20.11 Exercises

 Chapter 20

Exercise 20.1

Below is a list of independent transactions:

 

Description Section Cash Flow In (Out)
Issue of bonds payable of $500 cash
Sale of land and building of $60,000 cash
Retirement of bonds payable of $20,000 cash
Redemption of preferred shares classified as debt of $10,000
Current portion of long-term debt changed from $56,000 to $50,000
Repurchase of company’s own shares of $120,000 cash
Amortization of a bond discount of $500
Issuance of common shares of $80,000 cash
Payment of cash dividend of $25,000 recorded to retained earnings
Purchase of land of $60,000 cash and a $100,000 note (the note would be a non-cash transaction that is not directly reported within the body of the SCF but requires disclosure in the notes to the SCF)
Cash dividends received from a trading investment of $5,000
Increase in an available for sale investment due to appreciation in the market price of $10,000
Interest income received in cash from an investment of $2,000
Leased new equipment under an operating lease for $12,000 per year
Interest and finance charges paid of $15,000
Purchase of equipment of $32,000
Increase in accounts receivable of $75,000
Leased new equipment under a finance lease with a present value of $40,000
Purchase of 5% of the common shares of a supplier company for $30,000 cash
Decrease in a sales related short term note payable of $10,000
Made the annual contribution to the employee’s pension benefit plan for $220,000
Increase in income taxes payable of $3,000
Purchase of equipment in exchange for a $14,000 long-term note

Required:

For each transaction, identify which section of the SCF it is to be reported under and indicate if it is a cash in-flow (positive) or cash out-flow (negative). Hint: recall the use of the accounting equation A\;=\;L\;+\;E to help determine if an amount is positive or negative. Assume that the company policy is for interest paid or received, and dividends received, to be listed as operating cash flows, and for dividends paid to be listed as financing cash flows.


Exercise 20.2

Below are the unclassified financial statements for Rorrow Ltd. for the year ended December 31, 2020:

Rorrow Ltd.
Balance Sheet
As At December 31, 2020
2020 2019

Cash

$152,975 $86,000
Accounts receivable (net) 321,640 239,080
Inventory 801,410 855,700
Prepaid insurance expenses 37,840 30,100
Equipment 2,564,950 2,156,450
Accumulated depreciation, equipment (625,220) (524,600)
Total assets $3,253,595 $2,842,730
Accounts payable $478,900 $494,500
Salaries and wages payable 312,300 309,600
Accrued interest payable 106,210 97,180
Bonds payable, due July 31, 2028 322,500 430,000
Common shares 1,509,300 1,204,000
Retained earnings 524,385 307,450
Total liabilities and shareholders’ equity $3,253,595 $2,842,730
Rorrow Ltd.
Income Statement
For the Year Ended December 31, 2020
Sales $5,258,246
Expenses
Cost of goods sold 3,150,180
Salaries and benefits expense 754,186
Depreciation expense 100,620
Interest expense 258,129
Insurance expense 95,976
Income tax expense 253,098
4,612,189
Net income $646,057

Required:

  1. Complete the direct method worksheet for the operating activities section for the year ended December 31, 2020.
  2. Prepare the operating activities section for Rorrow Ltd. for the year ended December 31, 2020.

Exercise 20.3

Below is the unclassified balance sheet for Carmel Corp. as at December 31, 2020:

Camel Corp.
Balance Sheet
As At December 31, 2020
Cash $84,000 Accounts payable $146,000
Accounts receivable (net) 89,040 Mortgage payable 172,200
Investments – trading 134,400 Common shares 400,000
Buildings (net) 340,200 Retained earnings 297,440
Equipment (net) 168,000 $1,015,640
Land 200,000
$1,015,640

The net income for the year ended December 31, 2021 was broken down as follows:

Revenues $1,000,000
Gain 2,200
Total revenue 1,002,200
Expenses
Operating expenses 809,200
Interest expenses 35,000
Depreciation expense – building 28,000
Depreciation expense – equipment 20,000
Loss 5,000
897,200
Net income 105,000

