119) Accounts payable
120) Prepaid expense
121) Retained earnings
122) Subsequent events
123) MD&A
124) Franchise
42
Listed below are four terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the correct term.
A) An indication of how adept a company is at withstanding various events and circumstances
that might impair its ability to earn profits.
B) An indication of whether a company won’t be able to pay its obligations when they come due.
C) Each item in the financial statements is expressed as a percentage of an appropriate
corresponding total, or base amount, but within the same year.
D) Each item in a financial statement is expressed as a percentage of that same item in the
financial statements of another year (base amount).
125) Default risk
126) Operational risk
127) Horizontal analysis
128) Vertical analysis
43
129) Carter Appliances is preparing its annual report for the current fiscal year. The company’s
controller has asked for your help in determining how best to disclose information about the
following items:
1. A subsequent event.
2. Inventory costing method.
3. Composition of accrued liabilities.
4. Useful lives of depreciable assets.
5. Information on long-term leases.
6. Allowance for uncollectible accounts.
7. Revenue recognition policy.
8. Pension plans.
Required: Indicate whether the above items should be disclosed (a) in the summary of
significant accounting policies note, (b) in a separate disclosure note, or (c) on the face of the
balance sheet
44
130) As controller for Henderson, you are attempting to reconstruct and revise the following
balance sheet prepared by a staff accountant.
Henderson Manufacturing Company
Balance Sheet
At December 31, 2018
($ in 000s)
Assets
Current assets:
Cash $ 1,600
Accounts receivable 4,300
Allowance for uncollectible accounts (500)
Finished goods inventory 5,000
Prepaid expenses 2,400
Total current assets 12,800
Long-term assets:
Investments 2,000
Raw materials and work in process inventory 3,200
Equipment 18,000
Accumulated depreciation—equipment (8,000)
Franchise ________ ?
Total assets $ ?
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable $6,200
Note payable 8,000
Interest payable—note 200
Deferred revenue 2,400
Total current liabilities 16,800
Long-term liabilities:
Bonds payable 7,000
Interest payable—bonds 200
Shareholders’ equity:
Common stock $ ?
Retained earnings ? ?
Total liabilities and shareholders’ equity $ ?
45
Additional information ($ in 000s):
1. Certain records that included the account balances for the franchise and shareholders’
equity items were lost. However, a complete, preliminary balance sheet prepared before the
records were lost showed a debt to equity ratio of 1.5. That is, total liabilities are 150% of total
shareholders’ equity. Retained earnings at the beginning of the year was $4,300. Net income for
2018 was $2,500, and $800 in cash dividends were declared and paid to shareholders.
2. The investments represent treasury bills purchased in December 2018 that mature in
January 2019. These are considered cash equivalents.
3. Interest on both the note and the bonds is payable annually.
4. The note payable is due in annual installments of $800 each.
5. Deferred revenue will be recognized equally over the next 18 months.
6. The common stock represents 500,000 shares of no par stock authorized, 300,000 shares
issued and outstanding.
Required:
Prepare a complete, corrected, classified balance sheet.
46
47
48
131) You recently joined the internal auditing department of Kaitlyn Sportswear Corporation. As
one of your first assignments, you are examining a balance sheet prepared by a staff accountant.
Kaitlyn Sportswear Corporation
Balance Sheet
At December 31, 2018
Assets
Current assets:
Cash $ 220,000
Accounts receivable, net 340,000
Note receivable 80,000
Inventories 600,000
Prepaid expenses 40,000
Total current assets 1,280,000
Other assets:
Land $ 500,000
Buildings, net 2,200,000
Equipment, net 400,000
Investments 50,000
Patent 60,000
Total other assets 3,156,000
Total assets $4,346,000
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable $ 165,000
Salaries payable 75,000
Interest payable 45,000
Total current liabilities 285,000
Long-term liabilities:
Note payable $300,000
Bonds payable 500,000
Deferred revenue 80,000
Total long-term liabilities 880,000
Total liabilities 1,165,000
Shareholders’ equity:
Common stock $2,000,000
Retained earnings 1,181,000
Total shareholders’ equity 3,181,000
Total liabilities and
shareholders’ equity $4,346,000
In the course of your examination you uncover the following information pertaining to the
balance sheet:
49
1. The land and buildings represent the corporate headquarters and manufacturing facilities.
2. The note receivable is due in 2020. The balance of $80,000 includes $5,000 of accrued
interest. The next interest payment is due in July 2019.
3. The note payable is due in installments of $50,000 per year. Interest on both the notes and
bonds is payable annually.
4. The company’s investments consist of marketable equity securities of other corporations.
Management does not intend to liquidate any investments in the coming year.
5. Deferred revenue will be recognized ratably (equally) over the next two years.
Required:
Identify and explain the deficiencies in the statement prepared by the company’s accountant.
Include in your answer items that require additional disclosure, either on the face of the
statement or in a note.
50
132) Presented below is a partial trial balance for the Messenger Corporation at December 31,
2018.
