5-41
SOLUTIONS TO PROBLEMS
PROBLEM 5-1
COMPANY NAME
Balance Sheet
December 31, 20XX
Assets
Prepaid rent ……………………………………………..
XXX
Total current assets …………………………….
Long-term investments
Bond sinking fund …………………………………….
XXX
Cash surrender value of life insurance ……….
XXX
Land for future plant site …………………………..
XXX
Total long-term investments …………………
Property, plant, and equipment
Land ………………………………………………………..
XXX
Less: Accum. depreciation—buildings …..
Equipment ………………………………………………..
Less: Accum. depreciation—equipment ….
XXX
Total property, plant, and equipment …….
Intangible assets
Copyright …………………………………………………
XXX
Patents …………………………………………………….
XXX
Current assets
Cash on hand (including petty cash) ………….
Debt investments (trading) ………………………..
XXX
Accounts receivable …………………………………
Interest receivable …………………………………….
XXX
Advances to employees …………………………….
Inventory (ending) …………………………………….
XXX
PROBLEM 5-1 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable ………………………………………….
$XXX
Payroll taxes payable ……………………………….
Salaries and wages payable ……………………..
XXX
Dividends payable ……………………………………
XXX
Unearned subscriptions revenue ………………
Total current liabilities ………………………..
Long-term debt
Bonds payable …………………………………………
$XXX
Add: Premium on bonds payable ………..
XXX
XXX
Pension obligations …………………………………
Total long-term liabilities …………………….
Total liabilities …………………………………….
Stockholders’ equity
Capital stock
Preferred stock (description) ……………….
XXX
Common stock (description) ……………….
XXX
XXX
Additional paid-in capital
Preferred stock …………………………………..
Total paid-in capital …………………………….
XXX
Retained earnings ……………………………………
Less: Treasury stock ……………………………….
Total stockholders’ equity …………………..
5-43
PROBLEM 5-2
MONTOYA, INC.
Balance Sheet
December 31, 2012
Assets
Current assets
Cash …………………………………………….
$ 360,000
Equity investments (trading) ………….
121,000
Property, plant, and equipment
Land …………………………………………….
480,000
Buildings ………………………………………
$1,640,000
Less: Accum. depreciation—
buildings ……………………….
270,200
1,369,800
Equipment …………………………………….
Less: Accum. depreciation—
Intangible assets
Goodwill ……………………………………….
Notes receivable …………………………..
445,700
Income taxes receivable ………………..
Inventory ………………………………………
239,800
Prepaid expenses ………………………….
Total current assets …………………
$1,352,050
PROBLEM 5-2 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable …………………………..
$ 490,000
Notes payable to banks …………………..
265,000
Payroll taxes payable ……………………..
Income tax payable ………………………..
Rent payable ………………………………….
Total current liabilities ………………
Long-term liabilities
Notes payable
(long-term) …………………………………
1,600,000
Bonds payable ……………………………….
$300,000
Rent payable (long-term) ……………….
Total liabilities …………………………..
Stockholders’ equity
Capital stock
Preferred stock, $10 par; 20,000
shares authorized, 15,000
shares issued …………………………
150,000
($4,504,850 – $3,440,953) …………
5-45
PROBLEM 5-3
EASTWOOD COMPANY
Balance Sheet
December 31, 2012
Assets
Current assets
Cash ………………………………………………..
$ 41,000
Accounts receivable …………………………
$163,500
Long-term investments
Investments in stocks and bonds,
($120,000 have been pledged as
security for notes payable)—
at fair value ……………………………………
339,000
Property, plant, and equipment
Cost of uncompleted plant facilities
Equipment ………………………………………..
Less: Accum. depreciation ………….
Intangible assets
Patents (at cost less amortization)……..
Inventory (LIFO cost) ………………………..
Prepaid insurance …………………………..
5,900
Total current assets …………………….
PROBLEM 5-3 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable, secured by
investments of $120,000 ………………..
$ 94,000
Accounts payable …………………………..
Accrued expenses ………………………….
Total current liabilities ………………
$ 291,200
Long-term liabilities
8% bonds payable, due
January 1, 2023 …………………………...
200,000
Less: Discount on bonds payable …..
Total liabilities …………………………..
Stockholders’ equity
Common stock
545,000
Retained earnings ………………………….
Authorized 600,000 shares of $1
5-47
PROBLEM 5-4
KISHWAUKEE CORPORATION
Balance Sheet
December 31, 2012
Assets
Current assets
Cash ……………………………………………….
$175,900
Accounts receivable ………………………..
