CHAPTER SOLUTIONS TO B EXERCISES E5-1B (15–20 minutes) (a) Current asset (b) Current asset (c) If the investment in preferred stock is readily marketable and held with the intention of converting the stock to cash if the need should arise, then the account should appear as a current asset and be included with an available-for-sale securities If, on the other hand, the preferred stock is not readily marketable or is not held with the intention of selling, the account should be classified in the investment section (d) Current liability (e) Current liability (f) When the company accounts for the treasury stock on the cost basis, the account should properly be shown as a reduction of total stockholders’ equity (g) Current liability (h) If the warehouse in process of construction is being constructed for another party, it is properly classified as an inventory account in the current asset section This account will be shown net of any billings on the contract On the other hand, if the warehouse is being constructed for the use of this particular company, it should be classified as a separate item in the property, plant, and equipment section (i) Retained earnings (j) Current liability (k) Current asset (l) Current liability (m) Property, plant, and equipment (as a deduction) (n) Capital stock Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-1 E5-2B (15–20 minutes) 10 b a f g f b h a a c 11 12 13 14 15 16 17 18 19 20 a h a a d f f c g f 10 11 12 13 14 15 16 17 18 19 d f or g b a h f or g f a a h E5-3B (15–20 minutes) f a or e (preferably a.) f c x f c and n a i Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-2 E5-4B (30–35 minutes) CLUVER INC Balance Sheet December 31, 20xx Assets Current assets Cash Less: Cash restricted for plant expansion Accounts receivable Less: Allowance for doubtful accounts Notes receivable Receivables—officers Inventories Finished goods Work in process Raw materials Total current assets Long-term investments Preferred stock investments Land held for future plant site Cash restricted for plant expansion Total long-term investments Property, plant, and equipment Buildings Less: Accum depreciation— buildings Intangible assets Copyrights Total assets $XXX XXX XXX $XXX XXX XXX XXX XXX XXX XXX XXX XXX $XXX XXX XXX XXX XXX XXX XXX XXX XXX $XXX Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-3 E5-4B (Continued) Liabilities and Stockholders’ Equity Current liabilities Accrued salaries payable Notes payable, short-term Unearned subscriptions revenue Unearned rent revenue Total current liabilities $XXX XXX XXX XXX $XXX Long-term debt Bonds payable, due in four years Discount on bonds payable Total liabilities Stockholders’ equity Capital stock Common stock Additional paid-in capital Premium on common stock Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Treasury stock, at cost Total shareholders' equity-Cluver Inc Non-controlling interest Total stockholders’ equity Total liabilities and stockholders’ equity $XXX (XXX) XXX XXX XXX XXX XXX XXX XXX (XXX) XXX XXX XXX $XXX Note: As assumption made here is that cash included the cash restricted for plant expansion If it did not, then a subtraction from cash would not be necessary or the cash balance would be “grossed up” and then the cash restricted for plant expansion deducted Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-4 E5-5B (30–35 minutes) DARLING COMPANY Balance Sheet December 31, 2014 Assets Current assets Cash $105,000 Available-for-sale securities—at fair value 65,000 Accounts receivable $ 448,000 Less: Allowance for doubtful accounts 37,000 411,000 Inventories, at lower of average cost or market 561,000 Prepaid expenses 39,000 Total current assets $1,181,000 Long-term investments Land held for future use Cash surrender value of life insurance 251,000 26,000 277,000 Property, plant, and equipment Building $1,863,000 Less: Accum depr.—building 302,000 1,561,000 Office equipment 211,000 Less: Accum depr.—office equipment 86,000 125,000 1,686,000 Intangible assets Patents Total assets 128,00 $3,272,000 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-5 E5-5B (Continued) Liabilities and Stockholders’ Equity Current liabilities Accounts payable Notes payable (due next month) Unearned revenue Total current liabilities $ 367,000 75,000 26,000 $ 468,000 Long-term liabilities Bonds payable $1,500,000 Add: Premium on bonds payable 36,000 $1,536,000 Pension obligation 361,000 Total liabilities Stockholders’ equity Common stock, $1 par, authorized 1,000,000 shares, issued 610,000 shares 610,000 Additional paid-in capital 200,000 *Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity 1,897,000 2,365,000 810,000 97,000 907,000 $3,272,000 *$3,272,000 – $2,365,000 – $810,000 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-6 E5-6B (30–35 minutes) ODIE COMPANY Balance Sheet June 30, 2014 