Kunci Jawaban Intermediate Accounting

CHAPTER 3
QUESTIONS
1. Three elements, as defined by the FASB,
are contained in a balance sheet: assets,
liabilities, and equity. These elements
measure the worth of an enterprise at a
given point in time. The balance sheet thus
reports what resources an enterprise has
and who has claim against those
resources.
Two
other
elements,
investments by owners and distribution to
owners, are related to the equity element.
Information concerning the change in
equity is often contained in a separate
statement that supplements the balance
sheet.
6. a. Cash is classified as noncurrent when

it is a part of a fund that will be used to
discharge noncurrent obligations. Such
funds include bond retirement funds,
pension funds, and preferred stock
redemption funds. Cash to be used for
the acquisition of land, buildings, and
equipment or cash received on longterm deposits from customers would
also be reported as noncurrent.
b. Receivables not reportable as current
assets would include those arising from
unusual transactions, such as the sale
of land, buildings, and equipment or
advances to affiliates or employees
that would not be collectible within 12
months.
2. In order to meet the definition of an asset,

an item need not be associated with certain
future benefit. To acknowledge the
uncertainty inherent in business, the
definition of an asset stipulates that the
future benefit need be only probable.
7. If a short-term loan is expected to be

refinanced or paid back with the proceeds
of a replacement loan, the existing shortterm loan is not classified as current. This
is true as long as the intent of the company
is to refinance the loan on a long-term
basis and the companys intent is
evidenced by an actual refinancing after
the balance sheet date or by the existence
of an explicit refinancing agreement.
3. Some liabilities, such as accounts payable

and long-term debt, are denominated in
precise monetary terms. However, the
amounts of many liabilities must be
estimated based on expectations about
future events.
4. The difference between current assets and
current liabilities, referred to as working
capital, is a commonly used measure of the
liquidity of an enterprise. It helps to
determine whether the company will be
able to meet its current debt with available
assets and still continue normal operations.
8. a. A subjective acceleration clause is a

provision in a debt instrument that
specifies some general conditions
permitting a lender to unilaterally
accelerate the due date.
b. An objective acceleration clause is a
provision in a debt instrument that
specifies conditions that can cause the
debt to be immediately callable; for
example, failure to earn a certain
return on the assets or to make an
interest payment.
c. If a noncurrent debt instrument
contains a subjective acceleration
clause and the invoking of the clause is
deemed probable, the liability should
be classified as current. If invoking of
the clause is deemed reasonably
possible, but not probable, the
obligation should continue to be
reported as a noncurrent liability,
5. a. Assets are classified as current if

(1) the asset will be realized in cash
during the normal operating cycle
of the business or 1 year,
whichever is longer, or
(2) the asset will be sold or consumed
within a normal operating cycle or
1 year, whichever is longer.
b. Liabilities are classified as current if
liquidation of the liability is expected to
require
(1) the use of current assets, or
(2) the creation of other current
liabilities.
67
with a note to describe the contingency.

If a debt instrument contains an
objective acceleration clause and the
conditions that trigger the call have
occurred, the debt should be classified
as current. Exceptions are (1) the
creditor has waived the right to
demand payment for a period that
extends beyond the debtors normal
operating cycle, or (2) the debtor has
cured the deficiency after the balance
sheet date but before the statements
are issued, and the debt is not callable
for a period that extends beyond the
debtors normal operating cycle.
or owners equity account because such an

offset would not be for the purpose of
correctly valuing either account but rather
to condense financial data at the expense
of adequate disclosure.
13. Assets are usually presented in the order of
their liquidity, with the most liquid items
listed first.
14. Financial
ratios
are
mathematical
relationships between financial statement
amounts. For example, return on equity is
net income divided by owners' equity.
15. Asset turnover ratio (total sales divided by
total assets) is a measure of the number of
dollars of sales generated by each dollar of
assets. The higher the asset turnover ratio,
the more efficient the company is in using
its assets to generate sales.
9. Contingent liabilities may or may not give

rise to actual obligations; estimated
liabilities are known to exist but the amount
is not definitely known. A company could,
for example, win or lose a lawsuit, but it is
actually liable for income tax. The exact
amount of the income tax is unknown until
the final tax return is completed. The tax
liability may have to be estimated at the
time financial statements are prepared.
16. Return on equity is an indicator of the

overall performance of a company. Return
on equity measures the percentage return
on the stockholders' investment and is
computed as net income divided by total
equity.
10. With a proprietorship, owners equity is

reported with a single capital account. In a
partnership, separate capital accounts are
established for each partner. In a
corporation, a distinction is made between
contributed capital and retained earnings.
17. There are at least four types of notes used

by management to support the financial
statements and provide users with
additional relevant information. They may
be classified as follows.
(a) Summary of significant accounting
policies
(b) Additional information, both numerical
and descriptive, to support summary
totals included in the financial
statements
(c) Information about items that does not
meet the recognition criteria but that is
still useful to decision makers
(d) Supplementary schedules required by
the FASB or the SEC to fulfill the full
disclosure principle
11. The three major categories in a

corporation's equity section are:
(1) Contributed capital, including both
capital stock at par and additional paidin capital
(2) Retained earnings
(3) Other equity, such as treasury stock,
unrealized gains and losses on
available-for-sale securities, foreign
currency translation adjustments, and
unrealized gains and losses on
derivatives.
18. The FASB must maintain a balance

between conceptual purity and business
practicality. When a conceptually correct
recognition standard is criticized as
impractical, one FASB approach is to
require only the disclosure of the
information
rather than its formal
recognition. This sometimes mollifies
businesses complaints about impracticality.
For example, the FASB decided to require
only note disclosure of stock option
12. Offset balances are used to adjust the

gross amount of balance sheet items to
arrive at proper valuations. For example,
allowance for doubtful accounts is properly
offset against the gross amount of accounts
receivable to show the net amount
estimated collectible. It is generally not
proper to offset an asset account against a
liability
68
values in response to businesses

complaints about the proposed recognition
of those values as compensation expense.
bankruptcy petition by a major customer

provides additional data concerning the
collectibility of accounts receivable. The
conditions that led to the bankruptcy were
probably present at the balance sheet date
but may not have been known to the
preparer of the statements until the
bankruptcy filing took place. Under these
circumstances, Allowance for Doubtful
Accounts may need adjustment to properly
reflect the net realizable value of
receivables.
19. Separate supplementary information or

schedules may be included to disclose
segment
information;
details
about
property, plant, and equipment and shortterm borrowing; and trend data for periods
beyond those included in the basic
statements.
20. If a subsequent event provides additional
information about items included in the
financial statements, especially those
whose value has been estimated, the new
information should be used to make
adjustments to the amounts in the
statements. The event itself does not
actually change the value but merely
provides additional information about
conditions that existed at the balance sheet
date. For example, the filing of a
21. Many assets are reported at historical cost,

which is usually less than market value,
and other assets (such as homegrown
goodwill) are not included in the balance
sheet at all. Accordingly, the balance sheet
numbers are often a very poor reflection of
what a company is worth. Typically, a going
concern is worth significantly more than the
reported book value of equity.
DISCUSSION CASES
Discussion Case 31
1.
The equity shown on the balance sheet (assets liabilities) can be thought of as a rough measure of
the worth of the company. Accordingly, a companys net worth can never exceed the amount of its
assets. However, assets are reported at their historical cost, which in some cases differs greatly
from the market value of the assets. Land purchased for $10,000, 30 years ago, will still be shown
on the balance sheet at $10,000 even though its market value may be many times as great. In
addition, assets not acquired in a transaction are not recorded on the balance sheet at all. For
example, a companys reputation and customer network may have great value, but this goodwill is
not reported.
2.
Microsoft
General Electric
Wal-Mart
Merck
Intel
Pfizer
AT&T
Exxon
Coca-Cola
Cisco Systems
5.3%
98.8%
23.2%
16.0%
16.0%
10.0%
33.1%
48.8%
11.3%
5.4%
Clearly the market values each of these companies more than their balance sheets value them. The
market values such things as customers, historical performance, future expectations, and
contributions of management and employees. None of these factors shows up as an account on a
companys balance sheet yet the market values them.
69
3.
Microsoft
General Electric
Wal-Mart
Merck
Intel
Pfizer
AT&T
Exxon
Coca-Cola
Cisco Systems
93.2
38.8
48.0
37.9
32.4
54.4
28.2
29.8
47.9
123.4
In general, the following types of firms have higher PE ratios than average.
Firms with strong future growth possibilities
Firms with earnings for the year lower than average because of a nonrecurring event (e.g., a
large write-off, a natural disaster)
Firms with substantial unrecorded assets (e.g., appreciated land, unrecorded goodwill)
In general, the following types of firms have lower PE ratios than average.
Firms with earnings for the year higher than average because of a nonrecurring event (e.g., a
one-time gain)
Firms perceived as being very risky

Discussion Case 32
The claim against ATC represents a contingent liability. Contingent liabilities are accounted for according
to management's estimate of the probability that the contingent obligation will become an actual
obligation.
Probable: The liability (and a corresponding loss or expense) should be recognized.
Possible: The contingent loss is disclosed in a note to the financial statements.
Remote: No accounting action is necessary.

