5-21
EXERCISE 5-4 (Continued)
Liabilities and Shareholders’ Equity
Current liabilities
Salaries and wages payable ………………………..
$XXX
Notes payable, short-term …………………………..
XXX
Additional paid-in capital:
Paid in capital in excess of
par—common stock …………………………..
XXX
Total paid-in capital ………………………….
XXX
Retained earnings ………………………………………
XXX
Total paid-in capital and
Less: Treasury stock, at cost ………………..
Total stockholders’ equity ………………..
Unearned subscriptions revenue …………………
Unearned rent revenue ……………………………….
Total current liabilities …………………………..
Long-term debt
Bonds payable, due in four years ………………..
Less: Discount on bonds payable………………..
Total liabilities ………………………………………
Capital stock:
Common stock ……………………………………..
XXX
EXERCISE 5-5 (30–35 minutes)
BRUNO COMPANY
Balance Sheet
December 31, 2012
Assets
Current assets
Cash …………………………..……………………
Equity investments (trading) ……………..
Accounts receivable ………………………….
Less: Allowance for doubtful
accounts …………………………..
Inventory (lower-of-average-
Prepaid expenses ……………………………..
Total current assets ……………………..
Long-term investments
Land held for future use …………………….
Cash surrender value of life
insurance ………………………………………
265,000
Buildings ………………………………………….
Less: Accum. depr.—building ……..
Office equipment ………………………………
Intangible assets
Goodwill …………………………………………..
5-23
EXERCISE 5-5 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable ……………………………..
$135,000
Notes payable (due next year) ……………
125,000
Rent payable …………………………………….
49,000
Total current liabilities …………………
$ 309,000
Stockholders’ equity
Common stock, $1 par, authorized
400,000 shares, issued 290,000
shares ……………………………………………
290,000
Additional paid-in capital …………………..
Retained earnings …………………………….
Total stockholders’ equity ……………
Long-term liabilities
Bonds payable ………………………………….
Add: Premium on bonds payable ……….
553,000
Pension obligation …………………………..
82,000
635,000
Total liabilities …………………………….
EXERCISE 5-6 (30–35 minutes)
GARFIELD COMPANY
Balance Sheet
July 31, 2012
Assets
Current assets
Cash …………………………..…………………………..
$66,000*
Accounts receivable …………………………..
Inventory ……………………………………………………
Long-term investments
Bond sinking fund ………………………………………
12,000
Property, plant, and equipment
Equipment ………………………………………………….
Intangible assets
Patents ………………………………………………………
($69,000 – $12,000 + $9,000)
($52,000 – $5,300)
($60,000 + $5,300)
5-25
EXERCISE 5-6 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Notes and accounts payable ……………………….
$ 52,000****
Taxes payable …………………………………………….
9,000
Total current liabilities …………………………..
$ 61,000
EXERCISE 5-7 (15–20 minutes)
Current assets
Cash …………………………………………………………..
$ 92,000*
Less: Cash restricted for plant expansion ……
50,000
$ 42,000
Equity investments (fair value)
(cost, $31,000) …………………………………………..
29,000
Accounts receivable (of which $50,000 is
Less: Allowance for doubtful accounts ………..
Interest receivable [($40,000 X 6%) X 8/12] …….
Inventory (lower-of-cost (determined
using LIFO)-or-market)
Finished goods …………………………..………….
Work-in-process …………………………………….
Raw materials ………………………………………..
Long-term liabilities …………………………..…………….
Total liabilities ………………………………………
5-26
EXERCISE 5-8 (10–15 minutes)
1. Dividends payable of $1,900,000 will be reported as a current liability
[(1,000,000 – 50,000) X $2.00].
EXERCISE 5-9 (30–35 minutes)
(a) AGINCOURT COMPANY
Balance Sheet (Partial)
December 31, 2012
Current assets
Cash …………………………………………………..
$ 30,476*
Accounts receivable …………………………..
$ 91,300**
Inventory ……………………………………………
Prepaid expenses ……………………………….
Less: Cash sales in January ($30,000 – $21,500)
Bank loan proceeds ($35,324 – $23,324)
EXERCISE 5-9 (Continued)
**
Accounts receivable balance
$ 89,000
Add: Accounts reduced from January collection
($23,324 ÷ 98%)
23,800
Deduct: Accounts receivable in January
21,500
Inventories
$171,000
Less: Inventory received on consignment
10,000
Current liabilities
Accounts payable ………………………………………
$113,000a
Notes payable ……………………………………………
55,000b
Total current liabilities ………………………….
$168,000
Accounts payable balance
$ 61,000
Add: Cash disbursements
Purchase invoice omitted
Notes payable balance
$ 67,000
Less: Proceeds of bank loan
12,000
(b)
Adjustment to retained earnings balance:
Deduct: January sales………………………………….
January purchase discounts
December purchases ……………………….
Consignment inventory …………………….
(57,700)
Change (decrease) to retained earnings ………….
$ (57,224)
Add: January sales discounts
5-28
EXERCISE 5-10 (15–20 minutes)
(a) In order for a liability to be reported for threatened litigation, the amount
must be probable and payment reasonably estimable. Since these
conditions are not met an accrual is not required.
