EXERCISE 5.5 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable (due 2021) ………………….
$ 125,000
Accounts payable ……………………………..
Rent payable …………………………………….
Total current liabilities …………………
Long-term liabilities
Bonds payable ………………………………….
$500,000
Add: Premium on bonds payable ……….
53,000
Total liabilities …………………………….
Stockholders’ equity
Additional paid-in capital …………………..
Retained earnings …………………………….
Total stockholders’ equity ……………
Common stock, $1 par, authorized
400,000 shares, issued 290,000
EXERCISE 5.6 (30–35 minutes)
Geronimo Company
Balance Sheet
July 31, 2020
Assets
Current assets
Cash ……………………………………………………….
$60,000*
Accounts receivable …………………………..
$38,700**
accounts …………………………………………….
Inventory ……………………………………………………
Total current assets …………………………..
Long-term investments
Bond sinking fund ………………………………………
15,000
Property, plant, and equipment
Equipment ………………………………………………….
112,000
equipment …………………………..
84,000
Intangible assets
Patents ………………………………………………………
($69,000 – $15,000 + $6,000)
($60,000 + $5,300)
EXERCISE 5.6 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Notes and accounts payable ……………………….
$ 44,000
Income taxes payable …………………………………
6,000
Total current liabilities …………………………..
$ 50,000
Long-term liabilities …………………………………………
Total liabilities ………………………………………
EXERCISE 5.7 (15–20 minutes)
Current assets
Cash …………………………………………………………..
$ 87,000*
Less: Restricted cash (plant expansion) ……….
50,000
$ 37,000
Debt investments (at fair value; cost,
$31,000) ……………………………………………………
29,000
Accounts receivable (of which $50,000 is
pledged as collateral on a bank loan) …………
Less: Allowance for doubtful accounts …………
12,000
Interest receivable [($40,000 X 6%) X 8/12] …….
Inventories at lower of cost (determined
using LIFO) or market
Finished goods ………………………………………
Work in process …………………………..…………
Raw materials ………………………………………..
207,000
* ($37,000 + $50,000). An acceptable alternative is to report cash at $37,000
and simply report the restricted cash (plant expansion) in the investments
section.
EXERCISE 5.8 (10–15 minutes)
2. Bonds payable of $25,000,000 and interest payable of $3,000,000
3. Customer advances of $17,000,000 will be reported as a current
EXERCISE 5.9 (30–35 minutes)
(a) Allessandro Scarlatti Company
Balance Sheet (Partial)
December 31, 2020
Current assets
Cash …………………………………………………..
$ 34,396*
Accounts receivable …………………………..
$ 91,300**
Inventory …………………………..……………….
Prepaid expenses ……………………………….
Total current assets ……………………….
*
Cash balance
$ 40,000
Add: Cash disbursement after discount
($39,000 X .98)
38,220
78,220
Cash collected on account
Bank loan proceeds ($35,324 – $23,324)
43,824
Adjusted cash
$ 34,396
Accounts receivable balance
$ 89,000
Add: Accounts reduced from January collection
($23,324 ÷ .98)
23,800
112,800
Deduct: Accounts receivable in January
(21,500)
Adjusted accounts receivable
$ 91,300
Inventory
Less: Inventory received on consignment
EXERCISE 5.9 (Continued)
Current liabilities
Notes payable ……………………………………………
$55,000a
Accounts payable …………………………..………….
115,000b
Total current liabilities ………………………….
$170,000
Notes payable balance
Adjusted notes payable
Accounts payable balance
Add: Cash disbursements
Purchase invoice omitted
($27,000 – $12,000)
Adjusted accounts payable
(b)
Adjustment to retained earnings balance:
Add: January sales discounts
[($23,324 ÷ .98) X .02] ………………………..
$ 476
Deduct: January sales ………………………………….
$30,000
January purchase discounts
($39,000 X .02) ………………………………
December purchases ($27,000 – $12,000) ..
Change (decrease) to retained earnings …………
$(57,304)
EXERCISE 5.10 (15–20 minutes)
(a) In order for a liability to be reported for threatened litigation, the
potential loss must be probable and the amount of the payment must
(c) A current liability for accrued interest of $4,000 ($600,000 X 8% X 1/12)
should be reported. Also, the $600,000 note payable should be a current
liability if payable in one year. Otherwise, the $600,000 notes payable
would be a long-term liability.
(d) Bad Debt Expense of $300,000 ($10,000,000 x .03) should be debited
and the Allowance for Doubtful Accounts credited for $300,000 ,
assuming that there is a $0 balance in the Allowance for Doubtful
EXERCISE 5.11 (25–30 minutes)
Kelly Corporation
Balance Sheet
December 31, 2020
Assets
Current assets:
Cash ……………………………………………………………..
