Accounting (Text Only)
26th Edition
ISBN: 9781285743615
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Textbook Question
Chapter 16, Problem 16.3CP
Dillip Lachgar is the president and majority shareholder of Argon Inc., a small retail chain store. Recently, Dillip submitted a loan application for Argon Inc. to Compound Bank. It called for a $600,000, 9%, 10-year loan to help finance the construction of a building and the purchase of store equipment, costing a total of $750,000. This will enable Argon Inc. to open a store in the town of Compound. Land for this purpose was acquired last year. The bank's loan officer requested a statement of
As a close family friend, Dillip asked you to prepare a statement of cash flows. From the records provided, you prepared the following statement:
| Argon Inc. | ||
| Statement of Cash Flows | ||
| For the Year Ended December 31, 20Y7 | ||
| Cash flows from operating activities: | ||
| Net income.................................................... | $ 300,000 | |
| Adjustments to reconcile net income to net cash flow from operating activities: | ||
| 84,000 | ||
| Gain on sale of investments.................................. | (30,000) | |
| Changes in current operating assets and liabilities: | ||
| Decrease in |
21,000 | |
| Increase in inventories..................................... | (42,000) | |
| Increase in accounts payable............................... | 30,000 | |
| Decrease in accrued expenses payable...................... | (6,000) | |
| Net cash flow from operating activities.......................... | $ 357,000 | |
| Cash flows from (used for) investing activities: | ||
| Cash from investments sold..................................... | $ 180,000 | |
| Cash used for purchase of store equipment..................... | (120,000) | |
| Net cash flow from investing activities........................... | 60,000 | |
| Cash flows from (used for) financing activities: | ||
| Cash used for dividends........................................ | $ (126,000) | |
| Net cash flow used for financing activities........................ | (126,000) | |
| Increase (decrease) in cash......................................... | $ 291,000 | |
| Cash at the beginning of the year................................... | 108,000 | |
| Cash at the end of the year......................................... | $ 399,000 | |
After reviewing the statement, Dillip telephoned you and commented, “Are you sure this statement is right?" Dillip then raised the following questions:
1. “How can depreciation be a cash flow?"
2. “Issuing common stock for the land is listed in a separate schedule. This transaction has nothing to do with cash! Shouldn't this transaction be eliminated from the statement?"
3. “How can the gain on the sale of investments be a deduction from net income in determining the cash flow from operating activities?”
4. “Why does the bank need this statement anyway? They can compute the increase in cash from the balance sheets for the last two years."
After jotting down Dillip's questions, you assured him that this statement was “right." But to alleviate Dillip's concern, you arranged a meeting for the following day.
a. How would you respond to each of Dillip's questions?
b. Do you think that the statement of cash flows enhances the chances of Argon Inc. receiving the loan? Discuss.
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Dillip Lachgar is the president and majority shareholder of Argon Inc., a small retail chain store. Recently, Dillip submitted a loan application for Argon Inc. to Compound Bank. It called for a $600,000, 9%, 10-year loan to help finance the construction of a building and the purchase of store equipment, costing a total of $750,000. This will enable Argon Inc. to open a store in the town of Compound. Land for this purpose was acquired lastyear. The bank’s loan officer requested a statement of cash flows in addition to the most recent income statement, balance sheet, and retained earnings statement that Dillip had submitted with the loan application.As a close family friend, Dillip asked you to prepare a statement of cash flows. From the records provided, you prepared the following statement:
Please see the attachment for details:
After reviewing the statement, Dillip telephoned you and commented, “Are you sure this statement is right?” Dillip then raised the following questions:1.…
On January 3, 2024, Michelson & Sons acquired a tract of land just outside the city limits. The land and
existing building were purchased for $2.4 million. Michelson paid $400,000 and signed a noninterest-bearing
note requiring the company to pay the remaining $2,000,000 on December 31, 2025. An interest rate of 7%
properly reflects the time value of money for this type of loan agreement. Transfer taxes, title insurance, and
other costs totaling $24,000 were paid at closing.
