Accounting Answers Note #19

Question 1 a machine with a cost of $174,000 and accumulated depreciation of $107,000 is sold for $57,600. the amount of loss related to the sale of this machine should be reported in the operating section under indirect method is Answer Introduction: As a college student with high marks, it is important to approach this question with a thorough understanding of accounting principles and how to accurately report financial information. In this answer, I will delve into the details of a machine sold at a loss and how it should be reported in the operating section under the indirect method. Explanation: The amount of loss related to the sale of a machine is typically recorded as an expense in the financial statements of a company. This loss represents the difference between the original cost of the machine and its sale price, taking into account any accumulated depreciation. In this case, the machine was sold for less than its book value, resulting in a loss. According to the principle of conservatism in accounting, it is important to report losses as soon as they are realized, rather than waiting for potential future gains. Therefore, the loss related to the sale of the machine should be reported in the operating section under the indirect method. In the indirect method, the operating section of the cash flow statement begins with the net income from the company’s income statement. From there, adjustments are made to arrive at the operating cash flow. The loss on the sale of the machine should be included as a deduction from net income, as it represents a cash outflow for the company. Calculation: To calculate the loss related to the sale of the machine, we must first determine its book value. Book value is the original cost of the machine minus its accumulated depreciation. In this case, the book value of the machine would be $174,000 - $107,000 = $67,000. Next, we need to calculate the loss on the sale of the machine by subtracting the sale price from the book value. Therefore, the loss in this case would be $67,000 - $57,600 = $9,400. Question 2 west company declared a 50 cent per share dividend the company has 190,000 shares issues and 10,000 shares in treasury stock the journal entry to record the dividend declaration is Answer To record the dividend declaration, the following journal entry should be made: Date | Account | Debit | Credit ------------------------------[Date of declaration] | Retained Earnings | $95,000 | [Date of declaration] | Dividends Payable | | $95,000 Explanation: The declaration of a dividend is a transaction that involves the payment of cash to the shareholders of a company. It is important for companies to accurately record this transaction in their financial statements to reflect the impact on their financial position. Retained Earnings is a shareholder's equity account that represents the cumulative profits earned by a company since its inception, less any dividends paid to shareholders. As the company has declared a 50 cent per share dividend for 190,000 shares, the total amount to be paid to the shareholders is $95,000 ($0.50 x 190,000 shares). Therefore, Retained Earnings is debited for $95,000 to reflect the decrease in retained earnings. Dividends Payable is a liability account that represents the amount owed by the company to its shareholders as of the date of declaration. As the company has declared a dividend but has not yet paid it out, Dividends Payable is credited for $95,000 to reflect the increase in the liability. In the second part of the question, it is mentioned that the company has 10,000 shares in treasury stock. Treasury stock is the company's own stock that has been repurchased and is no longer held by shareholders. Since these shares are not held by shareholders, they are not entitled to receive dividends. Therefore, the number of shares in treasury stock should be subtracted from the total number of shares issued to determine the dividend amount. In this case, 190,000 shares minus 10,000 shares equals a total of 180,000 shares that will receive the dividend. Question 3 a company had a beginning balance in retained earnings of $424000 it had a net income of 62000 and declared and paid cash dividends of $67000 in the current period the ending balance in retained earnings equal Answer To accurately answer this question, we need to understand what retained earnings are and how they are affected by different transactions. Retained earnings refer to the portion of a company's profits that is kept by the company rather than distributed to its shareholders as dividends. It is essentially the cumulative balance of a company's net income over the years. In this scenario, the beginning balance of retained earnings is $424,000. This means that the company has retained this amount of its profits from previous years. In the current period, the company earned a net income of $62,000. This means that after all expenses and taxes were paid, the company made a profit of $62,000. However, the company also declared and paid cash dividends of $67,000 in the current period. This means that the company distributed $67,000 of its profits to its shareholders as dividends. As a result, the retained earnings would decrease by this amount. To calculate the ending balance in retained earnings, we can use the following formula: Ending balance