Angus
Farms Ltd., which uses ASPE, had the following transactions during the fiscal
year ending December 31, 2011.
1.
On May 1, a used tractor was sold at auction. The information concerning this
transaction included:
Original
cost of the tractor …………………………………..$52,000
Carrying
amount of tractor at date of sale …………………..
14,000
Cash
proceeds obtained at sale ……………………………… 22,500
2.
After the seeding season, on June 15, 2011, a plough with an original cost of
$6,000 and a carrying amount of $500 was discarded.
3.
On September 1, 2011, a new plough was purchased for $7,700.
4.
On December 30, a section of land was sold to a neighbouring farm called Clear
Pastures Ltd. The original cost of the land was $45,000. To finance the
purchase Clear Pastures gave Angus a three-year mortgage note in the amount of
$75,000 that carries interest at 5%, with interest payable annually each
December 30.
5.
On December 31, 2011, depreciation was recorded on the farm equipment in the
amount of $12,600.
Instructions
(a)
Prepare the journal entries that recorded the transactions during the year.
(b)
Prepare the sections of the cash flow statement of Angus Farms Ltd. to report
the transactions provided, using the indirect format.
(c)
Prepare the sections of the cash flow statement of Angus Farms Ltd. to report
the transactions provided, using the direct format.
(d)
What results do you notice when comparing the information arrived at in parts
(b) and (c) above?
(a)
2011
May 1 Cash............................. 22,500
Accumulated
Depreciation......... 38,000
Gain
on Disposal............... 8,500
Tractor........................ 52,000
June 15 Accumulated Depreciation......... 5,500
Loss
on Disposal................. 500
Farm
Equipment................. 6,000
Sept. 1 Farm Equipment................... 7,700
Cash........................... 7,700
Dec. 30 Mortgage Note Receivable......... 75,000
Gain
on Disposal............... 30,000
Land........................... 45,000
31 Depreciation Expense............. 12,600
Accumulated
Depreciation....... 12,600
(b) Indirect
method:
Operating
activities:
Depreciation
expense $12,600
Loss
on disposal of equipment 500
Gain
on sale of equipment (8,500)
Gain
on sale of land (30,000)
Investing
activities:
Sale
of equipment 22,500
Purchase
of equipment (7,700)
Note X: Significant non-cash investing and financing
activities:
A mortgage note receivable of $75,000 was
obtained from the sale of land.
(c) Direct
method:
Operating
activities:
Investing
activities:
Sale
of equipment 22,500
Purchase
of equipment (7,700)
Note X: Significant non-cash investing and financing
activities:
A mortgage note receivable of $75,000 was
obtained from the sale of land.
(d) Although
at first glance it might appear as if the results from operating activities
using the two formats differ. In fact they do not. Whereas in the indirect method four
adjustments appear to remove their effect on net income, the starting point of
the indirect method. These four items are listed to adjust accrual net income
to cash from operating activities. The four items listed were included in
income, and so their effect has to be removed by these adjustments as they do
not involve operating activities.
