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48
Chapter 3
Balance Sheet
QUESTIONS
3-1. Assets - Resources of the firm
3-2.
3-3.
3-4. They are listed in order of liquidity, which is the ease with which they can be
converted to cash.
3-5. Marketable securities are held as temporary investments or idle cash. They
higher return.
3- 6. Accounts receivable represents the money that the firm expects to collect;
3-7. A retailing firm will have merchandise inventory and supplies. A
and supplies.
3-8. Depreciation represents the allocation of an asset’s cost over the period it is
3-9. Straight-line depreciation is better for reporting, since it results in higher
profits than does accelerated depreciation. Double-declining balance is
a.
L
d.
A
g.
L
j.
E
m.
L
p.
A
s.
A
b.
L
e.
A
h.
A
k.
E
n.
L
q.
A
c.
A
f.
A
i.
A
l.
A
o.
A
r.
A
a.
TA
c.
IA
e.
IA
g.
TA
i.
TA
k.
IV
b.
CA
d.
CA
f.
CA
h.
CA
j.
CA
l.
TA
49
3-10. The rent is treated as a liability because it is unearned. The rental agency
covered by the rent.
there were a great deal of risk involved.
b. The discount is shown as a reduction of the liability.
interest expense on the income statement.
3-13. Historical cost causes difficulties in analysis because cost does not measure
3-14. At the option of the bondholder (creditor), the bond is exchanged for a
specified number of common shares (and the bondholder becomes a
When the common stock price increases sufficiently, the bondholder will
convert the bond to common stock.
3-15.
a.
CA
f.
CA
k.
CL
p.
NA
b.
CA
g.
E
l.
NL
q.
CA
c.
CL
h.
NA
m.
CL
r.
CL
d.
CL
i.
CA
n.
CA
s.
CA
e.
E
j.
E
o.
E
3-16. a. With the cumulative feature, if a corporation fails to declare the usual
dividend on the cumulative preferred stock, the amount of past
50
c. Convertible preferred stock contains a provision that allows the
preferred stockholders, at their option, to convert the share of
corporation.
d. Callable preferred stock may be retired (recalled) by the corporation at
its option.
3-17. The account “unrealized exchange gains or losses” is an shareholders’
combination, or the equity method of accounting.
3-18. Treasury stock represents the stock of the company that has been sold,
as inventory if they are not sold.
3-20. These subsidiaries are presented as an investment on the parent's balance
sheet.
3-21. Noncontrolling interest is presented on a balance sheet when an entity in
3-22. If DeLand Company owns 100% of Little Florida, Inc., it will not have a
noncontrolling interest. Little Florida would not be consolidated when control
3-23. The account “unrealized decline in market value of noncurrent equity
unrealized losses on long-term equity investments.
51
3-24. Redeemable preferred stock is subject to mandatory redemption
3-25. Fair value is the price that a company would receive to sell an asset (or
the date of measurement.
3-27. Level 3 valuation can be very subjective.
3-28. A quasi-reorganization is an accounting procedure equivalent to an
3-29. An ESOP is a qualified stock-bonus, or combination stock-bonus and
securities.
3-30. These institutions are willing to grant a reduced rate of interest because they
3-31. Some firms do not find an ESOP attractive because it can result in a
dilute the control of management.
compensation deduction within stockholders' equity.
3-33. Depreciation is the process of allocating the cost of building and machinery
depletion.
3-34. The three factors usually considered when computing depreciation are asset
from service.
3-35. A firm will often want to depreciate slowly for the financial statements
3-36. Over the life of an asset, the total depreciation will be the same, regardless
52
of the depreciation method selected.
3-38. Conceptually, this account balance represents retained earnings from other
comprehensive income.
3-39. Donated capital results from donations to the company by stockholders,
creditors, or other parties.
3-40. The land account under assets would be increased and the donated capital
3-41. 1. Those that require retroactive recognition (those require balance sheet
and income statement recognition).
