Question & Answer

Norma Smith is the controller of Baylor Corporation and is responsible for the preparation of the year-end financial statements. The following transactions occurred during the year.

(a) On December 20, 2014, a former employee filed a legal action against Baylor for $100,000 for wrongful dismissal. Management believes the action to be frivolous and without merit. The likelihood of payment to the employee is remote.

(b) Bonuses to key employees based on net income for 2014 are estimated to be $150,000.

(c) On December 1, 2014, the company borrowed $600,000 at 8% per year. Interest is paid quarterly.

(d) Credit sales for the year amounted to $10,000,000. Baylor’s expense provision for doubtful accounts is estimated to be 3% of credit sales.

(e) On December 15, 2014, the company declared a $2.00 per share dividend on the 40,000 shares of common stock outstanding, to be paid on January 5, 2015.

(f) During the year, customer advances of $160,000 were received; $50,000 of this amount was earned by December 31, 2014.

Instructions

For each item above, indicate the dollar amount to be reported as a current liability. If a liability is not reported, explain why.

The current assets and current liabilities sections of the balance sheet of Allessandro Scarlatti Company appear as follows.

The following errors in the corporation’s accounting have been discovered:

1. January 2015 cash disbursements entered as of December 2014 included payments of accounts payable in the amount of $39,000, on which a cash discount of 2% was taken.

2. The inventory included $27,000 of merchandise that had been received at December 31 but for which no purchase invoices had been received or entered. Of this amount, $12,000 had been received on consignment; the remainder was purchased f.o.b. destination, terms 2/10, n/30.

3. Sales for the first four days in January 2015 in the amount of $30,000 were entered in the sales journal as of December 31, 2014. Of these, $21,500 were sales on account and the remainder were cash sales.

4. Cash, not including cash sales, collected in January 2015 and entered as of December 31, 2014, totaled $35,324. Of this amount, $23,324 was received on account after cash discounts of 2% had been deducted; the remainder represented the proceeds of a bank loan.

Instructions

(a) Restate the current assets and current liabilities sections of the balance sheet in accordance with good accounting practice. (Assume that both accounts receivable and accounts payable are recorded gross.)

(b) State the net effect of your adjustments on Allessandro Scarlatti Company’s retained earnings balance.

Question:

Frederic Chopin Corporation is preparing its December 31, 2014, balance sheet. The following items may be reported as either a current or long-term liability.

1. On December 15, 2014, Chopin declared a cash dividend of $2.50 per share to stockholders of record on December 31. The dividend is payable on January 15, 2015. Chopin has issued 1,000,000 shares of common stock, of which 50,000 shares are held in treasury.

2. At December 31, bonds payable of $100,000,000 are outstanding. The bonds pay 12% interest every

September 30 and mature in installments of $25,000,000 every September 30, beginning September 30,

2015.

3. At December 31, 2013, customer advances were $12,000,000. During 2014, Chopin collected

$30,000,000 of customer advances; advances of $25,000,000 should be recognized in income.

Instructions

For each item above, indicate the dollar amounts to be reported as a current liability and as a long-term liability, if any.

Presented below are selected accounts of Yasunari

Kawabata Company at December 31, 2014

Inventory (fi nished goods) $ 52,000 Cost of Goods Sold $2,100,000

Unearned Service Revenue 90,000 Notes Receivable 40,000

Equipment 253,000 Accounts Receivable 161,000

Inventory (work in process) 34,000 Inventory (raw materials) 207,000

Cash 37,000 Supplies Expense 60,000

Equity Investments (short-term) 31,000 Allowance for Doubtful Accounts 12,000

Customer Advances 36,000 Licenses 18,000

Restricted Cash for Plant Expansion 50,000 Additional Paid-in Capital 88,000

Treasury Stock 22,000

The following additional information is available.

1. Inventories are valued at lower-of-cost-or-market using LIFO.

2. Equipment is recorded at cost. Accumulated depreciation, computed on a straight-line basis, is $50,600.

3. The short-term investments have a fair value of $29,000. (Assume they are trading securities.)

4. The notes receivable are due April 30, 2016, with interest receivable every April 30. The notes bear interest at 6%. (Hint: Accrued interest due on December 31, 2014.)

5. The allowance for doubtful accounts applies to the accounts receivable. Accounts receivable of

$50,000 are pledged as collateral on a bank loan.

6. Licenses are recorded net of accumulated amortization of $14,000.

7. Treasury stock is recorded at cost.

Instructions

Prepare the current assets section of Yasunari Kawabata Company’s December 31, 2014, balance sheet, with appropriate disclosures.

The bookkeeper for Geronimo Company has prepared the following balance sheet as of July 31, 2014.

The following additional information is provided.

1. Cash includes $1,200 in a petty cash fund and $15,000 in a bond sinking fund.

2. The net accounts receivable balance is comprised of the following two items: (a) accounts receivable

$44,000 and (b) allowance for doubtful accounts $3,500.

