Chapter 5 - Example on Proper Balance Sheet Form Airstreamer Company BALANCE SHEET For the Year Ended 2007

Current assets
Cash (net of bank overdraft of $15,000) Accounts receivable (net) Inventories, at lower of FIFO cost or market Marketable securitiesat cost (fair value $110,000) $180,0 00 380,00 0 435,00 0 90,000 590,00 0 180,00 0 75,000 90,000 80,000 6,000 18,000 85,000 100,00 0 92,000 40,000 25,000 50,000 400,00 0 310,00 0 279,00 0 ?

Property, plant and equipment

Building (net) Office equipment (net) Land held for future use

Intangible assets

Franchise Cash surrender value of life insurance Prepaid insurance

Current liabilities

Salaries payable Accounts payable Note payable, due June 30, 2009 Pension obligation Taxes payable Note payable, due October 1, 2008 Discount on bonds payable

Long-term liabilities

Bonds payable, 8% due May 1, 2011

Stockholders equity

Common stock, $1 par, authorized 500,000 shares, issued 310,000 shares Additional paid-in-capital Retained earnings

INSTRUCTIONS Prepare a revised balance sheet in good form. Correct any errors and weaknesses you find in the presentation above. Assume that the accumulated depreciation balance for the building is $150,000 and for the office equipment, $105,000. Marketable securities are classified as trading securities. The allowance for doubtful accounts has a balance of $20,000. The pension obligation is considered to be a long-term liability.

Airstreamer Company (solution) BALANCE SHEET December 31, 2007

Assets
Current Assets Cash Accounts Receivable Less allowance for doubtful accounts Inventories, at lower of FIFO cost or market Trading securities, at fair value (cost is $90,000) Prepaid insurance Total current assets Long-term Investments Land held for future use Cash surrender value of life insurance Total long-term investments Property, Plant, and Equipment Buildings Less accumulated depreciationbuilding Office equipment Less accumulated depreciationoffice equipmentTotal property, plant, and equipment Intangible Assets Franchise Total assets $195,00 0 380,000 435,000 110,000 6,000 1,126,00 0 155,000 740,000 150,000 285,000 105,000

$400,00 0 20,000

75,000 80,000

590,000 180,000 770,000 90,000 $2,141,0 00 $15,000 85,000 25,000 40,000 18,000 183,000 $100,00 0 350,000 92,000 542,000 725,000

Liabilities and Stockholders Current Liabilities Equity

Bank overdraft Accounts payable Note payable, due October 1, 2008 Taxes payable Salaries payable Total current liabilities Long-term Liabilities Note payable, due June 30, 2009 8% Bonds payable, due May 1, 2011 less discount Less payable discount on bonds payable on bonds Pension obligation Total long-term liabilities Total liabilities Stockholders equity Paid-in capital Common stock, $1 par, authorized 500,000 Additional shares, issued paid-in capital Retained earnings Total stockholders equity Total liabilities and stockholders equity

$400,00 0 50,000

310,000 279,000

589,000 827,000 1,416,00 $2,141,0 0 00

Explanations:

1. A bank overdraft in one bank account should not be reflected as an offset to positive cash items (such as a positive balance in another account). A bank overdraft must be reported as a current liability. (The one exception to this rule is as follows: if an account with a positive balance exists in the same bank as the overdraft, the overdraft can be reflected as an offset to the extent of that positive balance.) 2. Marketable securities in a trading portfolio are to be reported on the balance sheet at their fair value. The difference between cost and fair value has been included as an element of income and is therefore reflected in the balance of Retained Earnings at the balance sheet date. (This topic will be more fully explained in Chapter 17.) 3. Land held for future use is not to be classified in the property, plant, and equipment section because the land is not currently being used in operations. 4. Cash surrender value of life insurance is an intangible item in a legal sense (because it lacks physical substance), but it is classified as a long-term investment for accounting purposes. 5. Prepaid expenses such as prepaid insurance represent prepayments that relate to benefits that are expected to be consumed within the year that follows the balance sheet date. Hence, they are current assets. 6. A pension obligation is generally not expected to become due in the near future and, therefore, is not expected to require the use of current assets within a year of the balance sheet date. Hence, it is a long-term liability. 7. Discount on Bonds Payable is a contra type valuation account. A valuation account should always be reported with the account to which it relates. 8. Bonds payable are always assumed to be a long-term liability unless the facts make them appear to meet the definition for a current liability. 9. The balance of retained earnings for this exercise can be derived by determining the amount needed to cause total liabilities and stockholders equity to equal total assets. That is, it is a plug figure in this exercise.