INTERMEDIATE ACCOUNTING
INTERMEDIATE ACCOUNTING
8th Edition
ISBN: 9780078025839
Author: J. David Spiceland
Publisher: McGraw-Hill Education
Question
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Chapter 21, Problem 21.15P

1.

To determine

Statement of cash flows: It is one of the financial statement that shows the cash and cash equivalents of a company for a particular period. It determines the net changes in cash through reporting the sources and uses of cash due to the operating, investing, and financing activities of a company.

Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system

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.

To Determine: The amount, which the Company D would report as cash, related to bonds during the reporting period, using direct and indirect method.

1.

Expert Solution
Check Mark

Explanation of Solution

Company D would report $23,329,472 as cash inflow from the sale of bonds, under the financing activities, in doth the methods.

The payment of interest by bondholdersis considered as operating activity, as this is an interest being paid on the loan taken by the company. Hence it is considered as an expense and recorded as operating activity.

Calculate the interest payable on bonds.

Date Account Title Debit ($) Credit ($)
06.30.16 Interest expense $1,699,768  
       Discount on bonds payable $99,768
     Cash   $1,600,000
  (To record the amount of interest to be paid)    
12.31.16 Interest expense $1,705,754  
     Discount on bonds payable   $105,754
     Cash   $1,600,000
(To record the amount of interest to be paid)    

Table (1)

  • Interest expense decreases the stockholder's equity; hence debit the interest expense account.
  • Discount on bonds payable is a liability which is increased; hence credit the discount on bonds payable.
  • Cash is being paid, cash is an asset which is being decreased; hence credit the cash account.

Working Note:

Calculate the interest expense.

Interest expense = 6%×Value of Bonds= 6%×$28,329,472=$1,699,768

Calculate the Cash paid.

Cash Paid = 5%×Value of Bonds= 5%×$32,000,000=$1,600,000

Calculate the discount on bonds payable.

Discount on bonds payable = Interest expenseCash paid$1,699,768$1,600,000=$99,768

Calculate the interest expense.

Interest expense = 6%×(Value of Bonds+Discount on Bonds payable)= 6%×($28,329,472+$99,768)=6%×$28,429,240=$1,705,754

Calculate the discount on bonds payable.

Discount on bonds payable = Interest expenseCash paid$1,705,754$1,600,000=$105,754

Under the direct method, the interest would be reduced as an expense under operating activity. However, under indirect method, the discount on the bonds payable would be added to net income as the interest of $1,600,000 would be reduced while calculating the net income.

2.

To determine

The amount, which the Company M would report as cash, related to lease during the reporting period.

2.

Expert Solution
Check Mark

Explanation of Solution

Company M would report $6 million as an investment with a lease, and note itas non cash transaction in the disclosure notes of the financial statement.

Calculate the Present Annuity Value:

As per table 6, present value for

Number of leases payables: 20 (5 years×4 installment every year)

Interest rate: 3% (12%÷4) ;

Of annuity due for $1 are 15.3238.

Lease = Installment × Annuity value$391,548 × 15.32380= $6,000,000

The amount related to the assetvalue reported by Company M is shown below.

Date Account Title Debit ($) Credit ($)
 09.30.16 Right-of-use asset $6,000,000  
       Lease payable   $6,000,000
  (To record the amount to be paid for the asset)    

Table (2)

  • Right-to-use asset is being purchased, this increases the assets; hence debit the Right-of-use asset.
  • Lease payable is a liability, as the liability is increased; credit the lease payable account.

The amount of lease payable by Company M is shown below.

Date Account Title Debit ($) Credit ($)
09.30.16 Lease payable $391,548  
       Cash   $391,548
  (To record the amount of lease payable)    

Table (3)

  • Lease payable is a liability, as the liability is reduced; debit the lease payable account.
  • Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

The amount related to lease reported by Company M is shown below.

Date Account Title Debit ($) Credit ($)
12.31.16 Interest expense $168,254  
Lease payable  $223,294  
       Cash   $391,548
  (To record the amount of interest to be recorded by Company M)    

Table (4)

  • Interest expense decreases the stockholder's equity; hence debit the interest expense account.
  • Lease payable is a liability, as the liability is reduced; debit the lease payable account.
  • Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Working Note:

Calculate the interest expense.

Interest expense = 6%×(Cost of Asset Lease payable)= 6%×($6,000,000$391,548)=6%×$5,608,452=$168,254

Calculate the lease payable.

Lease payable = Cash installment Interest expense=$391,548 $168,254=$223,294

The amount of depreciation providedby Company M is shown below.

