EXERCISE 5-17 (Continued)
(b) Grant Wood Corporation
Balance Sheet
December 31, 2014
Assets
Current assets …………………………………………
$296,500b
Equity investments (Long-term) ………………..
16,000
Property, plant, and equipment
Land ………………………………………………….
$ 30,000
Building ($120,000 + $27,000) ………………
$147,000
Equipment ($90,000 – $20,000) …………….
Total property, plant, and equipment …..
Liabilities and Stockholders’ Equity
Current liabilities ($150,000 + $13,000) ……………………
Long-term liabilities
Bonds payable ($100,000 + $50,000) ………………….
Total liabilities ……………………………………………
Common stock ………………………………………………..
$180,000
Retained earnings ($44,000 + $55,000 – $30,000) ……..
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
EXERCISE 5-18 (25–35 minutes)
(a) Madrasah Corporation
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities
Net income ……………………………………………………….
$44,000
Adjustment to reconcile net income
to net cash provided by operating activities:
Depreciation ……………………………………………………..
Increase in accounts payable …………………………..
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 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 ………………………………………………..
$20,000
2014
2013
(b) Current ratio
6.3
6.73
$126,000
$101,000
$ 20,000
$ 15,000
Free Cash Flow Analysis
Net cash provided by operating activities ………………………..
$ 37,000
Less: Purchase of equipment …………………………………………
(17,000)
Pay dividends …………………………..………………………….
(33,000)
TIME AND PURPOSE OF PROBLEMS
Problem 5-1 (Time 30–35 minutes)
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
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)
Problem 5-6 (Time 35–45 minutes)
Purpose—to provide the student with an opportunity to prepare a complete statement of cash flows. A
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.
SOLUTIONS TO PROBLEMS
PROBLEM 5-1
COMPANY NAME
Balance Sheet
December 31, 20XX
Assets
Current assets
Cash on hand (including petty cash) ………….
$XXX
Cash in bank …………………………………………….
XXX
$XXX
Debt investments (trading) ………………………..
XXX
Accounts receivable ………………………………….
accounts …………………………………..
Interest receivable …………………………..………..
XXX
Advances to employees …………………………….
Inventory (ending) …………………………………….
XXX
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 …………………………..
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
Copyrights ……………………………………………….
XXX
Patents …………………………………………………….
XXX
Total intangible assets …………………………
XXX
Total assets ………………………………………………
$XXX
PROBLEM 5-1 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable ………………………………………….
$XXX
Payroll taxes payable ……………………………….
XXX
Salaries and wages payable ……………………..
XXX
XXX
Unearned subscriptions revenue ………………
Total current liabilities ………………………..
Long-term debt
Bonds payable …………………………………………
$XXX
Add: Premium on bonds payable ………..
XXX
XXX
Pension liability ……………………………………….
Total long-term liabilities …………………….
Total liabilities ……………………………………
Stockholders’ equity
Capital stock
Preferred stock (description) ……………….
XXX
Common stock (description) ……………….
XXX
XXX
Total paid-in capital …………………………….
XXX
Retained earnings ……………………………………
Less: Treasury stock ……………………………….
Total stockholders’ equity …………………..
Paid-in capital in excess of par –
PROBLEM 5-2
MONTOYA, INC.
Balance Sheet
December 31, 2014
Assets
Current assets
Cash …………………………………………….
$ 360,000
Equity investments (trading) ………….
121,000
Notes receivable …………………………..
445,700
Income taxes receivable ………………..
Inventory ………………………………………
239,800
Prepaid expenses ………………………….
Total current assets ………………….
$1,352,050
Property, plant, and equipment
Land ……………………………………………..
480,000
Equipment …………………………………….
Intangible assets
Goodwill ……………………………………….
125,000
Total assets ……………………………..
$4,504,850
PROBLEM 5-2 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable …………………………..
$ 490,000
Notes payable (to banks) …………………
265,000
Payroll taxes payable ………………………
Income taxes payable ……………………..
Rent payable …………………………………..
Total current liabilities ……………….
$1,075,953
Long-term liabilities
Notes payable
(long-term) ………………………………….
1,600,000
Bonds payable ………………………………..
Rent payable (long-term) ………………..
Total liabilities …………………………..
Stockholders’ equity
Capital stock
Preferred stock, $10 par; 20,000
PROBLEM 5-3
EASTWOOD COMPANY
Balance Sheet
December 31, 2014
Assets
Current assets
Cash ………………………………………………..
$ 41,000
Accounts receivable ………………………….
$163,500
Inventory (LIFO cost)…………………………
Prepaid insurance …………………………..
Total current assets ……………………..
Long-term investments
Equity investments
($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 ………………………………………..
Intangible assets
Patents (less $4,000 amortization) ……..
