Question

The comparative balance sheets for Larkspur Corporation show the following information.

		December 31
		2017		2016
Cash		$33,700		$13,200
Accounts receivable		12,100		9,900
Inventory		12,000		9,100
Available-for-sale debt investments		–0–		3,000
Buildings		–0–		29,500
Equipment		45,000		19,800
Patents		5,000		6,100
		$107,800		$90,600
Allowance for doubtful accounts		$3,100		$4,500
Accumulated depreciation—equipment		2,000		4,500
Accumulated depreciation—building		–0–		6,100
Accounts payable		5,000		3,000
Dividends payable		–0–		4,900
Notes payable, short-term (nontrade)		2,900		4,000
Long-term notes payable		31,000		25,000
Common stock		43,000		33,000
Retained earnings		20,800		5,600
		$107,800		$90,600

Additional data related to 2017 are as follows.

1.		Equipment that had cost $11,100 and was 40% depreciated at time of disposal was sold for $2,500.
2.		$10,000 of the long-term note payable was paid by issuing common stock.
3.		Cash dividends paid were $4,900.
4.		On January 1, 2017, the building was completely destroyed by a flood. Insurance proceeds on the building were $30,200 (net of $2,100 taxes).
5.		Investments (available-for-sale) were sold at $1,800 above their cost. The company has made similar sales and investments in the past.
6.		Cash was paid for the acquisition of equipment.
7.		A long-term note for $16,000 was issued for the acquisition of equipment.
8.		Interest of $2,000 and income taxes of $6,400 were paid in cash.

Prepare a statement of cash flows using the indirect method. Flood damage is unusual and infrequent in that part of the country.

Answer 1

Calculation:

Sale of Equipment:
Book Value of Equipment on the date of Sale = $11,100 – ($11,100 * 40%)
Book Value of Equipment on the date of Sale = $6,660

Gain / (Loss) on sale of Equipment = Sales Proceeds - Book Value of Equipment on the date of Sale
Gain / (Loss) on sale of Equipment = $2,500 - $6,660
Loss on sale of Equipment = -$4,160

Purchase of Equipment:
Equipment – December 31, 2017 = Equipment – December 31, 2016 + Purchase of Equipment – Cost of Equipment sold
$45,000 = $19,800 + Purchase of Equipment - $11,100
Purchase of Equipment = $36,300

Equipment purchased with cash = Purchase of Equipment – Equipment purchased against Common Stock
Equipment purchased with cash = $36,300 - $16,000
Equipment purchased with cash = $20,300

Flood Damage:
Book Value of Building, Net = $29,500 - $6,100
Book Value of Building, Net = $23,400

Gain / (Loss) due to Flood = Insurance proceeds – Book Value of Building, Net
Gain / (Loss) due to Flood = ($30,200 + $2,100) - $23,400
Gain due to Flood = $8,900

Sale of Investment:
Sale Proceeds from Investments = $3,000 + $1,800
Sale Proceeds from Investments = $4,800

Depreciation Expense = Accumulated Depreciation – December 31, 2017 + Depreciation of Equipment sold - Accumulated Depreciation – December 31, 2016
Depreciation Expense = $2,000 + $4,440 - $4,500
Depreciation Expense = $1,940