Assets Current assets Cash $ 34,000* Accounts receivable $84,800** Less: Allowance for doubtful accounts 7,000 77,800 Inventories 104,200*** Total current assets $216,000 Long-term investments Bond sinking fund Property, plant, and equipment Equipment Less: Accumulated depreciation— equipment Intangible assets Goodwill Total assets 14,000 260,000 73,000 187,000 50,000 $467,000 *($26,500 – $14,000 + $21,500) **($81,000 + $7,000 + $8,000 – $11,200) ***($93,000 + $11,200) Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-7 E5-6B (Continued) Liabilities and Stockholders’ Equity Current liabilities Notes and accounts payable Taxes payable Total current liabilities $ 134,000**** 21,500 155,500 Long-term liabilities Total liabilities 50,000 205,500 Stockholders’ equity Total liabilities and stockholders’ equity 261,500 $467,000 ****($126,000 + $8,000) Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-8 E5-7B (15–20 minutes) Current assets Cash Less: Cash restricted for plant expansion Trading securities at fair value (cost, $46,500) Accounts receivable (of which $75,000 is pledged as collateral on a bank loan) Less: Allowance for doubtful accounts Interest receivable [($60,000 X 12%) X 8/12] Inventories at lower of cost (determined using LIFO) or market Finished goods Work-in-process Raw materials Total current assets $130,500* (75,000) $ 55,500 43,500 241,500 (18,000) 78,000 51,000 310,500 223,500 4,800 439,500 $766,800 *An acceptable alternative is to report cash at $55,500 and simply report the cash restricted for plant expansion in the investments section E5-8B (10–15 minutes) Bonds payable of $50,000,000 and interest payable of $6,000,000 ($200,000,000 X 12% X 3/12) will be reported as a current liability Bonds payable of $150,000,000 will be reported as a long-term liability Dividends payable of $4,750,000 will be reported as a current liability [(1,000,000 – 50,000) X $5.00] No amounts are reported as a current or long-term liability Stock dividends distributable are reported in the stockholders’ equity section Customer advances of $34,000,000 will be reported as a current liability ($24,000,000 + $60,000,000 – $50,000,000) Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-9 E5-9B (30–35 minutes) (a) COOPER COMPANY Balance Sheet (partial) As of December 31, 2014 Current assets Cash Accounts receivable Less: Allowance for doubtful accounts Inventories Prepaid expenses Total current assets $ 85,990* $228,250** 17,500 Current liabilities Accounts payable Notes payable Total current liabilities *Cash balance Add: Cash disbursement after discount [$97,500 X 98%)] Less: Cash sales in January ($75,000 – $53,750) Cash collected on account Bank loan proceeds ($88,310 – $58,310) Adjusted cash **Accounts receivable balance Add: Accounts reduced from January collection ($58,310 plus 2% discount of $1,190) 210,750 397,500*** 22,500 $716,740 $287,500a 137,500b $425,000 $100,000 95,550 195,550 (21,250) (58,310) (30,000) $ 85,990 $222,500 Deduct: Accounts receivable in January Adjusted accounts receivable 59,500 282,000 (53,750) $228,250 ***Inventories Less: Inventory received on consignment Adjustment to inventory $427,500 30,000 $397,500 [Notes a and b are on the next page.] Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-10 E5-9B (Continued) a b (b) Accounts payable balance Add: Cash disbursements Purchase invoice omitted ($67,500 – $30,000) Adjusted accounts payable $152,500 $97,500 37,500 Notes payable balance Less: Proceeds of bank loan Adjusted notes payable Adjustment to retained earnings balance: Add: January sales discounts Deduct: January sales January purchase discounts ($97,500 X 2%) December purchases Consignment inventory Change (decrease) to retained earnings 135,000 $287,500 $167,500 30,000 $137,500 $ 1,190 $75,000 1,950 37,500 30,000 (144,450) $(143,260) Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-11 E5-10B (15–20 minutes) (a) Although bad debts expense of $150,000 should be debited and the allowance or doubtful accounts credited for $150,000, 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 (b) A current liability of $40,000 should be reported at December 31, 2014 The liability is recorded on the date of declaration (c) Customer advances of $55,000 will be reported as a current liability ($80,000 – $25,000) (d) Accrued interest of $2,000 should be reported at December 31, 2014 ($300,000 X 8% X 1/12) The $300,000 note payable may also be current, depending on the maturity date (e) 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 (f) A current liability of $75,000 should be recorded Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-12 E5-11B (25–30 minutes) DE YOUNG CORPORATION Balance Sheet December 31, 2014 Assets Current assets Cash Office supplies Prepaid insurance Total current assets Equipment Less: Accumulated depreciation