Because ATC has offered to settle out of court, management may view the likelihood of losing the case
as probable. If so, a liability should be recognized. Because ATC has offered $500,000 to settle the case,
the recognized liability should be at least that much. Alternatively, the settlement offer may be just a legal
strategy, and ATC's management may not think that loss of the case is probable. If so, only note
disclosure is necessary.
Discussion Case 33
This case presents the challenge of translating the facts of a realistic situation into the classification used
to recognize contingent losses. Students could be polled as to their views of the probability of loss based
on the stated facts. Since Ditka Engineering has signed a guarantee, it seems that some payment will
have to be made because of Libertys bankruptcy. Only the amount is uncertain. The most likely liability
amounts are $500,000, $300,000, $0, or some other amount. Based on the facts, a good argument can
be made that a $300,000 liability be established as representing the most likely loss in a settlement.
Discussion Case 34
Two of the events described in the case should definitely be disclosed in the notes to the financial
statements: the change in depreciation method and the revenue recognition principle used by the
corporation. Disclosure of significant accounting policies and changes to such policies/methods is
required by GAAP. The lawsuits may or may not be disclosed, depending on the facts involved in each
case. Pending litigation represents an uncertainty that should be disclosed in the notes to financial
statements if management determines it is reasonably possible that material losses will result from the
settlement of the lawsuits. The competitors construction of a new plant in the area probably would not be
disclosed in the notes; it would be impossible to assess the impact of such an event on future revenues
and profits. The move by the competitor might, however, be discussed in the letter to stockholders or in
managements discussion and analysis included in the annual report.
70
Notes are an integral part of financial statements, but they are often ignored by financial statement users
who assume the notes are too technical and detailed and not really relevant to decision making. Notes
do sometimes contain fairly technical and complex information. Such information, however, is included
because management and the independent auditors determined that the information is relevant and
material and that the benefits to users exceed the cost of providing the information. In short, notes are
considered useful to decision makers and should not be ignored. Excellos management should not have
deleted the notes when submitting the financial statements, and the bank should not have accepted the
statements without the related notes.
Discussion Case 35
BankAmerica.........................................................................
D
Kelly Services........................................................................
A
Yahoo! ................................................................................
C
McDonalds............................................................................
E
Consolidated Edison..............................................................
B
The power-generating facilities of utilities form a large portion of their assets and are shown on the
balance sheet as plant and equipment. However, McDonalds also has a great deal of plant and
equipment. In fact, the balance sheets of a utility company and of a fast-food company look similar. In
this instance, Consolidated Edison is B and McDonalds is E.
Kelly Services is A. Because service companies have low levels of fixed assets and low levels of
inventory, company A matches this profile. Also, because service companies typically dont have many
tangible long-term assets to serve as collateral, they also dont have high levels of long-term debt and
equity percentage is high.
BankAmerica is recognizable by its high level of other current liabilities (D). Far and away the largest
liability of a bank is its deposit liability. A bank borrows money from its depositors (deposit liability) and
loans it to its borrowers (loans receivables).
The Internet company Yahoo! is company C. It has no long-term debt and few long-term assets. The
bulk of Yahoos assets are invested in other current assets.
Discussion Case 36
1.
Steps to avoid violating the current ratio constraint:
Use FIFO instead of LIFO, causing current assets to increase by $50,000.
Cancel plans to declare and pay cash dividends next year.

Current ratio without changes:
($1,200,000/$900,000) = 1.33
Current ratio with FIFO and cancellation of the planned dividend:
($1,290,000/$900,000) = 1.43
Other steps might include issuing new stock and converting some of the short-term debt into longterm debt.
2.
Steps to avoid violating the debt ratio constraint:
Use FIFO instead of LIFO, causing current assets to increase by $50,000.
Lease the building instead of buying it. This will decrease long-term liabilities and long-term
assets by $100,000.
Cancel plans to declare and pay cash dividends next year.

Debt ratio without changes:
($1,700,000/$3,000,000) = .567
Debt ratio with FIFO, operating lease, and cancellation of the planned dividend:
($1,600,000/$2,990,000) = .535
Other steps might include issuing new stock.
The banks probably anticipated the cancellation of dividends, the issuance of new stock, and the
transformation of short-term debts into long-term debts.
71
One way to eliminate accounting changes as a way to bypass loan covenants is to write the
covenant in terms of a certain set of accounting principles. For example, for purposes of
determining whether the covenant is violated or not, the current ratio would be computed using the
LIFO inventory valuation method, whether the borrowing company was still using LIFO or not.
A lender might also wish to stipulate that all long-term leases are to be treated as capital leases for
purposes of the ratio computation.
Discussion Case 37
As a banker, you are concerned that the change in valuation requirements will limit your ability to borrow
and lend monies, the primary function you are in business to accomplish. Regulations limit the amount
that can be lent based on a percentage of the asset carrying value. If the total asset value is reduced
because of a decline in security values, the bank cannot lend as much money and thus cannot be as
profitable as it would be using a higher value. Of course, the opposite condition occurs when the
valuation of the securities increases.
You are also concerned about the effect the rule can have on the income statement. Revaluing securities
under FASB Statement No. 115 also requires recognizing unrealized gains and lossesif the securities
are classified as trading securities. The recognition of these unrealized gains and losses can add
volatility to the pattern of yearly earnings. To most investors, increased volatility indicates increased risk.
A banker (or any other business leader) avoids the appearance of increased risk whenever possible.
The FASB and SEC are very concerned when economic conditions cause a loss in asset value and it is
not reported in a timely manner on the financial statements. Some current values are very objective and
can be readily measured. These include marketable equity securities and, to a lesser extent, marketable
debt securities. If these securities are valued at current amounts, statement users can make more
informed decisions.
Discussion Case 38
Note to Technology Unlimited, Inc., financial statements:
Subsequent Events
On August 15, 2002, Technology Unlimited, Inc., split its common stock 2 for 1. After the split,
Technology has 200,000 shares of $0.50 par common stock outstanding.
Technology completed negotiations for the purchase of Liston Development Labs on July 18, 2002.
The purchase price was $775,000; $525,000 in cash and $250,000 in a 10%, 4-year note. The
acquisition was recorded in July 2002 and will be reflected in the financial statements for 2002 and
2003.
A $750,000 lawsuit was filed against Technology on August 15, 2002. Technology intends to defend
itself against the lawsuit; however, the probability of a favorable settlement is unknown as of
September 8, 2002, the date of the auditors report.
Events not included in subsequent events note:
Diatride Company bankruptcy. The loss from this receivable should be estimated and recorded in the
2002 fiscal year. Even though its bankruptcy didnt occur until after year-end, the underlying conditions
that caused the bankruptcy were in place at the end of the fiscal year. A sufficient allowance for doubtful
accounts must be established to cover the potential loss.
General decline in stock market technology stock values. Declines in market values are generally
available information and therefore do not require disclosure in a subsequent events note. To include the
information might attach more importance to it than is justified. Users of the financial statements should
be aware that financial statements do not contain all relevant economic information.
72
Discussion Case 39
1.
Differences:
(1) Both group and individual company balances are shown side by side. Seldom is this
information disclosed this way in the United States.
(2) The balance sheet begins with fixed assets rather than current assets. Current assets are listed
in reverse order of liquidity, with cash being shown last. In the United States, current assets are
listed in accordance with their liquidity, with cash being itemized first.
(3) Current assets less current liabilities is shown as a separate section. Some U.S. companies do
this, but they include this section as the first one on the balance sheet.
(4) Minority interests are shown as the last item on the balance sheet. They are shown before the
equity section in most U.S. balance sheets.
(5) Common stock is referred to as Called-up share capital.
(6) Retained earnings is referred to as Profit and loss account.
(7) A significant revaluation reserve is included in the British companys equity section. This arises
from use of current values for some assets. This type of reserve is not common in U.S.
statements.
(8) The British company does not identify the amount of accumulated depreciation balances on
the face of the balance sheet.
(9) Inventory is referred to as Stock in the British statement.
(10) Accounts receivable is referred to as Debtors in the British statement.
2.
Many of the differences arise from terminology differences. For instance, a few British terms would
be confusing if used in the United States; e.g., stock is seldom used to mean inventory because it
confuses reference to investments in common stock. Accountants should use terms that are
understandable to the reader. Other differences are related to a different order of disclosure in the
balance sheets of the two countries. In the United States, some companies consider the fixed
assets to be more important than current assets, and they list them first. Utilities follow this principle
in the United States, while most other industries follow the more common liquidity approach.
Minority interest totals are often a significant item on the credit side of the balance sheet. By
showing it last, readers are more likely to see the item and consider it in evaluating the impact of
items on the majority shareholders. The U.S. disclosure in the midst of the liabilities and equities is
often not seen by the reader.
The inclusion of both company and group totals is useful for readers who are concerned both with a
consolidated group of companies and the individual company balances. U.S. companies often show
only consolidated statements and do not show how the individual companies are doing. The
additional information provided by the British company might be of great use to investors and
creditors.
Discussion Case 310