The following events occurred in 2021:

  1. Investments in traded securities are short-term securities and the entire portfolio was sold for cash at a gain of $2,200. No new investments were purchased in 2021.
  2. A building with a carrying value of $225,000 was sold for cash at a loss of $5,000.
  3. The cash proceeds from the sale of the building were used to purchase additional land for investment purposes.
  4. On December 31, 2021, specialized equipment was purchased in exchange for issuing an additional $50,000 in common shares.
  5. An additional $20,000 in common shares were issued and sold for cash.
  6. Dividends of $8,000 were declared and paid in cash to the shareholders.
  7. The cash payments for the mortgage payable during 2021 included principal of $30,000 and interest of $35,000. In 2022, the cash payments will consist of $32,000 principal and $33,000 interest.
  8. All sales to customers, and purchases from suppliers for operating expenses, were on account. During 2021, collections from customers totalled $980,000 and cash payments to suppliers totalled $900,000.
  9. Ignore income taxes for purposes of simplicity.
  10. The company’s policy is to classify interest received and paid, and dividends received in operating activities. Dividends paid are classified in financing activities.
  11. Changes in other balance sheet accounts resulted from usual transactions and events.

Required:

  1. Prepare a statement of cash flows in good form with all required disclosures for the year ended December 31, 2021. The company prepares this statement using the indirect method.
  2. Calculate the company’s free cash flow, and discuss the company’s cash flow pattern, including details about sources and uses of cash.
  3. How can the information from the statement of cash flows be beneficial to the company stakeholders (i.e., creditors, investors, management, and others)?

Exercise 20.4

Below is the comparative balance sheet for Lambrinetta Industries Ltd.:

Lambrinetta Industries Ltd.
Balance Sheet
December 31

Assets:

2021 2020
Cash $32,300 $40,800
Accounts receivable 79,900 107,100
Investments – trading 88,400 81,600
Land 86,700 49,300
Plant assets 425,000 345,100
Accumulated depreciation – plant assets (147,900) (136,000)
Total assets 564,400 487,900
Liabilities and Equity:
Accounts payable $18,700 $6,800
Current portion of long-term note 8,000 10,000
Long-term note payable 119,500 75,000
Common shares 130,900 81,600
Retained earnings 287,300 314,500
Total liabilities and equity $564,400 $487,900

Additional information:

  1. Net income for the year ended December 31, 2021 was $161,500.
  2. Cash dividends were declared and paid during 2021.
  3. Plant assets with an original cost of $51,000, and with accumulated depreciation of $13,600, were sold for proceeds equal to book value during 2021.
  4. The investments are reported at their fair value on the balance sheet date. During 2021, investments with a cost of $12,000 were purchased. No other investment transactions occurred during the year. Fair value adjustments are reported directly on the income statement.
  5. In 2021, land was acquired through the issuance of common shares. There were no other land transactions during the year. The balance of the common shares issued were for cash.
  6. The company’s policy is to classify interest received and paid, and dividends received, in operating activities, and to classify dividends paid in financing activities.
  7. Note that payable arose from a single transaction.
  8. Changes in other balance sheet accounts resulted from usual transactions and events.

Required:

Using the indirect method, prepare the statement of cash flows for the year ended December 31, 2021, in good form, including all required disclosures identified in the chapter material. The company follows ASPE.


Exercise 20.5

Below is a comparative statement of financial position for Egglestone Vibe Inc. as at December 31, 2021:

Egglestone Vibe Inc.
Statement of Financial Position
December 31

Assets:

2021 2020
Cash $84,500 $37,700
Accounts receivable 113,100 76,700
Inventory 302,900 235,300
Investments – available for sale (OCI) 81,900 109,200
Land 84,500 133,900
Plant assets 507,000 560,000
Accumulated depreciation – plant assets (152,100) (111,800)
Goodwill (net) 161,200 224,900
Total assets 1,183,000 1,265,900
Liabilities and Equity:
Accounts payable $38,100 $66,300
Dividend payable 19,500 41,600
Notes payable 416,000 565,500
Common shares 322,500 162,500
Retained earnings 374,400 370,200
Accumulated other comprehensive income 12,500 59,800
Total liabilities and equity $1,183,000 $1,265,900

