Solution manual intermediate accounting 9e by nicolai ch03

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER THE BALANCE SHEET AND STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY CONTENT ANALYSIS OF EXERCISES AND PROBLEMS Number Content Time Range (minutes) E3-1 Current Assets Partial balance sheet preparation from listed accounts E3-2 Plant and Equipment Partial balance sheet preparation from general information 10-15 E3-3 Stockholders' Equity Partial balance sheet preparation from listed accounts 5-10 E3-4 Balance Sheet Matching various accounts with major sections 5-10 E3-5 Balance Sheet Matching various accounts with major sections 5-10 E3-6 Balance Sheet Preparation from accounts listed in random order Calculation of debt ratio 15-20 E3-7 Balance Sheet Preparation from accounts listed in alphabetical order Calculation of working capital and current ratio 15-20 E3-8 Balance Sheet Calculations Calculate missing information, given amounts of selected balance sheet elements 15-25 E3-9 Balance Sheet Calculations Calculate missing information, given amounts of selected balance sheet elements 15-25 E3-10 Corrections Preparation of a properly classified balance sheet from one prepared erroneously 10-15 E3-11 Changes in Stockholders' Equity Stock issuance, income earned, dividends paid Statement of changes in stockholders' equity 10-15 E3-12 Changes in Stockholders' Equity Stock issuance, income earned, dividends paid Statement of changes in stockholders' equity 10-15 3-1 5-10 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Number Content Time Range (minutes) P3-1 Balance Sheet Matching various accounts with major sections 15-30 P3-2 Balance Sheet Format preparation, no amounts 20-40 P3-3 Balance Sheet Preparation from accounts listed in alphabetical order Identification of possible disclosures Computation of working capital and current ratio 30-45 P3-4 Balance Sheet Preparation from accounts listed in random order 20-40 P3-5 Balance Sheet Preparation from alphabetical adjusted trial balance Calculation of debt ratio 20-30 P3-6 Balance Sheet Preparation from accounts listed in random order Notes Calculation of current ratio, liquid assets, and separable assets 45-60 P3-7 Comprehensive Preparation of balance sheet from accounts listed in alphabetical order Notes Statement of changes in stockholders' equity Calculation of debt ratio and discussion 75-90 P3-8 Corrections Preparation of a properly classified balance sheet from one prepared incorrectly, using account breakdowns 30-45 P3-9 Corrections Preparation of a properly classified balance sheet from one prepared incorrectly, using additional available information 30-45 P3-10 Balance Sheet Calculations Calculate missing information, given amounts of selected balance sheet elements 20-30 P3-11 Errors Identification of balance sheet errors Preparation of a properly classified balance sheet from one prepared erroneously 30-45 P3-12 (AICPA adapted) Complex Balance Sheet Preparation of corrected balance sheet from unaudited balance sheet and additional information 45-60 P3-13 Changes in Stockholders' Equity Stock issuance, treasury stock, paid dividends, donation, earned income Statement of changes in stockholders' equity 10-15 P3-14 Balance Sheet Disclosures Questions relating to the review of The Coca-Cola Company balance sheet disclosures in Appendix A 20-40 3-2 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ANSWERS TO QUESTIONS Q3-1 The major financial statements of a company are: A balance sheet, which summarizes the company's financial position at the end of the accounting period An income statement, which summarizes the results of operations of the company for the accounting period A statement of cash flows, which summarizes the cash inflows and cash outflows of a company for the accounting period Many companies also include a statement of changes in stockholders' equity, which summarizes the changes in each item of a company's stockholders' equity for the accounting period, as a fourth major financial statement Q3-2 The financial position of a company includes its economic resources (i.e., assets), economic obligations (i.e., liabilities), and equity, and their relationships to each other at a moment in time Q3-3 One purpose of a company's balance sheet is to provide information about its liquidity, financial flexibility, and operating capability A second purpose of the balance sheet is to provide a basis for evaluating the company's income-producing performance during a period Q3-4 Liquidity refers to how quickly an asset of a company can be converted into cash or a liability paid Financial flexibility refers to the ability of a company to use its financial resources to adapt to change Operating capability refers to the ability of a company to maintain a given physical level of operations Q3-5 Financial capital is the monetary value of the net assets contributed by stockholders and the value of the increase in net assets resulting from earnings retained by the corporation (cumulative income in excess of cumulative dividends) Capital maintenance refers to maintaining the stockholders' equity of the corporation in order to provide a return of investment Information about the maintenance of a