Financial and Managerial Accounting (Looseleaf) (Custom Package)
Financial and Managerial Accounting (Looseleaf) (Custom Package)
6th Edition
ISBN: 9781259754883
Author: Wild
Publisher: MCG
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Chapter 12, Problem 1GLP
To determine

Statement of cash flows:

The statement of cash flow is a financial statement, which provides a summary of actual or anticipated cash inflow and cash outflow in a firm over an accounting period. It determines the net changes in cash through reporting the sources and uses of cash due to operating, investing, and financial activities of a company.

Journal entry:

Journal is the primary record of the business transaction in chronological (date wise) order. Journal entry contains two effects, one is debit and the other is credit, under the double entry book keeping system.

To prepare: Summary journal entries reflecting changes in consecutive trial balances.

Expert Solution & Answer
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Explanation of Solution

Prepare the journal entries as shown below.

a.

Retirement of the notes payable:

Date Particulars L/F Amount
($)
Amount
($)
  Notes payable   30,000  
  Cash     30,000
  (To record the retirement of notes payable)      

Table (1)

• Notes payable account is a liability account. Since notes payable has been retired it decreases the liability of the company. So, the notes payable account is debited.

• Cash is an assets account of the company. Here, cash has been paid to retire the notes payable which decrease the assets of the company. So, the cash account is credited.

b.

Payment of dividend:

Date Particulars L/F Amount
($)
Amount
($)
  Dividend   90,310  
  Cash     90,310
  (To record the payment of dividend)      

Table (2)

• Dividend is an expense account to a company. Here, dividend is being paid which increases the expense for the company. So, dividend expense account is credited.

• Cash is an asset to a company. Here, cash has been paid for the payment of dividend which decreases the assets of the company. So, cash account is credited.

c.

Purchase of equipment:

Date Particulars L/F Amount
($)
Amount
($)
  Equipment   48,600  
  Cash     48,600
  (To record the purchase of equipment)      

Table (3)

• Equipment account is an asset account. Here, assets have been purchased which increases the assets of the company. So, equipment account is debited.

• Cash is an asset account. Here, cash has been paid to acquire equipment, which decreases the assets of the company. So, cash account is credited

d.

Sale of the equipment:

Date Particulars L/F Amount
($)
Amount
($)
  Cash   50,600  
  Profit and loss     2,000
  Equipment     48,600
  (To record the sale of the equipment)      

Table (4)

• Cash account is an asset account. Here, cash has been received by the company which increases the assets of the company. So, cash account is debited.

• Profit and loss account is a revenue account. Here, gain on the sale of equipment is revenue earned by the company. So, the profit and loss account is credited.

e.

Increase in the accounts receivable:

Date Particulars L/F Amount
($)
Amount
($)
  Account receivable   14,000  
  Sales     14,000
  (to record the account receivable)      

Table (5)

• Accounts receivable account is an assets account. Here, accounts receivable increases on the sale on credit. So, accounts receivable account is debited.

• Sales account is a revenue account. Here, sales generate revenue for the company. So, sales account is credited.

Decrease in the prepaid expenses:

Date Particulars L/F Amount
($)
Amount
($)
  Expense   1,000  
  Prepaid expense     1,000
  (To record the prepaid expenses)      

Table (6)

• Expenses being an expense account it increases and equity decreases. Hence, expense account is debited.

• Prepaid expense is an assets account. Here, the prepaid expense decreases so, prepaid expense account is credited.

Decrease in the accounts payable:

Date Particulars L/F Amount
($)
Amount
($)
  Accounts payable   5,000  
  Cash     5,000
  (To record the account payable)      

Table (7)

• Accounts payable is a liability account. Since, account payable reduces the equity of the company, so it must be debited.

• Cash is an assets account. Since, the cash of the company is reducing, so, it must be credited.

Decrease in the wages payable:

Date Particulars L/F Amount
($)
Amount
($)
  Wages payable   9,000  
  Cash     9,000
  (To record the wages payable)      

Table (8)

• Wages payable is a liability account. Since, wages payable reduces the equity of the company, so wages payable is debited.

• Cash is an asset account. Since, the cash of the company is reducing, so, the cash account is credited.

Decrease in the income tax payable:

Date Particulars L/F Amount
($)
Amount
($)
  Income tax payable   400  
  Cash     400
  (To record the income tax payable)      

Table (9)

• Income tax payable is a liability account. Since, income tax payable is decreasing. Hence, the income tax payable account is debited.

• Cash is an asset account. Since, the cash of the company is reducing, so, cash account is credited.

f.

Sale of the inventory on credit:

Date Particulars L/F Amount
($)
Amount
($)
  Sundry debtor   22,700  
  Inventory account     22,700
  (To record the sale of the inventory)      

Table (10)

• Sundry debtor account is an asset account. Here, debtors of the company are increasing. So, the sundry debtor account is debited.

• Inventory is an asset account. Here, the assets of the company are decreasing which decreases the assets of the company. So, the inventory account is credited.

Now, prepare the cash flow statement using the direct method as shown below.

