Solution Manual for Introduction to Health Care Finance and Accounting, 1st Edition

Solution Manual for Introduction to Health Care

Finance and Accounting, 1st Edition

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CHAPTER 6
THE BALANCE SHEET
CHAPTER QUESTIONS AND ANSWERS—
ASSETS
1. Which of the following is NOT a current asset?
A. Business checking account
B. Office supply inventory
C. Land
D. Prepaid expenses
ANSWER: C
2. Provide an example of a non-current asset.
ANSWER: Non-current assets include tangible
assets with a long useful life such as land, build-
ings, and equipment and intangible assets such
as goodwill.
3. Doctor Silverton owns a family medical practice. The
practice prepays for a maintenance contract on
office equipment at the rate of $600 for 6 months.
The most recent contract period started December 1
and will cover the months of December through
May. The financial records of the practice are main-
tained on a calendar-year basis. How much of the
maintenance contract will be booked as a prepaid
expense as of December 31?
ANSWER: $100. One-sixth of the contract will be
used during the current fiscal year with the balance
used during the following year ($600 3 1/6 5 $100).
4. Doctor Silverton’s practice is located in a commu-
nity with a relatively high percentage of low-income
households. At the end of the fiscal year, the
accounts receivable for the practice totals $60,000.
Half of that amount is from insurance claims not yet
paid and are assumed to be fully collectible. The
other half is made up of receivables from private-
pay patients. Doctor Silverton treats a number of
families knowing that they are unable to pay the full
amount charged and has estimated that the uncol-
lectible portion of receivables from private pay
patients is 20%. What is the reserve for uncol-
lectible accounts receivable?
ANSWER: $6,000. ($60,000 in receivables 3 50%
private pay 3 20% uncollectible).
5. Using the definition of capital assets established in
Medicare regulations, which of the following would
be treated as non-current assets under furniture
and equipment?
A. A cellular phone costing $200
B. Lakeview Medical’s initial stock of disposable
medical supplies costing $1,200
C. An examination table costing $2,000
D. Office furniture costing $4,500
E. All of the above except A
ANSWER: D. All other purchases will be expensed
when purchased.
6. Define the terms depreciation and accumulated
depreciation.
ANSWER: Depreciation is the periodic loss in
value of an asset as it is used up or becomes obso-
lete. Accumulated depreciation is the total of
the annual charges for depreciation of an asset
during the period of time it is owned and used by
the business.
7. Jordan’s Pharmacy offers free prescription delivery
to customers. The pharmacy maintains its financial
records on a calendar-year basis. At the end of June,
Jordan’s purchases a new delivery vehicle costing
$20,000. They plan to use the vehicle in the business
for 5 years and expect the vehicle will have a trade-
in value after 5 years of $5,000. What is the annual
charge for depreciation on this asset? How much
depreciation would be taken in the year of purchase?
ANSWER: Annual depreciation is $3,000
($20,000 2 $5,000 / 5 years). First year deprecia-
tion is $1,500 ($3,000 3 50% for one-half year).
27
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28 INSTRUCTOR RESOURCES TO ACCOMPANY INTRODUCTION TO HEALTH CARE FINANCE AND ACCOUNTING
8. A large urban HMO purchases a vacant office build-
ing to house expanded administrative functions for
$500,000. The accountant, working with their real-