in retained earnings = Beginning balance in retained earnings + Net income Dividends declared and paid = $424,000 + $62,000 - $67,000 = $419,000 Therefore, the ending balance in retained earnings is $419,000. Question 4 is “received cash payments from customers” an operating, investing, or financing activity Answer To accurately determine whether “received cash payments from customers” is considered an operating, investing, or financing activity, we must first understand the definitions of each of these activities. Operating activities involve the daily operations of a business, such as sales and expenses. Investing activities involve the purchase or sale of long-term assets, such as equipment or investments. Financing activities involve transactions related to raising capital, such as issuing stocks or repaying debt. Based on these definitions, we can conclude that “received cash payments from customers” falls under operating activities. This is because the cash payments received from customers are a result of the company’s core business operations, which is to sell goods or services. These payments are considered cash inflows and are reported on the statement of cash flows under operating activities. Moreover, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have issued guidelines clarifying the classification of cash flows related to customer payments. According to these guidelines, cash received from customers for goods sold or services rendered is to be classified as operating cash flows. This further supports the argument that “received cash payments from customers” is an operating activity. Question 5 Question two Rek Ltd offered 50,000 ordinary shares of sh.10 at sh.12.50 payable as under: Sh. Date On application 2.50 10th June 2023 On allotment 5.00 10th July 2023 On first call 2.50 10th August 2023 On second 2-50 10th September Applications were received for 60,000 shares. An application for 10,000 shares was rejected. Allotment money due was received. First and second call was made and all monies due were received except for 1000 shares due to one share holder who failed to pay both calls. The shares were forfeited after three months. They were then re-issued on 20th December 2023 at sh.7 per share as fully paid. Required; Ledger Accounts to record the above transactions. (20 marks) Answer In order to record the above transactions for Rek Ltd, we need to prepare ledger accounts for each transaction. A ledger account is a record of each individual type of asset, liability, equity, revenue, and expense. It helps to track the movement of funds and provides a better understanding of the financial position of a company. For this particular question, we will need to prepare ledger accounts for the following transactions: 1. Share application account 2. Share allotment account 3. First call account 4. Second call account 5. Share forfeiture account 6. Share capital account 7. Bank account 1. Share application account: Date | Particulars | Debit | Credit 10/06/2023 | Share Capital | 25,000 (50,000 shares x sh.0.50 per share) | Bank | 25,000 (Note: We credit the Share Capital account as the company receives the application money from the shareholders and debit the Bank account as the funds are received in the company's bank account.) 2. Share allotment account: Date | Particulars | Debit | Credit 10/07/2023 | Share Capital | 25,000 (50,000 shares x sh.0.50 per share) | Share Application | 25,000 (Note: We credit the Share Application account as the funds are transferred from the application account to the allotment account. We debit the Share Capital account as the application money is considered part of the share capital.) 3. First call account: Date | Particulars | Debit | Credit 10/08/2023 | Share Capital | 12,500 (50,000 shares x sh.0.25 per share) | Bank | 12,500 (Note: We credit the Share Capital account as the company receives the first call money from the shareholders and debit the Bank account as the funds are received in the company's bank account.) 4. Second call account: Date | Particulars | Debit | Credit 10/09/2023 | Share Capital | 12,500 (50,000 shares x sh.0.25 per share) | Bank | 12,500 (Note: We credit the Share Capital account as the company receives the second call money from the shareholders and debit the Bank account as the funds are received in the company's bank account.) 5. Share forfeiture account: Date | Particulars | Debit | Credit 10/12/2023 | Share Forfeiture | 1,000 (1,000 shares x sh.1 per share) | Share Capital | 1,000 (Note: We debit the Share Forfeiture account as the shares are forfeited and credit the Share Capital account as the company's issued capital reduces by the forfeited amount.) 6. Share capital account: Date | Particulars | Debit | Credit 31/12/2023 | Share Forfeiture | 1,000 | Share Capital | 6,000 (1,000 shares x sh.6 per share) (Note: We debit the Share Forfeiture account as the shares are reissued at a discounted price and credit the Share Capital account as the company's issued capital increases by the reissued amount.) 7. Bank account: Date | Particulars | Debit | Credit 31/12/2023 | Share Capital | 7,000 (1,000 shares x sh.7 per share) | Bank | 7,000 (Note: We credit the Share Capital account as the company receives funds from the reissued shares and debit the Bank account as the funds are received in the company's bank account.)