53
PROBLEMS
PROBLEM 3-1
Airlines International
Balance Sheet
December 31, 2012
ASSETS
Current assets:
Cash
$
28,837
Marketable securities
10,042
Accounts receivable
$
67,551
Less: Allowance for doubtful accounts
248
67,303
Inventory
16,643
Prepaid expenses
3,963
Total current assets
$
126,788
Investment and special funds
11,901
Property, plant, and equipment:
Property, plant and equipment
$
809,980
Less: Accumulated depreciation
220,541
589,439
Other assets
727
Total assets
$
728,855
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current Liabilities:
Accounts payable
$
77,916
Accrued expenses
23,952
Unearned transportation revenue
6,808
Current installments of long-term debt
36,875
Total current liabilities
$
145,551
Long-term debt, less current portion
393,808
Deferred income taxes
42,070
Stockholders’ equity:
Common stock (par $0.50, authorized 20,000
shares, issued and authorized 14,304)
$
7,152
Capital in excess of par
72,913
Retained earnings
67,361
Total stockholders’ equity
147,426
Total liabilities and stockholders’ equity
$
728,855
54
PROBLEM 3-2
Lukes, Inc.
Balance Sheet
December 31, 2012
ASETS
Current assets:
Cash
$
3,000
Receivables, less allowance of $3,000
58,000
Inventories
54,000
Prepaid expenses
2,000
Total current assets
$
117,000
Plant and equipment:
Buildings
$
75,000
Machinery and equipment
300,000
375,000
Less: accumulated depreciation
200,000
175,000
Land
11,000
Other assets
7,000
Total assets
$
310,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
35,000
Accrued income taxes
3,000
Other accrued expenses
8,000
Current portion of long-term debt
7,000
Total current liabilities:
$
53,000
Long-term liabilities:
Long-term debt, less current portion
99,870
Deferred income tax liability
24,000
Total long-term liabilities
$
123,870
Stockholders’ equity:
Common stock, no par value 10,000 shares
authorized, 5,724 shares issued
3,180
Retained earnings
129,950
Total stockholders’ equity
$
133,130
Total liabilities and stockholders’ equity
$
310,000
PROBLEM 3-3
Alleg, Inc.
Balance SheetDecember 31, 2012
ASSETS
Current assets:
Cash
Marketable securities
Accounts receivable
Inventories
Total current assets
Plant and equipment:
Land and buildings
Machinery and equipment
Less: Accumulated depreciation
Total plant and equipment
Intangibles:
Current maturities of long-term debt
Total current liabilities
Long-term liabilities:
Mortgages payable
Bonds payable
Deferred income taxes
Total long-term liabilities
Shareholders’ equity:
Common stock
21,000 shares authorized at $1 par value,
10,000 shares issued and outstanding
Additional paid-in capital
$ 13,000
17,000
26,000
30,000
86,000
57,000
125,000
182,000
61,000
121,000
8,000
10,000
26,000
80,000
70,000
18,000
168,000
10,000
38,000
33,000
56
investment.
b. Investment in Subsidiary Company is long-term.
depreciable.
e. Treasury stock should be deducted from stockholders' equity.
h. For most industries, liabilities should be classified as current and long-term.
i. Preferred and common stock should be separated, as should capital in
excess of par.
PROBLEM 3-5
b. Preferable to disclose allowance for doubtful accounts on face of
disclosed.
e. Short-term U.S. Notes should be classified under current assets.
f. Supplies should be classified under current assets.
payable should be under long-term liabilities.
h. Redeemable preferred stock should be presented before stockholders'
equity.
57
PROBLEM 3-6
b. $10,000 cash should be classified under “other assets” (restricted for
payment of long-term note).
d. Patent should be classified under intangibles.
f. Prepaid insurance should be under current assets.
PROBLEM 3-7
a. The dividends would not be shown on the balance sheet. The dividends
is shown on the balance sheet.
b. You would disclose a contingent liability in note format.
d. This subsequent event requires a note.
f. Securities held for control should be classified as long-term investments.
g. Land must be listed at cost. It will have to be written back down.
from the balance sheet.
