Ch03 Balance sheet.docx

CHAPTER 3—BALANCE SHEET MULTIPLE CHOICE 1. The balance sheet reports: a. the assets, liabilities, gains, and losses for a period of time b. the changes in assets, liabilities, and equity for a period of time c. the assets, expenses, and liabilities as of a certain date d. the probable future benefits, probable future sacrifices, and residual interest for a period of time e. the financial condition of an accounting entity as of a particular date ANS: E 2. Which of the following would not appear on a conventional balance sheet? a. income taxes payable b. funds from operations c. cash surrender value of life insurance d. appropriation for contingencies (restriction of retained earnings) e. patents ANS: B 3. At the beginning of the year, Execon Company had total assets of $200,000, total liabilities of $110,000, and shareholders' equity of $90,000. For the year, Execon Company earned net income of $75,000 and declared cash dividends of $30,000. At the end of the year, the company had total assets of $300,000 and its shareholders' equity was at $135,000. At the end of the year, Execon Corporation had total liabilities of: a. $0 b. $45,000 c. $50,000 d. $165,000 e. none of the answers are correct ANS: D 4. Ownership of debt instruments of the government and other companies that can be readily converted to cash are best reported as: a. long-term investments b. cash c. marketable securities d. intangibles e. inventory of near-cash items ANS: C 5. Tangible assets on the balance sheet should include: a. equipment b. taxes payable c. trademarks d. bonds payable e. none of the answers are correct ANS: A 6. The current asset section of the balance sheet should include: a. land b. trademarks c. investment in C Company (for purposes of control) d. dividends payable e. work in process inventory ANS: E 7. The current liability section of the balance sheet should include: a. buildings b. goodwill c. land held for speculation purposes d. accounts payable e. none of the answers are correct ANS: D 8. Which of the following is not a current asset? a. marketable securities b. material inventory c. unearned rent income d. prepaid interest e. prepaid insurance ANS: C 9. If a parent has some control over a subsidiary but the subsidiary is not consolidated, the subsidiary is accounted for as: a. a marketable security b. an investment c. a liability d. a fixed asset e. none of the answers are correct ANS: B 10. Which of the following is not a proper use of notes? a. To describe the nature and effect of a change in accounting principle, such as from FIFO to LIFO. b. To indicate the basis for asset valuation. c. To indicate the method of depreciation. d. To correct an improper financial statement presentation. e. To describe a firm's debt. ANS: D 11. Company A owns shares of Company B and Company C. The statements of Company B are consolidated with those of Company A. The statements of Company C are not consolidated. Company A reports "Minority Interest" on its balance sheet. This account represents: a. A's minority share of the stock of B b. A's minority share of the stock of C c. the minority share by outside owners of the stock of A d. the minority share by outside owners of the stock of B e. the minority share by outside owners of the stock of C ANS: D 12. Drama Products Inc. has issued redeemable preferred stock. For analysis purposes, these securities are best classified as: a. marketable securities b. long-term investments c. long-term debt d. paid-in capital e. retained earnings ANS: C 13. Treasury stock is best classified as: a. a current asset b. a long-term investment c. a contra liability d. a reduction of stockholders' equity e. a reduction of retained earnings ANS: D 14. Which of the following is not a common characteristic of preferred stock? a. voting rights b. preference as to dividends c. preference in liquidation d. callability by the corporation e. none of the answers are correct ANS: A 15. Which of the following is not a problem inherent in balance sheet presentation? a. Most assets are valued at cost. b. Varying methods are used for asset valuation. c. Not all items of value to the firm are included as assets. d. Liabilities related to contingencies may not appear on the balance sheet. e. The owners' interest