36,000
Total assets …………………………………
$1,154,200
PROBLEM 5-3 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable (secured by
investments of $120,000) ………………..
$ 94,000
Accounts payable …………………………...
Accrued liabilities …………………………...
Total current liabilities ……………….
Long-term liabilities
8% bonds payable, due
January 1, 2025 …………………………….
200,000
Less: Discount on bonds payable……
Total liabilities …………………………..
Stockholders’ equity
Common stock
Retained earnings …………………………..
PROBLEM 5-4
KISHWAUKEE CORPORATION
Balance Sheet
December 31, 2014
Assets
Current assets
Cash ……………………………………………….
$175,900
Accounts receivable …………………………
Inventory …………………………………………
Total current assets …………………….
Long-term investments
Assets allocated to trustee for
expansion:
Cash in bank ……………………………..
Debt investments
(held-to-maturity) ……………………
Property, plant, and equipment
Land ………………………………………………..
950,000
Buildings …………………………………………
Less: Accum. depreciation—
Total assets ………………………………..
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable—current installment ……
$100,000
Income taxes payable……………………….
75,000
Total current liabilities ………………..
$ 175,000
PROBLEM 5-4 (Continued)
Long-term liabilities
Notes payable …………………………………..
500,000b
Total liabilities ……………………………..
675,000
Stockholders’ equity
Retained earnings ……………………………..
Common stock, no par; 1,000,000
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).
Note: As an alternate presentation, the cash restricted for plant expansion
would be added to the general cash account and then subtracted. The
amount reported in the investments section would not change.
PROBLEM 5-5
SARGENT CORPORATION
Balance Sheet
December 31, 2014
Assets
Current assets
Cash ……………………………………………….
$150,000
Equity investments (Trading) ……………
80,000
Accounts receivable …………………………
Total current assets …………………….
Long-term investments
Bond sinking fund …………………………..
Land held for future use ……………………
270,000
Equity investments
Property, plant, and equipment
Land ………………………………………………..
500,000
Buildings …………………………………………
1,040,000
Less: Accum. depreciation—
Equipment ……………………………………….
Intangible assets
Franchise ………………………………………..
165,000
Goodwill ………………………………………….
100,000
265,000
Total assets ………………………………..
$3,115,000
PROBLEM 5-5 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable …………………………..
$ 140,000
Notes payable …………………………………..
Income taxes payable ……………………….
Unearned rent revenue ……………………..
5,000
Total current liabilities ………………….
Long-term liabilities
Notes payable …………………………………..
120,000
7% bonds payable, due 2022 …………….
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 …………….
PROBLEM 5-6
(a) LANSBURY INC.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities
Net income …………………………………………………..
$32,000
Depreciation expense ………………………………
Net cash provided by operating activities ………
Adjustments to reconcile net income to
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 …………………………………..
PROBLEM 5-6 (Continued)
(b) LANSBURY INC.
Balance Sheet
December 31, 2014
Assets
Liabilities and Stockholders’ Equity
Cash
$32,000
Accounts payable
$30,000
Equity
Bonds payable
(5)
Accounts
Notes payable
(1) $32,000 – ($15,000 – $3,400)
(2) $81,000 – $11,000
(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
PROBLEM 5-6 (Continued)
An analysis of Lansbury’s free cash flow indicates it is negative as shown
below:
Free Cash Flow Analysis
Net cash provided by operating activities …………………………
$19,200
Its current cash debt coverage is 0.64 to 1
$19,200
$30,000
and its cash debt
PROBLEM 5-7
(a) AERO INC.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities
Net income …………………………………………………….
$35,000
Depreciation expense ……………………………….
Loss on sale of investments ………………………
Increase in accounts receivable
Net cash provided by operating activities ………..
Adjustments to reconcile net income to
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 ………..
20,000
Net increase in cash …………………………………………….
50,200
Cash at beginning of year …………………………………….
20,000
PROBLEM 5-7 (Continued)
(b) AERO INC.
Balance Sheet
December 31, 2014
Assets
Liabilities and Stockholders’ Equity
Cash
$ 70,200
Accounts payable
$ 40,000
(1)
Retained earnings
(5)
(1) $81,000 – $12,000
(c) An analysis of Aero’s free cash flow indicates it is negative as shown
below:
Free Cash Flow Analysis
Net cash provided by operating activities …………………………
$41,200
Dividends ……………………………………………………………..
PROBLEM 5-7 (Continued)
Its current cash debt coverage is 1.18 to 1
$41,200
$35,000*
.
Overall, it appears
(d) This type of 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
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
CA 5-2 (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 5-3 (Time 20–25 minutes)
CA 5-4 (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 5-5 (Time 40–50 minutes)