Particulars Amount ($) Amount ($)
Cash flow from operating activities    
Cash collected from customers 664,000  
Cash paid to suppliers (393,300)  
Cash paid for other expense (75,000)  
Cash paid for income tax (44,290)  
Cash flow from operating activities (A)   151,410
Cash flow from investing activities:    
Cash received on sale of the equipment 10,000  
Cash paid for new equipment (57,600)  
Cash flow from investing activities (B)   (47,600)
Cash flow from financing activities:    
Cash from issuance of share 60,000  
cash paid on retirement (30,000)  
Cash paid for dividend (90,310)  
Cash flow from financing activities (C)   (60,310)
Net increase in cash (A)+(B)+(C)   43,500
Cash and cash equivalent, December 31, 2014   44,000
Cash and cash equivalent, December 31, 2015   87,500

Table (11)

Working notes:

1. Calculate the cash collected from the customer.

Cashcollectedfromcustomer=SalesrevenueIncreaseinaccountsreceivable=$678,000$14,000=$664,000

2. Calculate the cash paid to supplies.

Cashpaidtosupplies=(Costofgoodssold+DecreaseinaccountspayableDecreaseininventory)=$411,000+$5,000$22,700=$393,300

3. Calculate the cash paid for other expenses.

Cashpaidotherexpenses=(OtherexpenseDecreaseinprepaidexpenseDecreaseinwagespayable)=$67,000$1,000$9,000=$57,000

4. Calculate the cash received on the sale of equipment.

Particulars Amount ($)
Accumulated depreciation 2014 9,000
Add: Depreciation for the year 58,600
Less: Accumulated depreciation (27,000)
Depreciation on equipment sold 40,600
Original cost of the equipment sold 48,600
Less: Depreciation on equipment (40,600)
Book value of the equipment sold 8,000
Add: Gain on sale 2,000
Cash received on sale of equipment 10,000

Table (12)

5. Calculate the cash dividend paid.

Cashdividends=(Retainedearningopeningbalance+NetincomeRetainedeariningbalance)=$24,100+$99,510$33,300=$90,310

Now, prepare the cash flow statement using the indirect method as shown below.

Particulars Amount ($) Amount ($)
Cash flow from operating activities    
Net income 99,510  
Adjustment for non cash expense    
Add: Depreciation 58,600  
Less: Gain on sale of the machinery (2,000)  
Adjustment for working capital change    
Add: Increase in working capital (4,700)  
Net cash flow from operating activities   151,410
Cash flow from investing activities    
Cash received on sale of equipment 10,000  
Cash paid for acquiring new equipment (57,600)  
Cash flow from investing activities   (47,600)
Cash flow from financing activities:    
Cash from issuance of share 60,000  
cash paid on retirement (30,000)  
Cash paid for dividend (90,310)  
Cash flow from financing activities:   (60,310)
Net increase in cash (A)+(B)+(C)   43,500
Cash and cash equivalent, December 31, 2014   44,000
Cash and cash equivalent, December 31, 2015   87,500

Table (13)

Working note:

1. Calculate the working capital change.

Particulars 2015 2014 Increase/
Decrease
Accounts receivable 63,800 51,000 14,000
Inventory 63,800 86,500 (22,700)
Prepaid expenses 4,400 5,400 (1,000)
Increase (Decrease) in current assets (D)     (9,700)
Accounts payable 25,000 30,000 5,000
Wages payable 6,000 15,000 (9,000)
Income tax payable 3,400 3,800 (400)
Increase(decrease) in current liabilities (E)     (14,400)
Increase (Decrease) in working capital (D – E)     4,700

Table (14)

2. Calculate the cash received on the sale of equipment.

Particulars Amount ($)
Accumulated depreciation 2014 9,000
Add: Depreciation for the year 58,600
Less: Accumulated depreciation (27,000)
Depreciation on equipment sold 40,600
   
Original cost of the equipment sold 48,600
Less: Depreciation on equipment (40,600)
Book value of the equipment sold 8,000
Add: Gain on sale 2,000
Cash received on sale of equipment 10,000

Table (15)

Working note:

Calculate the cash dividend paid.

Cashdividends=(Retainedearningopeningbalance+NetincomeRetainedeariningbalance)=$24,100+$99,510$33,300=$90,310

Reconciliation of the cash flow using the direct and indirect method:

Particulars Amount ($) Amount ($)
Cash flow from operating activities:    
Net income 99,510  
Adjustment for non cash expense    
Add: Depreciation 58,600  
Less: Gain on sale of the machinery (2,000)  
Adjustment for working capital change:    
Add: Increase in working capital (4,700)  
Net cash flow from operating activities   151,410
     
Cash flow statement (Direct method)    
Cash flow from operating activities:    
Cash collected from customers 664,000  
Cash paid to suppliers (393,300)  
Cash paid for other expense (75,000)  
Cash paid for income tax (44,290)  
Cash flow from operating activities   151,410

Table (16)

Conclusion

Hence, the journal entries reflecting changes in consecutive trial balances are prepared as above.

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Chapter 12 Solutions

Financial and Managerial Accounting (Looseleaf) (Custom Package)

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