1.
2.
3.
Generally, the balance sheet shows liabilities on the right side and assets on the left side. The loans
that the thrifts make ("to get into high-risk business") are the thrift's assets, and the deposits ("kept
regulation and deposit insurance") are the thrift's liabilities. The writer seems a little confused.
When deposits are insured, the financial health of the bank or savings and loan is virtually irrelevant
to the depositor. Financial health is not completely irrelevant, however, because of the time it takes
federal regulators to pay off the institution's depositors. However, if deposit insurance were
discontinued, we would see potential depositors taking a much greater interest in the balance sheets
of financial institutions.
When you make a deposit at the bank, it is your asset (on the left side of your personal balance
sheet), but it is the bank's liability (on the right side of the bank's balance sheet), because the bank
owes you the money any time you demand it.
73
EXERCISES
311.
1. (g) ()
11. (a)
2. (b)
12. (b)
3. (f) or (g)*
13. (d)
4. (a)
14. (a) ()
5. (f)
15. (f)
6. (f)
16. (c) ()
7. (f) or (h)
17. (a)
8. (i)
18. (a)
9. (f)
19. (a)
10. (e)
20. (e)
* If bonds are expected to be refinanced and the necessary criteria are met.
312.
Account
a. Treasury Stock...............................................
b. Retained Earnings.........................................
c. Vacation Pay Payable....................................
d. Foreign Currency Translation Adjustment. .
e. Allowance for Doubtful Accounts................
f. Liability for Pension Payments....................
g. Investment Securities (Trading)...................
h. Paid-In Capital in Excess of Stated Value. . .
312.
i.
Leasehold Improvements.............................
j.
k.
l.
m.
Goodwill.........................................................
ReceivablesU.S. Government Contracts.
Advances to Salespersons...........................
Premium on Bonds Payable.........................
n.
o.
p.
q.
r.
Inventory........................................................
Patents............................................................
Unclaimed Payroll Checks............................
Income Taxes Payable..................................
Subscription Revenue Received
in Advance......................................................
(Concluded)
Account
Classification
Other equity portion of the
owners' equity section
Retained earnings in the
owners equity section
Current liability
Other equity portion of the
owners' equity section
Offset against receivables in
the current asset section
Other noncurrent liability,
except for current portion
Current asset
Additional paid-in capital in
the owners equity section
Property,
plant,
and
equipment
Intangible asset
Current asset
Current asset
Added to bonds payable in
long-term debt section
Current asset
Intangible asset
Current liability
Current liability
Current liability
Classification
74
s. Interest Payable.............................................
t. Deferred Income Tax Asset...........................
u. Tools...............................................................
v. Deferred Income Tax Liability.......................
Current liability
Other noncurrent asset
Property,
plant,
and
equipment
Other noncurrent liability
313. a. Not an asset. No probable future economic benefits are associated with the
mine.
b. Not an asset. The oil field has future economic benefit, but it is not yet
controlled by DeBroglie as a result of a past transaction.
c. Not an asset. There certainly are future economic benefits associated with
the geologists, but they are not controlled by DeBroglie, because they
always have the option of quitting.
d. Not an asset. The real estate is not currently controlled by DeBroglie.
e. Not an asset. The probability of future economic benefit from the crater is
low.
314. a. Not a liability. There was a liability, but since the payment was made, no
further future sacrifice of assets will be required.
b. Liability. Pauli is obligated to deliver services in the future as a result of
events (receipt of the advertising) that have already occurred.
c. Liability. It is probable that Pauli will have to sacrifice assets in the future
(new carpets) as a result of events that have already occurred (past sales
of guaranteed carpets).
d. Not a liability. Although it is probable that Pauli will have to make payments
in the future, the events necessitating those payments have not yet
occurred.
e. Not a liability. Same reasons as for (d).
75
315.
Balance Sheet
Assets
Current assets:
Cash
Investment securities (trading)
Accounts receivable
Less allowance for doubtful
accounts
Interest receivable
Inventory
Prepaid insurance
Total current assets
Investments:
Investment in subsidiary
Pension fund
Total investments
Property, plant, and equipment:
Land
Buildings
Less accumulated depreciation
Equipment
Less accumulated depreciation
Total property, plant, and
equipment
Intangible assets:
Patents
Goodwill
Total intangible assets
Total assets
Liabilities
Current liabilities:
Notes payable
Accounts payable
Income taxes payable
Salaries payable
Estimated warranty expense
payable
Total current liabilities
Noncurrent liabilities:
Long-term debt:
Bonds payable
Premium on bonds payable
Deferred income tax liability
Total noncurrent liabilities
Total liabilities
Stockholders Equity
Contributed capital:
Common stock
Paid-in capital in excess of stated
value
Paid-in capital from sale of
treasury stock
Total contributed capital
Retained earnings
Total stockholders equity
Total liabilities and stockholders
equity
76
316.
Current assets:
Cashgeneral checking account......................
Cashheld to pay sales taxes...........................
Trade accounts receivable.................................
Inventory..............................................................
Prepaid insurance*..............................................
Used equipmentfor resale..............................
278,000
Trade accounts payable.....................................
Note payabledue July 2003.............................
Salaries payable..................................................
Sales taxes payable............................................
Working capital.........................................................
142,000
$ 20,000
18,000
125,000
75,000
15,000
25,000
$ 60,000
33,000
20,000
23,000
136,000
$
*Even though prepaid insurance is for a period beyond one year, common
practice is to classify prepaid items as current, because their payment
conserves the use of cash in the subsequent period.
317.
Jared Corporation
Balance Sheet
December 31, 2002
Assets
Current assets:
Cash.................................. $ 8,500
Investment securities.......
5,250
Accounts receivable, net.
21,350
Inventory...........................
31,000
Land held for resale.........
8,000
Other current assets........
10,200
Total current assets....... $ 84,300
Noncurrent assets:
Investments....................... $ 2,750
Property, plant, and
equipment, net..................
56,800
Restricted cash:
For preferred stock.......
19,000
For equipment................
4,000
Advance to company
president...........................
4,000
Other noncurrent assets..
13,600
Total noncurrent
131,300
assets............................. $100,150
Total assets.......................... $184,450
184,450
77
Liabilities
Accounts payable..............
Current portion of bonds
payable...............................
Loan due on demand.........
Dividends payable.............
Other...................................
Total current liabilities....
Long-term liabilities:
Bonds payable...................
Other liabilities...................
Total long-term
liabilities...........................
Total liabilities.......................
Owners' Equity
Preferred stock.....................
Common stock......................
Retained earnings.................
Less: Treasury stock............
Total owners' equity...........
$ 3,400
2,500
7,000
15,000
2,000
$ 29,900
$ 7,500
15,750
$ 23,250
$ 53,150
$ 19,000
50,000
66,800
(4,500)
$
Total liabilities and owners'

equity..................................... $
317.
(Concluded)
COMPUTATIONS:
Cash: $12,500 $4,000 (a)
Investment securities: $8,000 $2,750 (b)
Other current assets: $14,200 $4,000 (c)
Property, plant, and equipment: $64,800 $8,000 (h)
Restricted cash: $19,000 (g)
$4,000 (a)
Investments: $2,750 (b)
Advance to company president: $4,000 (c)
Current portion of bonds payable: $2,500 (d)
Loan due on demand: $7,000 (e)
Dividends payable: $15,000 (f)
Long-term liabilities: $32,750 $2,500 (d) $7,000 (e)
Preferred stock: $19,000 (g)
Retained earnings: $81,800 $15,000 (f)
Treasury stock: formerly shown incorrectly as long-term asset
318.
319.
(a)
(b)
(c)
(d)
(e)
25,153
175,315
460,263
352,186
98,670
(f)
(g)
(h)
(i)
(j)
152,186
131,754
25,939
47,066
73,005
(k)
(l)
(m)
(n)
89,601
594,345
567,657
895,312
1. (a) Current assets:

Cash.............................................................
Investment securities (trading).................
Notes receivable.........................................
Accounts receivable...................................
Less: Allowance for doubtful accounts.
Accrued interest on notes receivable.......
Inventory......................................................
Prepaid expenses.......................................
Total current assets....................................
220,800
(b) Property, plant, and equipment:
Land............................................
Buildings.....................................
Equipment..................................
Total property, plant, and
equipment...................................
78
$ 33,900
20,000
18,000
$88,400
4,300
84,100
1,800
56,900
6,100
$
Accumulated
Book
Cost
Depreciation
Value
$ 80,000
$ 80,000
170,000
$34,000
136,000
48,000
7,600
40,400
$ 298,000
$41,600
$ 256,400
319.
(Concluded)
(c) Intangible assets:
Patents...................................................
Franchises.............................................
Total intangible assets..........................
$ 15,000
10,000
$ 25,000
(d) Total assets:

Current assets.......................................
Property, plant, and equipment............
Intangible assets...................................
Total assets............................................
$220,800
256,400
25,000
$ 502,200
(e) Current liabilities:

Accounts payable..................................
Notes payabletrade creditors...........
Accrued interest on notes payable......
Accrued interest on bonds payable....
Accrued interest on mortgage payable
Total current liabilities..........................
$ 31,500
16,000
800
8,000
2,160
$ 58,460
(f) Noncurrent liabilities:

Bonds payable, 8%issue 1................
Premium on bonds payable...............
Bonds payable, 12%issue 2..............
Discount on bonds payable...............
Mortgage payable..................................
Total noncurrent liabilities....................
$ 50,000
1,500 $ 51,500
$100,000
10,500
89,500
57,500
$ 198,500
(g) Owners equity:

