Assignment 3

Ashutosh Fatania
Accounting II

4 October 2023

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Table of Contents
Exercise 1: Cash Flow Statement from Operating Activities...........................................3
Exercise 2: Partnerships........................................................................................................4
Exercise 3: Plant Assets and Depreciation.........................................................................4
Exercise 4: Uncollectible receivables..................................................................................5
Exercise 5: Allowance for bad debts...................................................................................5
Exercise 6: Partnerships........................................................................................................5
Exercise 7: Payables and Accruals......................................................................................5
Exercise 8: Corporation and types of dividends................................................................6
Exercise 9: Corporations and type of stock.......................................................................6
Exercise 10: Accrued expenses...........................................................................................7
Exercise 11: Contingent Liabilities......................................................................................7
Bibliography............................................................................................................................8

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Exercise 1: Cash Flow Statement from Operating Activities
The net cash flow from operating activities is $115,800. To get to this we take the net
income of $100,000 add depreciation expenses of $34,000 and subtract the increase
in accounts receivable and inventory, finally adding the increase in accounts
payable.

Cash flows from Amount Amount

operating activities
Net Income $100,000
Adjustments
Addition of $34,000
depreciation
expenses
(Subtract) increase ($22,000)
in accounts
receivable
(Subtract) increase ($14,800)
in inventory
Addition of $18600
accounts payable
$15800
Cash flow (net) $115800
Operating
Activities

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Exercise 2: Partnerships

Anastasia is entitled to interest of $6000 on her $75,000. Her share of profit is

$58,500 minus the $9000 salary her partner is paid.

A. Interest on capital 8% of $75,000=$6,000

B. Profit for the year less salary paid $58,500 -$9000= $49500
C. Less interest on capital account (8% of $75,000) +(8% of $60,000)=
for both partners $10,800
D. Take the interest paid in (A) and $6000+($49,500-10800)/5*3=$29,220
add to (B). Then take that
amount and deduct from (C).
Finally, divide what you get by 5.
The amount we are left with
represents “one part” of the
amount of profit that can be
distributed between the two
partners. To get the amount that
Anastasia is due, multiple the
one part by 3 as the
company/partnership is owned
between her and her partner
proportionally by 3:2.

Exercise 3: Plant Assets and Depreciation

Accumulated depreciation (Net Book Machine

Value)
Purchase Price 12,000
Transportation 1,300
Installation 2,000
Total Cost at 1 March 20X7 15,300
Depreciation (15300*10%/10/12) (1275)
Correct book value 14,025

Alternatively, we can calculate net book value of the machine at year end as follows:

NBV= Cost of asset- accumulated depreciation

The cost of the asset was £12,000 plus transportation ($1300) + installation ($2000)-
accumulated depreciation of 10%
The value calculated for NBV is $13770

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Exercise 4: Uncollectible receivables

Direct method
Accounts Debit ($) Credit ($)
Bad Debt Expense 720
Accounts receivable 720

Allowance method
Accounts Debit ($) Credit ($)
Allowance for doubtful 720
account
Accounts receivable 720

Exercise 5: Allowance for bad debts

The unadjusted balance for the doubtful debt is calculated $2490 + $1320= $3810

Date Journal Debit Credit

30 September Allowance for $1950

Doubtful Debt
Accounts $1950
receivable

Exercise 6: Partnerships
The opening balance is $11486. Remove the drawings of $16500. Add the share of
net profit of ($28595*3/7). We get $7241.

The balance of the current account is $7241.

Exercise 7: Payables and Accruals

The correct value of creditors reported on Mark’s financial statement of position on

31 October is $79850. The error is in the payable’s ledger and not the Control
Account. The Control Account balance is accurate and correct, it can be used for the
statement of financial position.

