11.7: Exercises

EXERCISE 11–1 (LO1,2)

The following transactions were carried out by Crozier Manufacturing Limited.

Required: Indicate into which category each transaction or adjustment is placed in the statement of cash flows: operating (O), financing (F), or investing (I) activities. For non-cash investing/financing activities that are disclosed in a note to the financial statements, indicate (NC).

_________________	A payment of $5,000 was made on a bank loan.
_________________	Depreciation expense for equipment was $1,000.
_________________	$10,000 of share capital was issued for cash.
_________________	Cash dividends of $2,500 were declared and paid to shareholders.
_________________	Bonds were issued in exchange for equipment costing $7,000.
_________________	Land was purchased for $25,000 cash.
_________________	$750 of accrued salaries was paid.
_________________	$10,000 of accounts receivable was collected.
_________________	A building was purchased for $80,000: $30,000 was paid in cash and the rest was borrowed.
_________________	A long-term investment in shares of another company was sold for $50,000 cash.
_________________	Equipment was sold for $6,000. The related accumulation depreciation was $3,000 with an original cost of $10,000.
_________________	$1,200 was paid for a 12-month insurance policy in effect next year.
_________________	A patent was amortized for $500.
_________________	Bonds were issued for $50,000 cash.

EXERCISE 11–2 (LO2)

Assume the following selected income statement and balance sheet information for Larriet Inc.:

			Larriet Inc.
Larriet Inc.			Income Statement
Balance Sheet Information			Year Ended December 31, Year 5
(000's)			(000's)
	December 31,
	2023	2022	Sales revenue		$385
Cash	$40	$22	Cost of goods sold	$224
Accounts receivable	34	39	Other operating expenses	135
Merchandise inventory	150	146	Depreciation expense	25
Prepaid expenses	3	2	Loss on sale of machinery	3	(387)
Machinery	125	138	Net loss		$2
Accumulated depreciation	55	42
Accounts payable	29	31
Dividends payable	1	5
Bonds payable	15	38
Common shares	208	150
Retained earnings	44	81

Additional information:

1. Machinery costing $20 thousand was sold for cash.
2. Machinery was purchased for cash.
3. The change in retained earnings was caused by the net loss and the declaration of dividends.

Required:

1. Reconstruct the journal entry regarding the sale of the machinery.
2. Reconstruct the entry regarding the purchase of machinery.
3. Reconstruct the entry regarding the declaration of dividends.
4. Reconstruct the entry regarding the payment of dividends.
5. Prepare the statement of cash flows for the year ended December 31, Year 5.

EXERCISE 11–3 (LO2,3)

The comparative statement of financial positions of Glacier Corporation showed the following at December 31.

	2019		2018
Debits
Cash	$	10	$	8
Accounts receivable		18		10
Merchandise inventory		24		20
Land		10		24
Plant and equipment		94		60
	$	156	$	122
Credits
Accumulated depreciation	$	14	$	10
Accounts payable		16		12
Non-current borrowings		40		32
Common shares		60		50
Retained earnings		26		18
	$	156	$	122

The statement of profit and loss for 2019 was as follows:

Glacier Corporation
Statement of Profit and Loss
For the Year Ended December 31, 2019
Sales			$	300
Cost of sales				200
Gross profit				100
Operating expenses
Rent	$	77
Depreciation		6		83
Income from operations				17
Other gains (losses)
Gain on sale of equipment		1
Loss on sale of land		(4)		(3)
Net income				$ 14

Additional information:

1. Cash dividends paid during the year amounted to $6.
2. Land was sold during the year for $10. It was originally purchased for $14.
3. Equipment was sold during the year that originally cost $7. Carrying amount was $5.
4. Equipment was purchased for $41.

Required:

1. Prepare a statement of cash flows for the year ended December 31, 2019.
2. Comment on the operating, financing, and investing activities of Glacier Corporation for the year ended December 31, 2019.