3. Inventory costing $5,300 was shipped out on consignment on July 31, 2014. The ending inventory balance does not include the consigned goods. Receivables in the amount of $5,300 were recognized on these consigned goods.

4. Equipment had a cost of $112,000 and an accumulated depreciation balance of $28,000.

5. Income taxes payable of $6,000 were accrued on July 31. Geronimo Company, however, had set up a cash fund to meet this obligation. This cash fund was not included in the cash balance but was offset against the income taxes payable amount.

Instructions

Prepare a corrected classified balance sheet as of July 31, 2014, from the available information, adjusting the account balances using the additional information.

Uhura Company has decided to expand its operations. The bookkeeper recently completed the balance sheet presented below in order to obtain additional funds for expansion.

Intangible assets

Goodwill 80,000

Cash surrender value of life insurance 90,000

Prepaid expenses 12,000

Current liabilities

Accounts payable 135,000

Notes payable (due next year) 125,000

Pension obligation 82,000

Rent payable 49,000

Premium on bonds payable 53,000

Long-term liabilities

Bonds payable 500,000

Stockholders’ equity

Common stock, $1.00 par, authorized

400,000 shares, issued 290,000 290,000

Additional paid-in capital 160,000

Retained earnings ?

Instructions

Prepare a revised balance sheet given the available information. Assume that the accumulated depreciation balance for the buildings is $160,000 and for the equipment, $105,000. The allowance for doubtful accounts has a balance of $17,000. The pension obligation is considered a long-term liability.

Assume that Denis Savard Inc. has the following accounts at the end of the current year.

1. Common Stock.

2. Discount on Bonds Payable.

3. Treasury Stock (at cost).

4. Notes Payable (short-term).

5. Raw Materials.

6. Preferred Stock Investments (long-term).

7. Unearned Rent Revenue.

8. Work in Process.

9. Copyrights.

10. Buildings.

11. Notes Receivable (short-term).

12. Cash.

13. Salaries and Wages Payable.

14. Accumulated Depreciation—Buildings.

15. Restricted Cash for Plant Expansion.

16. Land Held for Future Plant Site.

17. Allowance for Doubtful Accounts.

18. Retained Earnings.

19. Paid-in Capital in Excess of Par—Common Stock.

20. Unearned Subscriptions Revenue.

21. Receivables—Officers (due in one year).

22. Inventory (finished goods).

23. Accounts Receivable.

24. Bonds Payable (due in 4 years).

25. Noncontrolling Interest.

nstructions

Prepare a classified balance sheet in good form. (No monetary amounts are necessary.)

Assume that Fielder Enterprises uses the following headings on its balance sheet.

(a) Current assets. (f) Current liabilities.

(b) Investments. (g) Long-term liabilities.

(c) Property, plant, and equipment. (h) Capital stock.

(d) Intangible assets. (i) Paid-in capital in excess of par.

(e) Other assets. (j) Retained earnings.

Instructions

Indicate by letter how each of the following usually should be classified. If an item should appear in a note to the financial statements, use the letter “N” to indicate this fact. If an item need not be reported at all on the balance sheet, use the letter “X.”

1. Prepaid insurance.

2. Stock owned in affiliated companies.

3. Unearned service revenue.

4. Advances to suppliers.

5. Unearned rent revenue.

6. Preferred stock.

7. Additional paid-in capital on preferred stock.

8. Copyrights.

9. Petty cash fund.

10. Sales taxes payable.

11. Accrued interest on notes receivable.

12. Twenty-year issue of bonds payable that will mature within the next year. (No sinking fund exists, and refunding is not planned.)

13. Machinery retired from use and held for sale.

14. Fully depreciated machine still in use.

15. Accrued interest on bonds payable.

16. Salaries that company budget shows will be paid to employees within the next year.

17. Discount on bonds payable. (Assume related to bonds payable in item 12.)

18. Accumulated depreciation—buildings.

19. Noncontrolling interest.

Presented below are the captions of Faulk Company’s balance sheet.

(a) Current assets. (f) Current liabilities.

(b) Investments. (g) Noncurrent liabilities.

(c) Property, plant, and equipment. (h) Capital stock.

(d) Intangible assets. (i) Additional paid-in capital.

(e) Other assets. (j) Retained earnings.

Instructions

Indicate by letter where each of the following items would be classified.

1. Preferred stock. 11. Cash surrender value of life insurance.

2. Goodwill. 12. Notes payable (due next year).

3. Salaries and wages payable. 13. Supplies.

4. Accounts payable. 14. Common stock.

5. Buildings. 15. Land.

6. Equity investments (trading). 16. Bond sinking fund.

7. Current maturity of long-term debt. 17. Inventory.

8. Premium on bonds payable. 18. Prepaid insurance.

9. Allowance for doubtful accounts. 19. Bonds payable.

10. Accounts receivable. 20. Income taxes payable.

Presented below are a number of balance sheet accounts of Deep

Blue Something, Inc.

(a) Investment in Preferred Stock. (h) Interest Payable.

(b) Treasury Stock. (i) Deficit.