Capital stock, par value $1,
10,000 shares authorized,
4,000 shares issued........................... $ 4,000
Additional paid-in capital................... 112,800 $ 116,800
Retained earnings.................................
139,440 $256,240
Less: Treasury stockat cost (500
shares)................................................
11,000
Total owners equity..............................
$ 245,240
(h) Total liabilities and owners equity:
Current liabilities...................................
Noncurrent liabilities............................
Owners equity.......................................
Total liabilities and owners equity......
2. (a) Current ratio = $220,800/$58,460 = 3.78
(b) Debt ratio = ($58,460 + $198,500)/$502,200 = 0.51
79
$ 58,460
198,500
245,240
$ 502,200
320.
The computation of Borg Company's ratios is as follows:
Current ratio ($70,000/$30,000).....................................
Debt ratio ($80,000/$150,000)........................................
Asset turnover ($300,000/$150,000)..............................
Return on assets ($10,000/$150,000)............................
Return on equity [$10,000/($150,000 $80,000)].........
2.33
0.53
2.00
6.67%
14.29%
321.
Lwaxana Company has the following assets and asset mix:
Cash.....................................................
Accounts receivable...........................
Inventory..............................................
Property, plant, and equipment..........
Total assets.........................................
Asset
% of
Industry
Amount
$ 15,000
50,000
100,000
200,000
$ 365,000
Total Assets
4.1%
13.7
27.4
54.8
100.0%
Asset Mix
7.0%
15.0
18.0
60.0
100.0%
Lwaxana Company holds 27.4% of its total assets in the form of inventory,
whereas the corresponding percentage for the industry is just 18%.
Lwaxana has too much inventory compared to other companies in its
industry.
80
322.
a. (1)
b. (2)
c. (1)
d. (3)
e. (2)
f. (1)
g. (2)
323.
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
The customers financial condition was deteriorating at the end of

the year, and the bankruptcy confirmed the doubtful nature of the
account. An increased allowance adjustment would be required.
Since the event occurred after the year-end, it would not be
recorded in the financial statements. However, because damage to
the plant was extensive, the event should be disclosed in the notes
to the statements.
The event that caused the loss occurred in a previous period. The
settlement of the case confirmed the amount of the loss and
should be recorded in the financial statements. Depending on the
facts of the case, the loss will be recorded either as an
extraordinary item or as a separate item in the operating income
section.
The U.S. trade deficit is a well-publicized fact. Unless some
specific regulation or event created an unusual impact on the
company, this information would not require disclosure in the
notes.
A major change in equity during the subsequent event period
should be disclosed in the notes. This event will affect the
statements to be issued at the close of the subsequent period.
If $25,000 is considered material, the income tax expense and tax
liability should be adjusted for the new information. Because the
liability relates to the financial statements currently being issued,
an adjustment should be made to the accounts.
or (3). This information may be considered important enough to
include a note. The controller of a company holds an important
position. The decision as to whether it should be reported with the
current statements would be left to the judgment of management.
Report the amount in the income statement.

Note disclosure.
Note disclosure.
Report the amount in the balance sheet as Allowance for Doubtful
Accounts.
Contingent liability mentioned in the body of the balance sheet. Note
description of the potential liability.
Report the detail in the income statement or as a note disclosure.
Report the amount as a long-term asset.
Report the amount as a subtraction in the equity section of the balance
sheet.
No financial statement disclosure.
Note disclosure.
No financial statement disclosure.
81
324.
Note 1. Summary of Significant Accounting Policies

Receivables. An allowance account is provided for the estimated
uncollectible accounts.
Inventories. Inventory is valued using the LIFO method. If the Company had
used the FIFO inventory method, the ending inventory would be reduced by
$50,000 and net income for the year would be reduced by $35,000 after
taxes. Consignment inventory is carried as an asset by Delta until it is sold
by the consignee.
Equipment. The Company depreciates its equipment using the straight-line
method. The current value of the equipment is $525,000.
Note 2. Receivables
The receivables amount of $126,000 includes the following balances:
Customers accounts..............................................
$ 70,000
Customers notes....................................................
30,000
Advances to sales representatives........................
10,000
Advance to president of company.........................
25,000
Total..........................................................................
$135,000
Less allowance........................................................
9,000
Net receivables........................................................
$ 126,000
Note 3. Anticipated Merger
The Board of Directors is discussing a merger with another chemical
company. No final decision has been made as of the date these statements
are being issued; however, it is anticipated that additional shares of stock
will be issued as part of any merger.
Note 4. Notes Payable
The Company borrowed $350,000 on a 10-year note at 14% interest. The
note is due on July 1, 2012. Equipment has been pledged as collateral for
the loan. The terms of the note prohibit any additional long-term borrowing
without the express permission of the note holders. Because of a need for
additional financing next year, management is planning to make such a
request.
82
PROBLEMS
325.
1. Working capital = $160,000 $88,000 = $72,000
Current assets:
Accounts receivable......................
Advances to salespersons............
Allowance for doubtful accounts.
Cash...............................................
Certificates of deposit...................
Inventory........................................
Investment in Siebert Co. stock. . .
Prepaid insurance.........................
Total current assets.......................
Total assets:
Current assets...............................
220,000
Equipment......................................
Tools...............................................
Accumulated depreciation............
100,000
Investment in Rowe Oil Co. stock
Total assets..................................$
$ 40,000
10,000
(10,000)
22,000
16,000
55,000
21,000
6,000
$160,000
Accounts payable.............. $ 66,000
Rent revenue received in
advance..............................
12,000
Taxes payable....................
10,000
Total current liabilities....... $ 88,000
$160,000
Total liabilities:
Current liabilities................ $
Bonds payable...................
Premium on bonds payable
Deferred income tax liability
Total liabilities.................... $
215,500
52,000
(44,000)
Owners' equity:
Common stock (par).......... $
76,500
460,000
88,000
80,000
6,000
46,000
Paid-in capital in excess of

par.......................................... 42,500
Retained earnings..............
97,500
Total owners' equity........... $
240,000
Owners' equity per share of stock:
$240,000 75,000 = $3.20
2.
Current ratio = $160,000/$88,000 = 1.82

Debt ratio = $220,000/$460,000 = 0.48
Return on equity = $20,000/$240,000 = 8.33%
83
326.
1.
Zaldo Investment Corporation

Balance Sheet
January 31, 2002
Assets
Current assets:
Cash on hand...............................................................................
Cash in banks..............................................................................
Investment securities (trading)...................................................
Notes receivable........................................................ $ 22,470
Accounts receivable.................................................
153,100
$ 175,570
Less: Allowance for doubtful notes and accounts
16,500
Interest receivable.......................................................................
Claim for income tax refund........................................................
Inventory.......................................................................................
Prepaid expenses:
Prepaid insurance.................................................. $ 3,500
Miscellaneous supplies inventory.........................
6,200
Long-term investments:
Cash fund for stock redemption.................................................
Investments in undeveloped properties.....................................
Land..............................................................................................
Buildings.................................................................... $ 410,000
Less: Accumulated depreciation..........................
151,700
Machinery and equipment........................................ $ 145,000
Less: Accumulated depreciation..........................
127,000
Total assets.....................................................................................
1,251,190
Liabilities
Notes payable...............................................................................
Accounts payable........................................................................
Salaries and wages payable........................................................
Income taxes payable..................................................................
Interest payable............................................................................
Employees income taxes payable.............................................
Notes payable (due 2007)............................................................
Total liabilities.................................................................................
Owners Equity
Preferred stock, $5 par, 64,000 shares.................... $ 320,000
Common stock, $1 par, 50,000 shares....................
50,000
Additional paid-in capitalcommon stock.............
662,000
Retained earnings (deficit).............................................................
Total owners equity........................................................................
Total liabilities and owners equity.................................................
1,251,190
2.
Current ratio = $594,390/$192,930 = 3.08

Debt ratio = $230,930/$1,251,190 = .185
84
97,300
9,120
102,500
159,070
900
4,500
211,300
9,700
$ 594,390
17,500
175,000
192,500
188,000
258,300
18,000
464,300
$
58,260
85,900
9,400
29,200
5,390
4,780
$ 192,930
38,000
$ 230,930
$1,032,000
(11,740)
1,020,260
$
Asset turnover = $5,000,000/$1,251,190 = 4.00
85
87
Chapter 3
327.
Brockbank Research Corp.
Balance Sheet
December 31, 2002
Assets
Current assets:
Cash.................................................................
Accounts receivabletrade........ $ 57,731
Less: Allowance for doubtful
accounts....................................
1,731
Insurance claims receivable
(Note 2)............................................................
Inventories (Note 1a)......................................
Prepaid Insurance...........................................
Investments:
Cash fund for bond retirement......................
Investment in unconsolidated
subsidiary........................................................
Land.................................................................
Leasehold improvements
(Note 3).......................................... $ 65,800
Furniture, fixtures, and store
equipment.....................................
769,000
Automotive equipment................
132,800
$ 967,600
Less: Accumulated
depreciation (Note 1b)..............
579,472
Intangible assets (Note 1c):
Franchises.......................................................
Patent licenses................................................
Other noncurrent assets:
Insurance claims receivable (Note 2)............
Total assets (Note 4)..........................................
$ 25,600
56,000
Liabilities
Notes payabletrade............................... $ 63,540
Notes payablebanks.............................
12,000
Accounts payable.....................................
32,160
Dividends payable....................................
37,500
Profit sharing, payroll, and
vacation payable.......................................
40,000 $ 185,200
80,000
201,620
5,500 $ 368,720 Long-term debt:
7%12% mortgage notes......................
$ 3,600
Deferred income tax liability.......................
Total liabilities..............................................
80,000
83,600 Contingencies (Note 5)
$
200,000
45,000
$ 430,200
6,000
388,128
$ 12,150
57,402
See accompanying notes to financial statements.
Owners' Equity
Common stock, $1 par,
100,000 shares authorized
35,000 shares issued
394,128
and outstanding..................... $ 35,000
Additional paid-in capital......
265,000 $ 300,000
Retained earnings........................................
225,800
69,552 Total owners' equity....................................
40,000
$ 956,000 Total liabilities and owners' equity............
525,800
$ 956,000
86
327.
Chapter 3
(Concluded)
BROCKBANK RESEARCH CORPORATION
NOTES TO FINANCIAL STATEMENTSYEAR ENDED DECEMBER 31, 2002
1. Summary of significant accounting policies

