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23 Aug
2019

P21-1Classification of cash flows | Good Grade Guarantee!

P21-1 P21-4 P21-8 PA-1
21-1Listed below are transactions that might be reported as investing and/or financing activities on a statement of cash flows.
P21-1Classification of cash flows from investing and financing activities
P21-1Listed below are transactions that might be reported as investing and/or financing activities on a statement of cash flows. Possible reporting classifications of those transactions are provided also.
Required:
Indicate the reporting classification of each transaction by entering the appropriate classification code
P21-4Statement of cash flows; direct method
P21-4The comparative balance sheets for 2013 and 2012 and the statement of income for 2013 are given below for Dux Company. Additional information from Dux’s accounting records is provided also.
Additional information from the accounting records:
a. A building that originally cost $40,000, and which was three-fourths depreciated, was sold for $7,000.
b. The common stock of Byrd Corporation was purchased for $5,000 as a long-term investment.
c. Property was acquired by issuing a 13%, seven-year, $30,000 note payable to the seller.
d. New equipment was purchased for $15,000 cash.
e. On January 1, 2013, $25,000 of bonds were sold at face value.
f. On January 19, Dux issued a 5% stock dividend (1,000 shares). The market price of the $10 par value common stock was $14 per share at that time.
g. Cash dividends of $13,000 were paid to shareholders.
h. On November 12, 500 shares of common stock were repurchased as treasury stock at a cost of $8,000.
Required:
Prepare the statement of cash flows of Dux Company for the year ended December 31, 2011. Present cash flows from operating activities by the direct method. (You may omit the schedule to reconcile net income to cash flows from operating activities.)
P21-8Cash flows from operating activities (direct method and indirect method)—deferred income tax liability and amortization of bond discount
P21-8Portions of the financial statements for Parnell Company are provided below.
Required:
1. Prepare the cash flows from operating activities section of the statement of cash flows for Parnell Company using the direct method.
2. Prepare the cash flows from operating activities section of the statement of cash flows for Parnell Company using the indirect method.
PA-1 Derivatives – interest rate swap
On January 1, 2013, Labtech Circuits borrowed $100,000 from First Bank by issuing a
On January 1, 2013, Labtech Circuits borrowed $100,000 from First Bank by issuing a three-year, 8% note, payable on December 31, 2015. Labtech wanted to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. Therefore, Labtech entered into a three-year interest rate swap agreement on January 1, 2013, and designated the swap as a fair value hedge. The agreement called for the company to receive payment based on an 8% fixed interest rate on a notional amount of $100,000 and to pay interest based on a floating interest rate tied to LIBOR. The contract called for cash settlement of the net interest amount on December 31 of each year. Floating (LIBOR) settlement rates were 8% at inception and 9%, 7%, and 7% at the end of 2013, 2014, and 2015, respectively. The fair values of the swap are quotes obtained from a derivatives dealer. These quotes and the fair values of the note are as follows:
Required:
1. Calculate the net cash settlement at the end of 2013, 2014, and 2015.
2. Prepare the journal entries during 2013 to record the issuance of the note, interest, and necessary adjustments for changes in fair value.
3. Prepare the journal entries during 2014 to record interest, net cash interest settlement for the interest rate swap, and necessary adjustments for changes in fair value. A-18
4. Prepare the journal entries during 2015 to record interest, net cash interest settlement for the interest rate swap, necessary adjustments for changes in fair value, and repayment of the debt.
5. Calculate the carrying values of both the swap account and the note in each of the three years.
6. Calculate the net effect on earnings of the hedging arrangement in each of the three years. (Ignore income taxes.) 7. Suppose the fair value of the note at December 31, 2013, had been $97,000 rather than $98,241 with the additional decline in fair value due to investors’ perceptions that the creditworthiness of Labtech was worsening. How would that affect your entries to record changes in the fair values?

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