Exercise 1 Impact of Transactions Involving Operating Assets on Statement of Cash Flows

From the following list, identify each item as operating (O), investing (I), financing (F), or not separately reported on the statement of cash flows (N).
________ Purchase of land
________ Proceeds from sale of land
________ Gain on sale of land
________ Purchase of equipment
________ Depreciation expense
________ Proceeds from sale of equipment
________ Loss on sale of equipment

Exercise 2: Impact of Transactions Involving Intangible Assets on Statement of Cash Flows

From the following list, identify each item as operating (O), investing (I), financing (F), or not separately reported on the statement of cash flows (N).
________ Cost incurred to acquire copyright
________ Proceeds from sale of patent
________ Gain on sale of patent
________ Research and development costs
________ Amortization of patent

Exercise 3: Capital versus Revenue Expenditures

On January 1, 2012, Jose Company purchased a building for $200,000 and a delivery truck for $20,000. The following expenditures have been incurred during 2014:
• The building was painted at a cost of $5,000.
• To prevent leaking, new windows were installed in the building at a cost of $10,000.
• To improve production, a new conveyor system was installed at a cost of $40,000.
• The delivery truck was repainted with a new company logo at a cost of $1,000.
• To allow better handling of large loads, a hydraulic lift system was installed on the truck at a cost of $5,000.
• The truck's engine was overhauled at a cost of $4,000.

Questions

1. Determine which of those costs should be capitalized. Also identify and analyze the effect of the capitalized costs. Assume that all costs were incurred on January 1, 2014.

2. Determine the amount of depreciation for the year 2014. The company uses the straight-line method and depreciates the building over 25 years and the truck over six years. Assume zero residual value for all assets.

3. How would the assets appear on the balance sheet of December 31, 2014?

Problem Book versus Tax Depreciation

Griffith Delivery Service purchased a delivery truck for $33,600. The truck has an estimated useful life of six years and no salvage value. For purposes of preparing financial statements, Griffith is planning to use straight-line depreciation. For tax purposes, Griffith follows MACRS. Depreciation expense using MACRS is $6,720 in Year 1, $10,750 in Year 2, $6,450 in Year 3, $3,870 in each of Years 4 and 5, and $1,940 in Year 6.
Questions
1. What is the difference between straight-line and MACRS depreciation expense for each of the six years?
2. Griffith's president has asked why you use one method for the books and another for tax calculations. ‘‘Can you do this? Is it legal? Don't we take the same total depreciation either way?'' he asked. Write a brief memo answering his questions and explaining the benefits of using two methods for depreciation.

Problem 4 Depreciation and Cash Flow

O'hare Company's only asset as of January 1, 2014, was a limousine. During 2014, only the following three transactions occurred:
Services of $100,000 were provided on account.

All accounts receivable were collected.

Depreciation on the limousine was $15,000.

Questions

1. Develop an income statement for O'hare for 2014.

2. Determine the amount of the net cash inflow for O'hare for 2014.

3. Explain why O'hare's net income does not equal net cash inflow.

4. If O'hare developed a cash flow statement for 2014 using the indirect method, what amount would appear in the category titled Cash Flow from Operating Activities?