Intangible—trademark Total assets $ 15,070 2,640 2,200 19,910 $105,600 8,800 96,800 2,090 $118,800 Liabilities and Stockholders’ Equity Current liabilities Accounts payable Salaries and wages payable Unearned service revenue Total current liabilities Long-term liabilities Bonds payable Total liabilities Stockholders’ equity Common stock Retained earnings ($55,000 – $5,500) Total stockholders’ equity Total liabilities and stockholders’ equity $ 22,000 1,100 4,400 27,500 19,800 47,300 22,000 49,500 71,500 $118,800 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-13 E5-12B (30–35 minutes) DO CORPORATION Balance Sheet December 31, 2014 Assets Current assets Cash $ 98,500 Trading securities 76,500 Accounts receivable $217,500 Less: Allowance for doubtful accounts (12,500) 205,000 Inventories 298,500 Total current assets $ 678,500 Long-term investments Investments in bonds Investments in stocks Total long-term investments Property, plant, and equipment Land Building Less: Accum depreciation Equipment Less: Accum depreciation Total property, plant, and equipment Intangible assets Franchise (net of $80,000 amortization) Patent (net of $30,000 amortization) Total intangible assets Total assets 149,500 138,500 288,000 130,000 520,000 (76,000) 300,000 (30,000) 444,000 270,000 844,000 80,000 97,500 177,500 $1,988,000 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-14 E5-12B (Continued) Liabilities and Stockholders’ Equity Current liabilities Accounts payable Short-term notes payable Dividends payable Accrued liabilities Total current liabilities Long-term debt Long-term notes payable Bonds payable Total long-term liabilities Total liabilities Stockholder’s equity Paid-in capital Common stock ($5 par) $500,000 Additional paid-in capital 40,000 Retained earnings** Total paid-in capital and retained earnings Less: Treasury stock Total stockholders’ equity Total liabilities and stockholders’ equity $227,500 45,000 68,000 48,000 $ 388,500 450,000 500,000 950,000 1,338,500 540,000 205,000 745,000 (95,500) 649,500 $1,988,000 (**Retained earnings computation is on the next page.) Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-15 E5-12B (Continued) **Computation of Retained Earnings: Sales Investment revenue Extraordinary gain Cost of goods sold Selling expenses Administrative expenses Interest expense Net income $4,050,000 31,500 40,000 (2,400,000) (1,000,000) (450,000) (105,500) $ 166,000 Beginning retained earnings Prior period adjustment—depreciation error Beginning retained earnings, restated Net income Ending retained earnings $ 109,000 (70,000) 39,000 166,000 $ 205,000 E5-13B (15–20 minutes) (a) (b) (c) (d) (e) 4 2 (f) (g) (h) (i) (j) 3 (k) (l) (m) Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-16 E5-14B (25–35 minutes) DUONG INC Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Increase in accounts receivable Increase in accounts payable Net cash provided by operating activities Cash flows from investing activities Purchase of equipment Cash flows from financing activities Issuance of common stock Payment of cash dividends Net cash used by financing activities Net increase in cash Cash at beginning of year Cash at end of year $ 88,000 $12,000 (6,000) 10,000 16,000 104,000 (34,000) 40,000 (46,000) (6,000) 64,000 26,000 $ 90,000 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-17 E5-15B (25–35 minutes) (a) GARCIA CORPORATION Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Loss on sale of investments Decrease in accounts receivable Decrease in current liabilities Net cash provided by operating activities Cash flows from investing activities Sale of investments [($185,000 – $130,000) – $25,000] Purchase of equipment Net cash used by investing activities Cash flows from financing activities Payment of cash dividends Net increase in cash Cash at beginning of year Cash at end of year $400,000 $ 42,500 25,000 12,500 (42,500) 37,500 437,500 30,000 (145,000) (115,000) (75,000) 247,500 195,000 $442,500 (b) Free Cash Flow Analysis Net cash provided by operating activities Less: Purchase of equipment Dividends Free cash flow $437,500 (145,000) (75,000) $217,500 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-18 E5-16B (25–35 minutes) (a) GOKHALE CORPORATION Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Increase in accounts receivable Decrease in inventory Decrease in accounts payable Net cash provided by operating activities Cash flows from investing activities Sale of land Purchase of equipment Net cash used by investing activities Cash flows from financing activities Payment of cash dividends Net increase in cash Cash at beginning of year Cash at end of year $187,500 $ 40,500 (24,000) 13,500 (19,500) 10,500 198,000 58,500 (90,000) (31,500) (90,000) 76,500 33,000 $109,500 The issuance of common stock to retire $75,000 of bonds payable is a significant