ASSIGNMENT 1 – WORTH 10% OF Final Mark

Question 1: Types of Organizational Structures – 20%

You are a newly designated CPA and are contemplating opening your own accounting firm with two of
your colleagues from your graduating class. The three of you have been debating what type of
business structure to use. All three of you are concerned about liability and want to have some
flexibility for tax planning purposes. You seem to the think that the three of you could incorporate, but
one of your colleagues is equally sure that the only available option is a partnership, but she is not
sure what kind. You decide to consult with your former law professor to determine what business
structure options are available for your new firm. What do you discover as part of your research? What
option should be chosen and why?

Question 2: Statement of cash flows (indirect method) – 80%

The net changes in the statement of financial position accounts of Sharma Inc. for the calendar year
2023 are shown below:

Account Debit Credit

Cash ............................................................................................................. $ 62,800
Accounts receivable .................................................................................... $ 32,000
Allowance for expected credit losses ......................................................... 7,000
Inventory ..................................................................................................... 108,600
Prepaid expenses ........................................................................................ 10,000
Long-term investments............................................................................... 72,000
Land ............................................................................................................. 150,000
Buildings ...................................................................................................... 300,000
Machinery .................................................................................................... 50,000
Office equipment......................................................................................... 14,000
Accumulated depreciation:
Buildings .............................................................................................. 12,000
Machinery ............................................................................................ 10,000
Office equipment ................................................................................. 6,000
Accounts payable ........................................................................................ 91,600
Accrued liabilities ........................................................................................ 36,000
Dividends payable ....................................................................................... 64,000
Bonds payable ............................................................................................. 416,000
Preferred shares .......................................................................................... 30,000
Common shares .......................................................................................... 189,600
Retained earnings ....................................................................................... 43,600 __________
$852,600 $852,600
Additional information:
1. Net income for the year was $70,000.
2. Cash dividends of $64,000 were declared December 15, 2023, payable January 15, 2024. A 5%
common stock dividend was issued March 31, 2023, when the market value was $22.00 per share.
At the time there were 36,000 common shares outstanding.
3. The long-term investments were sold for $70,000.
4. A building which had cost $240,000, with a book value of $150,000, was sold for $200,000, and a
new one was purchased.
5. The following entry was made to record an exchange of an old machine for a new one:
Machinery .......................................................................................... 80,000
Accumulated Depreciation—Machinery .......................................... 20,000
Machinery ............................................................................ 30,000
Cash ..................................................................................... 70,000
6. A fully depreciated copier machine, which cost $14,000, was written off.
7. Preferred shares originally issued for $30,000 were redeemed for $40,000.
8. Sharma Inc sold 6,000 common shares on June 15, 2023 for $25 a share.
9. Bonds were sold at 104 on December 31, 2023.
10. Land with a book value of $120,000 was sold for $54,000.

Instructions
Prepare a statement of cash flows (indirect method) for calendar 2023.