will be indicated. ANS: E 16. Which of the following is not true relating to treasury stock? a. A firm creates treasury stock when it repurchases its own stock and does not retire it. b. Treasury stock lowers the stock outstanding. c. Treasury stock may be recorded at the cost of the stock. d. Treasury stock may be recorded at par or stated value. e. Treasury stock is, in essence, an increase in paid-in capital. ANS: E 17. Which of the following is not true about an ESOP? a. An ESOP will reduce the amount of voting stock in the hands of employees. b. An ESOP must be a permanent trusted plan for the exclusive benefit of the employees. c. The plan participants become eligible for favorable taxation of distributions from the plan. d. Commercial lending institutions, insurance companies, and mutual funds are permitted an exclusion from income for 50% of the interest received on loans used to finance an ESOP's acquisition of company stock. e. An ESOP may reduce the potential of an unfriendly takeover. ANS: A 18. The most popular depreciation method for financial reporting is the following: a. units-of-production b. sum-of-the-years’-digits c. declining-balance d. straight-line e. other ANS: D 19. Which of the following is a current liability? a. prepaid insurance b. account receivable c. unearned rent revenue d. building e. common stock ANS: C 20. Which of the following accounts would not be classified as an intangible? a. franchises b. research and development c. patent d. trademarks e. goodwill ANS: B TRUE/FALSE 1. The purpose of a balance sheet is to show the financial condition of an accounting entity for a period of time. ANS: F 2. In a period of rising prices, LIFO usually results in a realistic cost of goods sold. ANS: T 3. Generally accepted accounting principles and the Internal Revenue Code of tax law require that the same depreciation method be used for both the financial statements and the federal tax return. ANS: F 4. All intangibles are amortized over their useful lives or their legal lives, whichever is shorter. ANS: F 5. Deferred taxes are caused by using different accounting methods for tax and financial reporting purposes. ANS: T 6. Assets are probable future economic benefits obtained or controlled by an entity as a result of past transactions or events. ANS: T 7. Minority interest reflects the ownership of minority shareholders in the equity of consolidated subsidiaries that are less than wholly owned. ANS: T 8. The stockholders' equity section of the balance sheet includes redeemable preferred stock. ANS: F 9. When a firm repurchases its own stock and retires it, the stock is called treasury stock. ANS: F 10. A sole proprietorship form of business has only one owner. ANS: T 11. The financial statements of legally separate entities may be issued to show the financial position and income as they would appear if the companies were one legal entity. Such statements reflect a legal, rather than an economic, concept of the entity. ANS: F 12. Current assets are listed on the balance sheet in order of liquidity. ANS: T 13. Long-term investments, usually stocks and bonds of other companies, are often held to maintain a business relationship or exercise control. ANS: T 14. When preferred stock has a preference as to dividends, the current year's preferred dividend must be paid before a dividend can be paid to common stockholders. ANS: T 15. If dividends are not declared by the board of directors in a particular year, a holder of cumulative preferred stock will never be paid that dividend. ANS: F 16. Preferred stock usually has voting rights. ANS: F 17. Warranty obligations are estimated in order to recognize the obligation at the balance sheet date and to charge the expense to the period of the sale. ANS: T 18. Corporations do not use a standard title for owners' equity. ANS: T 19. A quasi-reorganization is an accounting procedure equivalent to an accounting fresh start. ANS: T 20. The principal financial statements are the balance sheet, income statement, and statement of cash flows. ANS: T 21. The deferred compensation element of an equity-based deferred compensation arrangement is the amount of compensation cost deferred and amortized (expensed) to future periods as the services are provided. ANS: T 22. An ESOP is a