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Exercise 11-5A Determine proper classification (LO11-1) Analyze each of the four transactions Ernie’s Electronics had with Bert’s Bargain House from the perspective of Ernie's Electronics..Transactions Activities(1) Ernie sold Bert land, originally purchased for $180,000, at a sales price of $195,000, resulting in a gain on sale of land of $15,000. (2) Ernie borrowed $100,000 from Bert, signing a three-year note payable. (3) Ernie purchased $1 million in common stock in Bert's Bargain House through a private placement. (4) Ernie received a dividend of $40,000 from the common stock investment in Bert's Bargain House. Select the section of the statement of cash flows in which each of these items would be reported for Ernie's Electronics: operating activities (indirect method), investing activities, financing activities, or a separate noncash activities note.

Respuesta :

Answer:

1) Report cash inflow from investing by $195,000

2) Financing activity cash inflow $100,000

3) Investing activity cash outflow of $1 million

4) Operating Activity cash inflow $40,000

Explanation:

1) There is sale of land, which is considered to be an investing activity.

The same will be recorded under investing activity only if the cash payment is received, for the same.

Further the gain of $15,000 recorded in net income will be deducted under operating activities, and adjusted from net income.

2) Amount borrowed will be a cash inflow, and since it is against note payable, for 3 years it will be termed as long term liability. And it will be categorized as financing activity.

3) As there is purchase of common stock of some other company, it will be categorized as investing activity. As cash is paid to acquire shares, it will be cash outflow.

4) Dividend received on investment is income, it is included in net income of the company, and shown under operating activity as cash inflow.

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