(a) Inventories are stated at the lower of cost or market. Cost is calculated by
the specific identification method.
(b) Depreciation is computed using the straight-line method over the estimated
useful lives of the assets.
(c) The costs of an exclusive franchise to import a foreign companys ball
bearings and a related patent license are being amortized on the straight-line
method over their remaining lives of 10 years and 15 years, respectively.
2. Insurance claims, based on the opinion of an independent insurance adjustor, are
for property damages at the central warehouse. These claims have been
classified as current and noncurrent based on the companys estimate of
probable settlement dates.
3. The company leases all of its buildings. Rental lease commitments are $50,000
per year for the next 10 years. All leases are operating leases.
4. The company is currently in litigation over a $13,000 overpayment of income
taxes. In the opinion of counsel, the claim is valid, but no legal right to the
overpayment exists as of the date of the report.
5. The company is contingently liable for $12,000 of guaranteed notes.
328.
Sierra Corp.
Liabilities
December 31, 2002
Notes payabletrade..........................................................
Notes payablebank (Note 1)............................................
Accounts payable................................................................
Wages and salaries payable...............................................
Interest payable....................................................................
Mortgage note payable (Note 2)..........................................
Bonds payable (Note 3).......................................................
Total current liabilities.........................................................
393,800
Mortgage note payable (Note 2)..........................................
Notes payablebank (Note 4)............................................
Total noncurrent liabilities...................................................
Total liabilities............................................................................
589,800
$ 19,000
30,000
65,000
1,500
14,300
64,000
200,000
$
$146,000
50,000
196,000
$
328.
(Concluded)
Note 1.
8% note to First Interstate Bank issued March 1, 2000. Payable on demand.
Note 2.
Sierra has two mortgage notes outstanding. (1) $60,000, 10%, 10-year note
due October 1, 2009. Terms of this note give the holder the right to demand
immediate payment if the company fails to make a monthly interest
payment within 10 days of the date the payment is due. Because Sierra is
three months in arrears on these payments, this $60,000 note is classified
as a current liability. (2) 12%, 20-year note, current balance $150,000.
Payments of principal and interest due annually until 2016. $4,000 of the
April 1, 2003 payment applies to principal and is classified as a current
liability. The remaining principal balance of $146,000 is classified as a
noncurrent liability.
Note 3.
The 10-year, 8% bonds mature on June 30, 2003.
Note 4.
The 1-year, $50,000, 11% note to First Interstate Bank matures on January
2, 2003. On December 30, 2002, a written agreement was entered into with
First Interstate Bank to replace this note with a new, 2-year, $50,000, 10%
note to be issued January 2, 2003. Because of this agreement, the note is
properly classified as noncurrent.
329.
Rowley Company
Balance Sheet
June 30, 2002
Assets
Current assets:
Cash...........................................................................................
Investment securitiestrading...............................................
Inventories................................................................................
Prepaid expenses.....................................................................
Investments:
Oak Mountain Developers.......................................................
Property, plant, and equipment...................................................
Less: Accumulated depreciation............................................
Deposit made on future delivery of special inventories.......
Total assets...................................................................................
Liabilities
Notes payable...........................................................................
Accounts payable.....................................................................
Taxes payable...........................................................................
Long-term debt:
Notes payable...........................................................................
Bonds payable....................................................... $300,000
Less: Discount on bonds payable....................
10,000
Other noncurrent liabilities:
Deferred income tax liability...................................................
Liability under pension plan....................................................
Total liabilities...............................................................................
$ 25,500
62,000
709,600
23,000
250,000
$280,000
133,000
147,000
10,000
$ 1,227,100
$ 60,000
227,000
44,500
$ 331,500
$ 75,000
290,000
$ 68,000
60,000
Owners Equity
Common stock, $1 par, 10,000 shares
outstanding............................................................. $ 10,000
Additional paid-in capital....................................... 240,500 $250,500
Retained earnings:
Restricted for building expansion........................ $105,000
Unrestricted............................................................
47,100* 152,100
Total owners equity.....................................................................
Total liabilities and owners equity..............................................
*$117,100 $70,000 unrecognized goodwill = $47,100.
$ 820,100
365,000
128,000
$ 824,500
402,600
$ 1,227,100
330.
St. Charles Ranch
Balance Sheet
December 31, 2002
Assets
Current assets:
Cash on hand............................................................................
Cash in bank.............................................................................
Accounts receivable.............................................. $ 40,500
Less: Allowance for doubtful accounts...........
2,430
Claim for income tax refund....................................................
Feed inventory (at cost) ($37,000 25%)...............................
Grain inventory (at market).....................................................
Land...........................................................................................
Buildings and equipment...................................... $176,400
Less: Accumulated depreciation......................
70,560
Total assets...................................................................................
Liabilities
Mortgage payablecurrent portion.......................................
Income taxes payable..............................................................
Bonus payable..........................................................................
Dividends payable....................................................................
Mortgage payablenoncurrent portion.................................
Owners Equity
Common stock, $1 par value,
14,000 shares issued............................................. $ 14,000
Additional paid-in capital....................................... 276,000
Retained earnings*.......................................................................
$ 10,640
34,505
38,070
2,800
9,250
42,500
$137,765
$490,000
105,840
$ 37,000
25,000
18,500
9,000
30,000
595,840
$ 733,605
$ 119,500
225,000
$344,500
$290,000
99,105
389,105
$ 733,605
*Amount needed to balance the statement.

Note: The question of when to recognize a liability for property taxeswhen the
taxes are assessed or as the tax year elapsesis actually quite complicated. This
solution assumes that the liability is recognized as the tax year (2003) elapses. Thus,
no liability is recorded at the end of 2002.
331.
A work sheet is not required, but it facilitates the preparation of a corrected

balance sheet.
Dependable Computers, Inc.
Work Sheet for Corrected Balance Sheet
June 30, 2002
Account Title
Balance Sheet
Debit
Credit
Corrections
Debit
Credit
Current Assets..................... 244,050

.........
.........
Other Assets......................... 628,550
.........
.........
Current Liabilities................
......... 138,600 (c) 138,600
Other Liabilities....................
......... 90,000 (d) 90,000
Owners' Equity.....................
......... 644,000 (e) 644,000
872,600 872,600
Cash......................................
.........
......... (a) 42,250
Investment Securities..........
.........
......... (a) 60,000
Accounts Receivable...........
.........
......... (a) 56,800
Inventories............................
.........
......... (a) 83,000
Advertising Supplies...........
.........
......... (a)
2,000
Property, Plant, and
Equipment............................
.........
......... (b) 656,000
Accumulated Depreciation
Buildings and Equipment.. .
.........
.........
.........
Retained Earnings...............
.........
......... (b) 77,400
.........
......... (f) 127,000
Deposit with Supplier..........
.........
......... (b)
2,150
Payroll Payable.....................
.........
.........
.........
Taxes Payable.......................
.........
.........
.........
Rent Payable........................
.........
.........
.........
Accounts Payable................
.........
.........
.........
Notes Payable......................
.........
.........
.........
Note Receivable...................
.........
......... (c)
1,500
Mortgage Payable (current
portion).................................
.........
.........
.........
Mortgage Payable
(noncurrent portion)............
.........
.........
.........
Preferred Stock (19,000
shares at $20 par)................
.........
.........
.........
Common Stock (160,000
shares at $1 stated value)...
.........
.........
.........
Paid-In Capital in Excess
of Stated Value.....................
.........
.........
Corrected
Balance Sheet
Debit
Credit
(a) 244,050
(b) 628,550
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
42,250
60,000
56,800
83,000
2,000
.........
.........
.........
.........
.........
.........
656,000
.........
(b) 107,000
.........
.........
.........
(c)
7,150
(c)
4,150
(c)
11,400
(c) 101,400
(c)
16,000
.........
.........
.........
204,400
2,150
.........
.........
.........
.........
.........
1,500
107,000
.........
.........
.........
7,150
4,150
11,400
101,400
16,000
.........
(d)
18,000
.........
18,000
(d)
72,000
.........
72,000
(e) 380,000
.........
380,000
(e) 160,000
.........
160,000
(e) 104,000
......... (f) 127,000
.........
231,000
1,980,700
1,980,700 1,108,100 1,108,100
Corrections:
(a) To establish current asset balances
(b) To establish other asset balances and eliminate goodwill
(c) To establish current liability balances
(d) To establish mortgage payable balances
(e) and (f) To establish owners equity balances
331.
(Concluded)
Dependable Computers, Inc.
Balance Sheet
June 30, 2002
Assets
Current assets:
Cash...........................................................................................
Investment securitiestrading...............................................
Note receivable.........................................................................
Accounts receivable................................................................
Inventories................................................................................
Deposit with supplier...............................................................
Advertising supplies................................................................
Total assets...................................................................................
$ 42,250
60,000
1,500
56,800
83,000
2,150
2,000
$656,000
107,000
$247,700
549,000
$ 796,700
Liabilities
Notes payable...........................................................................
Mortgage payable (current portion)........................................
Accrued expenses:
Payroll payable.................................................. $ 7,150
Taxes payable....................................................
4,150
Rent payable......................................................
11,400
Mortgage payable (noncurrent portion).....................................
Owners Equity
Preferred stock issued, $20 par,
19,000 shares outstanding.................................... $380,000
Common stock, 160,000 shares
outstanding at $1 stated value.............................. 160,000
Paid-in capital in excess of stated value............. 231,000
Less: Accumulated deficit...........................................................
$ 16,000
101,400
18,000
22,700
$158,100
72,000
$230,100
$771,000
(204,400)
566,600
$ 796,700
332.