Additional information:

  1. Net income for the 2021 fiscal year was $24,700.
  2. On March 1, 2021, land was purchased for expansion purposes. On July 12, 2021, another section of land with a carrying value of $111,800 was sold for $150,000 cash.
  3. On June 15, 2021, notes payable of $160,000 were retired in exchange for the issuance of common shares. On December 31, 2021, notes payable of $10,500 were issued for additional cash flow.
  4. Available for sale investments (OCI) were purchased during 2021 for $20,000 cash. By year-end, the fair value of this portfolio dropped to $81,900. No investments from this portfolio were sold in 2021.
  5. At year-end, plant assets originally costing $53,000 were sold for $27,300 since they were no longer contributing to profits. At the date of the sale, the accumulated depreciation for the assets sold was $15,600.
  6. Cash dividends were declared and a portion were paid in 2021. These dividends are reported under the financing section.
  7. Goodwill impairment loss was recorded in 2021 to reflect an impairment of the cash-generating unit (CGU), including goodwill.
  8. The company’s policy is to classify interest received and paid, and dividends received in operating activities, and dividends paid in financing activities.
  9. Changes in other statement of financial position accounts resulted from usual transactions and events.

Required:

  1. Prepare a statement of cash flows in good form, including all required disclosures identified in the chapter material. The company uses the indirect method to prepare the statement.
  2. Analyze and comment on the results reported in the statement.

Exercise 20.6

Below are unclassified financial statements for Bognar Ltd. at December 31, 2020, and selected additional information taken from the accounting records:

Bognar Ltd.
Comparative Statement of Financial Position
December 31, 2020
2020 2019
Cash $5,500 $21,000
Accounts receivable, net 297,000 189,000
Investments – held for trading 209,000 241,500
Inventory 809,600 663,600
Land 363,000 430,500
Building 1,144,000 1,176,000
Accumulated depreciation, building (517,000) (399,000)
Machinery 1,188,000 918,750
Accumulated depreciation, machinery (240,900) (222,600)
Goodwill 49,500 115,500
$3,307,700 $3,134,250
Accounts payable $57,200 $94,500
Bonds payable, due 2031 (net) 1,089,000 1,034,250
Deferred tax payable (non-current) 26,400 69,300
Preferred shares 1,152,800 885,150
Common shares 305,500 199,500
Common stock conversion rights 525,000 525,000
Retained earnings 151,800 326,550
$3,307,700 $3,134,250
Statement of Income
For the Year Ended December 31, 2020
Sales $1,852,400
Cost of goods sold 1,213,300
Gross profit 639,100
Depreciation, building 121,000
Depreciation, machinery 82,500
Goodwill impairment 66,000
Interest expense 126,500
Other operating expenses 342,100
Loss in held for trading investment 32,500
Gain on sale of land (24,200)
Loss on sale of machine 10,800
Loss before income tax (118,100)
Income tax, recovery 59,400
Net loss $(58,700)

Additional information:

  1. No held for trading investments were purchased or sold. These investments are not cash equivalents.
  2. A partially depreciated building was sold for an amount equal to its carrying value.
  3. Cash of $50,000 was received on the sale of a machine that originally cost $125,000. Additionally, other machinery was purchased during 2020.
  4. Bonds payable are convertible to common shares at the rate of 15 common shares for every $1,000 bond after August 1, 2022. No new bond issuances occurred in 2020.
  5. Preferred shares were issued for cash on May 1, 2020. Dividends of $40,000 were paid on these shares in 2020.
  6. In 2020, 25,000 common shares were purchased and retired. The shares had an average issue price of $60,000 and were repurchased for $65,000. Also in 2020, 50,000 common shares were issued in exchange for machinery.
  7. The company’s policy is to classify interest received and paid, and dividends received in operating activities, and dividends paid in financing activities.
  8. Changes in other statement of financial position accounts resulted from usual transactions and events.