Date Account Title Debit ($) Credit ($)
  Amortization expense $300,000  
       Right-of-use asset   $300,000
  (To record the depreciation for the asset)    

Table (5)

  • Amortization expense is a contra asset being debited.
  • Right-to-use asset is being depreciated, this decreases the value of assets; hence credit the Right-of-use asset.

Working Note:

Calculate the amortization expense.

Amortization expense = Cost of asset ÷Useful life of asset $6,000,000÷ 5 years ×14=$1,200,0004=$300,000

Company M, shall report the following things in the statement of cash flow:

  • Amount of Lease payable $614,842 ($391,548 + 223,294), as financing activity.
  • Interest expense $168,254, as operating activity.
  • Amortization expense being a non-cash transaction is not recorded.

3.

To determine

The amount, which the Company D would report as cash, related to lease during the reporting period.

3.

Expert Solution
Check Mark

Explanation of Solution

Company D would report $6 million as an investment with a lease, and note it as non cash transaction in the disclosure notes of the financial statement.

The amount related to the assetvalue reported by Company Dis shown below.

Date Account Title Debit ($) Credit ($)
 09.30.16 Lease receivable $6,000,000  
   Inventory of equipment   $6,000,000
  (To record the amount to be paid for the asset)    

Table (6)

  • Lease receivable is an asset, which is increased; hence debit the lease receivable account.
  • Inventory of equipmentis an asset, which is decreased; credit the inventory of equipmentaccount.

The amount of lease payable by Company D is shown below.

Date Account Title Debit ($) Credit ($)
09.30.16 Cash $391,548  
  Lease receivable   $391,548
  (To record the amount of lease payable)    

Table (7)

  • Cash is received, cash is an asset which is being increased; hence debit the cash account.
  • Lease receivable is an asset which is being reduced; hence credit the lease receivable account.

The amount related to lease reported by Company Dis shown below.

Date Account Title Debit ($) Credit ($)
12.31.16 Cash $391,548  
Lease receivable $223,294 
   Interest revenue   $168,254
  (To record the amount of interest to be recorded by Company D)    

Table (8)

  • Cash is received, cash is an asset which is being increased; hence debit the cash account.
  • Lease receivable is an asset which is being reduced; hence credit the lease receivable account.
  • Interest revenue increases the stockholder's equity; hence credit the interest revenue account

Working Note:

Calculate the interest revenue.

Interest revenue = 6%×(Cost of Asset Lease payable)= 6%×($6,000,000$391,548)=6%×$5,608,452=$168,254

Company D, shall report the following things in the statement of cash flow:

  • Amount of Lease receivable $614,842 ($391,548 + 223,294), ascash inflow from financing activity.
  • Interest revenue $168,254, as cash inflow from operating activity.

4.

To determine

The amount, which the Company MD would report as cash, related to lease during the reporting period, assuming that Company M leased the machine from Company MD directly for $5 million.

4.

Expert Solution
Check Mark

Explanation of Solution

Company MD would report $5 million as an investment with a lease, and note it as non cash transaction in the disclosure notes of the financial statement.

The amount related to the assetvalue reported by Company MD is shown below.

Date Account Title Debit ($) Credit ($)
 09.30.16 Lease receivable $6,000,000  
Cost of goods sold $5,000,000
Sales revenue $6,000,000
   Inventory of equipment   $5,000,000
  (To record the amount to be paid for the asset)    

Table (9)

  • Lease receivable is an asset, which is increased; hence debit the lease receivable account.
  • Cost of goods sold, is an asset which is being increased; hence debit the cash account.
  • Sales revenue increases the stockholder's equity; hence credit the sales revenue account.
  • Inventory of equipmentis an asset, which is decreased; credit the inventory of equipment account.

The amount of lease payable by Company MD is shown below.

Date Account Title Debit ($) Credit ($)
09.30.16 Cash $391,548  
  Lease receivable   $391,548
  (To record the amount of lease payable)    

Table (10)

  • Cash is received, cash is an asset which is being increased; hence debit the cash account.
  • Lease receivable is an asset which is being reduced; hence credit the lease receivable account.

The amount related to lease reported by Company Dis shown below.