Account Title Debits Credits
Cash and cash equivalents 30,000
Accounts receivable 195,000
Raw materials inventory 36,000
Note receivable 120,000
Interest receivable 4,000
Interest payable 7,000
Marketable securities investments 48,000
Land 100,000
Buildings 1,500,000
Accumulated depreciation—buildings 740,000
Work in process inventory 38,000
Finished goods inventory 98,000
Equipment 400,000
Accumulated depreciation—equipment 230,000
Franchise (net of amortization) 120,000
Prepaid insurance (for the next year) 60,000
Deferred revenue 48,000
Accounts payable 240,000
Note payable 500,000
Salaries payable 6,000
Allowance for uncollectible accounts 24,000
Sales revenue 900,000
Cost of goods sold 500,000
Salaries expense 48,000
Additional information:
1. The note receivable, along with any accrued interest, is due on November 1, 2019.
2. The note payable is due in 2023. Interest is payable annually.
3. The marketable securities consist of investments in equity securities of other corporations.
Management does not intend to sell any of the securities in the next year.
4. Deferred revenue will be recognized equally over the next 18 months.
Required:
Determine the company’s working capital at December 31, 2018.
52
133) The December 31, 2018, post-closing trial balance ($ in thousands) for Libby Corporation
is presented below:
Debits Credits
Cash 22,500
Investments (long-term) 55,000
Accounts receivable 30,000
Allowance for uncollectible accounts 7,500
Prepaid insurance 4,500
Inventories 100,000
Land 45,000
Buildings 140,000
Accumulated depreciation–buildings 50,000
Equipment 132,500
Accumulated depreciation–equipment 30,000
Patents (unamortized balance) 5,000
Accounts payable 37,500
Notes payable, due 2019 65,000
Interest payable 10,000
Bonds payable, due 2028 120,000
Common stock, no par, 20,000 shares
authorized, issued, and outstanding 150,000
Retained earnings ________ 64,500
Totals 534,500 534,500
Required: Prepare a classified balance sheet for Libby Corporation at December 31, 2018.
54
Use this information to answer the following questions:
The condensed balance sheet and income statement for Marjoram Company are presented below.
Marjoram Company
Balance Sheet
At December 31, 2018
Cash $ 19,000
Nontrade receivable due August 15, 2019 35,000
Accounts receivable (net) 48,400
Merchandise inventory 70,600
Property, plant, and equipment (net) 250,000
Intangible assets 12,400
Total Assets $435,400
Current liabilities $108,400
11% Bonds payable, long term 100,000
Paid in capital 70,000
Retained earnings 157,000
Total liabilities and equity $435,400
Marjoram Company
Income Statement
For the Year ended December 31, 2018
Sales $704,000
Cost of goods sold 422,400
Gross profit $281,600
Operating expenses 166,200
Operating income $115,400
Interest expense 11,000
Income before income taxes $104,400
Income taxes 31,320
Net income $ 73,080
134) Compute the current ratio for Marjoram Company. Round your answer to two decimal
places.
55
135) Compute the acid-test ratio for Marjoram Company. Round your answer to two decimal
places.
136) Compute the debt to equity ratio for Marjoram Company. Round your answer to two
decimal places.
137) Compute the times interest earned ratio for Marjoram Company. Round your answer to two
decimal places.
138) Compute the return on shareholders’ equity ratio for Marjoram Company. Round your
answer to two decimal places.
56
Use this information to answer the following questions:
The balance sheet for Altoid Co. is shown below.
Altoid Co.
Balance Sheet
At December 31, 2018
Assets:
Cash $ 150
Short-term investments 200
Accounts receivable (net) 300
Inventories 450
Property, plant, and equipment (net) 1,100
Total assets $2,200
Liabilities and shareholders’ equity:
Current liabilities $ 450
Long-term liabilities 600
Paid-in capital 150
Retained earnings 1,000
Total liabilities and shareholders’ equity $2,200
Selected 2018 income statement information for Altoid Co. includes:
Net sales $7,700
Operating expenses 7,110
Income before interest and taxes 590
Interest expense 90
Income tax expense 150
Net income 350
Required: Compute the following financial statement ratios for 2018:
139) Altoid Co.’s current ratio. Round your answer to two decimal places.
57
140) Altoid Co.’s acid-test ratio. Round your answer to two decimal places.
141) Altoid Co.’s debt to equity ratio. Round your answer to two decimal places.
142) Altoid Co.’s times interest earned ratio. Round your answer to two decimal places.
143) Altoid Co.’s long term debt to equity ratio. Round your answer to two decimal places.
58
Use this information to answer the following questions:
Bronco Electronics’ current assets consist of cash, marketable securities, accounts receivable, and
inventories. The following data were abstracted from a recent financial statement:
Inventories $150,000
Total assets $1,400,000
Current ratio 3
Acid-test ratio 2.25
Debt to equity ratio 1.5
Required: Compute the following for Bronco:
144) Current assets
145) Shareholders’ equity