a stockholder’s equity and it is decreased. Therefore, debit the retained earnings.
  • Common stock is stockholders equity and it is increased. Therefore, credit the common stock.
  • Additional Paid-in Capital on common stock is stockholders equity and it is increased. Therefore, credit the additional paid-in Capital on common stock.

Prepare journal entry for exchange of equipment.

c. This exchange represents cash flows for investing activities because cash was paid in the

d. acquisition of the land. Additionally, the use of equipment in the exchange represents a simultaneous investing and financing activity.

DateAccounts and ExplanationDebit ($)Credit ($)
Land 12,000 
Equipment6,200
 Loss on exchange of equipment for land300 
 Exchanged equipment for land3,500
 Equipment  10,000
 Acquisition of land by exchange of equipment 3,500
 Payment for purchase of land 8,500
 (To record the exchange of equipment)  

Table (2)

Note: In this entry the cash payment of $8,500 will be reported as investing activity and the remaining $3,500 will be reported in the schedule of investing and financing activities not affecting cash.

  • Land is a fixed asset and it is increased. Therefore, debit the Land.
  • Equipment is a accumulated depreciation and it is increased. Therefore, debit the equipment.
  • Loss on exchange of equipment for land is a net cash flow from operating activities and it is increased. Therefore, debit the loss on exchange of equipment for land.
  • Exchanged equipment for land is not affecting cash from investing and financing activities and it is increased. Therefore, debit the exchanged equipment for land.
  • Equipment is a fixed asset and it is decreased. Therefore, credit the equipment.
  • Acquisition of land by exchange of equipment is not affecting cash from investing and financing activities and it is decreased. Therefore, credit the acquisition of land by exchange of equipment.
  • Payment for purchase of land is a cash flow from investing activities and it is decreased. Therefore, credit the payment for purchase of land.

Prepare journal entry for conversion of preferred stock to common stock.

e. The conversion of preferred stock to common stock is a investing and financing transaction which involves exchange of equity securities, it will be reported in a schedule accompanying the statement of cash flows. It is recorded on worksheet.

DateAccounts and ExplanationDebit ($)Credit ($)
Issuance of Common Stock to Convert Preferred Stock 22,800 
Common Stock, $10 par15,000
 Additional Paid-in Capital on Common Stock 7,800
 Preferred stock, $100 par20,000
 Additional paid-in capital on preferred stock2,800
 Conversion of Preferred Stock to Common Stock 22,800
 (To record the conversion of preferred to common stock)  

Table (3)

  • Issuance of Common Stock to Convert Preferred Stock is not affecting cash from investing and financing activities and it is increased...

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