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Chapter 5: Question 4ISTQ (page 262)

4. Franco Company uses IFRS and owns property, plant, and equipment with a historical cost of \(5,000,000. At December 31, 2016, the company reported a valuation reserve of \)690,000. At December 31, 2017, the property, plant, and equipment was appraised at \(5,325,000. The valuation reserve will show what balance at December 31, 2017?

(a) \)365,000.

(b) \(325,000.

(c) \)690,000.

(d) $0.

Short Answer

Expert verified

The correct option is(b) $325,000.

Step by step solution

01

Definition of Valuation Reserve

The reserve made by the business entity for getting protection against fluctuations in value of the asset is known as valuation reserve.

02

The Explanation for Correct Options

Valuation reserve on the balance sheet will be equal to:

Particular

Amount $

Appraised value of the asset

$5,325,000

Less: Historical cost

(5,000,000)

Valuation Reserve

$325,000

03

The Explanation for Incorrect Options

All other options are incorrect because they do not reflect the difference between the appraised value and the historical cost of the asset.

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Most popular questions from this chapter

The bookkeeper for Geronimo Company has prepared the following balance sheet as of July 31, 2017.

GERONIMO COMPANY

Balance Sheet

As of July 31, 2017

Cash

\(69,000

Notes and accounts payable

\)44,000

Account receivable (net)

40,500

Long-term liabilities

75,000

Inventory

60,000

Stockholder’s equity

155,500

Equipment (net)

84,000

Patents

21,000

\(274,500

\)274,500

The following additional information is provided.

1. Cash includes \(1,200 in a petty cash fund and \)15,000 in a bond sinking fund.

2. The net accounts receivable balance is comprised of the following two items: (a) accounts receivable \(44,000 and (b) allowance for doubtful accounts \)3,500.

3. Inventory costing \(5,300 was shipped out on consignment on July 31, 2017. The ending inventory balance does not include the consigned goods. Receivables in the amount of \)5,300 were recognized on these consigned goods.

4. Equipment had a cost of \(112,000 and an accumulated depreciation balance of \)28,000.

5. Income taxes payable of $6,000 were accrued on July 31. Geronimo Company, however, had set up a cash fund to meet this obligation. This cash fund was not included in the cash balance but was offset against the income taxes payable amount.

Instructions

Prepare a corrected classified balance sheet as of July 31, 2017, from the available information, adjusting the account balances using the additional information.

Early in January 2018, Hopkins Company is preparing for a meeting with its bankers to discuss a loan request. Its bookkeeper provided the following accounts and balances at December 31, 2017.

Debit \(

Credit \)

Cash

\(75,000

Accounts receivable (net)

38,500

Inventory (net)

65,300

Equipment (net)

84,000

Patent

15,000

Notes and Accounts payable

\)52,000

Note payable (due 2019)

75,000

Common stock

100,000

Retained earnings

50,800

\(277,800

\)277,800

Except for the following items, Hopkins has recorded all adjustments in its accounts.

1. Cash includes \(500 petty cash and \)15,000 in a bond sinking fund.

2. Net accounts receivable is comprised of \(52,000 in accounts receivable and \)13,500 in allowance for doubtful accounts.

3. Equipment had a cost of \(112,000 and accumulated depreciation of \)28,000.

4. On January 8, 2018, one of Hopkins’ customers declared bankruptcy. At December 31, 2017, this customer owed Hopkins \(9,000.

Accounting

Prepare a corrected December 31, 2017, balance sheet for Hopkins Company.

Analysis

Hopkins’ bank is considering granting an additional loan in the amount of \)45,000, which will be due December 31, 2018. How can the information in the balance sheet provide useful information to the bank about Hopkins’ ability to repay the loan?

Principles

In the upcoming meeting with the bank, Hopkins plans to provide additional information about the fair value of its equipment and some internally generated intangible assets related to its customer lists. This information indicates that Hopkins has significant unrealized gains on these assets, which are not reflected on the balance sheet. What objections is the bank likely to raise about the usefulness of this information in evaluating Hopkins for the loan renewal?

IFRS5-3 Briefly describe the convergence efforts related to financial statement presentation.

Where should the following items be shown on the balance sheet, if shown at all?

(a) Allowance for doubtful accounts.

(b) Merchandise held on consignment.

(c) Advances received on sales contract.

(d) Cash surrender value of life insurance.

(e) Land.

(f) Merchandise out on consignment.

(g) Franchises.

(h) Accumulated depreciation of equipment.

(i) Materials in transit—purchased f.o.b. destination.

The major classifications of activities reported in the statement of cash flows are operating, investing, and financing. Classify each of the transactions listed below as:

1. Operating activity—add to net income.

2. Operating activity—deduct from net income.

3. Investing activity.

4. Financing activity.

5. Reported as significant noncash activity.

The transactions are as follows.

(a) Issuance of common stock.

(h) Payment of cash dividends.

(b) Purchase of land and building.

(i) Exchange of furniture for office equipment.

(c) Redemption of bonds

(j) Purchase of treasury stock.

(d) Sale of equipment.

(k) Loss on sale of equipment.

(e) Depreciation of machinery.

(l) Increase in accounts receivable during the year.

(f) Amortization of patent.

(m) Decrease in accounts payable during the year.

(g) Issuance of bonds for plant assets.
See all solutions

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