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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

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.

P5-5 (L03) GROUPWORK (Balance Sheet Adjustment and Preparation) Presented below is the balance sheet of Sargent Corporation for the current year, 2017.

SARGENT CORPORATION

Balance Sheet

December 31, 2017

Current assets

\(485,000

Current liabilities

\)380,000

Investment

640,000

Long-term liabilities

1,000,000

Property, Plant, and Equipment

1,720,000

Stockholder’s equity

1,770,000

Intangible assets

305,000

\(3,150,000

\)3,150,000

The following information is presented.

1. The current assets section includes cash \(150,000, accounts receivable \)170,000 less \(10,000 for allowance for doubtful accounts, inventories \)180,000, and unearned rent revenue \(5,000. Inventory is stated on the lower-of-FIFO-cost-or-net realizable value.

2. The investments section includes the cash surrender value of a life insurance contract \)40,000; investments in common stock, short-term \(80,000 and long-term \)270,000; and bond sinking fund \(250,000. The cost and fair value of investments in common stock are the same.

3. Property, plant, and equipment includes buildings \)1,040,000 less accumulated depreciation \(360,000, equipment \)450,000 less accumulated depreciation \(180,000, land \)500,000, and land held for future use \(270,000.

4. Intangible assets include a franchise \)165,000, goodwill \(100,000, and discount on bonds payable \)40,000.

5. Current liabilities include accounts payable \(140,000, notes payable—short-term \)80,000 and long-term \(120,000, and income taxes payable \)40,000.

6. Long-term liabilities are composed solely of 7% bonds payable due 2025.

7. Stockholders’ equity has preferred stock, no par value, authorized 200,000 shares, issued 70,000 shares for \(450,000; and common stock, \)1.00 par value, authorized 400,000 shares, issued 100,000 shares at an average price of \(10. In addition, the corporation has retained earnings of \)320,000.

Instructions

Prepare a balance sheet in good form, adjusting the amounts in each balance sheet classification as affected by the information given above.

The comparative balance sheets of Constantine Cavamanlis Inc. at the beginning and the end of the year 2017 are as follows.

CONSTANTINE CAVAMALIS INC

BALANCE SHEETS

Assets

Dec 31, 2017

Jan 1, 2017

Inc./Dec.

Cash

\(45,000

\)13,000

\(32,000 Inc.

Accounts receivable

91,000

88,000

3,000 Inc.

Equipment

39,000

22,000

17,000 Inc.

Less: Accumulated depreciation – Equipment

(17,000)

(11,000)

6,000 Inc.

Total

158,000

\)112,000

Liabilities and Stockholder’s equity

Account payable

\(20,000

\)15,000

5,000 Inc.

Common stock

100,000

80,000

20,000 Inc

Retained earnings

38,000

17,000

21,000 Inc.

Total

\(158,000

\)112,000

Net income of \(44,000 was reported, and dividends of \)23,000 were paid in 2017. New equipment was purchased and none was sold.

Instructions

Prepare a statement of cash flows for the year 2017.

Presented below is the balance sheet for Tomkins plc, a British company.

Tomkins plc Consolidated Balance Sheet (amounts in £ million)

Particular

Amount £

Non-Current Assets

Goodwill

436

Other tangible assets

78

Property, plant, and equipment

1,122.80

Investment in associates

20.6

Trade and other receivables

81.1

Deferred tax assets

82.9

Post-employment benefits surpluses

1.3

1,822.7

Current assets

Inventories

590.8

Trade and other receivables

753

Income tax recoverable

49

Available for sale investment

1.2

Cash and Cash equivalents

445

1,839

Assets held for sale

11.9

Total assets

3,673.6

Current liabilities

Bank overdraft

4.8

Bank and other loans

11.2

Obligations under finance leases

1

Trade and other payables

677.6

Income tax liabilities

15.2

Provisions

100.3

810.1

Non-Current liabilities

Bank and other loans

687.3

Obligations under financial leases

3.6

Trade and other payables

27.1

Post-Employment benefits obligations

343.5

Deferred tax liabilities

25.3

Income tax liabilities

79.5

Provisions

19.2

1,185.5

Total liabilities

1,995.6

Net assets

1,678

Capital reserve

Ordinary share capital

79.6

Share premium account

799.2

Own shares

(8.2)

Capital redemption reserve

921.8

Currency translation reserve

(93)

Available for sale reserve

(0.9)

Accumulated deficit

(161.9)

Shareholder’s equity

1,536.6

Minority interest

141.4

Total equity

1,678

Instructions

(a) Identify at least three differences in balance sheet reporting between British and U.S. firms, as shown in Tomkins’ balance sheet.

(b) Review Tomkins’ balance sheet and identify how the format of this financial statement provides useful information, as illustrated in the chapter.

Case 1: Uniroyal Technology Corporation

Uniroyal Technology Corporation (UTC), with corporate offices in Sarasota, Florida, is organized into three operating segments. The high-performance plastics segment is responsible for research, development, and manufacture of a wide variety of products, including orthopedic braces, graffiti-resistant seats for buses and airplanes, and a static-resistant plastic used in the central processing units of microcomputers. The coated fabrics segment manufactures products such as automobile seating, door and instrument panels, and specialty items such as waterproof seats for personal watercraft and stain-resistant, easy-cleaning upholstery fabrics. The foams and adhesives segment develops and manufactures products used in commercial roofing applications.

The following items relate to operations in a recent year.

1. Serious pressure was placed on profitability by sharply increasing raw material prices. Some raw materials increased in price 50% during the past year. Cost containment programs were instituted and product prices were increased whenever possible, which resulted in profit margins actually improving over the course of the year.

2. The company entered into a revolving credit agreement, under which UTC may borrow the lesser of \(15,000,000 or 80% of eligible accounts receivable. At the end of the year, approximately \)4,000,000 was outstanding under this agreement. The company plans to use this line of credit in the upcoming year to finance operations and expansion.

Instructions

(a) Should investors be informed of raw materials price increase, such as described in item 1? Does the fact that the company successfully met the challenge of higher prices affect the answer? Explain.

(b) How should the information in item 2 be presented in the financial statements of UTC?
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