Question

Problem 23-5

You have completed the field work in connection with your audit of Waterway Corporation for the year ended December 31, 2017. The balance sheet accounts at the beginning and end of the year are shown below.

		Dec. 31, 2017		Dec. 31, 2016			Increase or (Decrease)
Cash		$327,922		$351,640			($23,718	)
Accounts receivable		553,920		416,540			137,380
Inventory		875,206		719,800			155,406
Prepaid expenses		14,160		9,440			4,720
Investment in subsidiary		130,390		0			130,390
Cash surrender value of life insurance		2,719		2,124			595
Machinery		244,260		224,200			20,060
Buildings		631,536		481,322			150,214
Land		61,950		61,950			0
Patents		81,420		75,520			5,900
Copyrights		47,200		59,000			(11,800	)
Bond discount and issue cost		5,312		0			5,312
		$2,975,995		$2,401,536			$574,459
Income taxes payable		$106,495		$93,928			$12,567
Accounts payable		353,150		330,400			22,750
Dividends payable		82,600		0			82,600
Bonds payable—8%		147,500		0			147,500
Bonds payable—12%		0		118,000			(118,000	)
Allowance for doubtful accounts		41,654		47,200			(5,546	)
Accumulated depreciation—buildings		500,320		472,000			28,320
Accumulated depreciation—machinery		204,140		153,400			50,740
Premium on bonds payable		0		2,832			(2,832	)
Common stock—no par		1,387,916		1,714,776			(326,860	)
Paid-in capital in excess of par—common stock		128,620		0			128,620
Retained earnings—unappropriated		23,600		(531,000	)		554,600
		$2,975,995		$2,401,536			$574,459

STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 2017
January	1, 2017		Balance (deficit)		$(531,000	)
March	31, 2017		Net income for first quarter of 2017		29,500
April	1, 2017		Transfer from paid-in capital		501,500
			Balance		0
December	31, 2017		Net income for last three quarters of 2017		106,200
			Dividend declared—payable January 21, 2018		(82,600	)
			Balance		$23,600

Your working papers from the audit contain the following information:

1.		On April 1, 2017, the existing deficit was written off against paid-in capital created by reducing the stated value of the no-par stock.
2.		On November 1, 2017, 34,928 shares of no-par stock were sold for $303,260. The board of directors voted to regard $5 per share as stated capital.
3.		A patent was purchased for $17,700.
4.		During the year, machinery that had a cost basis of $19,352 and on which there was accumulated depreciation of $6,136 was sold for $10,620. No other plant assets were sold during the year.
5.		The 12%, 20-year bonds were dated and issued on January 2, 2005. Interest was payable on June 30 and December 31. They were sold originally at 106. These bonds were redeemed at 100.9 plus accrued interest on March 31, 2017.
6.		The 8%, 40-year bonds were dated January 1, 2017, and were sold on March 31 at 97 plus accrued interest. Interest is payable semiannually on June 30 and December 31. Expense of issuance was $990.
7.		Waterway Corporation acquired 70% control in Crimson Company on January 2, 2017, for $118,000. The income statement of Crimson Company for 2017 shows a net income of $17,700.
8.		Major repairs to buildings of $8,496 were charged to Accumulated Depreciation—Buildings.
9.		Interest paid in 2017 was $12,390 and income taxes paid were $40,120.

From the information given, prepare a statement of cash flows using the indirect method. A worksheet is not necessary, but the principal computations should be supported by schedules or general ledger accounts. The company uses straight-line amortization for bond interest. (Round answers to 0 decimal places, e.g. 2,500. Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)

Answer 1

Particulars	Amount
Cash from operating activity
Profit after tax	38538
tax amount	33500.00
Profit before tax	72038.00
Changes in working capital adjustments
Add:
Decrease in acc receivable	11265.00
increase in acc payable	26000.00
increase in salaries payable	60600.00
Increase in doubtful allowance	2000.00
Less:
increase in inventory	-59265.00
Increase in cash surrender value	-1610.00
increase in prepaid expense	-8000.00
increase in investment	-200000.00
Net cash flow from operating activity	-96972.00
Cash from investing activity
Increase in building	-125000.00
increase in equipment	-91000.00
increase in patent	-16000.00
decrease in trade marks	-10000.00
Increase in acc dep	75000.00
Cash flow from investing activity	-167000.00
Cash from financing activity
Increase in funds
increase in bonds	100000.00
Decrease in bond	4910.00
premium	7762.00
common stock	25000.00
paid in capital	150000.00
Cash flow from financing activity	287672.00
Total cash changes	-11265.00
Cash at beginning of year	110700.00
Cash at end of the year	99435.00