Required:

  1. Prepare the statement of cash flows three-step worksheet for Bognar Ltd. for the year ended December 31, 2020 using the direct method. Include supplemental disclosures, if any.
  2. Using the information from part (a), prepare the statement of cash flows operating activities section.
  3. Prepare the operating activities section of the statement of cash flows for Bognar Ltd. for the year ended December 31, 2020 using the indirect method. Include supplemental disclosures, if any.

Exercise 20.7

The following are a list of transactions for an ASPE company, Verdon Ltd., for 2020:

  1. Land asset account increased by $98,000 over the year. In terms of activity during the year, land that originally cost $80,000 was exchanged, along with a cash payment of $5,000, for five acres of undeveloped land appraised at $100,000. Three months later, additional land was acquired for cash.
  2. Equipment asset account had an opening balance of $70,000 at the beginning of the year, and $60,000 closing balance at year-end. Accumulated depreciation opening balance was $20,000 and its closing balance was $6,600. Equipment which originally cost $15,000 (and was fully depreciated) was sold during the year for $2,000. There was also equipment that originally cost $4,000, with a carrying value of $1,200, that was discarded. During the year, there was new equipment purchased for cash.
  3. Half way through the current year, the company entered into a six year capital lease for some equipment. The lease term called for six annual payments of $20,000, to be paid at the beginning of each year. Upon signing the lease agreement, the first payment was made. The equipment will revert back to the lessor at the end of the lease term. The implicit rate for the lease was 8%, which was known to the lessee.

Required:

  1. Prepare the journal entries for Verdon Ltd. that relate to each of the changes in each asset account for 2020. Include entries for current year cash payments, depreciation, and interest, if any.
  2. Identify and classify the cash flows for each of the transactions identified in part (a).
  3. Prepare a partial SCF: operating activities, using the indirect method, including supplemental disclosures, if any. Assume no other transactions occurred in the current year for this company other than those identified in this question.

Exercise 20.8

Below are unclassified financial statements for Aegean Anchors Ltd. at December 31, 2020, and selected additional information taken from the accounting records.

Aegean Anchors Ltd.
Comparative Statement of Financial Position
December 31, 2020
2020 2019 Increase (Decrease)
Cash $33,960 $53,280 $(19,320)
Accounts receivable, net 1,015,680 920,040 95,640
Inventory 861,120 810,000 51,120
Equipment 3,679,680 3,439,680 240,000

Accumulated depreciation, equipment

(1,398,000) (1,212,000) 186,000
Investment in Vogeller Ltd., at equity 345,600 319,200 26,400
Note receivable 301,800 0 301,800
$4,839,840 $4,330,200
Bank overdraft $171,120 $87,480 $83,640
Accounts payable 904,320 977,520 (73,200)
Income tax payable 44,400 55,200 (10,800)
Dividends payable 78,000 102,000 (24,000)
Obligations under lease 324,000 0 324,000
Common shares 1,080,000 1,080,000 0
Retained earnings 2,238,000 2,028,000 210,000
$4,839,840 $4,330,200

Additional information:

  1. Net income for 2020 was $288,000. The income taxes paid were $181,000.
  2. The amount of interest paid during the year was $18,000, and the amount of interest received was $11,300.
  3. On January 2, 2020, Aegean Anchors Ltd. sold equipment which cost $84,000 (with a carrying amount of $53,000) for $50,000 cash.
  4. On December 31, 2019, Aegean Anchors Ltd. acquired 25% of Vogeller Ltd.’s common shares for $319,200. On that date, the carrying value of Vogeller Ltd.’s assets and liabilities were $1,276,800, which approximated their fair values. Vogeller Ltd. reported net income of $105,600 for the year ended December 31, 2020, and no dividend was paid on their common shares during 2020.
  5. On January 2, 2020, Aegean Anchors Ltd. loaned $350,000 to Vancorp Ltd. (the company is not related to Aegean Anchors Ltd.). Vancorp Ltd. made the first semi-annual principal repayment of $48,200, plus interest at seven percent, on December 31, 2020.
  6. The bank overdraft identified in the comparative statement of financial position is a line of credit, payable on demand.
  7. On December 31, 2020, Aegean Anchors Ltd. entered into a finance lease for equipment. The present value of the annual lease payments is $324,000, which equals the equipment’s fair value. Aegean made the first payment of $57,000 on January 2, 2021 when it was due.
  8. Aegean Anchors Ltd. declared and paid dividends in 2019 and 2020. In 2019, a dividend for $102,000 was declared to the shareholders on record at December 15, 2019. This dividend was paid on January 10, 2020. In 2020, a dividend for $78,000 was declared on December 15, 2020 and was paid on January 10, 2021.
  9. The company’s policy is to classify interest received and paid, and dividends received in operating activities, and to classify dividends paid in financing activities.
  10. Changes in other statement of financial position accounts resulted from usual transactions and events.

Required:

Prepare a statement of cash flows for Aegean Anchors Ltd. for the year ended December 31, 2020, using the indirect method. Include supplemental disclosures, if any.


Exercise 20.9

Aylmer Inc., follows ASPE, had the following statements prepared as at December 31, Y7:

Aylmer Inc.
Comparative Statement of Financial Position
At December 31

Y7

Y6

Cash $53,625 $25,000
Accounts receivable 58,000 51,000
Inventory 40,000 60,000
Prepaid rent 5,000 4,000
Equipment 154,000 130,000
Accumulated depreciation—equipment -35,000 -25,000
Goodwill 20,000 50,000
Total assets $295,625 $295,000
Accounts payable $46,000 40,000
Income tax payable 4,000 6,000
Salaries and wages payable 8,000 4,000
Short-term loans payable 8,000 10,000
Long-term loans payable 60,000 69,000
Common shares 130,000 130,000
Retained earnings 39,625 36,000
Total liabilities and shareholders' equity $295,625 $295,000

Aylmer Inc.
Comparative Income Statement
For the Year Ended December 31, Y7

Sales revenue $338,150
Cost of goods sold 165,000
Gross margin 173,150
Operating expenses 120,000
Operating income 53,150
Interest expense $11,400 
Impairment loss—goodwill 30,000
Gain on sale of equipment (2,000) 39,400
Income before income tax 13,750
Income tax expense 4,125
Net income $9,625

Additional information:

  1. Dividends on common shares in the amount of $6,000 were declared and paid during Y7.
  2. Depreciation expense is included in operating expenses, as is salaries and wages expense of $69,000.
  3. Equipment with a cost of $20,000 that was 70% depreciated was sold during Y7.

Required:

Prepare a statement of cash flows using the direct method.


Exercise 20.10

Lyons Inc., a major retailer of bicycles and accessories, operates several stores and is a publicly traded company.

The company is currently preparing its statement of cash flows. The comparative statement of financial position and income statement for Lyons as at May 31, Y4 are as follows:

Lyons INC.
Statement of Financial Position
As at May 31

Y4

Y3

Current assets
Cash $33,250 $20,000
Accounts receivable 74,800 55,600
Inventory 188,700 199,000
Prepaid expenses 8,800 7,000
Total current assets 305,550 281,600
Plant assets 596,500 501,500
Less: Accumulated depreciation 148,000 122,000
Net plant assets 448,500 379,500
Total assets $754,050 $661,100
Current liabilities
Accounts payable $123,000 $115,000
Salaries and wages payable 61,000 72,000
Interest payable 24,700 22,600
Total current liabilities 208,700 209,600
Mortgage payable 75,000 100,000
Total liabilities 283,700 309,600
Shareholders' equity
Common shares 335,750 280,000
Retained earnings 134,600 71,500
Total shareholders'equity 470,350 351,500
Total liabilities and shareholders' equity $754,050 $661,100

Lyons INC.
Income Statement
For the Year Ended May 31, Y4

Sales $1,345,800
Cost of goods sold 814,000
Gross margin 531,800
Expenses
Salaries and wages expense 207,800
Interest expense 66,700
Other operating expenses 24,800
Depreciation expense 26,000
Total operating expenses 325,300
Operating income 206,500
Income tax expense 65,400
Net earnings $141,100

The following is additional information about transactions during the year ended May 31, Y4 for Lyons Inc., which follows IFRS.

