Chapter 3, Problem 3.7P

Balance sheet preparation; errors

• LO3–2, LO3–3

The following balance sheet for the Hubbard Corporation was prepared by the company:

HUBBARD CORPORATION

Balance Sheet

At December 31, 20 18

Assets

Buildings	$ 750,000
Land	250,000
Cash	60,000
Accounts receivable (net)	120,000
Inventories	240,000
Machinery	280,000
Patent (net)	100,000
Investment in marketable equity securities	60,000
Total assets	$1,860,000

Liabilities and Shareholders’ Equity

Accounts payable	$ 215,000
Accumulated depreciation	255,000
Notes payable	500,000
Appreciation of inventories	80,000
Common stock, authorized and issued 100,000 shares of no par stock	430,000
Retained earnings	380,000
Total liabilities and shareholders’ equity	$1,860,000

Additional Information:

1. The buildings, land, and machinery are all stated at cost except for a parcel of land that the company is holding for future sale. The land originally cost $50,000 but, due to a significant increase in market value, is listed at $120,000. The increase in the land account was credited to retained earnings.

2. Marketable equity securities consist of stocks of other corporations and are recorded at cost, $20,000 of which will be sold in the coming year. The remainder will be held indefinitely.

3. Notes payable are all long-term. However, a $100,000 note requires an installment payment of $25,000 due in the coming year.

4. Inventories are recorded at current resale value. The original cost of the inventories is $160,000.

Required:

Prepare a corrected classified balance sheet for the Hubbard Corporation at December 31, 2018.

To determine

Balance sheet:

Balance sheet is the snapshot which shows the financial position of the company on a particular date. It provides the users of the financial statement to make effective decision.

The components of balance sheet are assets, liabilities and shareholders’ equity.

$\boxed{\text{Assets = Liabilities+ shareholders’ equity}}$

To Prepare: The balance sheet with given additional information and rectify its errors.

Explanation of Solution

Prepare a corrected balance sheet for Corporation H at December 31, 2018 as follows:

Corporation H
Balance Sheet
December 31, 2018
Assets
Current assets:	Amount   ($)	Amount ($)
Cash	60,000
Marketable securities (net)  (f)	20,000
Accounts receivable	120,000
Inventories (g)	160,000
Total current assets		360,000
Investments:
Marketable securities (a)	40,000
Land held for sale  (b)	50,000
Total investments		90,000
Property, plant and equipment:
Land (c)	130,000
Buildings	750,000
Machinery	280,000
Less: Accumulated depreciation	(255,000)
Net property, plant and equipment		905,000
Intangible assets:
Patent (net)		100,000
Total assets		1,455,000
Liabilities and shareholders’ Equity
Current liabilities:
Accounts payable		215,000
Current maturities of long-term debt (h)		25,000
Total current liabilities		240,000
Long-term liabilities:
Notes payable (d)		475,000
Shareholders’ equity:
Common stock	430,000
Retained earnings (e)	310,000
Total shareholders’ equity		740,000
Total liabilities and shareholders’ equity		1,455,000

Table (1)

Working notes:

1.

Calculate the amount of marketable securities of Corporation H:

$\begin{array}{c}\text{Marketable securities = }\left(\begin{array}{l}\text{Investment in securities}-\\ \text{Sale value of marketable securities}\end{array}\right)\\ \text{=}\left(\text{\$60,000}-\$20,000\right)\\ =\$40,000\end{array}$ (a)

2.

Calculate the amount of land held for sale of Corporation H:

$\begin{array}{c}\text{Land held for sale = }\left(\text{Market value of land}-\text{Increase}\text{in land}\right)\\ \text{=}\left(\text{\$120,000}-\$70,000\right)\\ =\$50,000\end{array}$ (b)

3.

Calculate the amount of land of Corporation H:

$\begin{array}{c}\text{Land = }\left(\text{Amount of land}-\text{Market value of land}\right)\\ \text{=}\left(\text{\$250,000}-\$120,000\right)\\ =\$130,000\end{array}$

Or,

$\begin{array}{c}\text{Land = }\left(\begin{array}{l}\text{Amount of land}-\text{Land held for sale}\\ -\text{Increase in land}\end{array}\right)\\ \text{=}\left(\text{\$250,000}-\$50,000-\$70,000\right)\\ =\$130,000\end{array}$ (c)

4.

Calculate the amount of notes payable of Corporation H:

$\begin{array}{c}\text{Notes payable = }\left(\begin{array}{l}\text{Amount of notes payable}\\ -\text{Installment payment}\end{array}\right)\\ \text{=}\left(\text{\$500,000}-\$25,000\right)\\ =\$475,000\end{array}$ (d)

5.

Calculate the amount of retained earnings of Corporation H:

$\begin{array}{c}\text{Retained earnings = }\left(\begin{array}{l}\text{Amount of reatined earnings}\\ -\text{Increase in land}\end{array}\right)\\ \text{=}\left(\text{\$380,000}-\$70,000\right)\\ =\$310,000\end{array}$ (e)

Notes:

• The amount of marketable equity securities is $20,000 is to be sold in the coming year is shown in the current asset side of the balance sheet. (f)
• The original cost of inventories is $160,000 is shown in the current asset side of the balance sheet. (g)
• Notes payable is a long-term liability and the note is payable in installment of amount $25,000 which is classified under current maturities of long-term debt. (h)

Conclusion

Therefore, total assets as well as total liabilities and shareholder’s equity of Corporation H as on December 31, 2018 is $ 1,455,000.