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ACCT 2220 Lecture Notes - Lecture 9: Finance Lease, Accelerated Depreciation, Operating Lease

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graytoad906
28 Feb 2016
School
University of Guelph
Department
Accounting
Course
ACCT 2220
Professor
Joseph Radocchia

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Document Summary

Property, plant and equipment are long-lived resources that a company controls, are tangible and are not intended for sale to customers. Used for the production and sale of goods or services to customers, for rentals to others, or for administrative purposes. In general, costs that benefit only the current period are expensed (operating expenditures) Costs that benefit future periods are included (capitalized) in a long-lived asset account and recorded as either property, plant or equipment (capital expenditures) Obligations to dismantle, remove or restore the long-lived asset when it is retired have costs that must be estimated and included in the cost of the asset (asset retirement costs) Land improvements structural additions made to land: decline in service potential over time, require maintenance and replacement. Buildings includes all costs that are directly related to its purchase or construction: if land and a building are purchased together for a single price, the fair value of each must be determined and recorded separately.

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Related Questions

The following changes took place last year in Pavolik Company’s balance sheet accounts:

Asset and Contra-Asset Accounts Liabilities and Stockholders' Equity Accounts
Cash $ 32 D Accounts payable $ 98 I
Accounts receivable $ 36 I Accrued liabilities $ 36 D
Inventory $ 82 D Income taxes payable $ 41 I
Prepaid expenses $ 31 I Bonds payable $ 300 I
Long-term investments $ 33 D Common stock $ 144 D
Property, plant, and equipment $ 575 I Retained earnings $ 118 I
Accumulated depreciation $ 118 I

D = Decrease; I = Increase.

Long-term investments that cost the company $33 were sold during the year for $70 and land that cost $69 was sold for $36. In addition, the company declared and paid $30 in cash dividends during the year. Besides the sale of land, no other sales or retirements of plant and equipment took place during the year. Pavolik did not retire any bonds during the year or issue any new common stock.

The company’s income statement for the year follows:

Sales $ 1,380
Cost of goods sold 614
Gross margin 766
Selling and administrative expenses 540
Net operating income 226
Nonoperating items:
Loss on sale of land $ (33 )
Gain on sale of investments 37 4
Income before taxes 230
Income taxes 82
Net income $ 148

The company’s beginning cash balance was $152 and its ending balance was $120.

Required:

1. Use the indirect method to determine the net cash provided by operating activities for the year.

2. Prepare a statement of cash flows for the year.

EXERCISE 14-4 Prepare a statement of Cash Flows (L014-1, L014-2] The following changes took place last year in Pavolik Company's balance sheet accounts: Asset and Contra-Asset Accounts Cash .. $5 Accounts receivable ... . . . . . . . $110 Inventory ................... $70 Prepaid expenses ............ $9 Long-term investments ........ $6 Property, plant, and equipment ... $185 Accumulated depreciation ..... $60 D L D Liabilities and Equity Accounts Accounts payable ............ $35 Accrued liabilities Income taxes payable ......... $8 Bonds payable ............... .. $150 Common stock ... Common stock .............. $80 Retained earnings ............ $54 D D D 1 D = Decrease; I = Increase Long-term investments that had cost the company S6 were sold during the year for $16 and land that had cost $15 was sold for $9. In addition, the company declared and paid $30 in cash dividends during the year. Besides the sale of land, no other sales or retirements of plant and equip ment took place during the year. Pavolik did not retire any bonds during the year or issue any new common stock The company's income statement for the year follows: $700 400 300 Sales ...... Cost of goods sold .. Gross margin .. Selling and administrative expenses .......... Net operating income ............ Nonoperating items: Loss on sale of land ..................... Gain on sale of investments .............. Income before taxes .......... ............ Income taxes ................ Net income ............. log The company's beginning cash balance was $90 and its ending balance was $85. Required: 1. Use the indirect method to determine the net cash provided by operating activities for the year. 2. Prepare a statement of cash flows for the year.

