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Chapter 5: Q32Q. (page 238)
What is the profession’s recommendation in regard to the use of the term “surplus”? Explain.
Professionals recommend that business entities not use “surplus” in the balance sheet.
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The partner in charge of the Kappeler Corporation audit comes by your desk and leaves a letter he has started to the CEO and a copy of the cash flow statement for the year ended December 31, 2017. Because he must leave on an emergency, he asks you to finish the letter by explaining: (1) the disparity between net income and cash flow, (2) the importance of operating cash flow, (3) the renewable source(s) of cash flow, and (4) possible suggestions to improve the cash position.
Date
President Kappeler, CEO
Kappeler Corporation
125 Wall Street
Middleton, Kansas 67458
Dear Mr. Kappeler:
I have good news and bad news about the financial statements for the year ended December 31, 2017. The good news is that net income of $100,000 is close to what we predicted in the strategic plan last year, indicating strong performance this year. The bad news is that the cash balance is seriously low. Enclosed is the Statement of Cash Flows, which best illustrates how both of these situations occurred simultaneously . . .
Instructions
Complete the letter to the CEO, including the four components requested by your boss.
(Preparation of a Corrected Balance Sheet) Uhura Company has decided to expand its operations. The bookkeeper recently completed the balance sheet presented below in order to obtain additional funds for expansion.
UHURA Company | |
Balance Sheet | |
For the year ended 2017 | |
Current assets | |
Cash | \(230,000 |
Accounts receivables (Net) | 340,000 |
Inventory (Lower of average cost or market) | 401,000 |
Equity investment (Trading) | 140,000 |
Property, Plant and Equipment | |
Building (net) | 570,000 |
Equipment (net) | 160,000 |
Land held for future use | 175,000 |
Intangible assets | |
Goodwill | 80,000 |
Cash surrender value of life insurance | 90,000 |
Prepaid expenses | 12,000 |
Current liabilities | |
Account payable | 135,000 |
Note payable | 125,000 |
Pension obligation | 82,000 |
Rent payable | 49,000 |
Premium on bond payable | 53,000 |
Long-term Liabilities | |
Bond payable | 500,000 |
Stockholders equity | |
Common stock \)1 par, authorized 400,000 shares, issued 290,000 | 290,000 |
Additional paid in capital | 160,000 |
Retained earnings |
Instructions
Prepare a revised balance sheet given the available information. Assume that the accumulated depreciation balance for the buildings is \(160,000 and for the equipment, \)105,000. The allowance for doubtful accounts has a balance of $17,000. The pension obligation is considered a long-term liability.
Perez Company reported an increase in inventories in the past year. Discuss the effect of this change on the current ratio (current assets ÷ current liabilities). What does this tell a statement user about Perez Company’s liquidity?
E5-11 (L03) EXCEL (Balance Sheet Preparation) Presented below is the adjusted trial balance of Kelly Corporation at December 31, 2017.
Particular | Debit | Credit |
Cash | \(? | |
Supplies | 1,200 | |
Prepaid insurance | 1,000 | |
Equipment | 48,000 | |
Accumulated depreciation – Equipment | \)4,000 | |
Trademarks | 950 | |
Accounts payable | 10,000 | |
Salaries and wages payable | 500 | |
Unearned service revenue | 2,000 | |
Bonds payable (due 2024) | 9,000 | |
Common stock | 10,000 | |
Retained earnings | 25,000 | |
Service revenue | 10,000 | |
Salaries and wages expenses | 9,000 | |
Insurance expenses | 1,400 | |
Rent expenses | 1,200 | |
Interest expenses | 900 | |
Total | \(? | \)? |
Additional information:
1. Net loss for the year was $2,500.
2. No dividends were declared during 2017.
Instructions
Prepare a classified balance sheet as of December 31, 2017.
E5-10 (L02,3) (Current Liabilities) Norma Smith is the controller of Baylor Corporation and is responsible for the preparation of the year-end financial statements. The following transactions occurred during the year.
(a) On December 20, 2017, a former employee filed a legal action against Baylor for \(100,000 for wrongful dismissal. Management believes the action to be frivolous and without merit. The likelihood of payment to the employee is remote.
(b) Bonuses to key employees based on net income for 2017 are estimated to be \)150,000.
(c) On December 1, 2017, the company borrowed \(600,000 at 8% per year. Interest is paid quarterly.
(d) Accounts receivable at December 31, 2017, is \)10,000,000. An aging analysis indicates that Baylor’s expense provision for doubtful accounts is estimated to be 3% of the receivables balance.
(e) On December 15, 2017, the company declared a \(2.00 per share dividend on the 40,000 shares of common stock outstanding, to be paid on January 5, 2018.
(f) During the year, customer advances of \)160,000 were received; $50,000 of this amount was earned by December 31, 2017.
Instructions For each item above, indicate the dollar amount to be reported as a current liability. If a liability is not reported, explain why.
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