Chapter Two
Challenge Exercise 1
LO: 1, 2
These items were taken from the financial statements of Bush Company at December 31, 2014:
Buildings $105,800 Common stock (20,000 shares) $60,000
Accounts receivable 15,600 Retained earnings (1/1/14) 40,000
Prepaid insurance 3,200 Accumulated depreciation-buildings 45,800
Instructions
(a) Prepare a classified balance sheet. Assume that $16,300 of the note payable will be paid in 2015.
Challenge Exercise 1 – Solution
(a) BUSH COMPANY
Balance Sheet
December 31, 2014
Assets
Current assets
Cash …………………………………………….. $11,800
Accounts receivable ……………………… 15,600
Total assets ……………………………. $215,600
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable …………………………. $ 8,500
Current maturity of note payable …….. 16,300
Challenge Exercise 1 – Solution (Cont’d)
(b) (1) Working capital: $30,600 – $28,400 = $2,200
Challenge Exercise 2
LO: 3
Mendez Company had three major business transactions during 2014.
(a) Security investments with a market value of $10,000 were reported in the financial statements at their
(c) The annual report did not include any notes to the financial statements.
Instructions
In each situation, identify the assumption or principle that has been violated, if any, and discuss what the
company should have done.
Challenge Exercise 2 – Solution
(a) This is a violation of the fair value principle. Security investments should be reported at their fair market
value in the financial statements.
(b) This is a violation of the monetary unit assumption. Only those transactions that can be measured in
dollars and cents are recorded and reported in the financial statements. The death of the CEO should be