corporation's capital is important in assessing the adequacy of a corporation's profitability and its ability to provide a return on investment Q3-6 Recognition is the process of formally recording and reporting an element in the financial statements It includes depiction of an element in both words and numbers, with the amount included in the totals Q3-7 An asset is a probable future economic benefit obtained or controlled by a company as a result of a past transaction or event To be considered an asset, an economic resource must have three characteristics First, the resource must singly, or in combination with other resources, have the capacity to contribute directly or indirectly to the company's future net cash inflows Second, the company must be able to obtain the future benefit and control others' access to it Third, the transaction or event giving the company the right to or control over the benefit must have already occurred 3-3 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Q3-8 A liability is a probable future sacrifice of economic benefits arising from a present obligation of a company to transfer assets or provide services to other entities in the future as a result of a past transaction or event An obligation of a company must have three characteristics to be considered a liability First, it must entail a responsibility to another entity or entities that will be settled by a sacrifice involving the transfer of assets, providing services, or other use of assets at a specified or determinable date, on occurrence of a specified event, or on demand Second, the responsibility must obligate the company in a way that it has little or no discretion to avoid the future sacrifice Third, the transaction or other event obligating the company must have occurred Q3-9 Stockholders' equity is the residual interest in the assets of a corporation that remains after deducting its liabilities Q3-10 The five alternatives for measuring (valuing) assets are: historical cost, current cost to replace, current market value in orderly liquidation, net realizable value in due course of business, and present value of future cash flows The latter four alternatives are ways of measuring the fair value of an asset Historical cost is the valuation method usually used in a company's balance sheet Q3-11 A company's balance sheet is divided into three major sections each with the components as follows: Assets a Current assets b Long-term investments c Property, plant, and equipment d Intangible assets e Other assets Liabilities a Current liabilities b Long-term liabilities c Other liabilities Stockholders' equity a Contributed capital (1) Capital stock (2) Additional paid-in capital b Retained earnings c Accumulated other comprehensive income Q3-12 Current assets are cash and other assets that are expected to be converted into cash, sold, or consumed within one year or the normal operating cycle, whichever is longer Current assets may include five items: (1) cash (and cash equivalents), (2) temporary investments in marketable securities, (3) receivables, (4) inventories, and (5) prepaid items Current liabilities are obligations whose liquidation is expected to require the use of existing resources properly classified as current assets, or the creation of other current liabilities within one year or the normal operating cycle, whichever is longer 3-4 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Q3-12 (continued) Examples of current liabilities are accounts payable, taxes payable, unearned rent, salaries payable, estimated liabilities for warranties, and the current portion of longterm debt Q3-13 A company's operating cycle is the average time taken by the company to spend cash for inventory, process and sell the inventory, and collect the receivables, converting them back into cash Working capital of a company relates primarily to the financial resources utilized in its operating cycle Working capital is computed by subtracting current liabilities from current assets Q3-14 a If management expects to hold investments for more than one year or the operating cycle, whichever is longer, these investments are classified as longterm Long-term investments include: Noncurrent investments in available-for-sale debt and equity securities Investments in held-to-maturity debt securities Investments in noncurrent notes receivable of unaffiliated companies and long-term advances to unconsolidated affiliated companies Financial instruments (such as options to buy stock) that are noncurrent Investments in property and equipment being held for use in future operations Special funds established for long-term purposes, such as the retirement of bonds or the acquisition of equipment Miscellaneous investments, such as the cash surrender value of life insurance b All tangible assets used in the operations of a company are classified as property, plant, and equipment They include: Land Buildings Equipment Natural resources Leased equipment under capital leases 3-5 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Q3-14 (continued) c Economic resources that are used in the operations of the business but that have no physical existence are classified as intangible assets They include: Q3-15 Patents Copyrights