$ 6,850
*
Supplies ……………………………………………………….
1,200
Prepaid insurance ………………………………………….
1,000
Property, plant and equipment:
Equipment ……………………………………………………
Less: Accumulated depr.—equipment …………..
4,000
Intangible assets:
Trademarks ………………………………………………….
Total assets ……………………………………………….
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable …………………………………………..
$10,000
Salaries and wages payable …………………………..
500
Unearned service revenue ………………………………
2,000
Total current liabilities …………………………..
Long-term liabilities
Bonds payable (due 2027) ………………………………
Total liabilities ……………………………………………….
Common stock ………………………………………………
Retained earnings ($25,000 – $2,500**) …………….
Total stockholders’ equity …………………………
EXERCISE 5.11 (Continued)
EXERCISE 5.12 (30–35 minutes)
Scott Butler Corporation
Balance Sheet
December 31, 2020
Assets
Current assets
Cash ……………………………………………….
$197,000
Debt investments (Trading) ………………
153,000
Accounts receivable ………………………..
Inventory …………………………………………
Long-term investments
Debt investments …………………………….
299,000
Equity investments ………………………….
277,000
Total long-term investments ………
576,000
Property, plant, and equipment
Land ……………………………………………….
260,000
Buildings …………………………..…………….
1,040,000
building ………………………………….
888,000
Equipment ………………………………………
equipment ………………………………
60,000
540,000
Intangible assets
Franchises ……………………………………………..
160,000
Patents ……………………………………………
195,000
Total intangible assets ………………..
EXERCISE 5.12 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable (short-term) ……………
$ 90,000
Accounts payable …………………………
455,000
Dividends payable ………………………..
136,000
Accrued liabilities …………………………
Total current liabilities …………..
Long-term debt
Notes payable (long-term) …………….
900,000
Bonds payable ……………………………..
Total long-term liabilities ………….
Total liabilities …………………………
Stockholder’s equity
Paid-in capital
Common stock ($5 par) ……………
$1,000,000
Retained earnings* ……………………….
retained earnings ………………..
Less: Treasury stock …………………….
Total stockholders’ equity ……..
EXERCISE 5.12 (Continued)
*Computation of Retained Earnings:
Sales revenue
$8,100,000
Investment revenue
63,000
Gain
80,000
Cost of goods sold
Selling expenses
Administrative expenses
Interest expense
(211,000)
Net income
$ 332,000
Beginning retained earnings
$ 78,000
Net income
332,000
Ending retained earnings
$410,000
Or ending retained earnings can be computed as follows:
$2,677,000)
Add: Treasury stock
Less: Total paid-in capital ($1,000,000 + $80,000)
Ending retained earnings
$ 410,000
EXERCISE 5.13 (15–20 minutes)
(a)
4.
(f)
1.
(k)
1.
(b)
3.
(g)
5.
(l)
2.
(c)
4.
(h)
4.
(m)
2.
(d)
3.
(i)
5.
(e)
1.
(j)
4.
EXERCISE 5.14 (25–35 minutes)
Constantine Cavamanlis Inc.
Statement of Cash Flows
For the Year Ended December 31, 2020
Cash flows from operating activities
Net income ……………………………………………………
$44,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense ……………………………….
Increase in accounts receivable ………………..
Increase in accounts payable ……………………
8,000
Net cash provided by operating activities ……….
52,000
Cash flows from investing activities
Purchase of equipment ………………………………….
(17,000)
Cash flows from financing activities
Issuance of common stock …………………………….
Payment of cash dividends …………………………..
Net cash used by financing activities ……………..
Net increase in cash ……………………………………………
32,000
Cash at beginning of year ……………………………………
EXERCISE 5.15 (25–35 minutes)
(a) Zubin Mehta Corporation
Statement of Cash Flows
For the Year Ended December 31, 2020
Cash flows from operating activities
Net income ……………………………………………………..
$160,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense ($106,000 – $89,000) ………
Loss on sale of investments ……………………….
Decrease in accounts receivable ………………..
Decrease in current liabilities ……………………..
(17,000)
Net cash provided by operating activities …………
Cash flows from investing activities
Sale of investments …………………………………………
12,000
[($74,000 – $52,000) – $10,000]
Purchase of equipment ($298,000 – $240,000) ………..
(58,000)
Cash flows from financing activities
Payment of cash dividends …………………………..
Net increase in cash ……………………………………………..
Cash at beginning of year …………………………..…………
(b) Free Cash Flow Analysis
Net cash provided by operating activities ………………
$175,000
Less: Purchase of equipment ………………………………
Dividends …………………………………………………..
(30,000)
Free cash flow ……………………………………………………..