(c) Common Stock. (j) Equity Investments (trading).

(d) Dividends Payable. (k) Income Taxes Payable.

(e) Accumulated Depreciation—Equipment. (l) Unearned Subscriptions Revenue.

(f) Construction in Process. (m) Work in Process.

(g) Petty Cash. (n) Salaries and Wages Payable.

Instructions

For each of the accounts above, indicate the proper balance sheet classification. In the case of borderline items, indicate the additional information that would be required to determine the proper classification.

Using the information in BE5-14, determine Martinez’s free cash flow, assuming that it reported net cash provided by operating activities of $400,000.

Use the information presented in BE5-14 for Martinez Corporation to compute the net cash used (provided) by financing activities.

Martinez Corporation engaged in the following cash transactions during 2014.

Sale of land and building $191,000

Purchase of treasury stock 40,000

Purchase of land 37,000

Payment of cash dividend 95,000

Purchase of equipment 53,000

Issuance of common stock 147,000

Retirement of bonds 100,000

Compute the net cash provided (used) by investing activities.

Ames Company reported 2014 net income of $151,000. During 2014, accounts receivable increased by $13,000 and accounts payable increased by $9,500. Depreciation expense was $44,000. Prepare the cash flows from operating activities section of the statement of cash flows.

Keyser Beverage Company reported the following items in the most recent year.

Net income $40,000

Dividends paid 5,000

Increase in accounts receivable 10,000

Increase in accounts payable 7,000

Purchase of equipment (capital expenditure) 8,000

Depreciation expense 4,000

Issue of notes payable 20000,3RIEF EXERCISES

Compute net cash provided by operating activities, the net change in cash during the year, and free cash flow.

Stowe Company’s December 31, 2014, trial balance includes the following accounts: Investment in Common Stock $70,000; Retained Earnings $114,000; Trademarks $31,000; Preferred Stock $152,000;

Common Stock $55,000; Deferred Income Taxes $88,000; Paid-in Capital in Excess of Par—Common Stock $174,000; Noncontrolling Interest $63,000. Prepare the stockholders’ equity section of the balance sheet.

Hawthorn Corporation’s adjusted trial balance contained the following accounts at December

31, 2014: Retained Earnings $120,000; Common Stock $750,000; Bonds Payable $100,000; Paid-in

Capital in Excess of Par—Common Stock $200,000; Goodwill $55,000; Accumulated Other Comprehensive Loss $150,000; Noncontrolling Interest $35,000. Prepare the stockholders’ equity section of the balance sheet.

Use the information presented in BE5-8 for Adams Company to prepare the long-term liabilities section of the balance sheet.

Included in Adams Company’s December 31, 2014, trial balance are the following accounts:

Accounts Payable $220,000; Pension Liability $375,000; Discount on Bonds Payable $29,000; Unearned Rent Revenue $41,000; Bonds Payable $400,000; Salaries and Wages Payable $27,000; Interest Payable $12,000; Income Taxes Payable $29,000. Prepare the current liabilities section of the balance sheet.

Thomas Corporation’s adjusted trial balance contained the following liability accounts at December

31, 2014: Bonds Payable (due in 3 years) $100,000; Accounts Payable $72,000; Notes Payable (due in 90 days) $22,500; Salaries and Wages Payable $4,000; Income Taxes Payable $7,000. Prepare the current liabilities section of the balance sheet.

Patrick Corporation’s adjusted trial balance contained the following asset accounts at December

31, 2014: Prepaid Rent $12,000; Goodwill $50,000; Franchise Fees Receivable $2,000; Franchises

$47,000; Patents $33,000; Trademarks $10,000. Prepare the intangible assets section of the balance sheet.

Crane Corporation has the following accounts included in its December 31, 2014, trial balance:

Equity Investments (trading) $21,000; Goodwill $150,000; Prepaid Insurance $12,000; Patents $220,000; Franchises $130,000. Prepare the intangible assets section of the balance sheet.

Lowell Company’s December 31, 2014, trial balance includes the following accounts: Inventory $120,000; Buildings $207,000; Accumulated Depreciation—Equipment $19,000; Equipment $190,000; Land (held for investment) $46,000; Accumulated Depreciation—Buildings $45,000; Land $71,000; Timberland $70,000. Prepare the property, plant, and equipment section of the balance sheet.

Included in Outkast Company’s December 31, 2014, trial balance are the following accounts:

Prepaid Rent $5,200; Debt Investments (trading) $56,000; Unearned Fees $17,000; Land (held for investment) $39,000; Notes Receivable (long-term) $42,000. Prepare the long-term investments section of the balance sheet.

Koch Corporation’s adjusted trial balance contained the following asset accounts at December 31,

2014: Cash $7,000; Land $40,000; Patents $12,500; Accounts Receivable $90,000; Prepaid Insurance $5,200; Inventory $30,000; Allowance for Doubtful Accounts $4,000; Equity Investments (trading) $11,000. Prepare the current assets section of the balance sheet, listing the accounts in proper sequence.