Franchises Trademarks Goodwill a Obligations that are not expected to require the use of current assets or are not expected to create current liabilities within one year or the normal operating cycle (whichever is longer) are classified as long-term liabilities They include: b Bonds payable Long-term notes payable Capital lease contract obligations Mortgages payable Pension obligations Obligations under noncurrent financial instruments Other liabilities are miscellaneous liabilities not meeting the definition of either a current or long-term liability They include: Deferred income taxes payable Obligations of a segment of the company that is being discontinued Long-term advances from customers Q3-16 A bond is a written promise to pay a specified interest rate and to repay a specific amount (its face value) at some future maturity date Bonds payable may be disclosed on a company's balance sheet as follows: Long-term liabilities 10% bonds payable outstanding, due January 1, 2010 Less: Unamortized bond discount Q3-17 $100,000 (15,000) $ 85,000 a Capital stock are the shares of stock that a corporation is authorized to issue as evidence of ownership in that corporation There are two types of capital stock, preferred stock and common stock Preferred stock has a preference over common stock as to dividends Common stock carries the right to vote at the annual stockholders' meeting and to share in residual profits b Additional paid-in capital represents the amount paid to the corporation by stockholders in excess of the par value of the stock issued c Treasury stock is the capital stock of a corporation that has been issued but reacquired by the corporation 3-6 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Q3-17 (continued) d Retained earnings is the amount of corporate earnings that has not been distributed to stockholders as dividends e Deficit is the term used to describe a negative retained earnings balance f Accumulated other comprehensive income is the other comprehensive income [from items such as unrealized increases (gains)or decreases (losses) in the market value of investments in available-for-sale securities] that a corporation has accumulated to date Q3-18 Investments by owners are increases in the equity of a company resulting from transfers of something valuable to the company from other entities in order to obtain or increase ownership interests Distributions to owners are decreases in the equity of a company caused by transferring assets, rendering services, or incurring liabilities to owners Many companies report these items in a statement of changes in stockholders' equity Q3-19 Examples of accounting policies that are disclosed in the notes accompanying a company's financial statements include: Basis for consolidation Depreciation and amortization methods Inventory pricing method Method for recognition of profits on long-term contracts Revenue recognition method for franchise and leasing operations Methods of foreign currency translation The disclosure of accounting policies is important because it enables the external users of financial statements to see: What method is employed by the company among existing acceptable alternatives Whether any method peculiar to the industry is used by the company Whether there are any unusual or innovative applications of generally accepted accounting principles Q3-20 Financial instruments include such items as notes payable and receivable, contracts for loan commitments, collateralized mortgages, interest rate swaps, and put and call options on stocks A company is also required to disclose the fair value of all its financial instruments (both assets and liabilities), whether recognized or not on the balance sheet, as well as all significant concentrations of credit risk due to its financial instruments A company is required to disclose information such as the types of derivative financial instruments it holds, its objectives in holding the instruments, and its strategies for achieving these objectives The description must indicate the company's risk management policy in regard to each type of instrument 3-7 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Q3-21 A loss contingency is a condition, situation, or circumstance that exists for a company on its balance sheet date involving uncertainty as to possible losses that it may incur if some future event occurs The following criteria are required for a company to accrue a contingent liability: It is probable that a liability has been incurred (or an asset impaired), and The amount of the loss can be reasonably estimated If either of these criteria is not met, a company discloses a contingent liability in a note accompanying its financial statements Q3-22 Usually a time lag of several weeks or months exists between the end of a company's accounting period and the date of the issuance of its annual report During this time, it is possible for significant business events and transactions to occur, which, if not disclosed in the company's annual report, would cause this report to be misleading When subsequent events occur that provide additional evidence concerning conditions that existed on the balance sheet date and significantly affect the estimates the company