Polluter Corp. Case Study
Polluter Corporation is a manufacturing firm in the United States registered with the Securities and Exchange Commission. Polluter Corp. operates three facilities manufacturing various household cleaning products. These products produced are sold to retail customers. The United States government funded their company with emission allowances (EAs). An emission allowance is an authorization to emit a fixed amount of a pollutant. An emissions allowance is sometimes also referred to as a permit. An allowance is a fully marketable commodity that may be bought, sold, or traded for use by entities covered by the program. The government granted those EAs with ...view middle of the document...
In order to compensate the cost, the Corp sold EAs worthy of $2 million with the vintage year of 2016 to Dirty Chemical Corp. We need to analyze the classification of the statement of cash flows for these two transactions base on the U.S. GAAP principles.
Scenario 1 solution:
According to ASC 230-10-45, paragraph 13 (c), states: “All of the following are cash outflows for investing activities: c. Payments at the time of purchase or soon before or after purchase to acquire property, plant, and equipment and other productive assets….” Base on this professional pronouncement, the acquisition of property, plant and equipment on account should be presented as an investing cash outflow in the statement of cash flows. The Company intends on paying Clean Air Corp to purchase EAs. Therefore, it is appropriate to reflect this capital expenditure as an investing cash outflow in the statement of cash flows. The first transaction is recorded as below:
EAs (Intangible Asset) $ 3,000,000
Scenario 2 solution:
Meanwhile, according to ASC 230-10-45, paragraph 12(c), “All of the following are cash inflows from investing activities: c. Receipts from sales of property, plant, and equipment and other productive assets.” Based on the above principal, any cash receipt from sales of assets is classified as investing activity. Therefore, the proceeds to offset the cost of EAs which sold it to Dirty Chemical Corp for $2 million should be considered as investing activities cash inflow because The Polluter Corp. considers the EAs as intangible asset. The second transaction is recorded as below: