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EXERCISES

Exercise 5-1

1. Total current assets

Current liabilities = $44,000 + 15,000 + 1,000 (accrued interest)


= $60,000
Since the current ratio is 1.5:1, current assets = 1.5 x $60,000 =
$90,000
2. Short-term investments
$90,000 - 5,000 - 20,000 - 60,000 = $5,000
3. Retained earnings
Current assets + Noncurrent assets = Current liabilities + Long-term
liabilities + Paid-in capital + Retained earnings (RE)
$90,000 + 120,000 = $60,000 + 30,000 (Note payable) + 100,000 +
RE
RE = $20,000

Exercise 5-2

1.

2.
f
Accounts payable
3.
-a _ Allowance for uncollectible accounts
4.
b _ Land, held for investment
liabilities
5.
g _ Note payable, due in 5 years
6.
f
Unearned rent revenue
7.
f
Note payable, due in 6 months
8.
i
Income less dividends, accumulated
9.
b _Investment in XYZ Corp., long-term

Exercise 5-3

1.

2.
d _Franchise
3.
-c _Accumulated depreciation
4.
e _Prepaid insurance, for 2002
5.
g _Bonds payable, due in 10 years
6.
f
Current maturities of long-term debt
7.
f
Note payable, due in 3 months
speculation

Equipment
10.
a
Inventories
11.
d _ Patent
12.
c
Land, in use
13.
f _ Accrued
14.
15.
16.
17.
18.

a _Prepaid rent
h _ Common stock
c _Building, in use
a _Cash
f _Taxes payable

f
Accrued interest payable
10.
a _Supplies
11.
c _Machinery
12.
c _Land, in use
13.
f _Unearned revenue
14.
d _ Copyrights
15.
h _ Preferred stock
16.
b _ Land, held for

8.
9.

b
b

Long-term receivables
Bond sinking fund, will be used to
retire bonds in 10 years

Exercise 5-4

17.
18.

a
f

_Cash equivalents
_Wages payable

Exercise 5-5Exercise
VALLEY5-6
PUMP CORPORATION
JACKSON
CORPORATION
Balance
Sheet
At December
31,Sheet
2000
Balance
At December 31, 2000
Assets

Current assets:
Assets
Cash ...................................................................................
Current assets:
Marketable securities .........................................................
Cash net
....................................................................
Accounts receivable,
of allowance for
Marketable
securities
.........................................
uncollectible
accounts of $5,000
.................................
Inventories .........................................................................
Accounts receivable ...........................................
Prepaid expenses
................................................................
Inventories
..........................................................
Total current
assets
......................................................
Prepaid rent ........................................................

Total current assets .......................................


Investments:
Marketable securities .........................................................
Property, plant, and equipment:
Land ...................................................................................
Machinery
..........................................................
Total investments
........................................................

Less: Accumulated depreciation ........................

Property, plant, and equipment:


Net property, plant, and equipment ...............
Land ...................................................................................
Buildings ............................................................................
Intangibles:
Equipment ..........................................................................

$ 25,000
19,000

$ 30,000
10,000 57,000
34,000 81,000
75,000 32,000
6,000 214,000
155,000
$145,000
(11,000)

$19,000
20,000
39,000

134,000

100,000
300,000
75,000
83,000
475,000
$372,000
(125,000
)

Patent ...............................................................
Total assets
.................................................
Less: Accumulated depreciation
.......................................
Net property, plant, and equipment .............................

350,000

Liabilities and Shareholders' Equity

Intangibles: Current liabilities:


Copyright ...........................................................................
Accounts payable ...............................................
Total assets
...............................................................
Wages
payable ...................................................

Taxes payable .....................................................


Liabilities and Shareholders' Equity
Current liabilities: Total current liabilities ..................................

$ 8,000 12,000
4,000$615,000
32,000
44,000

Accounts payable ...............................................................


Long-term
liabilities:
Interest payable
..................................................................
Note payable ......................................................................
Bonds payable ....................................................
Current maturities of long-term debt .................................
Total current
liabilities ................................................
Shareholders
equity:

$ 85,000
5,000
200,000 100,000
50,000
240,000

Common stock ...................................................

Long-term liabilities:
Retained earnings ...............................................
Note payable ......................................................................

Total shareholders equity .............................


Shareholders equity: Total liabilities and shareholders equity
Common stock ...................................................................
Retained earnings ..............................................................
Total shareholders equity ...........................................
Total liabilities and shareholders equity .................

$100,000
28,000
128,000
$372,000

100,000

$200,000
75,000

275,000
$615,000

Exercise 5-7

LOS GATOS CORPORATION


Balance Sheet
At December 31, 2000
Assets

Current assets:
Cash ...........................................................................
Accounts receivable, net of allowance for
uncollectible accounts of $5,000 ...........................
Inventories .................................................................
Total current assets ..............................................

$ 20,000
55,000
65,000
140,000

Investments:
Bond sinking fund .....................................................
Note receivable ..........................................................
Total investments .................................................