qualified stock-bonus or combination stock-bonus and money-purchase pension plan designed to invest primarily in stock, other than the employer's securities. ANS: F 23. The Internal Revenue Code penalizes borrowing for an ESOP. ANS: F 24. The balance sheet is presented with the assets equal to liabilities plus equity. When this presentation is presented side by side, it is called the account form. ANS: T 25. The analyst must assume that securities classified as marketable securities are readily marketable. ANS: T 26. There are many alternative titles for the statement of stockholders’ equity. The most frequently used alternative title is the statement of shareholders’ equity. ANS: T 27. When the bond market interest rate is 6% and the bond contractual interest rate is 8%, the bond will sell at a premium. ANS: T Noncontrolling interest reflects the ownership of noncontrolling shareholders in the equity of consolidated subsidiaries less than wholly occurred. ANS: T Noncontrolling interest should be presented at the bottom of stockholders equity. ANS: T IFRS require a standard format for the balance sheet. ANS: F Using IFRS, usually noncurrent assets are presented first, followed by current assets. ANS: T Under IFRS, reserves may result from upward revaluations of properties and investments. ANS: T PROBLEMS 1. Assume that Eugene Motor Corp. uses the following headings on its balance sheet: A. Current Assets B. Investments C. Property, Plant, and Equipment D. Intangible Assets E. Current Liabilities F. Long-Term Liabilities G. Capital Stock H. Retained Earnings I. Stockholders' Equity Required: Indicate by letter how each of the following should be best classified. If an item would not appear on the balance sheet but would appear in a note to the financial statements, use the letter "N" to indicate this. If an item is neither reported on the balance sheet nor disclosed as a note, use the letter "X" to indicate this. If the account balance is normally opposite that of a typical account in that classification, indicate this by placing the letter in parentheses. a. Patents b. Merchandise Inventory c. Taxes Payable d. Employee Payroll Deduction for State Income Taxes e. Cash f. Office Supplies g. Preferred Stock h. Common Stock i. Work in Process j. Land k. Accounts Receivable l. Accumulated Depreciation m. Unearned Rent Income n. Unamortized Bond Payable Discount (bond payable five years from current balance sheet date) o. Receivable from Officer—due in 6 months p. Accumulated Deficit (losses incurred since inception) q. Insurance Expense r. Goodwill s. Interest Accrued on U.S. Government Securities Owned t. Accounts payable u. Treasury Stock v. Wages Payable w. Land Purchased as Future Development Site x. Unexpired Rent Expense (prepaid rent) ANS: a. D b. A c. E d. E e. A f. A g. G h. G i. A j. C k. A l. (C) m. E n. (F) o. A p. (H) q. X r. D s. A t. E u. (I) v. E w. B x. A 2. Required: Using the letters provided, classify items (1–13) according to the most commonly preferred balance sheet presentation.     Assets     Liabilities and Stockholders' Equity a. Current Assets f. Current Liability b. Tangible Assets g. Long-Term Liability c. Investments h. Capital Stock d. Intangibles i. Retained Earnings e. Other j. Items Not Included on Balance Sheet 1. Land 2. Marketable Securities 3. Goodwill 4. Inventories 5. Premium on Preferred Stock 6. Appropriation for Expansion 7. Depreciation Expense 8. Investment in K Company Bonds (long-term investment) 9. Accounts Payable 10. Bonds Payable 11. Equipment 12. Copyright 13. Unamortized Premium on Bonds Payable ANS: 1. b 2. a 3. d 4. a 5. h 6. i 7. j 8. c 9. f 10. g 11. b 12. d 13. g 3. A partial list of accounts for Johnson and Clark, in alphabetical order, is presented below: Accounts Payable Accounts Receivable Accrued Salaries Payable Accumulated Depreciation—Buildings Accumulated Depreciation—Equipment Additional Paid-In Capital—Common Stock Allowance for Doubtful Accounts Bank Loan (long-term) Bonds Payable Buildings Cash in Bank Commission Expense Common Stock Current Portion of Long-Term Debt Equipment FICA Taxes Payable Franchise Goodwill Interest Income Interest Receivable Inventory—Ending Balance Land Land Held for Future Plant Site Loss on Sale of Equipment Marketable Securities