balance sheet.
Appalachian Freight Company
December 31, 2002
Account Title
Balance Sheet
Debit
Credit
Corrected
Balance Sheet
Debit
Credit
Corrections
Debit
Credit
Cash...................................... 45,050
.........
.........
.........
Accounts Receivable........... 112,500
.........
.........
.........
Inventories............................ 204,000
.........
......... (b) 45,000
Prepaid Insurance................
8,800
.........
.........
.........
Property, Plant,
and Equipment..................... 376,800
......... (c) 180,000 (c)
85,000
Miscellaneous Liabilities.....
.........
3,600 (d)
3,600
.........
Loan Payable........................
......... 76,200
.........
.........
Accounts Payable................
......... 75,250
......... (b) 16,250
Capital Stock........................
......... 134,000 (h) 134,000
.........
Paid-In Capital......................
......... 458,100 (i) 458,100
.........
747,150 747,150
.........
......... (a)
4,800 (i) 308,500
.........
......... (b) 61,250
.........
.........
......... (f) 18,250
.........
.........
......... (g) 44,550
.........
Allowance for Doubtful
Accounts...............................
.........
.........
......... (a)
4,800
Buildings and Equipment.. .
.........
......... (c) 85,000 (c) 180,000
Salaries Payable...................
.........
.........
......... (d)
9,500
Advances to Officers...........
.........
......... (d)
5,900
.........
Deferred Income Tax Liability .........
.........
......... (g) 44,550
Taxes Payable.......................
.........
.........
......... (f)
18,250
6% Preferred Stock, $20 Par
.........
.........
......... (h) 125,000
Common Stock, $1 Stated
Value......................................
.........
.........
......... (h)
9,000
of Par and Stated Values on
Preferred and Common
Stock.....................................
.........
.........
......... (i) 149,600
995,450
995,450
45,050
112,500
159,000
8,800
.........
.........
.........
.........
471,800
.........
.........
.........
.........
.........
.........
.........
76,200
91,500
.........
.........
.........
.........
.........
.........
.........
179,650
.........
.........
.........
4,800
.........
.........
5,900
.........
.........
.........
95,000
9,500
.........
44,550
18,250
125,000
.........
9,000
.........
803,050
149,600
803,050
332.
(Concluded)
Appalachian Freight Company
Balance Sheet
December 31, 2002
Assets
Current assets:
Cash...........................................................................................
Accounts receivable.............................................. $ 112,500
Less: Allowance for doubtful accounts...........
4,800
Inventories................................................................................
Prepaid insurance....................................................................
Advances to officers................................................................
Total assets...................................................................................
Liabilities
Loan payable to bank, portion due this year.........................
Salaries payable.......................................................................
Taxes payable...........................................................................
Loan payable to bank, portion due years following..................
Deferred income tax liability........................................................
Owners Equity
6% Preferred stock, $20 par, 6,250 shares.......... $125,000
Common stock, $1 stated value, 9,000 shares....
9,000
Paid-in capital in excess of par and stated
values on preferred and common stock.............. 149,600
Retained earnings........................................................................
$ 45,050
107,700
159,000
8,800
$320,550
$471,800
95,000
376,800
5,900
$ 703,250
$ 25,000
91,500
9,500
18,250
$144,250
51,200
44,550
$240,000
$283,600
179,650
463,250
$ 703,250
333.

balance sheet.
Delicious Bakery
December 31, 2002
Account Title
Balance Sheet
Debit
Credit
Current Assets.....................
Current Liabilities................
Other Assets.........................
Other Liabilities....................
Investment in Business.......
53,415
.........
......... 29,000 (c)
75,120
.........
.........
3,600 (d)
......... 95,935 (e)
128,535 128,535
Cash......................................
.........
......... (a)
Investment Securities
Trading (at market value)....
.........
......... (a)
Trade Accounts Receivable
.........
......... (a)
Inventory...............................
.........
......... (a)
Supplies Inventory...............
.........
......... (a)
Delivery Truck......................
.........
......... (a)
Fixtures.................................
.........
......... (a)
Fixtures.................................
.........
.........
Cash Surrender Value of
Insurance on Officers Lives
.........
......... (a)
.........
......... (a)
.........
......... (b)
.........
......... (d)
.........
.........
Land......................................
.........
......... (b)
Buildings...............................
.........
......... (b)
Buildings
[2 ($62,000 20)]...............
.........
.........
11% Mortgage Payable
(noncurrent portion)............
.........
.........
11% Mortgage Payable
(current portion)...................
.........
.........
Interest Payable...................
.........
.........
Trade Accounts Payable......
.........
.........
Miscellaneous Liabilities.....
.........
.........
Capital Stock, $5 Stated
Value, 5,000 Shares..............
.........
.........
of Stated Value.....................
.........
.........
Corrections: (a) To restate current assets
(b) To restate other assets
(c) To restate current liabilities
333.
Corrected
Balance Sheet
Debit
Credit
Corrections
Debit
Credit
......... (a)
29,000
......... (b)
3,600
95,935
.........
10,600
53,415
.........
75,120
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
10,600
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
2,575
12,500
8,040
425
2,100
12,500
.........
.........
.........
.........
.........
.........
......... (a)
2,100
.........
2,100
4,100
2,675
7,750
350
......... (e)
30,000
62,000
.........
.........
.........
.........
40,935
.........
.........
4,100
.........
.........
.........
.........
30,000
62,000
.........
.........
.........
30,160
.........
.........
.........
......... (b)
7,750
.........
7,750
......... (b)
12,000
.........
12,000
.........
.........
.........
.........
(b)
(b)
(c)
(d)
4,000
880
29,000
3,950
.........
.........
.........
.........
4,000
880
29,000
3,950
......... (e)
25,000
.........
25,000
2,575
12,500
8,040
425
2,100
12,500
......... (e)
30,000
.........
30,000
284,150
284,150
144,840
144,840
(d) To restate other liabilities
(e) To restate owners equity accounts
(Concluded)
Delicious Bakery
Balance Sheet
December 31, 2002

Assets
Current assets:
Cash...........................................................................................
Investment securitiestrading (reported at
market; cost $4,250)................................................................
Trade accounts receivable (fully collectible).........................
Inventory...................................................................................
Supplies inventory...................................................................
Investments:
Cash surrender value of life insurance..................................
Land...........................................................................................
Buildings................................................................. $ 62,000
7,750
$ 10,600
2,575
12,500
8,040
425
$ 34,140
4,100
$ 30,000
54,250
Fixtures................................................................... $ 12,500
2,100
Delivery truck...........................................................................
Total assets...................................................................................
10,400
2,100
Liabilities
Mortgage payable, portion due this year...............................
Trade accounts payable...........................................................
Interest payable........................................................................
Miscellaneous liabilities..........................................................
11% Mortgage payable (noncurrent portion).............................
$ 4,000
29,000
880
3,950
Owners Equity
Capital stock, $5 stated value, 5,000 shares....... $ 25,000
Paid-in capital in excess of stated value.............
30,000
Retained earnings........................................................................
$ 55,000
30,160
96,750
$ 134,990
$ 37,830
12,000
$ 49,830
85,160
$ 134,990
334.
A work sheet is not required, but it facilitates the preparation of the

December 31, 2002, balance sheet.
Account Title
Cash......................................
Accounts Receivable...........
Inventory...............................
Equipment............................
Accounts Payable
Suppliers...............................
Capital Stock, $1 par............
Additional Paid-In Capital.. .
Cornish Corporation
Work Sheet for Balance Sheet
December 31, 2002
Balance Sheet
Transactions
January 1, 2002
2002
Debit
Credit
Debit
Credit
10,000
......... (e) 365,000 (b) 175,000
.........
......... (g) 100,000 (a)
68,500
.........
.........
(c)
15,000
.........
.........
(f) 140,000
75,000
......... (d) 380,000 (e) 365,000
75,000
......... (a) 270,000 (d) 290,000
115,000
......... (f) 190,000 (f)
50,000
......... 45,000 (b) 175,000

......... 10,000
.........
......... 220,000
.........
275,000 275,000
.........
.........
......... (c) 15,000
.........
......... (h) 42,000
.........
......... (i) 27,000
.........
......... (j)
2,500
Wages Payable.....................
.........
.........
.........
Dividends Payable...............
.........
.........
.........
Equipment............................
.........
.........
.........
Allowance for Doubtful
Accounts...............................
.........
.........
.........
1,566,500
Transactions:
(a) To record costs of production
(b) To record payment to suppliers
(c) To record payment of other expenses
(d) To record gross profit for the year
(e) To record collections on receivables
(f) To record acquisition and retirement
of equipment
Balance Sheet
December 31, 2002
Debit
Credit
.........
.........
76,500
.........
.........
.........
.........
.........
90,000
.........
55,000
.........
255,000
.........
(g)
(h)
(i)
(j)
(a) 200,000
(g)
4,000
(g) 96,000
.........
(d) 90,000
.........
.........
.........
(a)
1,500
(h) 42,000
.........
.........
.........
.........
.........
.........
.........
.........
.........
.........
70,000
14,000
316,000
.........
.........
3,500
.........
.........
1,500
42,000
(i)
27,000
.........
27,000
(j)
2,500
1,566,500
.........
476,500
2,500
476,500
To record issuance of additional stock