At the end of February, the old building was demolished at a cost of $120,000, and an additional $100,000
was paid to clear and grade the land. Construction of a new building began on March 1 and was completed
on October 30. Construction expenditures were as follows:
$ 800,000
March 30
June 30
July 30
1,200,000
September 1 600,000
Michelson did not borrow specifically for the construction project, but did have the following debt outstanding
throughout 2024:
1,200,000
$6,000,000, 8% long-term note payable…
TBTF Incorporated rents commercial real state to locally based businesses. TBTF purchased a large office
complex on January 2, 2022. In exchange for the real estate, TBTF issued a noninterest bearing note to
the seller. This note will be paid in equal instalments that include both principal and interest at the end
of each calendar year. Other information pertaining to the purchase of the real estate follows:
Annual instalment payment amount
Market rate of borrowing for TBTF
Number of years note will be outstanding
Portion of the purchase price to be allocated to
land
Portion of the purchase price to be allocated to
land improvements
$ 253,134
8%
9
24%
14%
TBTF has a year end date of December 31.
Required:
Prepare the journal entries required by TBTF to account for the note on each of the following dates:
January 2, 2022
December 31, 2024
Chapter 16 Solutions
Accounting (Text Only)
Ch. 16 - What is the principal disadvantage of the direct...Ch. 16 - Prob. 2DQCh. 16 - A corporation issued 2,000,000 of common stock in...Ch. 16 - A retail business, using the accrual method of...Ch. 16 - Prob. 5DQCh. 16 - A long-term investment in bonds with a cost of...Ch. 16 - A corporation issued 2,000,000 of 20-year bonds...Ch. 16 - Fully depreciated equipment costing 50,000 is...Ch. 16 - Prob. 9DQCh. 16 - Name five common major classes of operating cash...
Ch. 16 - Prob. 16.1APECh. 16 - Classifying cash flows Identify whether each of...Ch. 16 - Prob. 16.2APECh. 16 - Prob. 16.2BPECh. 16 - Changes in current operating assets and...Ch. 16 - Changes in current operating assets and...Ch. 16 - Prob. 16.4APECh. 16 - Prob. 16.4BPECh. 16 - Prob. 16.5APECh. 16 - Land transactions on the statement of cash flows...Ch. 16 - Prob. 16.6APECh. 16 - Prob. 16.6BPECh. 16 - Cash payments for merchandisedirect method The...Ch. 16 - Cash payments for merchandisedirect method The...Ch. 16 - Free cash flow McMahon Inc. reported the following...Ch. 16 - Prob. 16.8BPECh. 16 - Prob. 16.1EXCh. 16 - Effect of transactions on cash flows State the...Ch. 16 - Prob. 16.3EXCh. 16 - Prob. 16.4EXCh. 16 - Cash flows from operating activities-indirect...Ch. 16 - Prob. 16.6EXCh. 16 - Prob. 16.7EXCh. 16 - Determining cash payments to stockholders The...Ch. 16 - Reporting changes in equipment on statement of...Ch. 16 - Prob. 16.10EXCh. 16 - Reporting land transactions on statement of cash...Ch. 16 - Prob. 16.12EXCh. 16 - Reporting land acquisition for cash and mortgage...Ch. 16 - Reporting issuance and retirement of longterm debt...Ch. 16 - Prob. 16.15EXCh. 16 - Prob. 16.16EXCh. 16 - Prob. 16.17EXCh. 16 - Prob. 16.18EXCh. 16 - Prob. 16.19EXCh. 16 - Prob. 16.20EXCh. 16 - Prob. 16.21EXCh. 16 - Prob. 16.22EXCh. 16 - Cash flows from operating activitiesdirect method....Ch. 16 - Prob. 16.24EXCh. 16 - Free cash flow The financial statement for Nike,...Ch. 16 - Free cash flow Lovato Motors Inc. has cash flows...Ch. 16 - Prob. 16.1APRCh. 16 - Statement of cash flowsindirect method The...Ch. 16 - Prob. 16.3APRCh. 16 - Statement of cash flows-direct method The...Ch. 16 - Prob. 16.5APRCh. 16 - Prob. 16.1BPRCh. 16 - Statement of cash flowsindirect method The...Ch. 16 - Prob. 16.3BPRCh. 16 - Statement of cash flows-direct method The...Ch. 16 - Prob. 16.5BPRCh. 16 - Ethics in Action Lucas Hunter, president of...Ch. 16 - Using the statement of cash flows You are...Ch. 16 - Dillip Lachgar is the president and majority...Ch. 16 - Prob. 16.4CP
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