Minority Interest Notes Payable (long-term) Obligations on Long-Term Loans Patent Preferred Stock Premium on Bonds Payable Prepaid Expenses Purchases Retained Earnings Sales Sales Salaries Expense Treasury Stock Unearned Rent Revenue Required: Prepare a balance sheet in good format, without monetary amounts, for December 31, 2010. Use the format Current Assets; Property, Plant, and Equipment; Investments; Intangibles; Current Liabilities; Long-Term Liabilities; and Stockholders' Equity. Do not use the accounts not found on the balance sheet. ANS: Johnson and Clark Balance Sheet December 31, 2010 Assets Current Assets:    Cash in Bank    Marketable Securities    Accounts Receivable    Less: Allowance for Doubtful Accounts    Interest Receivable    Inventory (ending balance)    Prepaid Expenses Total Current Assets Property, Plant, and Equipment:    Land    Buildings    Less: Accumulated Depreciation—Buildings    Equipment    Less: Accumulated Depreciation—Equipment Investments:    Land Held for Future Plant Site Intangibles:    Franchise    Patent    Goodwill    Total Assets Liabilities and Stockholders' Equity Current Liabilities:    Accounts Payable    Accrued Salaries Payable    FICA Taxes Payable    Unearned Rent Revenue    Current Portion of Long-Term Debt       Total Current Liabilities Long-Term Liabilities:    Bonds Payable    Plus: Premium on Bonds Payable    Notes Payable—Long-Term    Bank Loan—Long-Term    Obligations on Long-Term Loans    Minority Interest Stockholders' Equity:    Preferred Stock    Common Stock    Additional Paid-In Capital—Common Stock    Retained Earnings    Less: Treasury Stock       Total Liabilities and Stockholders' Equity 4. The following is a partial listing of accounts for Euisara, Inc., for the year ended December 31, 2010. Required: Prepare a balance sheet in good format for December 31, 2010. Finished Goods $   9,718 Current Maturities of Long-Term Debt 1,257 Accumulated Depreciation 9,980 Accounts Receivable 24,190 Sales Revenue 127,260 Treasury Stock 251 Prepaid Expenses 2,199 Deferred Taxes (long-term liability) 8,506 Interest Expense 2,410 Allowance for Doubtful Accounts 915 Retained Earnings 18,951 Raw Materials 9,576 Accounts Payable 19,021 Cash and Cash Equivalents 8,527 Sales Salaries Expense 872 Cost of Goods Sold 82,471 Investment in Unconsolidated Subsidiaries 3,559 Income Taxes Payable 8,356 Work In Process 1,984 Additional Paid-In Capital 9,614 Equipment 41,905 Long-Term Debt 15,258 Rent Income 2,468 Common Stock 3,895 Notes Payable (short-term) 6,156 Income Tax Expense 2,461 ANS: Euisara, Inc. Balance Sheet December 31, 2010 Assets Current Assets: Cash and Cash Equivalents $ 8,527  Accounts Receivable $ 24,190  Less: Allowance for Doubtful Accounts    (915) 23,275  Inventories: Raw Materials $  9,576  Work In Process 1,984  Finished Goods   9,718  21,278  Prepaid Expenses  2,199  Total Current Assets $ 55,279  Tangible Assets: Equipment $ 41,905  Less: Accumulated Depreciation  (9,980) 31,925  Investments: Investments in Unconsolidated Subsidiaries   3,559  Total Assets $ 90,763  Liabilities and Stockholders' Equity Current Liabilities: Current Maturities of Long-Term Debt $ 1,257  Notes Payable 6,156  Accounts Payable 19,021  Income Taxes Payable  8,356  Total Current Liabilities $ 34,790  Long-Term Liabilities: Long-Term Debt $15,258  Deferred Taxes  8,506  Total Long-Term Liabilities 23,764  Stockholders' Equity: Common Stock $ 3,895  Additional Paid-In Capital 9,614  Retained Earnings 18,951  $32,460  Less: Treasury Stock (251) 32,209  Total Liabilities and Stockholders' Equity $ 90,763  5. The following balance sheet, prepared by a careless bookkeeper, has been given to you to review. Required: List any corrections that need to be made. Errors can be in classification, lack of disclosure, format, or terminology. Eldorado, Inc. Balance Sheet For the Year Ended June 30, 2010 Assets Current Assets: Accounts Receivable $ 37,000  Merchandise Inventory 62,000  Cash  17,000  $116,000 Investments: Marketable Securities $ 18,000  Treasury Stock  4,000  22,000 Tangible Assets: Buildings $194,000  Less: Reserve for Depreciation (34,000) 160,000 Other Assets: Unamortized Portion of Bond Payable Discount   3,000 $301,000 Liabilities and Stockholders' Equity Current Liabilities: Accounts Payable $ 26,000  Bank Note Payable (due 6/1/2011)  22,000  $ 48,000 Long-Term Liabilities: Bonds Payable 112,000 Capital Stock: Common Stock $ 49,000  Earned Surplus  92,000  141,000 $301,000 ANS: 1. The date should read "June 30, 2010," as a balance sheet is at a particular point in time. 2. Cash should be listed first under current assets. 