estate agent, has estimated the value of the land at
$125,000, with the remaining cost of $375,000 valued
for the building. Prior to using the building, renova-
tions costing $100,000 are completed. The reno-
vated building has an estimated useful life of 27.5
years, with no residual value. What is the annual
charge for depreciation?
ANSWER: $17,272. ($375,000 building + $100,000
renovations / 27. 5 years).
CHAPTER QUESTIONS AND ANSWERS—
LIABILITIES AND NET WORTH:
1. Which of the following would be shown as current
liabilities for a medical practice maintaining finan-
cial records on a calendar-year basis?
A. The December electric bill, paid in January
B. Payroll expenses for days employees of the prac-
tice worked in December, paid on the first pay-
roll in January
C. The payment in December for January office
space rental
D. The January payment for medical supplies deliv-
ered in December
E. All of the above
F. All of the above except C
ANSWER: F. All of the above except C. The pay-
ment in December for January office rent will be a
prepaid expense asset at the end of the fiscal year.
2. Provide an example of a non-current liability.
ANSWER: The most common example of a non-
current liability is the portion of long-term debt
that is due after the end of the current fiscal year.
3. Near the end of a fiscal year, a hospital borrows
$200,000 from their local bank, scheduled to be
repaid over 5 years. Quarterly payments will be
made combining interest on the unpaid balance and
a payment of $10,000 on principal. The hospital’s
Current Assets Debit
Cash & Cash Equivalents
Short -Term Investments
Accounts Receivable $50,000
Less: Uncollectible ($2,000)
Supplies
Prepaid Expenses
Total Current Assets
balance sheet, prior to making the first of the sched-
uled payments, will show how much liability in cur-
rent portion of long-term debt and in long-term debt
net of current portion?
ANSWER: $40,000 is the current portion of the
long-term debt (four quarterly payments of
$10,000). The balance of $160,000 is long-term
debt net of current portion.
4. The hospital in question 2 entered into a $200,000
equipment loan. Two years of payments have now
been made. The hospital’s balance sheet will now
show how much liability in current portion–long-
term debt and in long-term debt–net of current
portion?
ANSWER: Remaining balance on the equipment
loan is $120,000. $40,000 is the current portion
of long-term debt and the remainder of $80,000
is long-term debt–net of current portion.
5. The reader of the financial statements of a medical
facility sees the heading Stockholders’ Equity in the
net worth section of the balance sheet. This indi-
cates that the legal structure of the facility is a:
A. Partnership
B. Corporation
C. Sole proprietorship
D. Facility owned by a local governmental unit
E. Not-for-profit
ANSWER: B. Corporation
CHAPTER QUESTIONS AND ANSWERS—
BALANCE SHEET ANALYSIS
1. How can ratios be used in analyzing the financial
condition of medical facilities?
ANSWER: Ratios are used to measure the financial
strength of businesses and the changes in finan-
cial strength over time. Ratios are also used to
compare businesses in the same type of industry.
2. Using the following data on current assets and cur-
rent liabilities, calculate both the current ratio and
the quick ratio for this medical facility.
Credit Current Liabilities
$5,000 Accounts Payable $5,000
$50,000 Accrued Expenses $10,000
Current Portion -
$48,000 Long -Term Debt $25,000
$3,000
$5,000
$111,000 Total Current Liabilities $40,000
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CHAPTER 6 THE BALANCE SHEET 29

