Acct H201-H; Exam #1 (B), Fall 2017. 4) On January 1, 2014, Morris Island Tours

Question

Acct H201-H; Exam #1 (B), Fall 2017. 4) On January 1, 2014, Morris Island Tours Company paid $23,000 cash to purchase office furniture. The furniture has a $3,000 salvage value and a five-year useful life. Required: a) Explain how Morris Island Tours would report this asset purchase on the 2014 statement of cash flows. (i.e.: Which activity would be affected and how much net cash flow is recorded) Cash Flow Activity 2014 b) Calculate the amount of depreciation expense and accumulated depreciation Morris Island Tours would report in the 2016 financial statements. Financial Statements Account 2016 Income Statement Depreciation Balance Sheet Accumulated Depreciation LOST 23, w

Explanation / Answer

Answer a.

Morris Island Tours Company made an investment in fixed assets by purchasing office furniture worth $23,000 with cash.
So, Purchase of Office Furniture will be shown as Investing Activities as cash outflow of $23,000.

Answer b.

Cost of Office Furniture = $23,000
Salvage Value = $3,000
Useul Life = 5 years

According to Straight-line Depreciation Method:

Annual Depreciation = (Cost of Office Furniture - Salvage Value) / Useul Life
Annual Depreciation = ($23,000 - $3,000) / 5
Annual Depreciation = $4,000

Accumulated Depreciation = Depreciation 2014 + Depreciation 2015 + Depreciation 2016
Accumulated Depreciation = $4,000 + $4,000 + $4,000
Accumulated Depreciation = $12,000

So, Depreciation Expense of $4,000 will be shown in Income Statement of 2016 and Accumulated Depreciation of $12,000 will be shown in Balance Sheet of 2016 as an adjustment to Office Furniture.

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