3. Marketable securities should be a current asset, listed after cash. 4. Treasury stock should be deducted from stockholders' equity. 5. "Allowance" is a better term than "Reserve" in relation to depreciation. 6. The bond discount should be subtracted from bonds payable rather than being shown as an asset. 7. The bank note payable is not due within a year and should be classified as long-term. 8. Retained earnings is now common terminology to replace earned surplus. 9. The par value and number of shares should be disclosed for the stock. 6. The following balance sheet, prepared by Whoops Bookkeeping Service, has been given to you to review. Required: Prepare a corrected, properly classified balance sheet in report form. Butler Corporation Balance Sheet For Year Ended December 31, 2010 Current Assets: Current Liabilities:    Cash $  6,200    Accounts Payable $ 15,000    Accounts Receivable 13,000    Wages Payable 2,000     Inventory 30,000    Accumulated Depreciation —Equipment 5,000     Treasury Stock 10,000    Accumulated Depreciation    —Buildings 10,000 Property, Plant, and Equipment:    Land 7,000 Long-Term Liabilities:    Trademarks 5,000    Current Taxes Payable 4,000    Buildings 45,000    Premium on Common Stock 3,000    Equipment 17,000    Bonds Payable 60,000 Intangibles:    Notes Payable—Long Term 10,000    Organization Costs 4,000    Discount on Bonds Payable 2,000 Owners' Equity:    Common Stock 31,200 Investments:    Retained Earnings 12,000    Long-Term Investment in      Bonds 8,000    Allowance for Doubtful      Accounts   2,000    Marketable Securities—      Short-Term    7,000 Total Assets $154,200 $154,200 ANS: Butler Corporation Balance Sheet December 31, 2010 Assets Current Assets:    Cash $ 6,200     Marketable Securities 7,000     Accounts Receivable $13,000    Less: Allowance for Doubtful Accounts (2,000) 11,000     Inventory 30,000       Total Current Assets $ 54,200 Tangible Assets:    Land $ 7,000     Equipment $17,000     Less: Accumulated Depreciation—Equipment (5,000) 12,000     Buildings 45,000     Less: Accumulated Depreciation—Buildings (10,000) 35,000  54,000 Investments:     Investment in Bonds 8,000 Intangibles:    Trademarks $ 5,000     Organization Costs  4,000    9,000 Total Assets $125,200 Liabilities and Stockholders' Equity Current Liabilities:    Accounts Payable $15,000     Wages Payable 2,000     Current Taxes Payable  4,000       Total Current Liabilities $ 21,000 Long-Term Debt:    Notes Payable—Long-Term $10,000     Bonds Payable $60,000     Less: Discount on Bonds Payable (2,000) 58,000       Total Long-Term Debt 68,000 Owners' Equity:    Common Stock 31,200     Premium on Common Stock 3,000     Retained Earnings 12,000     Treasury Stock (10,000)   36,200 Total Liabilities and Stockholders' Equity $125,200 7. Required: Using the information given below, prepare a classified balance sheet in good form for Babic Company at December 31, 2010. Accounts Payable $   83,000 Accounts Receivable 109,000 Accrued Liabilities 22,000 Accumulated Depreciation 326,000 Cash 32,000 Common Stock 107,000 Convertible Debentures 561,000 Deferred Income Taxes (long-term liability) 117,000 Equipment 1,070,000 Inventory 146,000 Land 917,000 Marketable Securities 11,000 Paid-In Capital in Excess of Par 141,000 Retained Earnings 952,000 Treasury Stock 24,000 ANS: Babic Company Balance Sheet December 31, 2010 Assets Current Assets:    Cash $  32,000    Marketable Securities 11,000    Accounts Receivable 109,000    Inventory  146,000      Total Current Assets $ 298,000 Tangible Assets:    Land $  917,000     Equipment $1,070,000     Less: Accumulated Depreciation  (326,000)   744,000  1,661,000 Total Assets $1,959,000 Liabilities and Stockholders' Equity Current Liabilities:    Accounts Payable $   83,000     Accrued Liabilities 22,000       Total Current Liabilities $  105,000 Convertible Debentures 561,000 Deferred Income Taxes 117,000 Stockholders' Equity:    Common Stock $  107,000     Paid-In Capital in Excess of Par 141,000     Retained Earnings   952,000  $1,200,000  Less: Treasury Stock  (24,000) 1,176,000 Total Liabilities and Stockholders' Equity $1,959,000 8. Required: Match each account to the proper account description by placing the appropriate letter before the account name; not all letters will be used.      