Karane Enterprises, a calendar-year manufacturer based in College Station, Texas, began business in 2020. In the process of setting up the business, Karane has acquired various types of assets. Below is a list of assets acquired during 2020: Asset Cost Date Placed in Service Office furniture $ 150,000 02/03/2020 Machinery 1,560,000 07/22/2020 Used delivery truck* 40,000 08/17/2020 *Not considered a luxury automobile. During 2020, Karane was very successful (and had no §179 limitations) and decided to acquire more assets in 2021 to increase its production capacity. These are the assets acquired during 2021: Asset Cost Date Placed in Service Computers and information system $ 400,000 03/31/2021 Luxury auto† 80,000 05/26/2021 Assembly equipment 1,200,000 08/15/2021 Storage building 700,000 11/13/2021 †Used 100% for business purposes. Karane generated taxable income in 2021 of $1,732,500 for purposes of computing the §179 expense limitation. (Use MACRS Table 1, Table 2, Table 3, Table 4, Table 5, and Exhibit 10-10.) (Leave no answer blank. Enter zero if applicable. Input all the values as positive numbers.) d. Now assume that during 2021, Karane decides to buy a competitor’s assets for a purchase price of $1,350,000. Compute the maximum 2021 cost recovery, including §179 expense and bonus depreciation. Karane purchased the following assets for the lump-sum purchase price: (Round your final answers to the nearest whole dollar amount.) Asset Cost Date Placed in Service Inventory $ 220,000 09/15/2021 Office furniture 230,000 09/15/2021 Machinery 250,000 09/15/2021 Patent 198,000 09/15/2021 Goodwill 2,000 09/15/2021 Building 430,000 09/15/2021 Land 20,000 09/15/2021 Assume that Karane takes the maximum section 179 expense for the Assembly Equipment.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Karane Enterprises, a calendar-year manufacturer based in College Station, Texas, began business in 2020. In the process of setting up the business, Karane has acquired various types of assets. Below is a list of assets acquired during 2020:
| Asset | Cost | Date Placed in Service |
|---|---|---|
| Office furniture | $ 150,000 | 02/03/2020 |
| Machinery | 1,560,000 | 07/22/2020 |
| Used delivery truck* | 40,000 | 08/17/2020 |
*Not considered a luxury automobile.
During 2020, Karane was very successful (and had no §179 limitations) and decided to acquire more assets in 2021 to increase its production capacity. These are the assets acquired during 2021:
| Asset | Cost | Date Placed in Service |
|---|---|---|
| Computers and information system | $ 400,000 | 03/31/2021 |
| Luxury auto† | 80,000 | 05/26/2021 |
| Assembly equipment | 1,200,000 | 08/15/2021 |
| Storage building | 700,000 | 11/13/2021 |
†Used 100% for business purposes.
Karane generated taxable income in 2021 of $1,732,500 for purposes of computing the §179 expense limitation. (Use MACRS Table 1, Table 2, Table 3, Table 4, Table 5, and Exhibit 10-10.) (Leave no answer blank. Enter zero if applicable. Input all the values as positive numbers.)
d. Now assume that during 2021, Karane decides to buy a competitor’s assets for a purchase price of $1,350,000. Compute the maximum 2021 cost recovery, including §179 expense and bonus
| Asset | Cost | Date Placed in Service |
|---|---|---|
| Inventory | $ 220,000 | 09/15/2021 |
| Office furniture | 230,000 | 09/15/2021 |
| Machinery | 250,000 | 09/15/2021 |
| Patent | 198,000 | 09/15/2021 |
| 2,000 | 09/15/2021 | |
| Building | 430,000 | 09/15/2021 |
| Land | 20,000 | 09/15/2021 |
Assume that Karane takes the maximum section 179 expense for the Assembly Equipment.
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