$ 87,000
EXERCISE 5.16 (20–25 minutes)
(a) Shabbona Corporation
Statement of Cash Flows
For the Year Ended December 31, 2020
Cash flows from operating activities
Net income ……………………………………………………..
$125,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense ($69,000 – $42,000) ………..
Increase in accounts receivable ………………….
Decrease in inventory ………………………………..
Decrease in accounts payable …………………….
(13,000)
Net cash provided by operating activities …………
Cash flows from investing activities
Sale of land ($110,000 – $71,000) …………………………..
39,000
Purchase of equipment ($260,000 – $200,000) ………..
(60,000)
Net cash used by investing activities ……………….
Cash flows from financing activities
Payment of cash dividends ……………………………..
Net increase in cash ……………………………………………..
Cash at beginning of year ……………………………………..
EXERCISE 5.16 (Continued)
(b) Current cash debt coverage =
Net cash provided by operating activities
Cash debt coverage =
Net cash provided by operating activities
=
Average total liabilities
.61 to 1
Free Cash Flow Analysis
Net cash provided by operating activities ……………………..
$132,000
Less: Purchase of equipment ……………………………………..
(60,000)
Dividends ………………………………………………………….
(60,000)
EXERCISE 5.17 (30–35 minutes)
(a) Grant Wood Corporation
Statement of Cash Flows
For the Year Ended December 31, 2020
Cash flows from operating activities
Net income ……………………………………………………….
$55,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Loss on sale of equipment …………………………..
Depreciation expense ($9,000 + $4,000) …………
Patent amortization ……………………………………..
Increase in current assets (other than cash) ……..
Increase in current liabilities ………………………..
1,500
Net cash provided by operating activities …………..
Cash flows from investing activities
Sale of equipment ……………………………………………..
10,000
Addition to building …………………………………………..
(27,000)
Investment in stock …………………………………………..
(16,000)
Net cash used by investing activities …………………
Cash flows from financing activities
Issuance of bonds …………………………………………….
50,000
Payment of dividends ………………………………………..
(30,000)
Purchase of treasury stock ………………………………..
(11,000)
Net cash provided by financing activities……………
Total current assets—end of period
$296,500
[from part (b)]
Total current assets—beginning of period
235,000
Increase in current assets during the period
Increase in current assets other than cash
29,000
EXERCISE 5.17 (Continued)
(b) Grant Wood Corporation
Balance Sheet
December 31, 2020
Assets
Current assets …………………………………………
$296,500b
Equity investments (Long-term) ………………..
16,000
Property, plant, and equipment
Land ………………………………………………….
Building ($120,000 + $27,000) ………………
($30,000 + $4,000) …………………………….
Equipment ($90,000 – $20,000) …………….
($11,000 – $8,000 + $9,000) ……………….
Total property, plant, and equipment …..
($40,000 – $2,500) …………………………….
Liabilities and Stockholders’ Equity
Current liabilities ($150,000 + $13,000) ……………………
$163,000
Long-term liabilities
Bonds payable ($100,000 + $50,000) ………………….
Total liabilities ……………………………………………
Common stock ………………………………………………..
$180,000
Retained earnings ($44,000 + $55,000 – $30,000) ……..
69,000
Total paid-in capital and retained earnings ……..
Less: Cost of treasury stock …………………………..
11,000
Total stockholders’ equity …………………………..
b
The amount determined for current assets could be computed last and then is a
“plug” figure. That is, total liabilities and stockholders’ equity is computed because
information is available to determine this amount. Because the total assets amount is
the same as total liabilities and stockholders’ equity amount, the amount of total
assets is determined. Information is available to compute all the asset amounts except
EXERCISE 5.18 (25–35 minutes)
(a) Madrasah Corporation
Statement of Cash Flows
For the Year Ended December 31, 2020
Cash flows from operating activities
Net income ……………………………………………………….
$44,000
Adjustment to reconcile net income
to net cash provided by operating activities:
Depreciation expense………………………………………..
Increase in accounts payable …………………………..
Increase in accounts receivable …………………………
Net cash provided by operating activities …………..
37,000
Cash flows from Investing activities
Purchase of equipment ……………………………………..
Cash flows from financing activities
Issuance of stock ……………………………………………..
20,000
Payment of dividends ………………………………………..
Net cash used by financing activities …………………
Net increase in cash ……………………………………………….
Cash at beginning of year ……………………………………….
Cash at end of year ………………………………………………..
2020
2019
(b) Current ratio
6.3
6.73
($20,000 +$126,000)
($13,000 + $88,000)
$ 20,000
$ 15,000
Free Cash Flow Analysis
Net cash provided by operating activities ………………………..
Less: Purchase of equipment …………………………………………
Pay dividends ………………………………………………………
(c) Although Madrasah’s current ratio has declined from 2019 to 2020, it is
still in excess of 6. It appears the company has good liquidity and