used in the preparation of its financial statements, an adjustment is made to the financial statements Subsequent events that provide evidence concerning conditions that did not exist on the balance sheet date but occurred after that date are disclosed in the form of a note, in pro-forma ("as if") statements, or in an explanatory paragraph in the audit report, depending on the materiality of the financial impact Q3-23 For related-party transactions, a company must disclose (1) the nature of the relationship involved, (2) a description of the transactions, (3) the dollar amount of the transactions, and (4) any amounts due to or from the related parties on the balance sheet date Q3-24 Comparative financial statements provide current as well as past financial information about a company Such information enables a trend to be drawn of the company's activities, thus yielding useful insights into the prediction of the company's future performance Q3-25 In an audit the certified public accountant is responsible for making an examination of the accounting system, records, and reports of a company in accordance with generally accepted auditing standards and, based on this examination, expressing an opinion as to the fairness of the company's financial statements and accompanying notes in accordance with generally accepted accounting principles The opinion, or auditor's report, usually provides external users with additional confidence that the reported financial statements and notes are a fair presentation of the company's financial resources, obligations, and activities Q3-26 The SEC "integrated" disclosures that most regulated companies include in their annual reports are: (1) Comparative financial statements These include comparative balance sheets for two years and comparative income statements and statements of cash flows for three years 3-8 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Q3-26 (continued) (2) Selected financial data These include (for a five-year period) net sales or operating revenues, income (loss) from continuing operations and related earnings per share, total assets, long-term obligations and redeemable stock, and cash dividends declared per share (3) Management's discussion and analysis This involves a discussion and analysis of the company's financial condition, changes in financial condition, and results of operations It includes, at a minimum, specific information about short-term and long-term liquidity and capital resources, a narrative discussion of the impact of inflation on sales and on income from continuing operations, explanations of material changes in financial statement items between years, and known events and uncertainties expected to impact future operations (4) Common stock market prices and dividends Information included here consists of the principal trading markets for the company's common stock, the high and low market prices for each quarter in the last two years, the approximate number of stockholders, the dividends paid in the last two years, and any dividend restrictions Q3-27 Under International Accounting Standards, on a company's balance sheet long-term assets are listed first followed by current assets Then, capital and reserves are listed, followed by long-term liabilities Current liabilities are listed last Q3-28 The report form of the balance sheet takes a vertical format in which the asset accounts are listed first and the liability and stockholders' equity accounts are listed in sequential order directly below the assets In the account form, the balance sheet is organized in a horizontal fashion, with the asset accounts listed on the left-hand side and liabilities and stockholders' equity accounts listed on the right-hand side Q3-29 Additional information not included in the accounts reported on a company's financial statements can be disclosed by the following alternative methods Notes are used to describe narrative information and to provide additional monetary amounts (and sometimes supplemental schedules) Examples include: b Summary of significant accounting policies Contingent liabilities Supporting schedules are used to complement an entire financial statement or explain a summary amount on a specific financial statement Examples include: a b Retained earnings statement Itemization of long-term liabilities Parenthetical notations are used to explain such items as the method of valuation or of determining the ending inventory, or to cross-reference certain related asset and liability accounts Examples include: 3-9 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Q3-29 (continued) (continued) a b c Q3-30 Lower of cost or market method of valuing inventories The FIFO method of valuing ending inventory Cross-referencing a bond sinking fund to the related bonds payable When preparing and writing financial reporting notes, the accountant should (1) specify what data are to be disclosed (by reference to related generally accepted accounting principles), (2) outline the desired format, (3) use short sentences, (4) use terminology understandable to the non-accountant, and (5) be concise but complete ANSWERS TO CASES C3-1 There are several alternative valuation methods other than historical cost that a company