170,000
Inventory …………………………………………
312,100
Total current assets ……………………
$ 658,000
Property, plant, and equipment
Land ……………………………………………….
950,000
Buildings …………………………………………
$1,070,000a
Less: Accum. depreciation—
buildings ………………………….
410,000
660,000
1,610,000
Total assets …………………………..……
$2,476,000
Current liabilities
Notes payable—current installment ……
Income tax payable ………………………….
Long-term investments
Assets allocated to trustee for
Cash in bank ……………………………………
Debt investments
PROBLEM 5-4 (Continued)
Long-term liabilities
Notes payable …………………………………..
500,000b
Total liabilities ………………………………
675,000
Retained earnings ……………………………..
a$1,640,000 – $570,000 (to eliminate the excess of appraisal value over cost
from the Buildings account. Note that the appreciation capital account is
also deleted).
5-49
PROBLEM 5-5
SARGENT CORPORATION
Balance Sheet
December 31, 2012
Assets
Current assets
Cash ……………………………………………….
$150,000
Trading securities (at fair value) ……….
80,000
Long-term investments
Investments in common stock
(at fair value) …………………………………
270,000
Bond sinking fund …………………………..
250,000
Cash surrender value of life
insurance ……………………………………..
40,000
Land held for future use …………………..
270,000
830,000
Property, plant, and equipment
Buildings …………………………………………
Less: Accum. depreciation—
Equipment ……………………………………….
450,000
equipment ………………………..
Intangible assets
Franchise ………………………………………..
Goodwill ………………………………………….
100,000
Accounts receivable ………………………..
accounts ………………………….
Total current assets ……………………
PROBLEM 5-5 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable …………………………..
$ 140,000
Notes payable …………………………………..
Taxes payable …………………………………..
Unearned revenue …………………………..
5,000
Total current liabilities ………………….
Long-term liabilities
Notes payable …………………………………..
120,000
7% bonds payable, due 2020 …………….
Less: Discount on bonds payable …….
960,000
Total liabilities ………………………………
Stockholders’ equity
Capital stock
Preferred stock, no par value;
200,000 shares authorized,
70,000 issued and outstanding ………
450,000
Paid-in capital in excess of par—
[$10.00 – $1.00)] ………………………….
Retained earnings …………………………..
320,000
Total stockholders’ equity …………….
5-51
PROBLEM 5-6
(a) LANSBURY INC.
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Net income …………………………………………………..
$32,000
Cash flows from investing activities
Sale of investments ………………………………………
15,000
Purchase of land ………………………………………….
(18,000)
Net cash used by investing activities …………….
(3,000)
Cash flows from financing activities
Issuance of common stock…………………………...
Retirement of notes payable ………………………….
Payment of cash dividends …………………………..
(8,200)
Net cash used by financing activities …………….
Net increase in cash …………………………………………..
Cash at beginning of year …………………………………..
Depreciation expense ……………………………..
Net cash provided by operating activities ………
PROBLEM 5-6 (Continued)
(b) LANSBURY INC.
Balance Sheet
December 31, 2012
Assets
Liabilities and Stockholders’ Equity
Cash
$32,000
Accounts payable
$30,000
Plant assets (net)
(2)
Common stock
120,000
(6)
(1) $32,000 – ($15,000 – $3,400)
(c) Cash flow information is useful for assessing the amount, timing, and
uncertainty of future cash flows. For example, by showing the specific
inflows and outflows from operating activities, investing activities,
and financing activities, the user has a better understanding of the
liquidity and financial flexibility of the enterprise. Similarly, these
5-53
PROBLEM 5-6 (Continued)
An analysis of Lansbury free cash flow indicates it is negative as shown
below:
Free Cash Flow Analysis
Net cash provided by operating activities …………………………
$19,200
Less: Purchase of land ………………………………………………….
18,000
Dividends …………………………………………………………….
5-54
PROBLEM 5-7
(a) AERO INC.
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Net income …………………………..……………………….
$35,000
Adjustments to reconcile net income to
net cash provided by operating activities
Cash flows from investing activities
Sale of investments ……………………………………….
27,000
Purchase of land ……………………………………………
(38,000)
Net cash used by investing activities ……………..
(11,000)
Cash flows from financing activities
Issuance of common stock …………………………….
30,000
Payment of cash dividends …………………………..
Net cash provided by financing activities………..
Net increase in cash ……………………………………………
Cash at beginning of year ……………………………………
Depreciation expense ……………………………….
Loss on sale of investments ……………………..
Increase in accounts receivable
($42,000 – $21,200) ……………………………..
Net cash provided by operating activities ……….
