Question

The comparative balance sheets for 2018 and 2017 are given below for Surmise Company. Net income for 2018 was $84 million. SURMISE COMPANY Comparative Balance Sheets December 31, 2018 and 2017 ($ in millions) 2018 2017 Assets Cash $ 31 $ 36 Accounts receivable 91 110 Less: Allowance for uncollectible accounts (24 ) (2 ) Prepaid expenses 20 18 Inventory 135 120 Long-term investment 92 50 Land 104 104 Buildings and equipment 418 280 Less: Accumulated depreciation (143 ) (112 ) Patent 27 30 $ 751 $ 634 Liabilities Accounts payable $ 21 $ 46 Accrued liabilities 1 22 Notes payable 52 0 Lease liability 128 0 Bonds payable 67 139 Shareholders’ Equity Common stock 71 50 Paid-in capital—excess of par 265 205 Retained earnings 146 172 $ 751 $ 634 Required: Prepare the statement of cash flows of Surmise Company for the year ended December 31, 2018. Use the indirect method to present cash flows from operating activities because you do not have sufficient information to use the direct method. You will need to make reasonable assumptions concerning the reasons for changes in some account balances. A spreadsheet or T-account analysis will be helpful. (Hint: The right to use a building was acquired with a seven-year lease agreement. Annual lease payments of $10 million are paid at January 1 of each year starting in 2018.) (Enter your answers in millions (i.e., 10,000,000 should be entered as 10). Amounts to be deducted should be indicated with a minus sign.)

Answer 1

Working Notes:

1. Balnce sheet

Balance Sheet
Assets	2018	2017
Cash	31	36
A/R	91	110
Less: Allowance for uncollectible accounts	-24	-2
Pre-paid expenses	20	18
Inventory	135	120
Long term investments	92	50
Land	104	104
Buildings and Equipment’s	418	280
Less: Accumulated Depreciation	-143	-112
Patents	27	30
Total Assets	751	634
Liabilities
A/P	21	46
Accrued liabilities	1	22
Notes Payable	52	0
Lease Liability	128	0
Bonds payable	67	139
Common stock	71	50
Paid in capital- Excess at par	265	205
Retained earnings	146	172
Total Liabilities and equity	751	634

2. Calculation of Dividend paid:

Retained Earnings A/c
To Dividend Paid	110	By Balance b/d	172
To Balance c/d	146	By Profit & Loss A/c-	84
	256		256

3) As the value of building taken on lease is 138 but the lease liability showing balance of 118, it means payment $10 has been made in current year. Further the purchase of building on lease is a non-cash investment and financing activity as nethier the payment has made for acquiring the building nor the cash has recieved on account of lease liability.

SOLUTION;:

Statement of Cash Flow for the year ended 2018
Cash Flow from Operating Activities
Profit before taxation (Net Income)	84
Adjustments for:
Provision for Depreciation	31
Amortization of patent rights	3
Allowance for uncollectible accounts	22
Changes in current assets and liabilities
Decrease in accounts receivables	19
Increases in Pre-paid expenses	-2
Increase in Inventory	-15
Decrease in accounts payable	-25
Decrease in accrued liabilities	-21
Net cash flow from operating activities		96
Cash Flow from Investing Activities
Purchase of long term investments	-42
Net cash used in Investing activities		-42
Cash Flow from Financing Activities
Amount raised through notes payable	52
Payment of lease liability	-10
Repayment of Bonds	-72
Issue of new common stock	21
Increase in capital - excess of par	60
Net cash used in financing activities	-110	-59
Net increase in cash and cash equivalents during the year		-5
Cash and cash equivalent at the beginning of the year		36
Cash and cash equivalent at the end of the year		31