Response to the following problem:
The comparative balance sheets of Sovereign Corporation showed the following information at December 31.
|
Debits
|
2017
|
2016
|
|
Cash
|
$ 22
|
$ 20
|
|
Short-term investments
|
30
|
38
|
|
Merchandize inventory
|
110
|
104
|
|
Prepaid expenses
|
16
|
6
|
|
Land
|
-0-
|
20
|
|
Buildings
|
240
|
180
|
|
Machinery
|
124
|
80
|
|
Patents, at carrying amount
|
8
|
10
|
|
|
$55O
|
$458
|
|
Credits
|
|
|
|
Accounts payable
|
$ 16
|
$ 24
|
|
Dividends payable
|
26
|
18
|
|
Income taxes payable
|
4
|
6
|
|
Accumulated depreciation
|
78
|
80
|
|
Non-current borrowings
|
70
|
60
|
|
Common shares
|
300
|
240
|
|
Retained earnings
|
56
|
30
|
|
|
$550
|
$458
|
Additional data for 2017:
a. Net income for the year amounted to $48, including income taxes expense of $12.
b. Amortization of patents amounted to $2.
c. Purchased machinery for $30, paying $10 in cash, and obtained a 5-year loan for the balance.
d. Purchased $50 of machinery by issuing common shares.
e. Paid $60 cash for an addition to the building.
f. Sold land for $24 (gain or loss is included in the income statement).
g. Declared cash dividends of $22.
h. Depreciation expense for the year amounted to $16.
i. Sold machinery for $14 that had originally cost $36; it was one-half depreciated at the time of sale (gain or loss is included in the income statement).
j. The short-term investments will be sold in 60 days for a known amount of cash.
Required:
1. Explain the appropriate treatment of items c. and d. above.
2. Prepare a cash flow table.
3. Prepare a statement of cash flows.
4. Explain what the statement of cash flows tells you about Sovereign Corporation.