Chapter 4, Problem 7P

Complex Balance Sheet Presented below is the unaudited balance sheet as of December 31, 2019, prepared by Zeus Manufacturing Corporation’s bookkeeper.

Your company has been engaged to perform an audit, during which you discover the following information:

1. 1. Checks totaling $14,000 in payment of accounts payable were mailed on December 31, 2019, but were not recorded until 2020. Late in December 2019, the bank returned a customer’s $2,000 check marked “NSF,” but no entry was made. Cash includes $100,000 restricted for building purposes.
2. 2. Included in accounts receivable is a $30,000 note due on December 31, 2022, from Zeus’s president.
3. 3. During 2019, Zeus purchased 500 shares of common stock of a major corporation that supplies Zeus with raw materials. Total cost of this stock was $51,300, and fair value on December 31, 2019, was $51,300. Zeus plans to hold these shares indefinitely.
4. 4. Treasury stock was recorded at cost when Zeus purchased 200 of its own shares for $32 per share in May 2019. This amount is included in investments.
5. 5. On December 31, 2019, Zeus borrowed $500,000 from a bank in exchange for a 10% note payable, manning December 31, 2024. Equal principal payments are due December 31 of each year beginning in 2020. This note is collateralized by a $250,000 tract of land acquired as a potential future building site, which is included in land.
6. 6. The mortgage payable requires $50,000 principal payments, plus interest, at the end of each month. Payments were made on January 31 and February 28, 2020. The balance of this mortgage was due June 30, 2020. On March 1, 2020, prior to issuance of the audited financial statements, Zeus consummated a non-cancelable agreement with the lender to refinance this mortgage. The new terms require $100,000 annual principal payments, plus interest, on February 28 of each year, beginning in 2021. The final payment is due February 28, 2028.
7. 7. The lawsuit liability will be paid in 2020.
8. 8. Of the total deferred tax liability; $5,000 is considered a current liability.
9. 9. The current income tax expense reported in Zeus’s 2019 income statement was $61,200.
10. 10. The company was authorized to issue 100,000 shares of $50 par value common stock.

To determine

Prepare a corrected classified balance sheet as of December 31, 2019.

Explanation of Solution

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 main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Prepare a corrected classified balance sheet of Company Z:

Company Z
Balance Sheet
December 31,2019
Current Assets:	Amount ($)	Amount ($)	Amount ($)
Cash (1)		109,000
Accounts receivable (net) (2)		317,700
Inventories		560,000
Total current assets			986,700
Long-Term Investment, at fair value (3)			51,300
Property, Plant, and Equipment (at cost):
Land (4)		200,000
Building	1,750,000
Machinery and equipment	1,964,000
Total	3,714,000
Less: Accumulated depreciation	(420,000)	3,294,000
Total property, plant, and equipment			3,494,000
Intangible Asset:
Goodwill			37,000
Other Assets:
Cash restricted for building purposes [ Refer working note (1) ]		100,000
Officer’s note receivable [ Refer working note (2) ]		30,000
Land held for future building site [ Refer working note (4) ]		250,000	380,000
Total Assets			4,949,000
Liabilities
Current Liabilities:
Accounts payable (5)		119,800
Current instalments of long-term debt[ Refer working notes  (6) & (7) ]		200,000
Lawsuit liability		80,000
Income taxes payable (8)		21,200
Deferred tax liability		5,000
Total current liabilities			426,000
Long-Term Debt:
Mortgage payable (6)		800,000
Notes payable (7)		400,000
Deferred tax liability		23,000
Total long-term debt			1,223,000
Total Liabilities			1,649,000
Shareholders’ Equity:
Contributed Capital:
Common stock, authorized 100,000 shares of $50 par value; issued 40,000 shares; outstanding 39,800 shares (9)		2,000,000
Additional paid-in capital [ Refer working note (9) ]		231,000
Total paid-in capital		2,231,000
Retained earnings		1,075,400
Total		3,306,400
Less: Cost of treasury stock capital [ Refer working note (3) ]		(6,400)
Total Shareholders’ Equity			3,300,000
Total Liabilities and Shareholders’ Equity			4,949,000

Table (1)

Therefore, the total of assets and total liabilities and shareholders’ equity equals to $4,949,000.

Working notes:

(1) Calculate corrected amount of cash balance:

Cash, per unaudited balance sheet	$225,000
Less: Unrecorded checks in payment of accounts payable	($14,000)
NSF check not recorded	($2,000)
Cash restricted for building purposes (reported in other assets)	($100,000)
Corrected balance	109,000

Table (2)

(2) Calculate the corrected amount of accounts receivable:

Accounts receivable (net), per unaudited balance sheet	$345,700
Add charge-back for NSF check [refer working note (1)]	$2,000
Less: Officer’s note receivable (reported in other assets)	($30,000)
Corrected balance	$317,700

Table (3)

(3) Calculate the corrected amount of investments:

Investments, per unaudited balance sheet	$57,700
Less: Long-term investment [reported separately as an asset]	($51,300)
Treasury stock [reported in shareholders’ equity]	($6,400)
Corrected balance	$0

Table (4)

(4) Calculate the corrected amount of land:

Land, per unaudited balance sheet	$450,000
Less: Land acquired for future building site (reported in other assets)	($250,000)
Corrected balance	$200,000

Table (5)

(5) Calculate the corrected amount of accounts payable:

Accounts payable, per unaudited balance sheet	$133,800
Less: Unrecorded payments [refer working note (1)]	($14,000)
Corrected balance	$119,800

Table (6)

(6) Calculate the corrected amount of mortgage payable:

Mortgage payable, per unaudited balance sheet	$900,000
Less: Current portion $\left(\text{\$50,000 × 2}\right)$	(100,000)
Refinanced as long-term mortgage payable	$800,000

Table (7)

(7) Calculate the corrected amount of long-term note payable:

Notes payable, per unaudited balance sheet	$500,000
Less: Current portion	($100,000)
Long-term note payable	$400,000

Table (8)

(8) Calculate the corrected amount of income taxes payable:

Income taxes payable, per unaudited balance sheet	$61,200
Less: Prepaid income taxes	($40,000)
Corrected balance	$21,200

Table (9)

(9) Calculate the corrected amount of common stock:

Common stock, per unaudited balance sheet	$2,231,000
Less: Additional paid-in capital in excess of par value	($231,000)
Corrected balance	$2,000,000

Table (10)