Question 1

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

Question 2

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

• Loaning money
• Receipt of cash from issuance of bonds payable
• Receipt of cash from 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 issuance of stock
• Dividends paid to shareholders
• Receipt of dividend income
• Payment of salaries to employees
• Payment of taxes

Question 3

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

2016

2015

From the comparative balance sheet:

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

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.

Question 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 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 at 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.