noncash financing transaction which would be disclosed in notes accompanying the financial statements Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-19 E5-16B (Continued) (b) Current cash debt coverage ratio = = Net cash provided by operating activities Average current liabilities = $198,000 ($51,000 + $70,500)/2 = 3.26 to Cash debt coverage ratio = = Net cash provided by operating activities Average total liabilities = $198,000 ÷ $276,000 + $370,500 = 61 to Free Cash Flow Analysis Net cash provided by operating activities Less: Purchase of equipment Dividends Free cash flow $198,000 (90,000) (90,000) $ 18,000 Gokhale has excellent liquidity Its financial flexibility is good It might be noted that it substantially reduced its long-term debt in 2014 which will help its financial flexibility Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-20 E5-17B (25–35 minutes) (a) GONZALVO CORPORATION Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Loss on sale of equipment Depreciation expense Patent amortization Increase in current liabilities Increase in current assets (other than cash) Net cash provided by operating activities $66,000 $ 2,400 15,600 3,000 15,600 Cash flows from investing activities Sale of equipment Addition to building Investment in stock Net cash used by investing activities Cash flows from financing activities Issuance of bonds Payment of dividends Purchase of treasury stock Net cash provided by financing activities Net increase in cash (34,800) 1,800 67,800 12,000 (32,400) (19,200) (39,600) 60,000 (36,000) (13,200) 10,800 $39,000a a An 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 Increase in cash during year $355,800 [from part (b)] 282,000 73,800 34,800 $ 39,000 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-21 E5-17B (Continued) (b) GONZALVO CORPORATION Balance Sheet December 31, 2014 Assets Current assets Long-term investments Property, plant, and equipment Land $ 36,000 Building ($144,000 + $32,400) $176,400 Less: Accum depreciation ($36,000 + $4,800) (40,800) 135,600 Equipment ($108,000 – $24,000) 84,000 Less: Accum depreciation ($13,200 – $9,600 + $10,800) (14,400) 69,600 Total Intangible assets—patents ($48,000 – $3,000) Total assets $355,800b 19,200 241,200 45,000 $661,200 Liabilities and Stockholders’ Equity Current liabilities ($180,000 + $15,600) Long-term liabilities Bonds payable ($120,000 + $60,000) Total liabilities Stockholders’ equity Common stock Retained earnings ($52,800 + $66,000 – $36,000) Total Less: Cost of treasury stock Total stockholders’ equity Total liabilities and stockholders’ equity b $195,600 180,000 375,600 $216,000 82,800 298,800 (13,200) 285,600 $661,200 The amount determined for current assets is computed last and 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 current assets and therefore current assets can be determined by deducting the total of all the other asset balances from the total asset balance (i.e., $661,200 – $45,000 – $241,200 – $19,200) Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-22 E5-18B (25 minutes) (a) HARRISON CORPORATION Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income Adjustments to net income: Depreciation expense Increase in accounts receivable Decrease in inventory Decrease in accounts payable Net cash provided by operating activities Cash flows from investing activities Sale of land Purchase of building Net cash used by investing activities Cash flows from financing activities Payment of cash dividends Net increase in cash Cash at beginning of year Cash at end of year $62,500* $13,500 (8,000) 4,500 (6,500) 3,500 66,000 19,500 (30,000) (10,500) (30,000) 25,500 11,000 $36,500 The issuance of common stock to convert $25,000 of bonds payable is a significant noncash financing transaction which would be disclosed in notes accompanying the financial statements *Beginning retained earnings + Net income – Dividends = Ending retained earnings Net income = $62,500 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-23 E5-18B (Continued) (b) Current ratio 2014 $167,500 = 9.9 $ 17,000 2013 $138,500 = 5.9 $ 23,500 Free Cash Flow Analysis Net cash provided by operating activities $ 66,000 Less: Purchase of building (30,000) Pay dividends (30,000) Free cash flow $ 6,000 (c) Harrison’s current ratio has improved substantially from 2013 to 2014 It appears the company has good liquidity However, financial flexibility is poor due to the low free cash flow Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-24 ... a.) f c x f c and n a i Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-2 E5-4B (30–35 minutes) CLUVER INC... XXX XXX XXX XXX XXX $XXX Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-3 E5-4B (Continued) Liabilities and... plant expansion deducted Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 5-4 E5-5B (30–35 minutes) DARLING COMPANY