Question

Ravenna Company is a merchandiser that uses the indirect method to prepare the operating activities section of its statement of cash flows. Its balance sheet for this year is as follows:

	Ending Balance			Beginning Balance
Cash and cash equivalents	$	102,000		$	122,400
Accounts receivable		81,700			88,000
Inventory		109,700			100,000
Total current assets		293,400			310,400
Property, plant, and equipment		291,000			280,000
Less accumulated depreciation		97,000			70,000
Net property, plant, and equipment		194,000			210,000
Total assets	$	487,400		$	520,400
Accounts payable	$	64,000		$	113,700
Income taxes payable		49,700			65,700
Bonds payable		120,000			100,000
Common stock		140,000			120,000
Retained earnings		113,700			121,000
Total liabilities and stockholders’ equity	$	487,400		$	520,400

During the year, Ravenna paid a $12,000 cash dividend and it sold a piece of equipment for $6,000 that had originally cost $13,800 and had accumulated depreciation of $9,200. The company did not retire any bonds or repurchase any of its own common stock during the year.

8-a. If the company debited income tax expense and credited income taxes payable $1,510 during the year, what is the total amount of the debits recorded in the Income Taxes Payable account?

8-b. What does the amount of these debits represent?

9-a. What is the amount and direction (+ or −) of the income taxes payable adjustment to net income in the operating activities section of the statement of cash flows?

9-b. What does this adjustment represent

10. Would the operating activities section of the company’s statement of cash flows contain an adjustment for a gain or a loss? What would be the amount and direction (+ or −) of the adjustment?

Answer 1

ANSWER

8-a)		income tax payable
	cash	5,920	opening	65,700
			year	1,510
			end	49,700
	total debits recorded			17,510	answer
8-b)	These debits represent cash paid to reduce the income
	tax outstanding

9a)

Decrease in income tax payable = 65,700-49,700= -16,000

Adjustment to reconcile net income to net cash flow from operating activities
Decrease in income tax payable	-16,000

9b)

So this adjustment represent cash outflow from Cash paid for income tax..

10)

Book value of equipment = 13,800 -9,200= 4,600

Gain on sale of equipment = Sale value-Book value = 6,000 -4,600= 1,400

Adjustment to reconcile net income to net cash flow from operating activities
Gain on sale of equipment	-1,400

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