For each of the following separate transactions: Sold a building costing $38,500, with $23,400 of accumulated depreciation, for $11,400 cash, resulting in a $3,700 loss. Acquired machinery worth $13,400 by issuing $13,400 in notes payable. Issued 1,340 shares of common stock at par for $2 per share. Note payables with a carrying value of $41,700 were retired for $50,400 cash, resulting in a $8,700 loss.

Required:
a. Prepare the reconstructed journal entry.

1. Record Sale of Building
2. Record Acquisition of machinery
3. Record the issuance of common stock for cash
4. Record payment of cash to retire debit

b. Identify the effect it has, if any, on the investing section or financing section of the statement of cash flows.

Separate Transactions

a. Reconstructed Journal Entries:

1. Record Sale of Building

Debit Sale of Building $38,500

Credit Building $38,500

To transfer building to sale of building account.

Debit Accumulated Depreciation- Building $23,400

Credit Sale of Sale $23,400

To transfer the accumulated depreciation to sale of building account.

Debit Cash Account $11,400

Credit Sale of Building $11,400

To record the cash received on sale of building.

2. Record Acquisition of machinery :

Debit Equipment (Machinery) $13,400

Credit Notes Payable $13,400

To record the purchase of machinery with notes payable.

3. Record the issuance of common stock for cash :

Debit Cash Account $2,680

Credit Common Stock $2,680

To record the issue of 1,340 shares at par, $2 per share.

4. Record payment of cash to retire debit:

Debit Notes Payable $41,700

Debit Loss on Notes Payable $8,700

Credit Cash Account $50,400

To record the retirement of notes payable.

b. Identification of the effect on the investing section or financing section of the statement of cash flows:

1. Investing Section of the statement of cash flows:

Building         $11,400

This increases the cash inflow from investing activities by $11,400.

2. Machinery acquired by issuing notes payable does not affect the statement of cash flows.  No cash is involved in the transaction, at least for now.

Financing Section of the statement of cash flows:

3. Issue of common stock  $2,680

This increases the cash inflow from financing activities by $2,680.

4. Notes Payable             ($50,400)

This increases the cash outflow from financing activities by $50,400 if the notes payable are non-current liabilities.  If they are current, it will have the same effect but on the operating activities section of the statement of cash flows.

Explanation:

The financing activities section of the statement of cash flows deals with the sources of funding the business, both inflow and outflow of cash.

The investing activities section deals with the investments made by the entity based on cash flows.

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