20.11 Exercises

Exercise 20.1

Below is a list of independent transactions:

 

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  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:

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:

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

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.:

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:

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:

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.

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.