Date Account Title Debit ($) Credit ($)
12.31.16 Cash $391,548  
Lease receivable $223,294 
       Interest revenue   $168,254
  (To record the amount of interest to be recorded by Company D)    

Table (11)

  • Cash is received, cash is an asset which is being increased; hence debit the cash account.
  • Lease receivable is an asset which is being reduced; hence credit the lease receivable account.
  • Interest revenue increases the stockholder's equity; hence credit the interest revenue account

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Chapter 21 Solutions

INTERMEDIATE ACCOUNTING

Ch. 21 - Perhaps the most noteworthy item reported on an...Ch. 21 - Prob. 21.12QCh. 21 - Given sales revenue of 200,000, how can it be...Ch. 21 - Prob. 21.14QCh. 21 - When determining the amount of cash paid for...Ch. 21 - Prob. 21.16QCh. 21 - When using the indirect method of determining net...Ch. 21 - Prob. 21.18QCh. 21 - Prob. 21.19QCh. 21 - Where can we find authoritative guidance for the...Ch. 21 - U.S. GAAP designates cash outflows for interest...Ch. 21 - Prob. 21.1BECh. 21 - Prob. 21.2BECh. 21 - Prob. 21.3BECh. 21 - Prob. 21.4BECh. 21 - Prob. 21.5BECh. 21 - Prob. 21.6BECh. 21 - BE 21–7 Installment note LO21–3, LO21–6 On...Ch. 21 - BE 21–8 Sale of land LO21–3, LO21–4, LO21–5 On...Ch. 21 - Investing activities LO215 Carter Containers sold...Ch. 21 - Financing activities LO216 Refer to the situation...Ch. 21 - Prob. 21.11BECh. 21 - Prob. 21.12BECh. 21 - Classification of cash flows LO213 through LO216...Ch. 21 - Determine cash paid to suppliers of merchandise ...Ch. 21 - Determine cash received from customers LO213...Ch. 21 - Prob. 21.4ECh. 21 - Prob. 21.5ECh. 21 - Prob. 21.6ECh. 21 - Determine cash paid for bond interest LO213...Ch. 21 - Determine cash paid for bond interest LO213 For...Ch. 21 - Determine cash paid for income taxes LO213...Ch. 21 - Prob. 21.10ECh. 21 - E21–11 Bonds; statement of cash flow...Ch. 21 - E21–12 Installment note: statement of cash flow...Ch. 21 - Prob. 21.13ECh. 21 - E 21–14 Identifying cash flows from investing...Ch. 21 - E 21–15 Lease; lessee; statement of cash flows...Ch. 21 - Prob. 21.16ECh. 21 - Indirect method; reconciliation of net income to...Ch. 21 - Prob. 21.18ECh. 21 - Prob. 21.19ECh. 21 - Prob. 21.20ECh. 21 - Prob. 21.21ECh. 21 - Indirect method; reconciliation of net income to...Ch. 21 - Prob. 21.23ECh. 21 - Prob. 21.24ECh. 21 - Prob. 21.25ECh. 21 - Prob. 21.26ECh. 21 - Prob. 21.27ECh. 21 - Prob. 21.28ECh. 21 - Prob. 21.29ECh. 21 - Prob. 21.30ECh. 21 - Prob. 21.31ECh. 21 - Prob. 21.32ECh. 21 - Prob. 1CPACh. 21 - Prob. 2CPACh. 21 - Prob. 3CPACh. 21 - Prob. 4CPACh. 21 - Prob. 5CPACh. 21 - Prob. 6CPACh. 21 - Prob. 7CPACh. 21 - Prob. 8CPACh. 21 - Prob. 9CPACh. 21 - Prob. 1CMACh. 21 - Prob. 2CMACh. 21 - Prob. 3CMACh. 21 - Prob. 21.1PCh. 21 - Prob. 21.2PCh. 21 - Prob. 21.3PCh. 21 - Prob. 21.4PCh. 21 - Prob. 21.5PCh. 21 - Prob. 21.6PCh. 21 - Prob. 21.7PCh. 21 - Prob. 21.8PCh. 21 - Prob. 21.9PCh. 21 - Prob. 21.10PCh. 21 - Prob. 21.11PCh. 21 - Prob. 21.12PCh. 21 - Prob. 21.13PCh. 21 - Prob. 21.14PCh. 21 - Prob. 21.15PCh. 21 - Prob. 21.16PCh. 21 - Prob. 21.17PCh. 21 - Prob. 21.18PCh. 21 - Prob. 21.19PCh. 21 - Prob. 21.20PCh. 21 - Prob. 21.21PCh. 21 - Prob. 21.1BYPCh. 21 - Prob. 21.2BYPCh. 21 - Prob. 21.3BYPCh. 21 - Prob. 21.5BYPCh. 21 - Prob. 21.6BYPCh. 21 - Prob. 21.7BYPCh. 21 - Prob. 21.8BYPCh. 21 - Prob. 21.10BYPCh. 21 - Research Case 219 FASB codification; locate and...Ch. 21 - IFRS Case 2110 Statement of cash flows...
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