Question 16.IP: The comparative balance sheet of Dowling Company for Decembe......

The comparative balance sheet of Dowling Company for December 31, 2012 and 2011, is as follows:

The income statement for Dowling Company is shown here.

Dowling Company
Income Statement
For the Year Ended December 31, 2012

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   $1,100,000
Cost of merchandise sold . . . . . . . . . . . . . . . . . . . . .                      \underline{710,000}

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    $ 390,000
Operating expenses:
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . .  $ 23,500
Patent amortization . . . . . . . . . . . . . . . . . . . . . . . . . .       7,000
Other operating expenses . . . . . . . . . . . . . . . . . . . .    \underline{196,000}

Total operating expenses . . . . . . . . . . . . . . . . . . . . .                       \underline{226,500}

Income from operations . . . . . . . . . . . . . . . . . . . . .                       $ 163,500
Other income:
Gain on sale of investments. . . . . . . . . . . . . . . . . . .   $ 11,000
Other expense:
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    \underline{26,000}        \underline{(15,000)}
Income before income tax . . . . . . . . . . . . . . . . . . .                        $ 148,500
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . .                             \underline{50,000}
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                            \underline{\underline{\$ 98,500}}

An examination of the accounting records revealed the following additional information applicable to 2012:

a.   Land costing $15,000 was sold for $15,000.
b.  A mortgage note was issued for $40,000.
c.   A building costing $115,000 was constructed.
d.  2,500 shares of common stock were issued at $40 in exchange for the bonds payable.
e.   Cash dividends declared were $74,670.

Instructions

1. Prepare a statement of cash flows, using the indirect method of reporting cash flows from operating activities.

2. Prepare a statement of cash flows, using the direct method of reporting cash flows from operating activities.

Dowling Company
Comparative Balance Sheet
December 31, 2012 and 2011

2012 2011
Assets
Cash $140,350 $95,900
Accounts receivable (net) 95,300 102,300
Inventories 165,200 157,900
Prepaid expenses 6,240 5,860
Investments (long-term) 35,700 84,700
Land 75,000 90,000
Buildings 375,000 260,000
Accumulated depreciation—buildings (71,300) (58,300)
Machinery and equipment 428,300 428,300
Accumulated depreciation—machinery and equipment (148,500) (138,000)
Patents \underline{58,000} \underline{65,000}
Total assets \underline{\underline{\$ 1,159,290}} \underline{\underline{\$ 1,093,660}}
Liabilities and Stockholders’ Equity
Accounts payable (merchandise creditors) $43,500 $46,700
Accrued expenses payable (operating expenses) 14,000 12,500
Income taxes payable 7,900 8,400
Dividends payable 14,000 10,000
Mortgage note payable, due 2023 40,000 0
Bonds payable 150,000 250,000
Common stock, $30 par 450,000 375,000
Excess of issue price over par—common stock 66,250 41,250
Retained earnings \underline{373,640}  \underline{349,810}
Total liabilities and stockholders’ equity \underline{\underline{\$ 1,159,290}}  \underline{\underline{\$ 1,093,660}}
Step-by-Step
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1.

Dowling Company
Statement of Cash Flows—Indirect Method
For the Year Ended December 31, 2012

Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 $ 98,500
Adjustments to reconcile net income to net
cash flow from operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  23,500
Amortization of patents. . . . . . . . . . . . . . . . . . . . . . .                   7,000
Gain on sale of investments . . . . . . . . . . . . . . . . . .                  (11,000)
Changes in current operating assets and

liabilities:
Decrease in accounts receivable . . . . . . . .                    7,000
Increase in inventories . . . . . . . . . . . . . . . . . .                  (7,300)
Increase in prepaid expenses . . . . . . . . . . . .                   (380)
Decrease in accounts payable. . . . . . . . . . . .                (3,200)
Increase in accrued expenses payable . . .                   1,500
Decrease in income taxes payable . . . . . . .                   \underline{(500)}

Net cash flow from operating activities . . . . . . . .                                 $115,120
Cash flows from investing activities:
Cash received from sale of:

Investments. . . . . . . . . . . . . . . . . . . . . . . . .  $60,000¹
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     \underline{15,000}    $ 75,000

Less: Cash paid for construction of building . . .             \underline{115,000}
Net cash flow used for investing activities. . . . .                                 (40,000)
Cash flows from financing activities:
Cash received from issuing mortgage note payable. . $ 40,000
Less: Cash paid for dividends. . . . . . . . . . . . . . . . . . . . . . . . .   \underline{70,670}²
Net cash flow used for financing activities . . . . . . . . . . . .                   \underline{(30,670)}
Increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   $ 44,450
Cash at the beginning of the year. . . . . . . . . . . . . . . . . . . . .                      \underline{95,900}

Cash at the end of the year. . . . . . . . . . . . . . . . . . . . . . . . . . . .                 \underline{\underline{\$ 140,350}}

Schedule of Noncash Investing and Financing Activities:
Issued common stock to retire bonds payable . . . . . . . . . .        $100,000
¹  $60,000 = $11,000 gain + $49,000 (decrease in investments)
²  $70,670 = $74,670 – $4,000 (increase in dividends)

2.

Dowling Company
Statement of Cash Flows—Direct Method
For the Year Ended December 31, 2012

Cash flows from operating activities:
Cash received from customers¹. . . . . . . . . . . . . . . . .                      $1,107,000
Deduct: Cash paid for merchandise² . . . . . . . . . . . . $720,500

Cash paid for operating expenses³. . . . . . . . .   194,880
Cash paid for interest expense . . . . . . . . . . . .     26,000
Cash paid for income tax^{4} . . . . . . . . . . . . . . . . .   \underline{50,500}     \underline{991,880}

Net cash flow from operating activities . . . . . . . .                                       $115,120
Cash flows from investing activities:
Cash received from sale of:

Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,000^{5}
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  \underline{15,000}   $  75,000

Less: Cash paid for construction of building . . . . . .               \underline{115,000}

Net cash flow used for investing activities. . . . . . . .                                 (40,000)
Cash flows from financing activities:
Cash received from issuing mortgage note payable. .       $ 40,000
Less: Cash paid for dividends^{6} . . . . . . . . . . . . . . . . . . .                  \underline{70,670}
Net cash flow used for financing activities . . . . . . .                                \underline{(30,670)}
Increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                 $ 44,450
Cash at the beginning of the year. . . . . . . . . . . . . . . .                                    \underline{95,900}

Cash at the end of the year. . . . . . . . . . . . . . . . . . . . . . .                               \underline{\underline{\$ 140,350}}

Schedule of Noncash Investing and
Financing Activities:

Issued common stock to retire bonds payable . . .                      $100,000

Schedule Reconciling Net Income with Cash Flows
from Operating Activities^{7}

Computations:

¹ $1,100,000 + $7,000 = $1,107,000

² $710,000 + $3,200 + $7,300 = $720,500

³ $196,000 + $380 – $1,500 = $194,880

^{4} $50,000 + $500 = $50,500

^{5} $60,000 = $11,000 gain + $49,000 (decrease in investments)

^{6} $74,670 + $10,000 – $14,000 = $70,670

^{7} The content of this schedule is the same as the

Operating Activities section of part (1) of this solution and is not reproduced here for the sake of brevity.

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