  1. Plant assets costing $95,000 were purchased by paying $44,000 in cash and issuing 5,000 common shares.
  2. The “other expenses” relate to prepaid items.
  3. In order to supplement its cash, Lyons issued 4,000 additional common shares.
  4. There were no penalties assessed for the repayment of mortgage.
  5. Cash dividends of $78,000 were declared and paid at the end of the fiscal year.

Required:

Prepare the statement of cash flow using the direct method


Exercise 20.11

Information from the statement of financial position and statement of income are given below for Dorchester Inc., a company following IFRS, for the year ended December 31.

Dorchester has adopted the policy of classifying interest paid as operating activities and dividends paid as financing activities.

Comparative Statement of Financial Position, at December 31

Y3

Y2

Cash $92,700 $47,250
Accounts receivable 90,800 37,000
Inventory 121,900 102,650
Investments in land 84,500 107,000
Property, plant, and equipment 290,000 205,000
Accumulated depreciation (49,500) (40,000)
$630,400 $458,900 
Accounts payable $52,700 $48,280
Accrued liabilities 12,100 18,830
Notes payable 140,000 70,000
Common shares 250,000 200,000
Retained earnings 175,600 121,790
$630,400 $458,900 

Statement of Income, Year Ended December 31, Y3
Revenues $297,500
Sales 5,000
Gain on sale of investment in land 3,750
Gain on sale of equipment 306,250 
Expenses
Cost of goods sold $99,460
Depreciation expense 58,700
Operating expenses 14,670
Income tax expense 39,000
Interest expense 2,940 214,770
Net income $91,480
Additional information:
1. Investments in land were sold at a gain during Y3.
2. Equipment costing $56,000 was sold for $10,550, resulting in a gain.
3. Common shares were issued in exchange for equipment during the year. No other shares were issued.
4. The remaining purchases of equipment were paid for in cash.

Required:

Prepare the statement of cash flow for the year ended December 31, Y3, using the direct method.


Exercise 20.12

Kingsmill Corp. uses the direct method to prepare its statement of cash flows and follows IFRS.

Kingsmill’s trial balances at December 31, Y5 and Y4 were as follows:

  Dec. 31, Y5 Dec. 31, Y4
Debits
Cash $55,000 $31,000
Accounts receivable 33,000 30,000
Inventory 31,000 47,000
Property, plant, and equipment 95,000 90,000
Cost of goods sold 253,000 380,000
Selling expenses 138,000 172,000
Administrative expenses 140,000 151,300
Interest expense 15,600 28,600
Income tax expense 20,200 56,200
$780,800 $986,100

 

Dec. 31, Y5

Dec. 31, Y4

Credits
Allowance for doubtful accounts $1,300 $1,100
Accumulated depreciation 26,500 25,000
Accounts payable 25,000 15,500
Income taxes payable 21,000 29,100
Deferred income tax liability 5,300 4,600
8% callable bonds payable 46,000 45,500
Common shares 53,600 22,000
Retained earnings 44,700 64,600
Sales revenue 557,400 778,700
$780,800 $986,100

Additional information:

  1. Kingsmill purchased $5,000 of equipment during Y5.
  2. Bad debt expense for Y5 was $5,000 and write-offs of uncollectible accounts totalled $4,800.
  3. Kingsmill has adopted the policy of classifying the payments of interest as operating activities on the statement.

Required:

Prepare the statement of cash flows for the year ended December 31, Y5 using the direct method.

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