ANSWER: The current ratio is 2.775 ($111,000 cur- 4. Using the information from question 3, calculate the
rent assets / $40,000 current liabilities). The debt-to-net-worth ratio of the hospital for the fol-
quick ratio is 2.575 ($103,000 cash, short-term lowing year, assuming that operating revenues
investments, and net receivables / $40,000 cur- exceed operating expenses by $200,000, increasing
rent liabilities). the net worth of the business.
3. The year-end balance sheet of a hospital shows total Total Liabilities $4,000,000
ANSWER: = = 1.25
liabilities of $4,000,000, including a bank note used Net Worth $3,200,000
to expand the facility. Net worth of the hospital at
the balance sheet date is $3,000,000. What is the
debt-to-net-worth ratio of the hospital?
Total Liabilities $4,000,000
ANSWER: = = 1.33
Net Worth $3,000,000
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30 INSTRUCTOR RESOURCES TO ACCOMPANY INTRODUCTION TO HEALTH CARE FINANCE AND ACCOUNTING

Chapter 6—The Balance Sheet

Quiz
Name___________________________________________ Date__________________________________________
Instructor________________________________________

5. Which of the following business assets will NOT be

(5 points each) charged depreciation on an annual basis?
1. TRUE or FALSE (circle correct answer): Current A. Land
assets are those assets that will be used by the busi- B. Buildings
ness for a period of time greater than 1 year. C. Durable medical equipment
2. TRUE or FALSE: Depreciation expense is the meas- D. Computer hardware and software
urement of loss in value of a capital asset, charged
6. Homestead Rehabilitation took out a bank loan of
annually, as it ages or is used up in the course of
$100,000 for the purchase of equipment. The loan
business.
agreement with the bank was signed in March 2010
(Multiple Choice: circle the letter of the correct and calls for $25,000 payments on the loan principal
answer.) on September 30th of 2010, 2011, 2012, and 2013. The
3. Which of the following is NOT a current asset of a 2010 and 2011 payments were made. The facility uses
medical business? the calendar year as a fiscal year. As of December 31,
A. Balance in the operating checking account 2011, what are the current and non-current liability
balances on the bank loan?
B. Inventory of supplies at the end of the year
A. $25,000 is the current liability; $75,000 is the
C. Short-term bank loan to be repaid within 12
non-current liability.
months
B. $50,000 is the current liability; there is no non-
D. Accounts receivable
current liability.
4. Which of the following are non-current assets of a
C. $25,000 is the current liability; $25,000 is the
medical business?
non-current liability.
A. Hospital building owned by a medical corporation
D. There is no current liability; $50,000 is the non-
B. Computer system for financial management current liability.
owned by a medical practice
C. Improvements made to leased property
D. All of the above
E. Only A and B above

(Short Answer 10 points each)

7. Define fiscal year.

(continued)
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CHAPTER 6 THE BALANCE SHEET 31

8. What is a contra account?

9. Provide an example of an intangible asset.

10. Provide an example of a prepaid expense.

11. A community hospital in a rural community operates the ambulance service. The hospital purchases a new ambu-
lance for $150,000. They estimate a useful life of 10 years and a salvage value of $20,000. What is the annual charge
for depreciation on this asset?

12. The balance sheet of Lakeview Medical shows the following amounts as of December 31, 2011:
Current assets $150,000
Non-current assets $685,000
Current liabilities $ 75,000
Non-current liabilities $200,000
Net worth $560,000
Calculate the current ratio for Lakeview Medical.

13. The current ratio, as calculated in the previous question, is a measurement of liquidity. What does this ratio tell us?
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Solution Manual for Introduction to Health Care Finance and Accounting, 1st Edition

32 INSTRUCTOR RESOURCES TO ACCOMPANY INTRODUCTION TO HEALTH CARE FINANCE AND ACCOUNTING

Chapter 6 —The Balance Sheet
Quiz Answers
1. FALSE. The definition is for non-current assets.
2. TRUE.
3. C.
4. D.
5. A.
6. C.
7. Fiscal year is a consecutive 12-month period chosen
by the business to report financial operations.
8. A contra account is used to reduce the value of an
asset by the estimated loss in value of the asset.
Contra accounts are most commonly used to record
the estimated value of uncollectible accounts
receivable and to record accumulated depreciation
of capital assets.
9. Intangible assets are assets that are of value to the
business, but do not have a physical existence, such
as patents, copyrights, goodwill, and investment in
research and development.
10. Prepaid expenses are those normal costs of doing
business that are paid in advance and have a contract
period of time extending into a future fiscal year.
Examples would include payments on lease agree-
ments and insurance policies where the contract
term includes months in the following fiscal year.
11. $13.000. ($150,000 2 $20,000 divided by 10).
12. The current ratio is 2.0. (Current assets of $150,000
divided by current liabilities of $75,000).
13. Liquidity analysis, provided by the current ratio, is
used to determine if a business in the short term has
sufficient cash and other current assets to meet
short-term liabilities, such as accrued payroll and
expenses and accounts payable. A ratio of less than
1.0 may indicate a liquidity problem for the business.

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