Chapter 22 Big Statement of Cash Flows

Question 1

1. On April 1, 2025, 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, 2025, 29,600 shares of no-par stock were sold for $257,000. The board of directors voted to regard $5 per share as stated capital.
3. A patent was purchased for $15,000.
4. During the year, machinery that had a cost basis of $16,400 and on which there was accumulated depreciation of $5,200 was sold for $9,000. No other plant assets were sold during the year.
5. The 12%, 20-year bonds were dated and issued on January 2, 2013. 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, 2025.
6. The 8%, 40-year bonds were dated January 1, 2025, 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 $839.
7. Alexander Corporation acquired 70% control in Crimson Company on January 2, 2025, for $100,000. The income statement of Crimson Company for 2025 shows a net income of $15,000.
8. Major repairs to buildings of $7,200 were charged to Accumulated Depreciation—Buildings.
9. Interest paid in 2025 was $10,500 and income taxes paid were $34,000.

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.

Answer 1

OPERATING ACTIVITIES

1. Start with Net Income

→ From Retained Earnings:
25,000 (Q1) + 90,000 (last 3 Qs) = 115,000

2. Add Non-Cash Expenses and Losses

• Loss on Sale of Machinery:
  Book value = 16,400 – 5,200 = 11,200
  Sold for 9,000 → Loss = 2,200
• Depreciation of Machinery:
  173,000 – 130,000 = 43,000
  But the statement uses: 48,200
  ✔ Includes the 5,200 on sold asset → Dep. = 43,000 + 5,200 = 48,200
• Gain on Redemption of Bonds:
  Face value of bonds: $100,000
  Issued at a 6% premium (sold at 106) →
  Premium = $100,000 × 6% = $6,000
  Amortization of premium:
  Bonds issued Jan 2, 2013, redeemed Mar 31, 2025 → 12.25 years elapsed
  Straight-line method over 20 years →
  6,000 / 20 = 300 per year
  300 x 12.25 = 3,675 amortized
  6,000 - 3,675 = 2,325
  100,000 + 2,325 = 102,325
  100,000 x 1.009 = 100,900
  102,325 - 100,900 = 1,425
• Depreciation of Building:
  424,000 – 400,000 = 24,000
  PLUS repairs of 7,200 charged to Acc. Depreciation → Total = 31,200
• Amortization of Patents:
  Balance sheet shows:
  2024: $64,000 → 2025: $69,000 → Increase = $5,000
  If purchase was $15,000 and net increase was $5,000,
  → Amortization = 15,000 – 5,000 = $10,000
• Amortization of Copyrights:
  50,000 – 40,000 = 10,000 decrease → fully amortized
  → 10,000
• Amortization of Bond Discount (8% Bonds):
  Face = 125,000
  Sold at 97: 125,000 x 0.97 = 121,250
  Discount = 125,000 - 121,250 = 3,750
  3,750 + 839 = 4,589
  40 years - 3 months = 477 months
  4,589 / 477 = 9.62
  9.62 x 9 months = 87
  ​
• Amortization of Bond Premium (12% Bonds):
  Face = 100,000
  Sold at 106: 100,000 x 6% = 6,000
  Original premium = 6,000
  6,000 / 20 = 300
  Portion amortized in 2025 before redemption (January - March): 300 x 3/12 = 75
• Equity in Earnings of Subsidiary (Noncash):
  15,000 × 70% = (10,500)

3. Adjust for Changes in Working Capital

• Increase in A/R:
  469,424 – 353,000 = (116,424)
  → Adjusted for allowance increase of 4,700
  → Net = (121,124)
• Increase in Inventory:
  741,700 – 610,000 = (131,700)
• Increase in Prepaid Expenses:
  12,000 – 8,000 = (4,000)
• Increase in Income Taxes Payable:
  90,250 – 79,600 = 10,650
• Increase in Accounts Payable:
  299,280 – 280,000 = 19,280

115,000 + 2,200 - 1,425 + 48,200 + 31,200 + 10,000 + 10,000 + 87 - 75 - 10,500 - 121,124 - 131,700 - 4,000 + 10,650 + 19,280 = (22,207)
TOTAL: Net Cash Used in Operating Activities = (22,207)

INVESTING ACTIVITIES

• Sale of Machinery:
  Sold for 9,000
• Investment in Subsidiary:
  → (100,000) (Crimson acquisition)
• Addition to Buildings:
  535,200 - 407,900 = 127,300
• Major Repairs to Building:
  (7,200)
• Purchase of Machinery:
  207,000
  190,000 - 16,400 = 173,600
  207,000 - 173,600 = (33,400)
• Purchase of Patent:
  → (15,000)
• Increase in Cash Surrender Value of Life Insurance:
  2,304 – 1,800 = (504)

9,000 - 100,000 - 127,300 - 7,200 - 33,400 - 15,000 - 504 = (274,404)
TOTAL: Net Cash Used in Investing = ($274,404)

FINANCING ACTIVITIES

• Redemption of 12% Bonds:
  100,000 × 100.9% = (100,900)
• Sale of 8% Bonds (March 31):
  Face = 125,000 at 97 = 121,250
  Discount = (3,750), Issue Cost = (839)
  → Cash received = 120,411
• Sale of Stock (Nov 1):
  257,000

-100,900 + 120,411 + 257,000 = 276,511
TOTAL: Net Cash Provided by Financing = $276,511

SUMMARY

• Net Cash Change:
  Operating: (22,207)
  Investing: (274,404)
  Financing: +276,511
  → Net = (20,100)
• Beginning Cash:
  298,000
• Ending Cash:
  277,900 (matches balance sheet)

NONCASH DISCLOSURE

• April 1, 2025:
  Reduction of stock stated value to eliminate deficit:
  → $425,000 noncash transaction