Chapter 3, Problem 3.8P

To determine

Balance sheet:

This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the components of balance sheet are assets, liabilities and shareholders’ equity.

To prepare: Complete, corrected, classified balance sheet.

Explanation of Solution

Prepare a classified balance sheet of Company SM as on December 31, 2016.

Company SM
Balance sheet
At December 31, 2016
	Amount (in $)	Amount (in $)
Assets
Current assets:
Cash	1,250
Short term investments	3,000
Accounts receivables     (1)	3,100
Inventories      (2)	8,250
Prepaid expenses	1,200
Total current assets		16,800
Property, plant and equipment:
Equipment	15,000
less: accumulated depreciation	4,200
Net property, plant and equipment		10,800
Intangible assets
Patents (6)		5,400
Total assets		33,000
Liabilities and shareholders' equity
Current liabilities:
Accounts payable	5,200
Note payable      (3)	1,000
Interest payable - note	100
Deferred revenue      (4)	1,500
Interest payable - bonds	200
Total current liabilities		8,000
Long term liabilities
Bonds payable	5,500
Note payable      (3)	1,500
Deferred revenue      (4)	3,000
Total long term liabilities		10,000
Total liabilities		18,000
Shareholders' equity
Common stock, no par,250,000 shares issued and outstanding     (5)	10,000
Retained earnings   (5)	5,000
Total shareholders' equity		15,000
Total liabilities and shareholders' equity		33,000

Table (1)

Working notes:

1. 1. Compute accounts receivables balance at December 31, 2016.

• $\begin{array}{l}\left(\begin{array}{l}\text{Accounts receivables at}\\ \text{ December 31, 2018}\end{array}\right)=\left(\begin{array}{l}\text{Accounts receivable}-\text{Allowance for }\\ \text{ uncollectible accounts}\end{array}\right)\\ =\$3,500-\$400\\ =\$3,100\end{array}$

1. 2. Compute inventory balance at December 31, 2016.

• $\begin{array}{l}\left(\text{Inventory at December 31, 2018}\right)=\left(\begin{array}{l}\text{Finished}\text{goods}\text{+}\text{Raw}\text{material}\\ \text{and}\text{Work}\text{In}\text{Progress}\end{array}\right)\\ =\left(\$6,000+\$2,250\right)\\ =\$8,250\end{array}$

1. 3. Note payable at December is $4,000. The note payable is due in annual installments of $1,000 each. Thus, $1,000 is reported as a current liability and remaining $3,000 is reported as long term liability.

1. 4. Deferred revenue at December 31, 2016 is $3,000. It will be recognized as revenue equally over the next two fiscal years. Thus, $1,500 (half of the $3,000) is reported as current liability and remaining $1,500 reported as long term liability.

1. 5. Calculate common stock and retained earnings.

• $\begin{array}{l}\text{Debt to equity ratio = 1}\text{.2}\\ \text{Liabilities }÷\text{ Equity = 1}\text{.2}\\ \text{\$18,000 }÷\text{ Equity =1}\text{.2}\\ \text{Equity = \$18,000 }÷\text{ 1}\text{.2 = \$15,000}\end{array}$

• Therefore Equity is $15,000. It includes common stock and retained earnings

  Compute retained earnings at December 31, 2016.

• $\begin{array}{l}\left(\begin{array}{l}\text{Retained}\text{earnings}\text{at}\\ \text{December}\text{31,}\text{2016}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Retained}\text{earnings}\text{at}\text{December}\text{31,}\text{2015}\\ \text{+}\text{net}\text{income}\text{for}\text{2016}\text{-}\text{dividends}\text{paid}\end{array}\right)\\ =\$4,000+\$1,560-\$560\\ =\$5,000\end{array}$

• Compute Common stock at December 31, 2018.

• $\begin{array}{l}\text{Equity = Common stock + Retained earnings}\\ \text{\$15,000}\text{=}\text{Common stock + \$5,000}\\ \text{Common stock = \$15,000 - \$5,000}\\ \text{= \$10,000}\end{array}$

1. 6. Calculate patents at December 31, 2018.

• $\begin{array}{l}\text{Assets}\text{=}\text{Equity}\text{+}\text{Liabilities}\\ \text{All}\text{other}\text{assets}\text{+}\text{Patents}\text{=}\text{Equity}\text{+}\text{Liabilities}\\ \$27,600+\text{Patents}=\$15,000+\$18,000\\ \text{Patents}=\$15,000+\$18,000-\$27,600\\ \text{Patents}=\$5,400\end{array}$