Question

Listed below are a series of transactions that occurred during the first three years of operations for Freeman Fields Company: 1. On January 1, 2016, Freeman paid $50,000 to acquire a 10-year patent on a lawn fertilizer technology On January 1, 2016, Freeman purchased a warehouse for S600,000 cash and a $240,000, 8-year note payable. The warehouse is estimated to be able to store up to $140,000 in inventory. The building had an estimated useful life of 15 years and a $18,000 residual value On January 1, 2016, Freeman purchased a used Model 16 sod harvester for $48,000. Freeman also, paid $2,300 for delivery and setup, and $2,700 in sales taxes. The harvester had an estimated useful life of 4 years and a residual value of $5,000 On January 1, 2017, Freeman issued 100 shares of $1 par, common stock to an equipment dealer to purchase a used dump truck. Additionally, Freeman paid the dealer $5,000 cash. The truck had a quoted market price of $30,000. The truck also had an estimated useful life of 3 years and a salvage value of $3,000 On January 1, 2018, Freeman paid $8,500 for repairs to the sod harvester. In addition to required annual maintenance costing $1,500, Freeman also installed a new engine which increased the useful life of the harvester by two years. 2. 3. 4. 5. 6. On June 30, 2018, Freeman sold the Model 16 Sod Harvester for $36,000 7. On December 31,2018, Freeman sold its patent to Morgan Holding Company for $28,000 8. On December 31,2018 Freeman internally developed a new revolutionary lawrn fertilizer technology. Research and development costs totaled $30,000, but market specialists estimate the patent would be worth $68,000 on the open market Show what would be reported on the 2016, 2017 and 2018 statements of cash flow related to the above transactions under both the direct and indirect methods. Present the numbers as they would be displayed in comparable statements of cash flow.

Answer 1

Indirect method			Direct method
2016 Cash flow statement
Investing activity			Investing activity
1.Acquisition of patent	-50000		1.Acquisition of patent	-50000
2.Purchase of Warehouse	-600000		2.Purchase of Warehouse	-600000
3. Purchase of Model 16 sod harvester(48000+2300+2700)	-53000		3. Purchase of Model 16 sod harvester(48000+2300+2700)	-53000
Operating activity			Operating activity
2.Non-cash charge to the Income statement of the year			Annual maintenance cost-Sod harvester	-1500
Depn.-Patent (50000/10)	5000
Depreciation-Building
((600000+240000)-18000)/15	54800
Depreciation-Harvester
(53000-5000)/4	12000
2017 Cash flow statement
Investing activity			Investing activity
4.Cash paid towards purchase of dump-truck	-5000		4.Cash paid towards purchase of dump-truck	-5000
Operating activity			Operating activity
4.Non-cash charge to the Income statement of the year			Annual maintenance cost-Sod harvester	-1500
Depn.-Patent (50000/10)	5000
Depreciation-Dump-struck
(30000-3000)/3	9000
Depreciation-Building (as above)	54800
Depreciation-Harvester(as above)	12000
2018 Cash flow statement
Investing activity
5. Cost of new engine for the above sod harvester(8500-1500)	-7000		5. Cost of new engine for the above sod harvester(8500-1500)	-7000
6. Sale proceeds of Sod harvester	36000		6. Sale proceeds of Sod harvester	36000
7. Sale proceeds of patent	28000		7. Sale proceeds of patent	28000
8. Devpt. Costs Of new technology	-30000		8. Devpt. Costs Of new technology	-30000
Operating activity			Operating activity
5.Non-cash charges to the Income statement of the year -(+/-)			Annual maintenance cost-Sod harvester	-1500
Depn.-Patent (50000/10)	5000
Depreciation-Harvester-after new engine(1/2 yr.)	3875
Depreciation-Dump-struck(as above)	9000
Depreciation-Building (as above)	54800
Gain on sale of sod harvester(Ref. Wkgs.)	-3875
Loss on sal eof patent(50000-15000-28000)	7000

Workings:
	Model 16 sod harvester
			Carrying value
Jan 1,2016	Purchase cost	53000	53000
	Depn.-2016	12000	41000
	Depn.2017	12000	29000
	Engine	7000	36000
	Depn. 2018(1/2 yr.)	3875	32125	(36000-5000)/4/2=	3875
	Sale proceeds		36000
	Gain on sale(36000-32125)		3875