Account ____ 1. Accounts Payable ____ 2. Accounts Receivable ____ 3. Accrued Liabilities ____ 4. Accumulated Depreciation ____ 5. Cash ____ 6. Common Stock ____ 7. Convertible Debentures ____ 8. Deferred Income Taxes (liability) ____ 9. Equipment ____ 10. Inventory ____ 11. Land ____ 12. Marketable Securities ____ 13. Minority Interest ____ 14. Paid-In Capital in Excess of Par ____ 15. Retained Earnings ____ 16. Treasury Stock      Account Descriptions a. Stocks and bonds of other companies held for the purpose of exercising control. b. An accumulation of the sum of the expense since the beginning of the benefit period. c. Outside ownership in the equity of consolidated subsidiaries. d. Machinery and tools, valued at historical cost. e. Monies due because expenses, such as salaries, are incurred in a different period than when the cash outlay occurs. f. The most liquid of assets, it may also include savings accounts. g. Goods on hand. h. A potential liability created by differing tax and reporting methods. i. Ownership and debt instruments readily converted to cash. j. An expenditure made in advance of the use of the service or good. k. Monies due from customers arising from sale or service rendered. l. The capital stock of residual owners. m. Bonds that can be exchanged for stock at the option of the holder. n. Undistributed earnings of the corporation. o. Shares of the firm's own stock that have been repurchased. p. Monies due for goods bought for use or resale. q. Excess over legal par paid at time of sale. r. Nondepreciable real estate. s. Collections in advance of service. t. Securities that give the holder the right to buy additional shares of common stock at a fixed price. ANS: 1. p 2. k 3. e 4. b 5. f 6. l 7. m 8. h 9. d 10. g 11. r 12. i 13. c 14. q 15. n 16. o Account Descriptions a, j, s, and t are not used. 9. An item of equipment acquired on January 1, at a cost of $100,000, has an estimated use of 50,000 hours. During the first three years, the equipment was used 11,000, 8,000, and 7,000 hours, respectively. The equipment has an estimated life of five years and an estimated salvage of $10,000. Required: Determine the depreciation for each of the three years, using the straight-line method, the double declining-balance method, the sum-of-the-years'-digits method, and the units-of-production method. ANS: Straight-Line: $100,000 - $10,000 = $18,000 Each Year 5 Declining-Balance = Year 1: 1/5 ? 2 ? $100,000 = $40,000 1st Year Year 2: 1/5 ? 2 ? ($100,000 - $40,000) = $24,000 2nd Year Year 3: 1/5 ? 2 ? ($100,000 - $64,000) = $14,400 3rd Year Sum-of-the-Years'-Digits: Year 1: 5/15 ? ($100,000 - $10,000) = $30,000 Year 2: 4/15 ? ($100,000 - $10,000) = $24,000 Year 3: 3/15 ? ($100,000 - $10,000) = $18,000 Units-of-Production Method: Year 1: 11,000 ? $1.80 = $19,800 ($100,000 - $10,000) ÷ 50,000 = $1.80 per unit) Year 2: 8,000 ? $1.80 = $14,400 Year 3: 7,000 ? $1.80 = $12,600 10. Smith Company has had 10,000 shares of 8%, $100 par-value preferred stock, and 15,000 shares of $10 par-value common stock outstanding for the last two years. During the most recent year, dividends paid totaled $100,000; in the prior year, dividends paid totaled $60,000. Required: Compute the amount of dividends that must have been paid to preferred stockholders and common stockholders in each of the years, given the following independent assumptions: a. Preferred stock is nonparticipating and noncumulative. b. Preferred stock is nonparticipating and cumulative. ANS: a. Preferred   Stock   Common   Stock   Year 1 Dividends, $60,000 Preferred Stock 10,000 ? $100 ? 8% = $80,000 $ 60,000 -0- Year 2 Dividends, $100,000 Preferred Stock 10,000 ? $100 ? 8% = $80,000 $ 80,000 $20,000 b. Year 1 Dividends, $60,000 Preferred Stock 10,000 ? $100 ? 8% = $80,000 $ 60,000 -0- Year 2 Dividends, $100,000 Preferred Stock Carryover from Year 1 $ 20,000 10,000 ? $100 ? 8% = $80,000  80,000 -0- $100,000