Concept explainers
1.
Prepare the
1.
Explanation of Solution
Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (
The balance sheet of company W is prepared as follows:
Company W | |||
Balance Sheet | |||
December 31,2016 | |||
Current Assets: | Amount ($) | Amount ($) | Amount ($) |
Cash | $11,600 | ||
Short-term investments in marketable securities [Refer to subpart 2 (note 1)] | $19,100 | ||
$32,300 | |||
Less: Allowance for doubtful accounts | ($1,500) | $30,800 | |
Inventories [Refer to subpart 2 (Notes 1 and 2) ] | $98,500 | ||
Total current assets | $160,000 | ||
Long-Term Investments: | |||
Investment in bonds [Refer to subpart 2 (note 1)] | $25,000 | ||
Land held for building site | $19,500 | ||
Cash surrender value of life insurance | $8,900 | ||
Total long-term investments | $53,400 | ||
Property, plant, and equipment [Refer to subpart 2 (Notes 1 and 3) ] | $229,300 | ||
Intangible Assets: | |||
Patents (net) [Refer to subpart 2 (Notes 1 and 2) ] | $18,200 | ||
Total Assets | $460,900 | ||
Liabilities | |||
Current Liabilities: | |||
Accounts payable | $58,000 | ||
Income taxes payable | $24,700 | ||
Miscellaneous current payables | $6,200 | ||
Estimated liability for product warranties | $7,300 | ||
Total current liabilities | $96,200 | ||
Long-Term Liabilities: | |||
Bonds payable (mature on 12/31/2024) | $80,000 | ||
Premium on bonds payable | $4,800 | ||
Total long-term liabilities | $84,800 | ||
Total Liabilities | $181,000 | ||
Shareholders’ Equity | |||
Contributed Capital: | |||
$40,000 | |||
Common stock, $10 par, 12,000 shares authorized, 6,280 shares issued | $62,800 | ||
Additional paid-in capital on: | |||
Preferred stock | $23,400 | ||
Common stock | $30,300 | ||
Total contributed capital | $156,500 | ||
$123,400 | |||
Total Shareholders’ Equity | $279,900 | ||
Total Liabilities and Shareholders’ Equity | $460,900 |
Table (1)
Therefore, the amount of total assets and total liabilities and stockholders’ equity equals $460,900.
2.
Prepare notes to accompany the balance sheet that itemize company accounting policies, inventories, and property, plant and equipment.
2.
Explanation of Solution
Accompanying Notes to the balance sheet:
Note (1):
Summary of important accounting policies:
- “Inventories are valued at the lower of average cost or market.”.
- “Property, plant, and equipment are recorded at cost less
accumulated depreciation . The straight-line method is used todepreciate all property, plant, and equipment, except land”. - “Patents are amortized on a straight-line basis directly to the Patent account”.
- “Temporary investments in marketable securities are stated at their market value”.
- “Investment in bonds is carried at original cost (face value) and is being held to maturity”.
Note (2):
Composition of inventories:
The inventories of the company as of December 31, 2016, are composed of the following components:
Particulars | Amount |
Raw materials | $22,200 |
Work in process | $34,700 |
Finished goods | $41,600 |
Total | $98,500 |
Table (2)
Note (3)
Composition of property, plant, and equipment:
The property, plant, and equipment of the company as of December 31, 2016, comprise the following:
Item | Cost | Accumulated Depreciation | Book value |
Land | $32,000 | $32,000 | |
Buildings | $182,400 | $62,200 | $120,000 |
Machinery | $63,900 | $18,600 | $45,300 |
Equipment | $53,000 | $21,200 | $31,800 |
Total | $331,300 | $102,000 | $229,300 |
Table (3)
3.
Compute the
3.
Explanation of Solution
Current ratio: The financial ratio which evaluates the ability of a company to pay off the debt obligations which mature within one year or within completion of operating cycle is referred to as current ratio. This ratio assesses the liquidity of a company.
Quick ratio: The financial ratio which evaluates the ability of a company to pay off the instant debt obligations is referred to as quick ratio. Quick assets are cash, marketable securities, and accounts receivables. This ratio assesses the short-term liquidity of a company from its most liquid (quick) assets.
Calculate the current ratio:
Therefore, the current ratio is 1.66:4.
Compute quick ratio:
Therefore, the quick ratio is 0.64:1.
- Current ratio evaluates the liquidity
- Quick ratio analyzes a company’s potential working capital.
- Comparison of these two ratios states the amount of liquidity that comes from the inventory, which is not as liquid as the quick assets.
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Chapter 4 Solutions
EBK INTERMEDIATE ACCOUNTING: REPORTING
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