could use to measure the value of an asset First, the current cost of an asset might be measured in terms of the amount of cash (or equivalent) that would be required on the date of the balance sheet to obtain the same asset Methods for obtaining the current cost of an asset include quoted market prices, the use of specific price indexes, and the use of appraisals Inventories, which include goods held for resale in the normal course of business, or in the case of a manufacturing company, raw materials and goods in process inventories, are listed at their market value (current cost) when that value is lower than cost Second, the current market value of an asset might be measured in terms of the amount of cash (or equivalent) that could be obtained on the date of the balance sheet by selling the asset, in its present condition, in an orderly liquidation A current market value would be determined by obtaining a quoted market price for the sale of an asset of similar kind and condition Short-term marketable securities are listed at their current market (fair) value Third, the value of an asset might be determined by measuring its net realizable value This method values the asset at the amount of cash (or equivalent) into which the asset is expected to be converted in the ordinary operations of the company, less any expected conversion costs It is based upon expected future sales proceeds of the asset and is sometimes referred to as expected exit value Both accounts receivable and notes receivable are listed at their estimated collectible amounts (net realizable values) A fourth alternative valuation method is present value The present value of an asset is the net amount of discounted future cash inflows less the discounted future cash outflows relating to the asset The estimated cash flows used to determine present value are similar to those used to determine net realizable value with the exception that in the present value approach consideration is given to the time value of money Long-term investments (i.e., bonds) may be listed at their present value, depending on the type of investment 3-10 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P3-7 (continued) Statement of Changes in Stockholders' Equity For Year Ended December 31, 2004 Balances, 1/1/04* Common stock issued Preferred stock issued Net income Dividends paid Balances, 12/31/04 Preferred Stock $50 par $25,000 Common Stock $10 par $70,000 10,000 7,000 $32,000 Additional Paid-in Capital on Preferred Stock $2,500 Additional Paid-in Capital on Common Stock $17,000 3,000 Retained Earnings $55,100 700 $80,000 $3,200 $20,000 50,500 (21,000) $84,600 Total $169,600 13,000 7,700 50,500 (21,000) $219,800 3-44 *Each of the beginning balances must be derived by taking the ending balances as given and adjusting for the transactions that occurred during the year affecting each respective account To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P3-7 (continued) (1) Summary of significant accounting policies: a The straight-line method is used to depreciate property and equipment based upon cost, estimated residual value, and estimated useful life b Inventory is valued at the lower of average cost or market (2) Guarantee to affiliate: The company has guaranteed the interest on 12%, $50,000, 15-year bonds issued by the affiliate (3) Composition of property, plant, and equipment: Item Cost Land Buildings Store fixtures Office equipment Total $ 29,500 164,600 72,600 30,000 $296,700 Accumulated Depreciation – $ 54,600 37,400 17,300 $109,300 Book Value $ 29,500 110,000 35,200 12,700 $187,400 (4) Composition of long-term liabilities: Item 12% bonds 11% bonds 13% note Total Maturity Date 12/31/2009 12/31/2013 01/01/2007 Face Value $36,000 48,000 6,200 $90,200 Unamortized Premium (Discount) $(1,000) 1,800 -$ 800 Book Value $35,000 49,800 6,200 $91,000 (5) Subsequent events: On January 15, 2005, a building with a cost of $20,000 and a book value of $7,000 was totally destroyed Insurance proceeds will amount to $5,000 (a) Debt ratio = Total liabilities Total assets 42.4% = $161,700 $381,500 The debt ratio for 2004 has increased by over 3% compared to 2003 This indicates that there may be slightly more risk for investors and creditors because of higher interest payments that may have to be made by the company On the other hand, stockholders may benefit if the company can make a higher return on the additional debt equity than the interest paid 3-45 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P3-8 CABLE COMPANY Balance Sheet December 31, 2004 Assets Current Assets Cash Temporary investments in marketable securities Accounts receivable Less: Allowance for doubtful accounts Inventories Prepaid items: Insurance Office supplies Total current assets Long-Term Investments Investment in available-for-sale stock Property, Plant, and Equipment Land Buildings and equipment Less: Accumulated depreciation Total property, plant, and equipment Total Assets $12,300 17,000 $ 18,000 (1,400) 16,600 32,000 2,400 3,500 $ 83,800 29,000 $12,000 $100,000 (40,000) 60,000 72,000 $184,800 Liabilities Current Liabilities Accounts payable Income taxes payable Wages payable Total current liabilities Long-Term Liabilities Bonds payable (due 2014) Less: