Question

Suppose on January 1, 2017, a company borrows $50,000 from a bank at a 5 percent annual rate, with principal and interest payment due at the end of 2018. On January 1, 2017, it also acquires furniture with a ten-year useful life and no salvage value for $40,000. On June 30, 2018, it sells the furniture for an $2,000 gain. What are the operating, investing, and financing cash flows associated with these transactions in (1) 2017 and (2) 2018?

Answer 1

Solution:

Requirement:1 Year 2017

For the Year Ended December 31,2017
Cash flows from operating activities:	Inflow /[Outflow]
Cash flow from[used for] investing activities:
Purchase of Furniture	$                    (40,000)
Cash flow from [used for] financing activities:
Borrowing from Bank	$                      50,000

Requirement:2 Year 2018

For the Year Ended December 31,2018
Cash flows from operating activities:	Inflow /[Outflow]
Interest Expense [50000*5/100*2 Years]	$                      (5,000)
Cash flow from[used for] investing activities:
Sale of Furniture [Note:1]	$                      36,000
Cash flow from [used for] financing activities:
Payment of borrowing from Bank	$                    (50,000)

Notes:

1) Sale of Furniture = Cost - Accumulated Depreciation + Gain on Sale

= $40,000 - [$ 40,000 * 1.5 year / 10 years ] + $ 2000

=$ 36,000