Question

The comparative balance sheets for Skysong Corporation show the following information. December 31 2017 2016 Cash $33,600 $13,000 Accounts receivable 12,100 10,000 Inventory 12,200 9,000 Available-for-sale debt investments –0– 3,000 Buildings –0– 30,000 Equipment 45,100 19,900 Patents 5,100 6,300 $108,100 $91,200 Allowance for doubtful accounts $3,100 $4,500 Accumulated depreciation—equipment 2,000 4,500 Accumulated depreciation—building –0– 6,000 Accounts payable 5,100 3,000 Dividends payable –0– 5,000 Notes payable, short-term (nontrade) 3,000 4,100 Long-term notes payable 31,000 25,000 Common stock 43,000 33,000 Retained earnings 20,900 6,100 $108,100 $91,200 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 $5,000. 4. On January 1, 2017, the building was completely destroyed by a flood. Insurance proceeds on the building were $29,700 (net of $2,100 taxes). 5. Investments (available-for-sale) were sold at $1,700 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 $6,600 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

Skysong Corporation
Statement of Cash Flows
For the Year Ended December 31, 2017
Cash flows from operating activities
Net income (a)		$14,800
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on sale of equipment (b)	$4,160
Gain from flood damage [($29,700 + $2,100) – ($30,000 – $6,000)]	(7,800)
Depreciation expense (c)	1,940
Patent amortization	1,200
Gain on sale of investments	(1,700)
Increase in Accts Rec (net) [($12,100–$3,100)–($10,000–$4,500)]	(3,500)
Increase in inventory	(3,200)
Increase in accounts payable	2,100	(6,800)
Net cash provided by operating activities		$8,000
Cash flows from investing activities
Sale of investments	$4,700
Sale of equipment	2,500
Purchase of equipment (d)	(20,300)
Proceeds from flood damage to building	31,800
Net cash provided by investing activities		$18,700
Cash flows from financing activities
Payment of dividends	($5,000)
Payment of short-term note payable	(1,100)
Net cash used by financing activities		($6,100)
Increase in cash		$20,600
Cash, January 1, 2017		13,000
Cash, December 31, 2017		$33,600

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	2,000
Income taxes:	6,600
Noncash investing and financing activities
Retired note payable by issuing common stock	$10,000
Purchased equipment by issuing note payable	16,000
	$26,000

Working notes for the above answer is as under

(A)

(a) Ending retained earnings	$20,900
Beginning retained earnings	(6,100)
Net income	$14,800

(B)

(b) Cost	$11,100
Accumulated depreciation (40% * $11,100)	(4,440)
Book value	6,660
Proceeds from sale	(2,500)
Loss on sale	$4,160

(C)

(c) Accumulated depreciation on equipment sold

Decrease in accumulated depreciation

Depreciation expense

(D)

(d) Beginning equipment balance	$19,900
Cost of equipment sold	(11,100)
Remaining balance	8,800
Purchase of equipment with note	16,000
Adjusted balance	24,800
Ending equipment balance	(45,100)
Purchased with cash	$20,300