MacAskill Mills Limited, which uses ASPE, engaged in the following

MacAskill Mills Limited, which uses ASPE, engaged in the following transactions in 2011.

1. The Land account increased by $58,000 over the year: Land that originally cost $60,000 was exchanged along with a cash payment of $3,000 for another parcel of land valued at $91,000. Additional land was acquired later in the year in a cash purchase.

2. The Furniture and Fixtures account had a balance of $67,500 at the beginning of the year and $62,000 at the end. The related accumulated depreciation account decreased over the same period from a balance of $24,000 to $15,200. Fully depreciated office furniture that cost $10,000 was sold to employees during the year for $1,000. In addition, fixtures that cost $3,000 and had a carrying amount of $700 were written off, and new fixtures were acquired and paid for.

3. A five-year capital lease for specialized machinery was entered into halfway through the year; under the terms of the lease the company agreed to make five annual payments (in advance) of $25,000, after which the machinery will revert to the lessor. The present value of these lease payments at the 10% rate that is implicit in the lease was $104,247. The first payment was made as agreed.

Instructions

For each listed item:

(a) Prepare the underlying journal entries that were made by MacAskill Mills during 2011 to record all information related to the changes in each capital asset account and associated accounts over the year.

(b) Identify the amount(s) of the cash flows that result from the transactions and events recorded, and determine the classification of each one.

(c) Prepare the corresponding amounts to those prepared in part (b) for the operating activities section of the statement of cash flows prepared using the indirect method.

(d) Comment on the results obtained in (b) and (c) above.

 (a)

1.	Land (new)............................	91,000
	Cash...............................		3,000
	Land (old).........................		60,000
	Gain on Exchange of Land...........		28,000
	Land..................................	27,000
	Cash...............................		27,000
	($58,000 – $91,000 + $60,000)
2.	Accumulated Depreciation—Furniture  and Fixtures.........................	10,000
	Cash..................................	1,000
	Furniture and Fixtures.............		10,000
	Gain on Sale of Office Furniture...		1,000
	Accumulated Depreciation—Furniture  and Fixtures.........................	2,300
	Loss on Write-off of Fixtures.........	700
	Furniture and Fixtures.............		3,000
	Furniture and Fixtures	7,500
	Cash		7,500
	($67,500 – $10,000 – $3,000 + X = $62,000)
	Depreciation Expense—Furniture and   Fixtures	3,500
	Accumulated Depreciation—Furniture     and Fixtures		3,500
	($24,000 – $10,000 – $2,300 + X = $15,200)
3.	Leased Machinery .....................	104,247
	Lease Obligation...................		104,247
	Lease Obligation......................	25,000
	Cash...............................		25,000
	Interest Expense......................	3,962
	Interest Payable...................		3,962
	[($104,247 – $25,000) X 10% X 6/12]
	Depreciation Expense—     Leased Machinery.................	10,425
	Accumulated Depreciation—     Leased Machinery...............		10,425
	($104,247 X 6/12 divided by 5 years)

(b)

1.	Investing activities:
	Payment on exchange of land	(3,000)
	Purchase of land	(27,000)
2.	Investing activities:
	Proceeds from sale of fixtures	1,000
	Purchase of furniture and fixtures	(7,500)
3.	Financing activities:
	Payment on capital lease	(25,000)

(c)

1.	Gain on exchange of land	(28,000)
2.	Gain on sale of furniture and fixtures	(1,000)
	Loss on write-off of fixtures	700
	Depreciation expense on furniture and fixtures	3,500
3.	Depreciation expense on leased machinery	10,425
	Increase in interest payable	3,962

(d) In part (b), no entries appeared for operating activities for any of the entries prepared in part (a) when using the direct method of the statement of cash flows. In part (c) several items needed to appear under the operating activities using the indirect format. 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 six adjustments appear to remove their effect on net income, the starting point of the indirect method. These six 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.