EXERCISE 11–4 (LO2,3)

The following trial balance has been prepared from the ledger of Lelie Ltd. at December 31, 2019, following its first year of operations.

	(in $000's)
	Debits		Credits
Cash	$	40
Accounts receivable		100
Merchandise inventory		60
Prepaid rent		10
Equipment		160
Accumulated depreciation – equipment			$	44
Patent		-0-
Accounts payable				50
Dividends payable				10
Income taxes payable				8
Note payable – due 2023				80
Common shares				140
Retained earnings				-0-
Cash dividends		20
Sales				225
Depreciation		44
Cost of goods sold		100
Selling and administrative expenses		28
Income taxes expense		10
Gain on sale of land				15
	$	572	$	572

Additional information:

1. A patent costing $30,000 was purchased, and then sold during the year for $45,000.
2. Lelie assumed $100,000 of long-term debt during the year.
3. Some of the principal of the long-term debt was repaid during the year.
4. Lelie issued $40,000 of common shares for equipment. Other equipment was purchased for $120,000 cash. No equipment was sold during the year.

Required:

1. Prepare a statement of cash flows for the year ended December 31, 2019.
2. Explain what the statement of cash flows tells you about Lelei Ltd. at the end of December 31, 2019.

EXERCISE 11–5 (LO2,3)

The accounts balances of ZZ Corp. at December 31 appear below:

	2019		2018
Debits
Cash	$	40,000	$	30,000
Accounts receivable		40,000		30,000
Merchandise inventory		122,000		126,000
Prepaid expenses		6,000		4,000
Land		8,000		30,000
Buildings		220,000		160,000
Equipment		123,000		80,000
	$	559,000	$	460,000
Credits
Accounts payable	$	48,000	$	50,000
Accumulated depreciation		86,000		70,000
Note payable, due 2023		70,000		55,000
Common shares		300,000		250,000
Retained earnings		55,000		35,000
	$	559,000	$	460,000

The following additional information is available:

1. Net income for the year was $40,000; income taxes expense was $4,000 and depreciation recorded on building and equipment was $27,000.
2. Equipment costing $30,000 was purchased; one-half was paid in cash and a 4-year promissory note signed for the balance.
3. Equipment costing $50,000 was purchased in exchange for 6,000 common shares.
4. Equipment was sold for $15,000 that originally cost $37,000. The gain/loss was reported in net income.
5. An addition to the building was built during the year.
6. Land costing $22,000 was sold for $26,000 cash during the year. The related gain was reported in the income statement.
7. Cash dividends were paid.

Required:

1. Prepare a statement of cash flows for the year ended December 31, 2019.
2. What observations about ZZ Corp. can be made from this statement?

EXERCISE 11–6 (LO2,3)

Below is a comparative statement of financial position for Egglestone Vibe Inc. as at December 31, 2016:

Egglestone Vibe Inc.
Statement of Financial Position
	December 31
	2016		2015
Assets:
Cash	$	166,400	$	146,900
Accounts receivable		113,100		76,700
Inventory		302,900		235,300
Land		84,500		133,900
Plant assets		507,000		560,000
Accumulated depreciation – plant assets		(152,100)		(111,800)
Goodwill		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		386,900		430,000
Total liabilities and equity	$	1,183,000	$	1,265,900

Additional information:

1. Net income for the 2016 fiscal year was $24,700. Depreciation expense was $55,900.
2. During 2016, land was purchased for cash of $62,400 for expansion purposes. Six months later, another section of land with a carrying value of $111,800 was sold for $150,000 cash.
3. On June 15, 2016, notes payable of $160,000 was retired in exchange for the issuance of common shares. On December 31, 2016, notes payable for $10,500 were issued for additional cash flow.
4. 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 asset sold was $15,600.
5. Cash dividends were declared and a portion of those were paid in 2016.
6. Goodwill impairment loss was recorded in 2016 to reflect a decrease in the recoverable amount of goodwill. (Hint: Review impairment of long-lived assets in Chapter 8 of the text.)