(d) Although bad debts expense of $200,000 should be debited and the
allowance for doubtful accounts credited for $200,000, this does not
result in a liability. The allowance for doubtful accounts is a valuation
account (contra asset) and is deducted from accounts receivable on
the balance sheet.
EXERCISE 5-11 (25–30 minutes)
ABBEY CORPORATION
Balance Sheet
December 31, 2012
Assets
Current assets
Cash ……………………………………………………………..
$ 6,850
Supplies ……………………………………………………….
Prepaid insurance ………………………………………….
1,000
Total current assets …………………………………
$ 9,050
Intangible assets—trademarks …………………………..
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable …………………………………………..
$10,000
Salaries and wages payable …………………………..
500
Unearned service revenue ………………………………
2,000
Total current liabilities …………………………..
$12,500
Long-term liabilities
Bonds payable ……………………………………………….
Total liabilities ……………………………………………….
Common stock ………………………………………………
Retained earnings ($20,000 – $2,500*) ……………..
17,500
Total stockholders’ equity …………………………
5-30
EXERCISE 5-12 (30–35 minutes)
VIVALDI CORPORATION
Balance Sheet
December 31, 2012
Assets
Current assets
Cash …………………………..…………………..
Debt investments ……………………………..
Long-term investments
Debt investments ……………………………..
Equity investments …………………………..
Total long-term investments ………
576,000
Property, plant, and equipment
Land …………………………..……………………
Buildings …………………………………………
Less: Accum. depreciation …………
Equipment ………………………………………
Less: Accum. depreciation …………
Intangible assets
Franchises ……………………………………….
Patents ……………………………………………
Total intangible assets ………………..
Total assets …………………………..…..
Accounts receivable …………………………
Total current assets ……………………
EXERCISE 5-12 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable …………………………
$ 455,000
Notes payable (short-term) ……………
90,000
Dividends payable ………………………..
136,000
Accrued liabilities …………………………
96,000
Total current liabilities …………..
$ 777,000
Long-term debt
Bonds payable ……………………………..
Notes payable (long-term) …………….
900,000
Total long-term liabilities ………….
Stockholders’ equity
Paid-in capital
Common stock ($5 par) ……………
$1,000,000
Retained earnings* ……………………….
Less: Treasury stock ……………………
Total stockholders’ equity ……..
Paid-in capital in
5-32
EXERCISE 5-12 (Continued)
*Computation of Retained Earnings:
Sales ……………………………………………………………….
$7,900,000
Investment revenue ………………………………………….
63,000
Extraordinary gain ……………………………………………
80,000
Beginning retained earnings …………………………….
$ 78,000
Net income ………………………………………………………
132,000
Ending retained earnings ………………………………….
$ 210,000
$1,099,000
Add: Treasury stock ……………………………………….
Less: Paid-in capital ………………………………………..
Ending retained earnings ………………………………….
$ 210,000
Note to instructor: There is no dividends account. Thus, the 12/31/12 retained
earnings balance already reflects any dividends declared.
EXERCISE 5-13 (15–20 minutes)
Cost of goods sold …………………………………………..
Selling expenses …………………………..…………………
Administrative expenses …………………………..……..
Interest expense ………………………………………………
(211,000)
Net income ………………………………………………………
$ 132,000
EXERCISE 5-14 (25–35 minutes)
CONNECTICUT INC.
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Net income …………………………………………………….
$34,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense ……………………………….
Increase in accounts receivable …………………
Net cash provided by operating activities ………..
Cash flows from investing activities
Purchase of equipment …………………………………..
(17,000)
Cash flows from financing activities
Issuance of common stock……………………………..
20,000
Payment of cash dividends …………………………..
(13,000)
Net cash provided by financing activities ………..
Net increase in cash …………………………………………….
Cash at beginning of year …………………………………….
5-34
EXERCISE 5-15 (25–35 minutes)
(a) SONDERGAARD CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Net income ……………………………………………………..
$160,000
Adjustments to reconcile net income
Decrease in current liabilities ……………………..
(17,000)
12,000
Net cash provided by operating activities …………
172,000
Cash flows from investing activities
Sale of investments
[($74,000 – $52,000) – $7,000] ………………………..
15,000
Purchase of equipment ……………………………………
Cash flows from financing activities
Payment of cash dividends …………………………..
Cash at beginning of year ……………………………………..
(b) Free Cash Flow Analysis
Net cash provided by operating activities ………………
$172,000
Less: Purchase of equipment ……………………………….
58,000
Dividends …………………………………………………..
Free cash flow ……………………………………………………..
to net cash provided by operating
activities:
Depreciation expense …………………………………
Loss on sale of investments ……………………….
EXERCISE 5-16 (20–25 minutes)
(a) OROZCO CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Net income ……………………………………………………..
$105,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense ………………………………..
Increase in accounts receivable ………………….
Decrease in accounts payable ……………………
Net cash provided by operating activities …………
112,000
Cash flows from investing activities
Sale of land …………………………..………………………..
39,000
Purchase of equipment ……………………………………
(70,000)
Net cash used by investing activities ……………….
