Question

Use the following data to answer questions about Northwood Corp.:

Balance sheet data	20X7	20X6
Cash	$1,290	$1,100
Accounts receivable	1,250	1,200
Inventory	1,740	1,800
Property, plant, equipment	1,920	1,900
Accumulated depreciation	(1,290)	(1,250)
Total assets	$4,910	$4,750
Accounts payable	$970	$850
Interest payable	150	100
Dividends payable	100	75
Long-term debt	530	785
Bank note	300	200
Common stock	1,030	950
Additional paid in capital	700	690
Retained earnings	1,130	1,100
Total liabilities and equity	$4,910	$4,750

Income statement for the year 20X7
Sales	$1,625
COGS	1,000
Depreciation	100
Interest expense	30
Gain on sale of old machine	100
Taxes	135
Net income	$460

Notes:

• Dividends declared to shareholders were $10.New common shares were sold at par for $30.
• Fixed assets were sold for $300. Original cost of these assets was $800, and $600 of accumulated depreciation has been charged to their original cost. The firm borrowed $100 in a 10-year bank note – the proceeds of the loan were used to pay for new fixed assets.
• Depreciation for the year was $100 (accumulated depreciation up $40 and depreciation on sold assets $60).
• At the beginning of 20X8,Northwood Corp. purchased new equipment to be used in its manufacturing plant. The cost of the equipment was $2,500 including $500 freight and $1,200 of taxes. In addition to the equipment cost, Northwood paid $100 to install the equipment and $750 to train its employees to use the equipment. Over the asset's life, Northwood paid $350 for repair and maintenance. At the end of five years, Northwood extended the life of the asset by rebuilding the equipment's motors at a cost of $850.
• In year 20X8,Northwood Corp. leases a machine for its own use for four years with annual payments of $ 5,000. At the end of the lease, the machine is returned to the lessor, who will sell it for its scrap value. The appropriate interest rate is 4%. Northwood Corp. depreciates all assets on a straight-line basis. The lease payments are made at the end of the year.

1. Assuming US GAAP, calculate cash flow from operations using the indirect method. Please explain your answer.
2. Assuming US GAAP, calculate the CFI and CFF. Please explain your calculations.
3. What amounts related to the purchase of the new equipment in year 20X8 should be capitalized on Northwood's balance sheet and what amounts should be expensed in the period incurred? Please explain your results.
4. Calculate the immediate impact of the lease on Northwood Corp.’s balance sheet. Please explain which type of lease it is.

Answer 1

tonsas.ood copoiom kel-i fonne $460 Adi Non LOO l sain on ala ak old Hack ities ablo $ 60 4 120 $ 50 cble $120

AL

Amount Cost ot to equipt 2D 330 Au $ 3 30 2