Discount on bonds payable Notes payable (due 2006) Accrued pension cost Total long-term liabilities Total Liabilities $22,700 16,400 3,600 $ 42,700 $ 33,000 (3,000) $30,000 17,000 6,500 53,500 $ 96,200 (continued on next page) 3-46 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P3-8 (continued) Stockholders' Equity Contributed Capital Preferred stock, $100 par Common stock, $5 par Premium on preferred stock Premium on common stock Total contributed capital Retained Earnings Accumulated Other Comprehensive Loss Unrealized decrease in value of available-for-sale securities Total contributed capital, retained earnings, and accumulated other comprehensive income Less: Treasury stock (at cost) Total Stockholders' Equity Total Liabilities and Stockholders' Equity P3-9 $12,000 25,000 2,600 15,600 $ 55,200 40,000 (1,300) $ 93,900 (5,300) $ 88,600 $184,800 BRANDT COMPANY Balance Sheet December 31, 2004 Assets Current Assets Cash Temporary investments in available-for-sale securities Accounts receivable Less: Allowance for doubtful accounts Inventory Prepaid insurance Total current assets Long-Term Investments Notes receivable (due 2006) Investment in Dray Company bonds Sinking fund for bond retirement Total long-term investments Property, Plant, and Equipment Land Buildings Less: Accumulated depreciation Equipment Less: Accumulated depreciation Total property, plant, and equipment $ 3,800 $18,500 (700) 17,800 30,500 2,900 $10,000 9,000 7,000 $63,400 (21,000) $29,600 (13,000) (continued on next page) 3-47 4,600 $ 59,600 26,000 $12,000 42,400 16,600 71,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P3-9 (continued) Intangible Assets Patents (net) Trademarks Total intangible assets Total Assets $ 5,900 3,700 9,600 $166,200 Liabilities Current Liabilities Accounts payable Income taxes payable Wages payable Current portion of mortgage payable Total current liabilities Long-Term Liabilities Mortgage payable Bonds payable (due 2015) $40,000 Add: Premium on bonds payable 4,300 Total long-term liabilities Total Liabilities $19,400 7,200 4,100 4,000 $ 34,700 $16,000 44,300 60,300 $ 95,000 Stockholders' Equity Contributed Capital Preferred stock, $100 par Common stock, $5 par Premium on preferred stock Premium on common stock Total contributed capital Retained Earnings Accumulated Other Comprehensive Income Unrealized increase in value of available-for-sale securities Total contributed capital, retained earnings, and accumulated other comprehensive income Less: Treasury stock (at cost) Total Stockholders' Equity Total Liabilities and Stockholders' Equity 3-48 $ 6,000 11,000 2,400 14,700 $ 34,100 37,800 1,100 $ 73,000 (1,800) $ 71,200 $166,200 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P3-10 Note to Instructor: The solution is shown in a balance sheet format The answers are lettered (a) through (p) The more difficult explanations are explained in footnotes (1) through (6) JOHN COMPANY Balance Sheet December 31 Current assets Long-term investments Property, plant, and equipment Less: Accumulated depreciation Intangible assets Total assets 2004 $ 35,200(d)2 40,100 153,000(h) ( 37,500) 19,100 $209,900(e) 2005 $ 39,800 42,300(o) 180,000 (48,600) 18,600 $232,100(m) Current liabilities Long-term liabilities Total liabilities $ 17,300(g)1 34,600(a)1 $ 51,900 $ 20,000(p)2 33,100 $ 53,100(j) Capital stock, $10 par Additional paid-in capital Total contributed capital Retained earnings Accumulated other comprehensive income Total stockholders' equity $ 29,000(b)3 37,700(f) $ 66,700 83,300 8,000 $158,000(c) $ 30,000(i)4 39,200(n)5 $ 69,200(l) 100,900(k)6 8,900 $179,000 Total liabilities & stockholders' equity $209,900 $232,100 1Total liabilities = Current liabilities(x) + Long-term liabilities(2x) $51,900 = x + 2x; $51,900 = 3x; x = $17,300, 2x = $34,600 2Working capital = Current assets - Current liabilities; 2004: $17,900 = $35,200(d) - $17,300; 2005: $19,800 = $39,800 - $20,000(p) 32,900 shares x $10 par 4$29,000 + ($10 x 100 shares issued) 5$37,700 + [($25 - $10) x 100] 6$83,300 beginning retained earnings + $20,600 net income [$1 x (2,900 + 100 shares)] dividends 3-49 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P3-11 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21) (22) (23) "Balance Report" should be "Balance Sheet." Balance sheet is reported on a certain date Therefore, "For year ended December 31, 2004" should be altered to "December 31, 2004." Major headings should be included for assets, liabilities, and stockholders' equity Inventory should be valued at the lower of cost or market Treasury stock should not be classified under Long-Term Investments It is a deduction from the total of contributed capital and retained earnings Marketable securities (short-term) should be classified under Current Assets rather than Long-Term Investments Patents should be classified under Intangibles rather than Property, Plant, and Equipment Patents are usually reported at book value Cash surrender value of life insurance should be classified under LongTerm Investments Discount on bonds payable is a contra-liability account and should be placed immediately after the Bonds Payable account under Long-Term Liabilities Accumulated depreciation: buildings is not a current liability