Comparative financial statement data for Carmono Company follow:
This Year Last Year
Assets
Cash $ 7.50 $ 14.00
Accounts receivable 50.00 43.00
Inventory 92.50 79.20
Total current assets 150.00 136.20
Property, plant, and equipment 231.00 194.00
Less accumulated depreciation 45.60 34.20
Net property, plant, and equipment 185.40 159.80
Total assets $ 335.40 $ 296.00
Liabilities and Stockholders’ Equity
Accounts payable $ 55.50 $ 46.00
Common stock 118.00 91.00
Retained earnings 161.90 159.00
Total liabilities and stockholders’ equity $ 335.40 $ 296.00
For this year, the company reported net income as follows:
Sales $ 850.00
Cost of goods sold 510.00
Gross margin 340.00
Selling and administrative expenses 320.00
Net income $ 20.00

This year Carmono declared and paid a cash dividend. There were no sales of property, plant, and equipment during this year. The company did not repurchase any of its own stock this year.

Carmono CompanyStatement of Cash Flows - Indirect MethodFor This Year Ended December 31Operating activities:Net income$20.00Adjustments to convert net income to a cash basis:Depreciation$11.40Increase in accounts receivable(7.00)Increase in inventory(13.30)Increase in accounts payable9.500.60Net cash provided by operating activities20.60Investing activities:Increase in plant and equipment(37.00)Net cash used in investing activities(37.00)Financing activities:Increase in common stock27.00Cash dividends(17.10)Net cash provided by financing activities9.90Net decrease in cash(6.50)Beginning cash and cash equivalents14.00Ending cash and cash equivalents$7.50
2.

Compute Carmono’s free cash flow for this year. (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to 2 decimal places.)

Free cash flow$

3.

Changes in various accounts and gains and losses on the sale of assets during the year for Argon Company are given below:


Item Amount
Accounts receivable $ 79,000 decrease
Inventory $ 120,000 increase
Prepaid expenses $ 3,500 decrease
Accounts payable $ 41,000 decrease
Accrued liabilities $ 9,600 increase
Income taxes payable $ 15,700 increase
Sale of equipment $ 8,100 gain
Sale of long-term investments $ 12,200 loss


Required:

For each item, indicate whether the dollar amount should be added to or deducted from net income under the indirect method when computing the net cash provided by operating activities for the year.
Item Amount Effect
Accounts receivable
Inventory
Prepaid expenses
Accounts payable
Accrued liabilities
Income taxes payable
Sale of equipment
Sale of long-term investments

4.

Apex Company prepared the statement of cash flows for the current year that is shown below:


Apex Company
Statement of Cash Flows—Indirect Method
Operating activities:
Net income $ 41,500
Adjustments to convert net income to cash basis:
Depreciation $ 20,100
Increase in accounts receivable (61,500)
Increase in inventory (25,100)
Decrease in prepaid expenses 9,400
Increase in accounts payable 54,300
Decrease in accrued liabilities (10,100)
Increase in income taxes payable 3,300 (9,600)
Net cash provided by operating activities 31,900
Investing activities:
Proceeds from the sale of equipment 15,200
Loan to Thomas Company (41,900)
Additions to plant and equipment (121,800)
Net cash used for investing activities (148,500)
Financing activities:
Increase in bonds payable 88,800
Increase in common stock 38,700
Cash dividends (28,400)
Net cash provided by financing activities 99,100
Net decrease in cash (17,500)
Beginning cash balance 27,200
Ending cash balance $ 9,700


Required:

Compute Apex Company’s free cash flow for the current year. (Negative amount should be indicated by a minus sign.)

Free Cash Flow

5.

For the just completed year, Hanna Company had net income of $95,000. Balances in the company’s current asset and current liability accounts at the beginning and end of the year were as follows:


December 31
End of Year Beginning of Year
Current assets:
Cash $ 59,000 $ 80,000
Accounts receivable $ 164,000 $ 184,000
Inventory $ 448,000 $ 346,000
Prepaid expenses $ 11,500 $ 15,000
Current liabilities:
Accounts payable $ 366,000 $ 392,000
Accrued liabilities $ 8,000 $ 13,000
Income taxes payable $ 32,000 $ 25,000

The Accumulated Depreciation account had total credits of $42,000 during the year. Hanna Company did not record any gains or losses during the year.


Required:

Use the indirect method to determine the net cash provided by (or used in) operating activities for the year. (List any deduction in cash and cash outflows as negative amounts.)