Question

Selected financial statement information and additional data for Johnston Enterprises is presented below.

Johnston Enterprises

Statement of Financial Position and Income Statement Data

                                                                                          December 31,        December 31,

                                                                                              2019           2018

Property, Plant, and Equipment                           HK$1,241,000     HK$ 1,122,000

Less: Accumulated Depreciation                             (477,000)           (442,000)

                                                                                  764,000            680,000

Current Assets:

Inventory                                                                391,000             340,000

Accounts Receivable                                            238,000                 306,000

Cash                                                                     154,000                 119,000

Total Current Assets                                     783,000                 765,000

Total Assets                                                         HK$1,547,000      HK$1,445,000

Equity:

Share Capital–Ordinary                                 HK$ 510,000        HK$ 467,500

Retained Earnings                                                374,000                 340,000

Total Equity 884,000              807,500

         Non-Current Liabilities:

Bonds Payable                                                              340,000                 391,000

Current Liabilities:

Accounts Payable                                                      187,000                 102,000

Notes Payable                                                              51,000                   68,000

Income Taxes Payable 85,000               76,500

Total Current Liabilities 323,000                 246,500

Total Liabilities    663,000                 637,500

Total Liabilities & Equity HK$1,547,000      HK$1,445,000

Sales Revenue                                                     HK$1,615,000      HK$1,513,000

Less Cost of Goods Sold                                              731,000                 731,000

Gross Profit                                                                   884,000                 782,000

Expenses:

Depreciation Expense                                             154,000                 136,000

Salaries and Wages Expense                              391,000                 357,000

Interest Expense                                                        34,000                   34,000

Loss on Sale of Equipment    17,000                 0

Income Before Taxes 288,000                 255,000

Less Income Tax Expense 119,000             102,000

Net Income HK$ 169,000     HK$ 153,000

Additional Information:

During the year, Johnston sold equipment with an original cost of HK$153,000 and accumulated depreciation of HK$119,000 and purchased new equipment for HK$272,000.

1. Calculate the dividend declared in 2019. Show your workings.
2. Prepare The Statement of cash flows for the year ending December 31, 2019.
3. A clerical staff asked you whether all the dividend declared in 2019 has been paid. Please advise to him.
4. A clerical staff asked you if a transaction for cash sales in 2019 has not been recorded, how would this affect your preparation of statement of cash flow? Please advise him.

Answer 1

a) DIVIDEND DECLARED = BEGINNING RETAINED EARNING +NET INCOME FOR 2019 - ENDING RETAINED EARNING

                = 340000 +169000 - 374000

                = 135000

B)

Johnston Enterprises STATEMENT OF CASH FLOW FOR THE YEAR ENDED DECEMBER 31,2019
CASH FLOW FROM OPERATING ACTIVITY
Net income		169000
Adjustment to reconcile net income to cash flow
Depreciation expense	154000
loss on sale of equipment	17000
Increase in inventory [391000-340000]	-51000
Decrease in accounts receivable [306000-238000]	68000
Increase in accounts payable [187000-102000]	85000
Decrease in notes payable	-17000
Increase in income tax payable	8500
		264500
CASH FLOW FROM OPERATING ACTIVITY [A]		433500
CASH FLOW FROM INVESTING ACTIVITY
Sale of equipment	17000
Purchase of equipment	-272000
CASH FLOW FROM INVESTING ACTIVITY [B]		- 255000
CASH FLOW FROM FINANCING ACTIVITY
Payment of Bond payable [391000-340000]	-51000
Dividend paid	-135000
Issue of share capital [510000-467500]	42500
CASH F LOW FROM FINANCING ACTIVITY [C]		- 143500
NET INCREASE /(DECREASE )IN CASH [A+B+C]		35000
BEGINNING CASH BALANCE		119000
CASH AT END		154000

**BOOK VALUE OF EQUIPMENT SOLD = 153000-119000=34000

CASH RECEIVED FROM SALE =BOOK VALUE -LOSS ON SALE

                                       = 34000 -17000

                                       = 17000

c)Since there is no liability at year end relating to dividend (Dividend payable is 0) ,it means all of the dividend declared is paid during the year

d)If cash sales has not been recorded ,cash flow from operating activity as well as cash balance at year end is understated by amount of sales .