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Chapter 5: 2 (page 237)
What is meant by solvency? What information in the balance sheet can be used to assess a company鈥檚 solvency?
Solvency reflects the ability to repay the borrowed money. It can be determined using the liabilities and the assets classified as current in nature.
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In what section of the balance sheet should the following items appear, and what balance sheet terminology would you use?
(a) Treasury stock (recorded at cost).
(b) Checking account at bank.
(c) Land (held as an investment).
(d) Sinking fund.
(e) Unamortized premium on bonds payable.
(f) Copyrights.
(g) Pension fund assets.
(h) Premium on common stock.
(i) Long-term investments (pledged against bank loans payable).
The comparative balance sheets of Madrasah Corporation at the beginning and end of the year 2017 appear below.
MADRASAH CORPORATION | |||
BALANCE SHEETS | |||
Assets | Dec 31, 2017 | Jan 1, 2017 | Inc./Dec. |
Cash | \(20,000 | \)13,000 | \(7,000 Inc. |
Accounts receivable | 106,000 | 88,000 | 18,000 Inc. |
Equipment | 39,000 | 22,000 | 17,000 Inc. |
Less: Accumulated depreciation 鈥� Equipment | 17,000 | 11,000 | 6,000 Inc. |
Total | \)148,000 | \(112,000 | |
Liabilities and Stockholder鈥檚 equity | |||
Account payable | \)20,000 | \(15,000 | 5,000 Inc. |
Common stock | 100,000 | 80,000 | 20,000 Inc. |
Retained earnings | 28,000 | 17,000 | 11,000 Inc. |
Total | \)148,000 | \(112,000 |
Net income of \)44,000 was reported, and dividends of $33,000 were paid in 2017. New equipment was purchased and none was sold.
Instructions
(a) Prepare a statement of cash flows for the year 2017.
(b) Compute the current ratio (current assets 梅 current liabilities) as of January 1, 2017, and December 31, 2017, and compute free cash flow for the year 2017.
(c) In light of the analysis in (b), comment on Madrasah鈥檚 liquidity and financial flexibility.
(Preparation of a Corrected Balance Sheet) Uhura Company has decided to expand its operations. The bookkeeper recently completed the balance sheet presented below in order to obtain additional funds for expansion.
UHURA Company | |
Balance Sheet | |
For the year ended 2017 | |
Current assets | |
Cash | \(230,000 |
Accounts receivables (Net) | 340,000 |
Inventory (Lower of average cost or market) | 401,000 |
Equity investment (Trading) | 140,000 |
Property, Plant and Equipment | |
Building (net) | 570,000 |
Equipment (net) | 160,000 |
Land held for future use | 175,000 |
Intangible assets | |
Goodwill | 80,000 |
Cash surrender value of life insurance | 90,000 |
Prepaid expenses | 12,000 |
Current liabilities | |
Account payable | 135,000 |
Note payable | 125,000 |
Pension obligation | 82,000 |
Rent payable | 49,000 |
Premium on bond payable | 53,000 |
Long-term Liabilities | |
Bond payable | 500,000 |
Stockholders equity | |
Common stock \)1 par, authorized 400,000 shares, issued 290,000 | 290,000 |
Additional paid in capital | 160,000 |
Retained earnings |
Instructions
Prepare a revised balance sheet given the available information. Assume that the accumulated depreciation balance for the buildings is \(160,000 and for the equipment, \)105,000. The allowance for doubtful accounts has a balance of $17,000. The pension obligation is considered a long-term liability.
(L03) (Preparation of a Classified Balance Sheet, Periodic Inventory) Presented below is a list of accounts in alphabetical order.
Accounts Receivable-Inventory-Ending
Accumulated Depreciation鈥擝uildings-Land
Accumulated Depreciation鈥擡quipment Land for Future Plant Site
Accumulated Other Comprehensive Income - Loss from Flood
Advances to Employees- Noncontrolling Interest
Advertising Expense - Notes Payable (due next year)
Allowance for Doubtful Accounts - Paid-in Capital in Excess of Par鈥� preferred stock
Bond Sinking Fund -Patents
Bonds Payable - Payroll Taxes Payable
Buildings - Pension Liability
Cash (in bank) - Petty Cash
Cash (on hand) - Preferred Stock
Cash Surrender Value of Life Insurance -Premium on Bonds Payable
Commission Expense- Prepaid Rent
Common Stock- Purchase Returns and Allowances
Copyrights - Purchases
Debt Investments (trading)- Retained Earnings
Dividends Payable- Salaries and Wages Expense (sales)
Equipment - Salaries and Wages Payable
Freight-In Sales- Discounts
Gain on Disposal of Equipment- Sales Revenue
Interest Receivable - Treasury Stock (at cost)
Inventory鈥擝eginning Unearned Subscriptions Revenue
Instructions Prepare a classified balance sheet in good form. (No monetary amounts are to be shown.)
BE5-7 (L03) Thomas Corporation鈥檚 adjusted trial balance contained the following liability accounts at December 31, 2017: Bonds Payable (due in 3 years) \(100,000, Accounts Payable \)72,000, Notes Payable (due in 90 days) \(22,500, Salaries and Wages Payable \)4,000, and Income Taxes Payable $7,000. Prepare the current liabilities section of the balance sheet.
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