Question

Use the following information about Valerie Sporty to answer Questions 28 – 32. Valerie Sporty has just acquire a brand-spanking new, shiny red sports car (for her business, of course) at a cash price of $70,000. She put a certain amount down and financed the balance with a note requiring that Valerie make five equal year-end payments to retire the debt. A partial amortization table is as follows:

Period	Payment	Interest	Principal	Carrying Value
0				$60,000
1	$15,426	$5,400	$10,026	49,974
2	15,426	4,498	10,928	39,046
3	15,426	3,514	11,912	27,134

30.        What amount or amounts will be reported on the Year 1 statement of cash flows for Valerie’s business? In what section or sections? What would be the likely label or labels used?

31.        What amount from this table will be reported on the Year 2 income statement for Valerie’s business? What will it likely be called?

32.        At the end of Year 3, what amount or amounts from this table will be reported on the balance sheet for Valerie’s business? In what section/s and under what title/s?

Answer 1

1) Purchase of vehicle such as a car is an investing activity. Given that the value of car is$70,000 and a down payment was made. The carrying value of the car at the begining is given as $60,000.Therefore the value of down payment will be,

The actual cost of car - Carrying value at the beginning

I.e= $70,000-$60,000

I.e= $10,000.

Therefore during first, year the following transaction as shown below,

a) Periodic payment- As installment payment at investing activities on cash flow statement as an out flow.

b) Payment of interest-will not be shown at investing activity as it is an expenditure. It will be debited at P&L

c) Payment of Principle.- As payment of principal at investing activity in cash flow statement. It will be shown as out flow.

d) Payment of down payment- This will shown as out flow in the name of payment at investing activities in cash flow statement.

2) Of all the elements given at table for year 2, only the payment of interest is an expenditure. All other elements are liabilities relating to an asset purchase. So it will be taken at investing activities at cash flow statement. The interest paid will appear at income statement as interest expense.

3) Other than the value of asset (car) , shown as a fixed asset at balance sheet, the amount outstanding towards payment pending for car purchase , will be shown as outstandings or A/C payable under current liabilities at the balance sheet.