Questions

1.What primary factor should a creditor consider when evaluating whether a corporation can pay the interest and principal on a loan at maturity?

2

1.Classify each of the following as an operating, investing, or financing activity under ASPE:

Loaning money

Receipt of cash from the issuance of bonds payable

Receipt of cash from the sale of equipment

Payments of acquisition of land

Receiving cash from customers

Receiving interest revenue

Payments for inventory

Payments for interest

Receipt of cash from the issuance of stock

Dividends paid to shareholders

Receipt of dividend income

Payment of salaries to employees

Payment of taxes

3

Three-Eyed Raven Ltd. reported the following on December 31, 2016 (in thousands):

From the comparative balance sheet. 2016. 2015

Property and equipment, net. $11,150. $9,590

Long-term notes payable 4,400. 3,080

From the statement of cash flows:

Depreciation $1,920

Capital expenditures (4,130)

Proceeds from sale of property and equipment. 770

Proceeds from issuance of long-term note payable 1,190

Payment of long-term note payable (110)

Issuance of common shares 383

1.Determine the following items for Three Eyed Raven Ltd. During 2016:

Gain or loss on the sale of property and equipment.

Amount of long-term debt issued for something other than cash.

4

Classic Automobiles of Huntsville Ltd. was formed on January 1, 2016, when Classic issued common shares for $300,000. Early in January 2016, Classic made the following cash payments:

$150,000 for equipment

$120,000 for inventory (four cars at $30,000 each)

$20,000 for 2016 rent on a store building

In February 2016, Classic purchased six cars for inventory on account. Cost of this inventory was $260,000 ($43,333.33 each). Before year-end, Classic paid $208,000 of this debt. Classic uses the FIFO method to account for inventory.

During 2016, Classic sold eight vintage autos for a total of $500,000. Before year-end, Classic collected 80% of this amount.

The business employs three people. The combined annual payroll is $95,000, of which Classic owes $4,000 at year-end. At the end of the year, Classic paid an income tax of $10,000.

Late in 2016, Classic declared and paid cash dividends of $11,000.

For equipment, Classic uses the straight-line depreciation method over five years with zero residual value.

1.Prepare Classic Automobiles of Huntsville Ltd.'s income statement for the year ended December 31, 2016. Use the single-step format with all revenues listed together and all expenses listed together.

2.Prepare Classic's balance sheet on December 31, 2016.

3.Prepare Classic's statement of cash flows for the year ended December 31, 2016. Format cash flows from operating activities by using the indirect method.

4.Comment on the business performance based on the statement of cash flows.