Required:

1. Prepare a statement of cash flows for the year ended December 31, 2016.
2. Analyse and comment on the results reported in the statement.

EXERCISE 11–7 (LO2)

Below is a comparative statement of financial position for Nueton Ltd. as at June 30, 2016:

Nueton Ltd.
Balance Sheet
	June 30
	2016		2015
Cash	$	55,800	$	35,000
Accounts receivable (net)		80,000		62,000
Inventory		66,800		96,800
Prepaid expenses		5,400		5,200
Equipment		130,000		120,000
Accumulated depreciation		28,000		10,000
Accounts payable		6,000		32,000
Wages payable		7,000		16,000
Income taxes payable		2,400		3,600
Notes payable (long-term)		40,000		70,000
Common shares		230,000		180,000
Retained earnings		24,600		7,400

Nueton Ltd.
Income Statement
For Year Ended June 30, 2016
Sales	$	500,000
Cost of goods sold		300,000
Gross profit		200,000
Operating expenses:
Depreciation expense		58,600
Other expenses		80,000
Total operating expenses		138,600
Income from operations		61,400
Gain on sale of equipment		2,000
Income before taxes		63,400
Income taxes		19,020
Net income	$	44,380

Additional Information:

1. A note is retired at its carrying value.
2. New equipment is acquired during 2016 for $58,600.
3. The gain on sale of equipment costing $48,600 during 2016 is $2,000.

Required: Use the Neuton Ltd. information given above to prepare a statement of cash flows for the year ended June 30, 2016.

EXERCISE 11–8 (LO2)

The trial balance for Yucotin Corp. is shown below. All accounts have normal balances.

Yucotin Corp.
Trial Balance
	December 31
	2016		2015
Cash	$	248,000	$	268,000
Accounts receivable		62,000		54,000
Inventory		406,000		261,000
Equipment		222,000		198,000
Accumulated depreciation, equipment		(104,000)		(68,000)
Accounts payable		46,000		64,000
Income taxes payable		18,000		16,000
Common shares		520,000		480,000
Retained earnings		116,000		58,000
Sales		1,328,000		1,200,000
Cost of goods sold		796,000		720,000
Depreciation expense		36,000		30,000
Operating expenses		334,000		330,000
Income taxes expense		28,000		25,000

Additional information:

1. Equipment is purchased for $24,000 cash.
2. 16,000 common shares are issued for cash at $2.50 per share.
3. Declared and paid $74,000 of cash dividends during the year.

Required: Prepare a statement of cash flows for 2016.

EXERCISE 11–9 (LO2)

Below is an unclassified balance sheet and income statement for Tubric Corp. for the year ended December 31, 2016:

Tubric Corp.
Balance Sheet
	December 31
	2016		2015
Cash	$	40,000	$	20,800
Petty cash		14,400		8,000
Accounts receivable		73,600		31,200
Inventory		95,200		69,600
Long-term investment		0		14,400
Land		64,000		64,000
Building and equipment		370,400		380,000
Accumulated depreciation		98,400		80,800
Total assets	$	559,200	$	507,200
Accounts payable		16,600		31,500
Dividends payable		1,000		500
Bonds payable		20,000		0
Preferred shares		68,000		68,000
Common shares		338,400		338,400
Retained earnings		115,200		68,800
Total liabilities and equity	$	559,200	$	507,200

Tubric Corp.
Income Statement
For the year ended December 31, 2016
Sales			$	720,000
Cost of goods sold				480,000
Gross profit				240,000
Operating expenses	$	110,600
Depreciation expense		34,400
Loss on sale of equipment		3,200
Income tax expense		15,000
Gain on sale of long-term investment		(9,600)		153,600
Net income			$	86,400

During 2016, the following transactions occurred:

1. Purchased equipment for $16,000 cash.
2. Sold the long-term investment on January 2, 2016, for $24,000.
3. Sold equipment originally costing $25,600 for $5,600 cash. Equipment had $16,800 of accumulated depreciation at the time of the sale.
4. Issued $20,000 of bonds payable at par.

