Financial Accounting: Liabilities & Equities (FA3) Exam Review

FA3 Exam Review notes Barbara Wyntjes, CGA, MBA, B.Sc.
Question 5 (9 marks)
Information for MTC Limited follows:
MTC LIMITED
Comparative Balance Sheet
2008 and 2007
2008 2007
Assets
Cash $ 200,000 $ 500,000
Accounts receivable 1,400,000 1,500,000
Inventory 600,000 400,000
Leased assets 3,250,000 3,250,000
Accumulated amortization, leased assets (1,950,000) (1,700,000)
Total $ 3,500,000 $ 3,950,000
Liabilities and shareholders’ equity
Accounts payable $ 320,000 $ 100,000
Lease liability 2,100,000 2,550,000
Bonds payable — 400,000
Discount on bonds payable — (20,000)
Preferred shares — 10,000
Common shares 600,000 500,000
Retained earnings 480,000 410,000
Total $ 3,500,000 $ 3,950,000
Additional information
1. Preferred shares were converted to common shares during the year at their book value.
2. Bonds payable were retired at the beginning of the year through an open market
purchase at 101. As a result, MTC reported a loss on retirement of $24,000.
3. Net income was $80,000.
4. There was a common stock dividend valued at $4,000 and cash dividends were also
paid.
Required
3 a. Prepare the operating activities section of the cash flow statement for the year ended
December 31, 2008, using the indirect approach.
6 b. Prepare the financing activities section of the cash flow statement for the year ended
December 31, 2008.
3 a. Operating activities
Net income (given) $ 80,000
(1) Add Amortization (1,700,000 + ? - 0 = 1,950,000) 250,000
(1/2) Loss on bond repurchase (#2) 24,000
(1/2) Decrease in accounts receivable 100,000
(1/2) Increase in inventory (200,000)
(1/2) Increase in accounts payable 220,000
Cash provided by operating activities $ 474,000
4