A4-16: Contingencies

a. Guarantor
Theyre related companies by control by the same shareholders
Material amount not just a $20 loan
Is it a contingency or not? What may change it from a contingency
to a liability?
If probably and measurable -> actual liability
Very least, it is a contingency
Related party transaction
Probable
Default or not? dont know
This is both (1) a contingent liability and (2) a related party transaction. At the very minimum,
the nature, amount, and circumstances aof the gurantee should be disclosed in UPLs financial
statements.
The probability of having to make good on the guarantee seems to be growing. If payment is
probable and the amount is measurable, the liability should be recognized on UPLs balance
sheet, offset by a loss on the income statement.
On the other hand, it is possible to argue that default is not assured and that the amount is not
measurable with reasonable assurance because the related company has not filed for bankruptcy
and the extent of assets to cover the liability is not known. Further investigation is needed.
b. Subsidiary in Japan
UPL may wish to report the $20 million gain in 20X5. However, the deal is not yet closed and
reporting the gain would violate the conservatism principle. Contingent gains are recognized
when realized. Many things can go wrong over the next six months. Disclosure of this pending
deal is required.
c. Bankruptcy
This is a subsequent event this year. The amount recorded as the accounts receivable and
allowance for bad debts would need to be adjusted for the bankruptcy of this customer.

A5-1: Overview SCF Classification

Requirements 1 and 2
a. Investing activities - cash paid for capital asset

$(340,000)

b. Operating activities - add back depreciation

$134,000

c.

$(28,000)

Operating activities - deduct gain on sale

Investing activities - sold capital asset

$68,000

d. Investing activities cash paid for capital asset

$(40,000)
Remainder of transaction is excluded/disclosed because it is a non-cash transaction
e. Operating activities - decrease in wages payable
$(20,000)
f.

Operating activities - decrease in accounts receivable

$430,000

g. Financing activities - borrowed money

$214,000

h. Financing activities - paid dividend

$(136,000)
Note to instructor: this cash outflow may also be classified in operating activities if the
company wishes. The assignment instructions require classification in financing.
Could be wrong because doesnt say they paid the dividend, just declared
i. Financing activities - . Repaid note payable
$(300,000)
Cash flow for interest ($12,000) should be represented by interest expense and is
separately disclosed as a cash outflow as part of operating activities, per the assignment
instructions. The company has the alternate choice of financing classification.
j. Excluded; non-cash transaction

A5-17: Statement of Cash Flows

Sold equipment for 66,000
20X4 80,000
20X5 77,000
Should be 14,000
77-14 = 63,000?
Difference in common shares - $10,000
Paid for it with $10,000 in shares
Paid for the rest in cash: 63,000 10,000
Comments:
Investing activities; purchase of equipment; $64,000
$80,000 (20X4 balance) less $66,000 (equipment sold) = $14,000 vs 77,000 (20X5 balance) =
$63,000 increase
*Partial payment = common shares 70,000
(20X4) vs. 80,000 (20X5) = 10,000 increase
Therefore, 63,000 10,000 = 53,000 cash outflow for purchase of equipment
Financing activities; Dividends paid; (647,000)
$61,000 = Net Income
$6000 = PY retained earnings
Net increase in cash; cash balance$32,000
Reconciles to the 20X5 cash balance
Sells Company
Cash Flow Statement Indirect Method
Year ended 31 December 20X5
Operating Activities
Net Earnings
Adjustment for non-cash items
Depreciation of equipment
Amortization of intangible assets
Amortization of bond discount
Changes in current assets and current liabilities

61,000
45,000
2,000
2,000
110,000

Accounts receivable decrease

Other receivables decrease
Inventory increase
Accounts payable increase
Income taxes payable decrease
Interest payable decrease
Net cash provided (used) from operations

Investing Activities
Sale of equipment
Purchase of equipment ($63,000 less $10,000 in
shares)
Financing Activities
Bonds retired
Dividends paid ($6+61 vs. $47)
Net increase in cash
Cash balance, beginning of the year
Cash balance, end of the year

3,000
1,000
(2,000)
10,000
(20,000)
(1,000)
$101,000

20,000
(53,000)

(32,000)
(20,000)

(33,000)

(52,000)
16,000
16,000
$32,000