To record dividend declaration
To record depreciation expense
To record the allowance for doubtful
accounts
334.
(Concluded)
Cornish Corporation
Balance Sheet
December 31, 2002
Assets
Current assets:
Cash.............................................. $ 76,500
Accounts receivable (net of
allowance for doubtful
accounts)...................................... 87,500
113,500
Inventory....................................... 55,000
Total current assets..................... $219,000
Equipment....................................... $255,000
Less: Accumulated
depreciation.................................. 27,000
$228,000
Liabilities
Accounts payablesuppliers.... $ 70,000
Wages payable............................
1,500
Dividends payable...................... 42,000
Total current liabilities................ $
Owners' Equity
Capital stock, $1 par,
14,000 shares issued
and outstanding.......................... $ 14,000
Additional paid-in capital........... 316,000
Retained earnings.........................
3,500
Total owners' equity...................... $
333,500
Total assets..................................... $447,000
447,000
Total liabilities and owners'

equity.............................................. $
COMPETENCY ENHANCEMENT OPPORTUNITIES

Deciphering 31 (The Walt Disney Company)
1.
2.
3.
4.
5.
6.
Disney reports a current ratio of 1.25 ($9,375/$7,525). This ratio has increased slightly from 1997
when it was 1.22.
In Note 1, Disney states that it uses the moving average cost basis for computing the cost of
inventories and that the inventories are stated at the lower of cost or market.
Note 1 discloses that theme parks, resorts, and other property are carried at cost. Depreciation is
computed on the straight-line method based upon estimated useful lives ranging from 3 to 50 years.
In Note 10 to the financial statements, Disney reports that of the $15,769 related to intangible
assets, $14,248 resulted from Disneys acquisition of ABC.
In Note 13, Disney states that it is committed to the purchase of a cruise ship and to the purchase of
various broadcast rights over the next 6 years. The company is also obligated to pay $2 billion in the
future relating to noncancellable operating leases. In addition, Disney is the object of various
lawsuits, but management does not expect any of them to materially affect the company.
In Note 11, Disney reveals that of total 1998 operating income of $4,015 million, 86.4%, or $3,468
million, was generated in the United States.
Deciphering 32 (Boston Celtics)

1.
2.
3.
4.
The bulk of the increase in assets came in the form of marketable securities and other short-term
investments. These two categories accounted for $90 million of the $108 million increase in total
assets. Most of the financing for these new assets came from an increase in current notes payable
of $75 million.
The original value recorded for the NBA franchise can be computed by adding the reported book
value and the accumulated amortization:
Book value of NBA franchise.................................................
$4,318,701
Accumulated amortization.....................................................
1,850,880
Original recorded value of franchise.....................................
$6,169,581
The annual amortization charge is computed by observing the change in accumulated amortization
from 1994 to 1995:
$1,850,880 $1,696,640 = $154,240 annual amortization
The amortization period can be computed by comparing the original recorded value of the franchise
and the annual amortization charge:
$6,169,581/$154,240 = 40 years
The accumulated amortization of $1,850,880 on June 30, 1995, represents 12 years of amortization
($1,850,880/$154,240 = 12). Therefore, the NBA franchise asset was originally recognized on June
30, 1983.
Partners' capital can become negative in two ways: The partnership can experience losses large
enough to wipe out the partners' original investments, or the partnership can pay out cash
distributions in excess of the partners' original investments. The Celtics have paid out excess
distributions to partners. One reason this is possible is that the NBA franchise asset analyzed in
question 2 is reported in the balance sheet at far less than its current market value, which probably
exceeds $200 million.
The sum of current and noncurrent deferred compensation was $21.5 million on June 30, 1994. This
total decreased to $19.8 million in 1995. It appears that the Celtics signed no new deferred
compensation contracts in 1995. The change in the total balance is probably a combination of a
decrease from the payment of the 1994 current portion of deferred compensation ($3.3 million) and
an increase from accrued interest on the unpaid balance.
Deciphering 33 (Diageo)
Diageo
Consolidated Balance Sheet
30 June 1998
(In millions of )
Assets
Current assets:
Cash................................................................................................................................
Investments.....................................................................................................................
Accounts receivable (2,037 + 999 + 18).........................................................................
Inventory.........................................................................................................................
Total current assets.........................................................................................................
Investments.........................................................................................................................
Property, plant, and equipment, net (3,006 190)...............................................................
Intangible assets..................................................................................................................
Total assets..........................................................................................................................
Liabilities
Accounts payable and accrued liabilities........................................................................
Short-term debt...............................................................................................................
Total current liabilities......................................................................................................
Long-term debt.....................................................................................................................
Other noncurrent liabilities...................................................................................................
Provisions for liabilities and charges....................................................................................
Minority interest (169 + 366)................................................................................................
Total liabilities.......................................................................................................................
Stockholders' Equity
Preferred stock................................................................................................................
Common stock................................................................................................................
Additional paid-in capital.................................................................................................
Retained earnings................................................................................................................
Total stockholders' equity.....................................................................................................
Total liabilities and stockholders' equity...............................................................................
2,503
484
3,054
2,236
8,277
1,244
2,816
4,727
17,064
3,524
4,724
8,248
2,894
243
705
535
12,625
105
1,034
1,121
2,179
4,439
17,064
Deciphering 34 (Safeway, Albertsons, and A&P)

1.
Current ratio.......................................................................
Debt ratio............................................................................
Asset turnover....................................................................
Return on equity.................................................................
Safeway
0.80
0.73
2.15
26.2%
Albertsons
1.33
0.55
2.57
20.2%
A&P
1.27
0.66
3.43
6.2%
2.
3.
Evaluation of how efficiently specific assets are used can be done by computing asset turnover
ratios for specific assets.
Inventory turnover:
(Cost of Goods Sold/Inventory).....................................
9.35
7.73
8.31
Fixed asset turnover:
(Sales/PPE)...................................................................
4.72
4.03
6.43
It appears that Safeway is the most efficient at using inventoryeach dollar of inventory measured
at cost generates $9.35 dollars of sales volume during a year. A&P appears to be the most efficient
at using property, plant, and equipmenteach dollar of PPE generates $6.43 of sales during the
year.
Ratio comparisons can be invalid when the companies being compared use different accounting
methods. For example, comparisons of inventory efficiency may be misleading if one company
uses LIFO and another uses FIFO. Comparative property, plant, and equipment efficiency is
impacted by what fraction of a company's fixed assets are leased under operating leases and
therefore do not appear on the balance sheet.
Deciphering 35 (AT&T Corporation)

1.
2.
3.
The proposed AT&T restructuring is not a subsequent event because nothing happened in the period
between December 31, 1995, and the release of the financial statements on February 28, 1996.
If the proposed restructuring announcement had been made on January 20, 1996, the
announcement would have been a subsequent event, since it would have occurred in the period
between the balance sheet date and the final preparation of the financial statements. It would not
have required any revision to the 1995 financial statements, but it would be of material interest to
investors and creditors.
The financial statements and accompanying notes should include all information necessary for
external users to make informed decisions about the company. Some events, such as the
announcement of AT&T's proposed restructuring, do not require any formal recognition in the
accounting records, but they are so significant to the future of the company that the concept of full
disclosure dictates their inclusion in the financial statement notes.
Writing Assignment: Unrecorded assets should stay unrecorded.

TO: The militant economics student group
No, it isn't the balance sheet that is stupid and outdated; it is your knowledge of the business information
environment. The financial statements do not pretend to report everything that is useful in making
decisions about a company. Yes, the value of the reputation of Coca-Cola is a useful thing to know. But
so are the health of Coca-Cola's CEO and the announced marketing strategies of Coke's competitors.
The financial statements include only a subset, albeit an important one, of the value-relevant information
available about a company.
In order to be recognized in the financial statements, information must be both relevant and reliable. The
art of accounting involves correctly trading off these two characteristics of information. Some market
value information is considered to be sufficiently reliable to include in the financial statementsthe
market value of investment securities is a good example. Accountants have decided that other classes of
market value information do not meet the reliability test. For example, market information may suggest
that the value of Coca-Cola's reputation is $30 billion. However, the value of Coke's stock can change by
5% to 10% in one dayare these changes a result of changes in Coke's reputation, or do they stem from
macroeconomic factors?
Financial statement information is both relevant and reliable. As such, it comprises an important part of
the information investors and creditors need to make informed decisions about companies.
Research Project: Why are the notes so long?

