Question

For each of the following separate transactions: Sold a building costing $32,000, with $20,800 of accumulated depreciation, for $8,800 cash, resulting in a $2,400 loss. Acquired machinery worth $10,800 by issuing $10,800 in notes payable. Issued 1,080 shares of common stock at par for $2 per share. Note payables with a carrying value of $40,400 were retired for $47,800 cash, resulting in a $7,400 loss. (a) Prepare the reconstructed journal entry. (b) Identify the effect it has, if any, on the investing section or financing section of the statement of cash flows.

Answer 1

Answer:

Sale of building:

journal entry:

cash                          8,800 debit

acc dep building    20,800 debit

loss at disposal        2,400 debit

         building                            32,000 credit

cash generated from investing activities: 8,800

Purchase of Machine

journal entry:

machinery          10,800 debit

       note payable         10,800 credit

no cash involve no effect on cash flow statement

issuance of shares:

journal entry:

cash      2,160 debit

        common stock   2,160 credit

cash generated from financing activities: 2,160

note payable redemption:

note payable          40,400 debit

loss on redemption 7,400  debit

            Cash                   7,400 credit

cash used for financing activities: 47,800

Explanation:

Sale of building:

we write-off the assets along with his depreciation and enter the proceed at disposal. We also need to recognzie the gain/loss for the difference:

32,000 - 20,800 = 11,200

procceds                (8,800)

result                        2,400 loss

cash flow effect: investing activities:  8,800

Purchase of Machine

we record the asset received and the liability issued to get it.

no cash involve no effect on cash flow statement

issuance of shares:

1,080 shares x $2 each = 2,160 this is the amount of the shares and the cash proceeds.

financing for the cash proceeds: 2,160

note payable redemption:

we write-off the liability, we credit the cahs used and recognize the loss.

cash used for financing for 47,800