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Exercise 8: Corporation and types of dividends

Journal entry for declaration of dividend on 31/12/2017

Date Account Title Debit Credit

31/12/2017 Dividend $1,200,000
Dividend payable $1,200,000
(Record
declaration of
Dividend)

Journal entry for payment of final dividend on 31/03/2018

Date Account Title Debit Credit

31-08-2018 Dividend Payable $1,200,000
Cash $1,200,000
(To record
payment of
Dividend)

Exercise 9: Corporations and type of stock

Common stock and preferred stock are two types of equity offerings public limited
companies may offer to members of the public, institutions and investors via an initial
public offering or the secondary market. The fundamental difference between
common stock and preferred stock is the rights the holder of the stock has.

Preferred stock usually has no voting rights but does rights to dividends
(Investopedia, 2023). Dividends are more stable, and preferred stocks face less
volatility. Dividends are usually higher for preferred stock. Preferred stockholders
have priority over dividend payments so if a company misses a dividend payment it
must first compensate the preferred stockholder before distributing the remaining
proceeds to common shareholders (Preferred vs. Common Stock: What’s the
Difference? 2023).

In liquidation preferred stockholders have greater rights to the company’s proceeds

including assets and cash above common stockholders (Preferred vs. Common
Stock: What’s the Difference? 2023).

Issuers of preferred shares can call back the share sometime in the future, and it is
usually at a higher price than what they issued the share for. This is a good
opportunity for preferred shareholders because they make a premium on their
investment.

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It should be noted that preferred stockholders do not have priority over company
proceeds ahead of debtholders and bond holders. Debt holders and bond holders
have a higher priority when it comes to payment of any proceeds the company may
owe now or in the future or at times of insolvency or liquidation.

Exercise 10: Accrued expenses

Date Journal DR CR
13 January 2018 Electricity expense 2,000
Electricity expense payable 2,000
(To record electricity expense)
13 January 2018 Water expense 650
Water expense payable 650
(To record water expense)
13 January 2018 Audit fee 5,500
Audit fee payable 5,500
(To record audit fee)
13 March 2018 Audit fee payable 5,500
Cash 5000
Discount 500
(To record payment of audit fee)

Exercise 11: Contingent Liabilities

IAS37 defines contingent liabilities as a possible obligation depending on whether

some uncertain future event occurs or a present obligation, but payment is not
probable or the amount cannot be measured accurately (IAS 37 — Provisions,
Contingent Liabilities and Contingent Assets, n.d.).

Contingent liabilities are not usually recognized in a statement of financial position

unless there is the likelihood of cash flow being impacted, it is disclosed in the notes
however (IFRS, 2017).

GAAP accounting standards recognize three types of contingent liability being

probable, possible and remote (Banton, 2022). Probable contingent liabilities can be
reasonably estimated and will be reflected in financial statements (Banton, 2022).
Possible contingent liabilities are liabilities that could occur and are disclosed in
footnotes (Banton, 2022). Remote contingent liabilities are those that are extremely
unlikely to occur and are not recorded in the financial statements or footnotes.

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Examples of contingent liabilities include a lawsuit, a product warranty, a pending
investigation, a bank guarantee, a change in Government policy, a change in
Foreign Exchange, or liquidated damages (Contingent Liabilities Example, 2021).

Bibliography

Contingent Liabilities Example. (2021, August 2). WallStreetMojo.

https://www.wallstreetmojo.com/contingent-liabilities-example/

IAS 37 — Provisions, Contingent Liabilities and Contingent Assets. Www.iasplus.com.

Retrieved September 17, 2023, from

https://www.iasplus.com/en-gb/standards/ias/copy_of_ias37#:~:text=Contingent

%20liability%3A

IFRS. (2017). IFRS. Ifrs.org. https://www.ifrs.org/issued-standards/list-of-standards/ias-37-

provisions-contingent-liabilities-and-contingent-assets/

Preferred vs. Common Stock: What’s the Difference? (2023). Investopedia.

https://www.investopedia.com/ask/answers/difference-between-preferred-stock-and-

common-stock/#:~:text=There%20are%20many%20differences%20between