Required:

1. Calculate the cash paid dividends for 2016.
2. Prepare a statement of cash flows for Tubric Corp. for the year ended December 31, 2016.

EXERCISE 11–10

This exercise uses the direct method for creating Statements of Cash Flows as explained in Section 11.5.

Below are the unclassified financial statements for Rorrow Ltd. for the year ended December 31, 2015:

Rorrow Ltd.
Balance Sheet
As at December 31, 2015
	2015		2014
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, 2023		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, 2015
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, 2015.
2. Prepare the operating activities section for Rorrow Ltd. for the year ended December 31, 2015.

EXERCISE 11–11

This exercise is similar to Exercise 11–4 except that it uses the direct method for creating Statements of Cash Flows as explained in Section 11.5.

The following trial balance has been prepared from the ledger of Lelie Ltd. at December 31, 2019, following its first year of operations.

	(in $000's)
	Debits		Credits
Cash	$	40
Accounts receivable		100
Merchandise inventory		60
Prepaid rent		10
Equipment		160
Accumulated depreciation – equipment			$	44
Patent		-0-
Accounts payable				50
Dividends payable				10
Income taxes payable				8
Note payable – due 2023				80
Common shares				140
Retained earnings				-0-
Cash dividends		20
Sales				225
Depreciation		44
Cost of goods sold		100
Selling and administrative expenses		28
Income taxes expense		10
Gain on sale of land				15
	$	572	$	572

Additional information:

1. A patent costing $30,000 was purchased, and then sold during the year for $45,000.
2. Lelie assumed $100,000 of long-term debt during the year.
3. Some of the principal of the long-term debt was repaid during the year.
4. Lelie issued $40,000 of common shares for equipment. Other equipment was purchased for $120,000 cash. No equipment was sold during the year.

Required:

1. Prepare a statement of cash flows for the year ended December 31, 2019 using the direct method.
2. Explain what the statement of cash flows tells you about Lelei Ltd. at the end of December 31, 2019.

EXERCISE 11–12

This exercise is similar to Exercise 11–7 except that it uses the direct method for creating Statements of Cash Flows as explained in Section 11.5.

Below is a comparative statement of financial position for Nueton Ltd. as at June 30, 2016:

Nueton Ltd.
Balance Sheet
	June 30
	2016		2015
Cash	$	55,800	$	35,000
Accounts receivable (net)		80,000		62,000
Inventory		66,800		96,800
Prepaid expenses		5,400		5,200
Equipment		130,000		120,000
Accumulated depreciation		28,000		10,000
Accounts payable		6,000		32,000
Wages payable		7,000		16,000
Income taxes payable		2,400		3,600
Notes payable (long-term)		40,000		70,000
Common shares		230,000		180,000
Retained earnings		24,600		7,400

Nueton Ltd.
Income Statement
For Year Ended June 30, 2016
Sales	$	500,000
Cost of goods sold		300,000
Gross profit		200,000
Operating expenses:
Depreciation expense		58,600
Other expenses		80,000
Total operating expenses		138,600
Income from operations		61,400
Gain on sale of equipment		2,000
Income before taxes		63,400
Income taxes		19,020
Net income	$	44,380

Additional Information:

1. A note is retired at its carrying value.
2. New equipment is acquired during 2016 for $58,600.
3. The gain on sale of equipment costing $48,600 during 2016 is $2,000.
4. Assume that Other expenses includes salaries expense of $30,000, interest expense of $5,000 and the remaining for various purchases of goods and services.

Required: Use the Neuton Ltd. information given above to prepare a statement of cash flows for the year ended June 30, 2016 using the direct method.

Problems

PROBLEM 11–1 (LO2)

Assume the following income statement information:

Sales (all cash)	$35
Operating Expenses
Depreciation	10
Income before Other Item	25
Other Item
Gain on Sale of Equipment	8
Net Income	$33

Required:

1. Assume the equipment that was sold for a gain of $8 originally cost $20, had a book value of $4 at the date of disposal, and was sold for $12. Prepare the journal entry to record the disposal. What is the cash effect of this entry?
2. Calculate cash flow from operating activities.