It is a contra-asset account and should be placed immediately after the Buildings account in Property, Plant, and Equipment Additional paid-in capital on common stock should be included in the Contributed Capital section of Stockholders' Equity Sinking fund to retire bonds is a long-term investment Preferred stock should be included in the Contributed Capital section Premium on preferred stock should be included in the Contributed Capital section Accumulated depreciation: equipment should be listed as a contra account to the Equipment account in Property, Plant, and Equipment Current taxes payable should be listed as a current liability "Stockholders' equity" is a better term than "Owners' equity" for a corporation The unrealized "gain" on write-up of marketable securities should be titled unrealized "increase" to avoid confusion with a gain reported on the income statement Furthermore, it should be reported as a component of accumulated other comprehensive income The unrealized "gain" on write-up of inventory should be eliminated because generally accepted accounting principles not allow inventories to be valued at higher of cost or market Allowance for doubtful accounts is a contra-asset account and should be listed directly after Accounts Receivable "Total equities" should be altered to "Total liabilities and stockholders' equity." Each section of the balance sheet should be subtotaled 3-50 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P3-11 (continued) CUTLER CORPORATION Balance Sheet December 31, 2004 Assets Current Assets Cash Marketable securities, short-term Accounts receivable $15,900 Less: Allowance for doubtful accounts (700) Inventory, at cost (market value, $28,000) Total current assets Long-Term Investments Investment in D Company bonds (at book value) Cash surrender value of life insurance Sinking fund to retire bonds Total long-term investments Property, Plant, and Equipment Land Buildings $40,800 Less: Accumulated depreciation (17,100) Equipment $19,000 Less: Accumulated depreciation (7,000) Total property, plant, and equipment Intangibles Patents (net) Trademarks Total intangibles Total Assets Liabilities Current Liabilities Accounts payable Wages payable Current taxes payable Total current liabilities Long-Term Liabilities Bonds payable Less: Discount on bonds payable Total Liabilities (continued on next page) 3-51 $ 6,300 10,000 15,200 27,200 $ 58,700 $ 7,300 5,000 6,000 18,300 $11,300 23,700 12,000 47,000 $ 5,200 5,700 10,900 $134,900 $13,000 3,000 9,600 $ 25,600 $46,000 (3,900) 42,100 $ 67,700 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P3-11 (continued) (continued) Stockholders' Equity Contributed Capital Preferred stock, $50 par $15,000 Common stock, $2 par 8,000 Premium on preferred stock 5,100 Additional paid-in capital on common stock 23,200 Total contributed capital Retained Earnings Accumulated Other Comprehensive Income Unrealized increase in value of available-for-sale securities Total contributed capital, retained earnings, and accumulated other comprehensive income Less: Treasury stock (at cost) Total Stockholders' Equity Total Liabilities and Stockholders' Equity 3-52 $ 51,300 16,000 1,300 $ 68,600 (1,400) $ 67,200 $134,900 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P3-12 (AICPA adapted solution) Note to Instructor: This problem includes many topics that are covered in depth in later chapters Students should be able to develop most of the correct answers from reading Chapter 3, and the content of this problem provides for a good introduction to the more advanced topics ZUES MANUFACTURING CORPORATION Balance Sheet December 31, 2004 Assets Current Assets Cash Accounts receivable (net) Inventories Total current assets Long-Term Investment, at market value Property, Plant, and Equipment at cost Land Building $1,750,000 Machinery and equipment 1,964,000 Total $3,714,000 Less: Accumulated depreciation (420,000) Total property, plant, & equipment Intangible Asset Goodwill Other Assets Cash restricted for building purposes Officer's note receivable1 Land held for future building site Total Assets Liabilities Current Liabilities Accounts payable Current installments of long-term debt Lawsuit liability Income taxes payable Deferred tax liability Total current liabilities Long-Term Debt Mortgage payable Note payable Deferred tax liability Total long-term debt Total Liabilities (continued on next page) 3-53 $ 109,000a 317,700b 560,000 $ 986,700 47,000c,j $ 200,000d 3,294,000 3,494,000 37,000 $ 100,000a 30,000b 250,000d 380,000 $4,944,700 $ 119,800e 200,000f,g 80,000 21,200h 5,000 $ 426,000 $ 800,000f 400,000g 23,000 1,223,000 $1,649,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P3-12 (continued) Stockholders' Equity Contributed Capital Common stock, authorized 100,000 shares of $50 par value; issued 40,000 shares; outstanding 39,800 shares Additional paid-in capital Total paid-in capital Accumulated Other Comprehensive Loss Unrealized decrease in value of long-term investment Retained Earnings Total Less: Cost of treasury stock Total Stockholders' Equity Total Liabilities and Stockholders' Equity 1Alternatively, $2,000,000i 231,000i $2,231,000 (4,300)j 1,075,400 $3,302,100 (6,400)c 3,295,700 $4,944,700 this could be