5-55
PROBLEM 5-7 (Continued)
(b) AERO INC.
Balance Sheet
December 31, 2012
Assets
Liabilities and Stockholders’ Equity
Cash
$ 70,200
Accounts payable
$ 40,000
(1) $81,000 – $12,000
(2) $40,000 + $38,000 + $30,000
(3) $41,000 + $30,000
(4) $100,000 + $30,000
(5) $23,200 + $35,000 – $10,000
(1)
Retained earnings
(5)
PROBLEM 5-7 (Continued)
Its current cash debt coverage is 1.18 to 1
$41,200
$35,000*
.
Overall, it appears
that its liquidity position is average and overall financial flexibility should
be improved.
*($30,000 + $40,000) ÷ 2
5-57
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 5-1 (Time 20–25 minutes)
Purpose—to provide a varied number of financial transactions and then determine how each of these
items should be reported in the financial statements. Accounting changes, additional assessments of
income taxes, prior period adjustments, and changes in estimates are some of the financial transac–
tions presented.
CA 5-2 (Time 25–30 minutes)
Purpose—to present the student with the opportunity to determine whether certain accounts should be
classified as current asset and current liability items. Borderline cases are included in which the student
is required to state the reasons for the questionable classifications. The number of items to be classified
is substantial and provides a good review to assess whether students understand what items should be
classified in the current section of the balance sheet.
CA 5-3 (Time 30–35 minutes)
Purpose—to present the asset section of a partial balance sheet that must be analyzed to assess its
deficiencies. Items such as improper classifications, terminology, and disclosure must be considered.
CA 5-4 (Time 20–25 minutes)
Purpose—to present a balance sheet that must be analyzed to assess its deficiencies. Items such as
improper classification, terminology, and disclosure must be considered.
CA 5-5 (Time 20–25 minutes)
Purpose—to present the student an ethical issue related to the presentation of balance sheet
information. The reporting involves “net presentation” of property, plant and equipment.
CA 5-6 (Time 40–50 minutes)
Purpose—to present a cash flow statement that must be analyzed to explain differences in cash flow
and net income, and sources and uses of cash flow and ways to improve cash flow.
5-58
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 5-1
1. The new estimate would be used in computing depreciation expense for 2012. No adjustment of
the balance in accumulated depreciation at the beginning of the year would be made. Instead, the
2. The additional assessment should be shown on the current period’s income statement. If material
it should be shown separately; if immaterial it could be included with the current year’s tax
expense. This transaction does not represent a prior period adjustment.
3. The effect of the error at December 31, 2011, should be shown as an adjustment of the beginning
4. Generally, an entry is made for a cash dividend on the date of declaration. The appropriate
CA 5-2
Current Assets
Current Liabilities
Interest receivable on U.S. gov. securities.
Preferred cash dividend, payable Nov. 1, 2012.
Notes receivable.
Income taxes payable.
Petty cash fund.
Debt investments (trading).
completed next year).
Cash in bank.
Premium on bonds redeemable in 2012.
Inventory of operating parts and supplies.
Inventory of raw materials.
Accrued payroll.
Accounts receivable.
Notes payable.
U.S. government contracts.
Interest payable.
8% First mortgage bonds to be redeemed in 2012.
Inventory of finished goods.
Inventory of work in process.
CA 5-2 (Continued)
Borderline cases that have been classified on the basis of assumptions are:
1. Notes receivable are assumed to be collectible within one year or the operating cycle.
CA 5-3
1. Unclaimed payroll checks should be shown as a current liability if these are claims by employees.
2. Debt investments (trading) securities should be reported at fair value, not cost.
6. Land should not be depreciated.
7. Buildings and equipment and their related accumulated depreciation balances should be separately
disclosed.
CA 5-4
Criticisms of the balance sheet of the Rasheed Brothers Corporation:
5-60
CA 5-4 (Continued)
3. The basis for the valuation and the method of pricing for Inventory are not indicated.
6. Buildings and land should be segregated. The Reserve for Depreciation should be shown as a
subtraction from the Buildings account only. Also, the term “reserve for” should be replaced by
“accumulated.”
7. Cash Surrender Value of Life Insurance would be more appropriately shown under the heading of
“Investments.”
11. Bonds Payable is inadequately disclosed. The interest rate, interest payment dates, and maturity
date should be indicated.
CA 5-5
1. The ethical issues involved are integrity and honesty in financial reporting, full disclosure, and the
accountant’s professionalism.
2. While presenting property, plant, and equipment net of depreciation on the balance sheet may be
acceptable under GAAP, it is inappropriate to attempt to hide information from financial statement