Cash flows from financing activities
Payment of cash dividends ……………………………..
Net increase in cash ……………………………………………..
Cash at beginning of year …………………………..…………
5-36
EXERCISE 5-16 (Continued)
(b) Current cash debt coverage ratio =
=
2.77 to 1
Cash debt coverage ratio =
=
0.52 to 1
Free Cash Flow Analysis
Net cash provided by operating activities ……………………..
$112,000
Less: Purchase of equipment ………………………………………
EXERCISE 5-17 (30–35 minutes)
(a) CHEKOV CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Net income ……………………………………………………….
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense ………………………………….
Patent amortization ……………………………………..
2,500
Increase in current liabilities ………………………..
Increase in current assets (other than cash) …….
(25,000)
Net cash provided by operating activities …………..
Cash flows from investing activities
Sale of equipment …………………………………………….
9,000
Addition to building…………………………………………..
(27,000)
Investment in stock …………………………………………..
(16,000)
Net cash used by investing activities …………………
(34,000)
Cash flows from financing activities
Issuance of bonds …………………………………………….
Payment of dividends ……………………………………….
(25,000)
Purchase of treasury stock………………………………..
(11,000)
Net cash provided by financing activities …………..
*[$9,000 – ($20,000 – $8,000)]
aAn additional proof to arrive at the increase in cash is provided as follows:
Total current assets—end of period
Total current assets—beginning of period
Increase in current assets during the period
Increase in current assets other than cash
5-38
EXERCISE 5-17 (Continued)
(b) CHEKOV CORPORATION
Balance Sheet
December 31, 2012
Assets
Current assets …………………………………………
$301,500b
Long-term investments …………………………….
16,000
Property, plant, and equipment
Liabilities and Stockholders’ Equity
Current liabilities ($150,000 + $13,000) ……………………
$163,000
Long-term liabilities
Bonds payable ($100,000 + $50,000) ………………….
150,000
Total liabilities …………………………………………….
Common stock …………………………………………………
Retained earnings ($44,000 + $55,000 – $25,000) ………
Total paid-in capital and retained earnings ……..
254,000
Less: Cost of treasury stock …………………………..
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
Land …………………………..………………………
Buildings ($120,000 + $27,000) …………….
$147,000
Equipment ($90,000 – $20,000) …………….
Total property, plant, and equipment …..
EXERCISE 5-18 (25–35 minutes)
(a) MENACHEM CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Net income ……………………………………………………….
$34,000
Adjustment to reconcile net income
to net cash provided by operating activities:
Depreciation …………………………………………………….
Increase in accounts payable …………………………..
5,000
Increase in accounts receivable …………………………
Cash flows from Investing activities
Purchase of equipment ……………………………………..
(15,000)
Cash flows from financing activities
Issuance of stock ……………………………………………..
Payment of dividends ……………………………………….
Net cash used by financing activities …………………
Net increase in cash ……………………………………………….
Cash at beginning of year …………………………..…………..
Cash at end of year ………………………………………………..
2012
2011
(b) Current ratio
$128,000
= 6.4
$101,000
= 6.73
$ 20,000
$ 15,000
Free Cash Flow Analysis
Net cash provided by operating activities ………………………..
$ 27,000
Less: Purchase of equipment ………………………………………..
15,000
Free cash flow ……………………………………………………….
5-40
TIME AND PURPOSE OF PROBLEMS
Problem 5-1 (Time 30–35 minutes)
Purpose—to provide the student with the opportunity to prepare a balance sheet, given a set of accounts.
No monetary amounts are to be reported.
Problem 5-2 (Time 35–40 minutes)
Purpose—to provide the student with the opportunity to prepare a complete balance sheet, involving
dollar amounts. A unique feature of this problem is that the student must solve for the retained earnings
balance.
Problem 5-3 (Time 40–45 minutes)
Purpose—to provide an opportunity for the student to prepare a balance sheet in good form. Emphasis
is given in this problem to additional important information that should be disclosed. For example, an
inventory valuation method, bank loans secured by long-term investments, and information related to
the capital stock accounts must be disclosed.
Problem 5-4 (Time 40–45 minutes)
Purpose—to provide the student with the opportunity to analyze a balance sheet and correct it where
appropriate. The balance sheet as reported is incomplete, uses poor terminology, and is in error. A
challenging problem.
Problem 5-5 (Time 40–45 minutes)
Purpose—to provide the student with the opportunity to prepare a balance sheet in good form. Additional
information is provided on each asset and liability category for purposes of preparing the balance sheet.
A challenging problem.
Problem 5-6 (Time 35–45 minutes)
Purpose—to provide the student with an opportunity to prepare a complete statement of cash flows. A
condensed balance sheet is also required. The student is also required to explain the usefulness of the
statement of cash flows. Because the textbook does not explain in Chapter 5 all of the steps involved in
preparing the statement of cash flows, assignment of this problem is dependent upon additional
instruction by the instructor or knowledge gained in elementary financial accounting.
Problem 5-7 (Time 40–50 minutes)
Purpose—to provide the student with an opportunity to prepare a balance sheet in good form and a
more complex cash flow statement.