reported under Long-Term Investments Explanations of Amounts aCash, per unaudited balance sheet Less: Unrecorded checks in payment of accounts payable NSF check not recorded Cash restricted for building purposes (reported in other assets) Corrected balance receivable (net), per unaudited balance sheet Add charge-back for NSF check [see (a)] Less: Officer's note receivable (reported in other assets) Corrected balance $225,000 (14,000) (2,000) (100,000) $109,000 bAccounts $345,700 2,000 (30,000) $317,700 cInvestments, $ 57,700 (51,300) (6,400) $ dLand, $450,000 per unaudited balance sheet Less: Long-term investment [reported separately, see (j)] Treasury stock (reported in stockholders' equity) Corrected balance per unaudited balance sheet Less: Land acquired for future building site (reported in other assets) Corrected balance (continued on next page) 3-54 (250,000) $200,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P3-12 (continued) eAccounts payable, per unaudited balance sheet Less: Unrecorded payments [see (a)] Corrected balance $133,800 (14,000) $119,800 fMortgage $900,000 (100,000) $800,000 gNote $500,000 (100,000) $400,000 payable, per unaudited balance sheet Less: Current portion ($50,000 x 2) Refinanced as long-term mortgage payable payable, per unaudited balance sheet Less: Current portion Long-term note payable hIncome taxes payable, per unaudited balance sheet Less: Prepaid income taxes Corrected balance iCommon stock, per unaudited balance sheet Less: Additional paid-in capital in excess of par value Corrected balance jLong-term investment, at cost [see (c)] Less: Unrealized decrease in value Long-term investment, at market value $ 61,200 (40,000) $ 21,200 $2,231,000 (231,000) $2,000,000 $ 51,300 (4,300) $ 47,000 3-55 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P3-13 KNOX COMPANY Statement of Changes in Stockholders' Equity For Year Ended December 31, 2004 3-56 Balances, 1/1/04 Unrealized increase in value of available-for-sale securities Common stock issued Preferred stock issued Common stock reacquired Net income Cash dividend paid on preferred* Cash dividend paid on common+ Balances, 12/31/04 Additional Additional Paid-in Paid-in Preferred Common Capital Capital Stock Stock on Preferred on Common $100 par $10 par Stock Stock $50,000 $100,000 $6,000 $130,000 Retained Earnings $224,000 $9,000 20,000 11,000 57,000 (4,270) (4,270) 30,000 1,760 $(10,400) _ $61,000 $120,000 $7,760 $160,000 Total $510,000 9,000 50,000 12,760 (10,400) 57,000 (14,500) $262,230 *Preferred dividend: $7 x (500 + 110 shares) = $4,270 +Common Accumulated Other Comprehen- Treasury Sive Income Stock dividend: $1.25 x (10,000 + 2,000 - 400 treasury shares) = $14,500 $9,000 _ (14,500) $(10,400) $609,590 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P3-14 Current assets, December 31, 2001: $7,171 million (p 58) Allowance for doubtful accounts, December 31, 2001: $59 million (p 58) The common stock has a $0.25 par value; 3,491,465,016 shares had been issued at the end of 2001 (p 59) The total amount of inventories on December 31, 2001 was $1,055 million (p 58) The principal categories of inventory and related amounts were: Raw materials and supplies (p 62) Long-term debt, December 31, 2001: $1,219 million (p 59) Portion related to 3/4% U.S dollar notes due 2011: $498 million (p 67) Amount of allowance for depreciation on December 31, 2001: $2,652 million (p 58) Principally the straight-line method (p 63) Accounts payable and accrued expenses, December 31, 2001: $3,679 million (p 59) Accrued marketing expenses were $1,160 million (p 67) Inventory costing methods for most inventories: Average cost or first-in, first-out (p 62) Reinvested earnings, December 31, 2001: $23,443 million (p 59) 10 Total property, plant, and equipment on December 31, 2001: Before allowance for depreciation, $7,105 million (p 58); after allowance for depreciation, $4,453 million (p 58) 11 Total assets on December 31, 2001: $22,417 million (p 58) 12 Current liabilities, December 31, 2001: $8,429 million (p 59) 13 Number of shares of treasury stock, December 31, 2001: 1,005,237,693 (p 59) Cost of treasury stock, December 31, 2001: $13,682 million (p 59) 14 Marketable securities on December 31, 2001: $68 million (p 58) Net change in unrealized gain (loss) on securities during 2001: ($29 million) (p 61) 15 The company was contingently liable for guarantees of indebtedness of $436 million owed by third parties on December 31, 2001 (p 72) Note to Instructor: Some of the preceding answers may be located on other pages within the financial report 3-57 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 3-58 3-58 ... Under International Accounting Standards, on a company's balance sheet long-term assets are listed first followed by current assets Then, capital and reserves are listed, followed by long-term liabilities... the accounting equation states that the total of the assets is equal to the sum of the liabilities and stockholders' equity; that is, assets are not only financed by common stockholders, but by. .. the monetary value of the net assets contributed by stockholders and the value of the increase in net assets resulting from earnings retained by the corporation (cumulative income in excess of