PROBLEM 11–2 (LO2)

Assume the following selected income statement and balance sheet information for the year ended December 31, 2019:

Sales	$200
Cost of Goods Sold	120
Gross Profit	80
Operating Expenses
Rent	30
Net Income	$50

	2023 Dr. (Cr.)	2022 Dr. (Cr.)
Cash	$100	$86
Accounts Receivable	60	40
Inventory	36	30
Prepaid Rent	10	-0-
Retained Earnings	(206)	(156)

Required:

1. Reconcile the change in retained earnings from December 31, 2018 to December 31, 2019.
2. Calculate cash flow from operating activities.

PROBLEM 11–3 (LO2)

Assume the following income statement and balance sheet information:

Revenue	$-0-
Depreciation Expense	(100)
Net Loss	$(100)

	2023 Dr. (Cr.)	2022 Dr. (Cr.)
Cash	$350	$650
Machinery	500	200
Accumulated Depreciation – Machinery	(250)	(150)
Retained Earnings	(600)	(700)

No machinery was disposed during the year. All machinery purchases were paid in cash.

Required:

1. Prepare a journal entry to record the depreciation expense for the year. Determine the cash effect.
2. Prepare a journal entry to account for the change in the Machinery balance sheet account. What is the cash effect of this entry?
3. Prepare a statement of cash flows for the year ended December 31, 2019.

PROBLEM 11–4 (LO2)

Assume the following income statement and balance sheet information:

Service Revenue (all cash)	$175
Operating Expenses
Salaries (all cash)	85
Net Income	$90

	2023 Dr. (Cr.)	2022 Dr. (Cr.)
Cash	$1,350	$1,800
Borrowings	(800)	(1,300)
Retained Earnings	(550)	(500)

Other information: All dividends were paid in cash.

Required:

1. Calculate cash flow from operating activities.
2. Calculate the amount of dividends paid during the year.
3. Calculate cash flow used by financing activities.

PROBLEM 11–5 (LO2)

The following transactions occurred in the Hubris Corporation during the year ended December 31, 2019.

(a) Net income for the year (accrual basis)	$800
(b) Depreciation expense	120
(c) Increase in wages payable	20
(d) Increase in accounts receivable	40
(e) Decrease in merchandise inventory	50
(f) Amortization of patents	5
(g) Payment of non-current borrowings	250
(h) Issuance of common shares for cash	500
(i) Payment of cash dividends	30

Other information: Cash at December 31, 2019 was $1,200.

Required: Prepare a statement of cash flows.

PROBLEM 11–6 (LO2,3)

During the year ended December 31, 2019, the Wheaton Co. Ltd. reported $95,000 of revenues, $70,000 of operating expenses, and $5,000 of income taxes expense. Following is a list of transactions that occurred during the year:

1. Depreciation expense, $3,000 (included with operating expenses)
2. Increase in wages payable, $500
3. Increase in accounts receivable, $900
4. Decrease in merchandise inventory, $1,200
5. Amortisation of patent, $100
6. Non-current borrowings paid in cash, $5,000
7. Issuance of common shares for cash, $12,500
8. Equipment, cost $10,000, acquired by issuing common shares
9. At the end of the fiscal year, a $5,000 cash dividend was declared but not paid.
10. Old machinery sold for $6,000 cash; it originally cost $15,000 (one-half depreciated). Loss reported on income statement as ordinary item and included in the $70,000 of operating expenses.
11. Decrease in accounts payable, $1,000.
12. Cash at January 1, 2019 was $1,000; increase in cash during the year, $37,900
13. There was no change in income taxes owing.

Required:

1. Prepare a statement of cash flows.
2. Explain what this statement tells you about Wheaton Co. Ltd.