$ 20,000
20,000

Property, plant, and equipment:


Machinery ..................................................................
Less: Accumulated depreciation ................................
Net property, plant, and equipment ......................

190,000
(70,000)

40,000

120,000

Intangibles:
Franchise ...................................................................
Total assets ........................................................

20,000
$320,000

Liabilities and Shareholders' Equity


Current liabilities:
Accounts payable ......................................................
Interest payable ..........................................................
Note payable ..............................................................
Total current liabilities .........................................

$ 60,000
5,000
50,000
115,000

Long-term liabilities:
Bonds payable ...........................................................

100,000

Shareholders equity:
Common stock, no par value; 100,000 shares
authorized; 50,000 shares issued and outstanding
Retained earnings ......................................................
Total shareholders equity ...................................
Total liabilities and shareholders equity ..........

$ 70,000
35,000
105,000
$320,000

CONE CORPORATION
Balance Sheet (Partial)
At December 31, 2000
Assets
Current assets:
Marketable securities .........................................
Prepaid rent ........................................................

$ 30,000
12,000

Investments:
Bond sinking fund ..............................................
Marketable securities .........................................

50,000
30,000

Other assets:
Prepaid rent (1) ...................................................

12,000

Liabilities and Shareholders' Equity


Current liabilities:
Interest payable ..................................................
Current maturities of long-term debt .................

$ 12,000
20,000

Long-term liabilities:
Note payable ......................................................

180,000

(1) Note: In practice, companies often report all prepaid expenses as

current assets.
1.
Exercise 5-8costing method
2.
Information on related party transactions
3. Composition of property, plant, and equipment
4. Depreciation method
5. Subsequent event information
6. Basis of revenue recognition on long-term contracts
7. Important merger occurring after year-end
8. Composition of receivables

Inventory
A
B
B
A
B
A
B
B

Exercise

1.
5-92.
1.

a
c
c

Exercise 5-10
d
1. Balance sheet
assets.
h
2. Liquidity
consumed
or the operating cycle.
b
3. Current assets
conformity
j
4. Operating cycle
equity.
a
5. Current liabilities
across companies.
k
6. Cash equivalent
GAAP.
m 7. Intangible asset
not yet
l
8. Working capital
asset is
cash or a liability is paid.
g
9. Accrued liabilities
the
issued.
e 10. Summary of significant
accounting policies
i 11. Subsequent events
c 12. Unqualified opinion
f 13. Qualified opinion

List A

List B

a. Will be satisfied through the use of current


b. Items expected to be converted to cash or
within one year
c. The statements are presented fairly in
with GAAP.
d. An organized array of assets, liabilities and
e. Important to a user in comparing financial
information
f. Scope limitation or a departure from
g. Recorded when an expense is incurred but
paid.
h. Relates to the amount of time before an
converted
to
i. Occurs after the fiscal year-end but before
statements are
j. Cash to cash.
k. One-month certificate of deposit.
l. Current assets minus current liabilities.
m. Lacks physical existence.

1. Current ratio [$100 + 150 + 200 + 400] $400 = 2.125


Exercise 5-11 2. Acid-test ratio[$100 + 150 + 200] $400 = 1.125
3. Debt to equity ratio [$400 + 350] [$700 + 400] = .68
4. Times interest earned ratio
[$160 + 20 + 100] $20 = 14 times
Exercise 5-121. Acid-test ratio = Quick assets Current liabilities =
1.20
Quick assets = Current assets - Inventory
Quick assets = Current assets - $420,000
Current assets Current liabilities =
Current assets - $420,000 Current liabilities =

2.25
1.20

$420,000 Current liabilities =


Current liabilities = $400,000
Current assets $400,000 = 2.25
Current assets = $900,000

1.05

2. Debt to equity ratio = Total liabilities Shareholders equity = 1.8


Total liabilities + Shareholders' equity = Total assets
Total liabilities + Shareholders' equity = $2,800,000
Let x equal shareholders' equity
1.8 x + x = $2,800,000
x = $1,000,000 = Shareholders' equity
3. Noncurrent assets = Total assets - Current assets
Noncurrent assets = $2,800,000 - 900,000 = $1,900,000
4. Long-term liabilities = Total assets-Current liabilities-Shareholders'
equity
Long-term liabilities = $2,800,000 -400,000 - 1,000,000 = $1,400,000
Current AcidExercise 5-13test
Debt to
Action
Ratio Ratio
Equity Ratio
1. Issuance of long-term bonds
I
I
I
2. Issuance of short-term notes
I
I
I
3. Payment of accounts payable
D
D
D
4. Purchase of inventory on account
I
D
I
5. Purchase of inventory for cash
N
D
N
6. Purchase of equipment with a 4-year note
N
N
I
7. Retirement of bonds
D
D
D
8. Sale of common stock
I
I
D
9. Write-off of obsolete inventory
D
N
I
10. Purchase of short-term investment for cash
N
N
N
11. Decision to refinance on a long-term basis
some currently maturing debt
I
I
N
1.
a
Exercise 5-142.
a