The 1998 financial statements of Johnson & Johnson will be used to illustrate the length and type of
information contained in the typical annual report.
1. There are 9 pages of notes to Johnson & Johnson's 1998 financial statements.
2.
3.
4.
5.
The top five notes in terms of space used are:

#13 Retirement and Pension Plans
#1 Summary of Significant Accounting Policies
#10 Common Stock, Stock Option Plans, and Stock Compensation Agreements
#15 Restructuring and In-Process Research and Development Charges
#18 Financial Instruments
Of course, this is a matter of opinion, but the segment information frequently seems to be the most
useful. This information allows a person to evaluate the performance of operations by geographic
segment and by line of business. As far as the least useful notejust as parents love all of their
children, accounting professors love all of the notes.
Johnson & Johnson's Note 21 is titled "Quarterly Information (unaudited)." Quarterly information is
usually the only note that is not included in the audit opinion.
While the answer to this question will depend on the annual reports reviewed, in the case of
Johnson & Johnson the most interesting note relates to pending legal proceedings. The company is
a defendant in numerous cases ranking from anti-trust litigation to patent infringement.
The Debate: Kill the notes!

Statements Only
In this age of instant communication, investors need fast information.
Preparation of the detailed notes slows down the release of the financial statements.
Almost all investor and creditor decisions are based on the financial statement numbers. Hardly
anyone looks at the notes.
In fact, many decisions are based on the net income number alone.
We demand speed.
Save the Notes
The Stock Market Crash of 1929 shows what can happen when investors buy and sell stocks based
on faulty information or no information at all.
The U.S. financial disclosure system is the best in the world because of the extensive information
required to be provided in the notes.
The U.S. financial disclosure system is instrumental in making U.S. securities markets the most
efficient and fair in the world.
Many of the detailed note disclosures are the direct result of users crying for more information. Two
examples are the business segment information and the details provided about financial instruments.
The financial statements are incomplete, and potentially misleading, without the notes.
Ethical Dilemma: Dodging a loan covenant violation.
Depending on the attitude of your senior colleagues on the accounting staff, it may be time for you to
plan your departure from the firm. If you find yourself working for unethical superiors, you inevitably will
be placed in situation after situation where you are faced with compromising your principles. If you think
you will have to leave the firm eventually, you are better off to make it an orderly departure.
If your senior colleagues are ethical people who are also troubled by the options facing the firm, then you
might suggest the following approach. Action 1 (lying about management intent concerning the property
in order to reclassify it as a current asset) is clearly unethical and unacceptable. All of the emphasis
should be placed on Action 2, which has a chance of being made to comply with the accounting rules.
The presentation to the board of directors might include the following points:
A loan covenant violation would be very costly (give details).
One way to avoid violation is to accelerate the negotiations on the refinancing plan.
If a formal refinancing deal can be signed by the date the financial statements are finalized, the
short-term loans can be properly classified as long-term, thus improving the current ratio and
avoiding the covenant violation.
If refinancing negotiations are not accelerated, the only other option is very unattractive and involves
outright lying (briefly describe Action 1).
A presentation focusing on these points is ethical, gives the board of directors a concrete action to
consider (i.e., getting to work on the refinancing negotiations), and points out the unsuitability of the only
alternative action.
Cumulative Spreadsheet Analysis

See Cumulative Spreadsheet Analysis solutions disk, provided with this manual.
Internet Search
An updated solution for the Internet Search exercise in this chapter can be found at the text Internet site
(http://skousen.swcollege.com).
SOLUTIONS TO STOP & THINK

Stop & Think (p. 103): Alternatively, an asset could be defined as everything legally owned by a
company, and a liability defined as all legal obligations. What problems would arise from using these
definitions?
When assets and liabilities are defined in terms of legal form instead of economic substance, the
potential for misleading reporting is huge. Companies could cleverly structure contracts to make them
legal owners of lots of desirable assets over which they had no economic control. In addition, companies
could use technicalities in order to hide their economic liabilities in legally separate companies.
Stop & Think (p. 110): The current/noncurrent classification scheme is only one way to split assets and
liabilities into two groups. Can you think of any other basis that might be used to separate assets and
liabilities into two groups?
Other possible ways to split assets and liabilities into two groups are given below. Some of these
classifications are potentially very informative.
Monetary and nonmonetary
Located in the U.S. and located in a foreign country
In the parent company or in a subsidiary
In the primary line of business of the company or in a secondary business
Valued using current value and valued using some other basis
Stop & Think (p. 117): From the information in Exhibit 3-7, compute total assets for British
Telecommunications as of March 31, 1998.
Total assets is the sum of current assets and long-term (fixed) assets. For British Telecommunications as
of March 31, 1998, the amount of total assets is 23,285 million (18,960 million + 4,325 million). Note
that this is not the same total amount shown in the balance sheetthe balance sheet amount is total
assets minus current liabilities.
Stop & Think (p. 125): In analyzing a company, do users care whether they get the information from the
financial statements themselves or from the notes? From a user's standpoint, are recognition and
disclosure the same thing?
When a user is performing a detailed analysis of one company, it probably doesn't matter whether
information comes in the form of recognition or disclosure. However, when large numbers of companies
are being compared with summary measures, items that are not recognized are almost always excluded
from consideration.
Stop & Think (p. 127): Which of the five subsequent events disclosed by AT&T as occurring in 1999
would also require an adjustment to the 1998 financial statements?
None of the five subsequent events disclosed by AT&T as occurring in 1999 would require an adjustment
to the 1998 financial statements. These events do not provide new information about conditions existing
as of December 31, 1998. However, these subsequent events are disclosed because they became
known before the release of the financial statements and they could impact the way financial statement
users project the future based on the 1998 financial statements.
SOLUTIONS TO BOXED ITEMS

Balance Sheet Tilt (p. 108)
1.
2.
3.
4.
Net income (or income from continuing operations) is a key number in many business valuation
models. It is certainly the most reported number from the financial statements. Thus, there is
justification for concern about making sure that the income statement provides the best possible
measure of a companys economic performance for the period.
However, one reason that most valuation models emphasize the income statement is that
accountants have sometimes not done well at making the balance sheet seem relevant to valuation.
Perhaps in years to come this "balance sheet tilt" will result in more attention being paid to the
balance sheet.
Volatile earnings create the impression of riskiness. And no company wants to appear more risky
because this makes both investors and creditors nervous.
Comprehensive income will include all changes in equity during a period except for those stemming
from investments by and distributions to owners. In particular, comprehensive income will include all
of the unrealized gains and losses that are recognized in order to report current values in the
balance sheet. Some of these unrealized gains and losses will be excluded from earnings, or net
income.
Students answers will vary.
Information Overload (p. 124)

1.
2.
3.
One cost of providing additional financial disclosures is the bookkeeping cost associated with hiring
new staff, reprogramming computers, and increasing audit fees to cover the audit of these new
disclosures. Potentially more significant, however, is the cost of publicly disclosing information that
formerly was private.
A summary annual report includes just the financial statements and a very abbreviated set of notes.
This summary may reduce information overload for unsophisticated users who don't seriously
analyze the notes anyway. Most serious investors and creditors demand a copy of the full financial
statements and notes.
Information technology reduces the cost (both in time and in money) of providing large quantities of
data. As the cost of providing large quantities of data decreases, it is inevitable that firms will
provide investors with more data. It is then the challenge of users to efficiently sort through and
analyze that data to find what they need.

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CHAPTER 3

6. a. Cash is classified as noncurrent when

2. In order to meet the definition of an asset,

7. If a short-term loan is expected to be

3. Some liabilities, such as accounts payable

8. a. A subjective acceleration clause is a

5. a. Assets are classified as current if

with a note to describe the contingency.

or owners equity account because such an

9. Contingent liabilities may or may not give

16. Return on equity is an indicator of the

10. With a proprietorship, owners equity is

17. There are at least four types of notes used

11. The three major categories in a

18. The FASB must maintain a balance

12. Offset balances are used to adjust the

values in response to businesses

bankruptcy petition by a major customer

19. Separate supplementary information or

21. Many assets are reported at historical cost,

Firms with strong future growth possibilities

Firms perceived as being very risky

Probable: The liability (and a corresponding loss or expense) should be recognized.

Possible: The contingent loss is disclosed in a note to the financial statements.

Remote: No accounting action is necessary.

Steps to avoid violating the current ratio constraint:

Use FIFO instead of LIFO, causing current assets to increase by $50,000.

Cancel plans to declare and pay cash dividends next year.

Steps to avoid violating the debt ratio constraint:

Use FIFO instead of LIFO, causing current assets to increase by $50,000.

Cancel plans to declare and pay cash dividends next year.

Discussion Case 310

Total liabilities and owners'

1. (a) Current assets:

(d) Total assets:

(e) Current liabilities:

(f) Noncurrent liabilities:

(g) Owners equity:

The customers financial condition was deteriorating at the end of

Report the amount in the income statement.

Note 1. Summary of Significant Accounting Policies

Paid-in capital in excess of

Current ratio = $160,000/$88,000 = 1.82

Zaldo Investment Corporation

Current ratio = $594,390/$192,930 = 3.08

Asset turnover = $5,000,000/$1,251,190 = 4.00

See accompanying notes to financial statements.

1. Summary of significant accounting policies

8% note to First Interstate Bank issued March 1, 2000. Payable on demand.

The 10-year, 8% bonds mature on June 30, 2003.

*Amount needed to balance the statement.

A work sheet is not required, but it facilitates the preparation of a corrected

Current Assets..................... 244,050

A work sheet is not required, but it facilitates the preparation of a corrected

A work sheet is not required, but it facilitates the preparation of a corrected

December 31, 2002

A work sheet is not required, but it facilitates the preparation of the

......... 45,000 (b) 175,000

To record issuance of additional stock

Total liabilities and owners'

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