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Chapter 5: 4 (page 237)
Discuss at least two situations in which estimates could affect the usefulness of the information in the balance sheet.
Two estimates that will affect the usefulness of the balance sheet information are:
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5. A company has purchased a tract of land and expects to build a production plant on the land in approximately five years. During the 5 years before construction, the land will be idle. Under IFRS, the land should be reported as:
(a) land expense.
(b) property, plant, and equipment.
(c) an intangible asset.
(d) a long-term investment.
The creditors of Chester Company agree to accept promissory notes for the amount of its indebtedness with a proviso that two-thirds of the annual profits must be applied to their liquidation. How should these notes be reported on the balance sheet of the issuing company? Give a reason for your answer
Presented below is a condensed version of the comparative balance sheets for Zubin Mehta Corporation for the last two years at December 31.
2017 | 2016 | |
Cash | \(177,000 | \)78,000 |
Accounts receivables | 180,000 | 185,000 |
Investment | 52,000 | 74,000 |
Equipment | 298,000 | 240,000 |
Accumulated depreciation | (106,000) | (89,000) |
Current liabilities | 134,000 | 151,000 |
Common stock | 160,000 | 160,000 |
Retained earnings | 307,000 | 177,000 |
Additional information:
Investments were sold at a loss of \(10,000; no equipment was sold; cash dividends paid were \)30,000; and net income was $160,000.
Instructions
(a) Prepare a statement of cash flows for 2017 for Zubin Mehta Corporation.
(b) Determine Zubin Mehta Corporation鈥檚 free cash flow.
The major classifications of activities reported in the statement of cash flows are operating, investing, and financing. Classify each of the transactions listed below as:
1. Operating activity鈥攁dd to net income.
2. Operating activity鈥攄educt from net income.
3. Investing activity.
4. Financing activity.
5. Reported as significant noncash activity.
The transactions are as follows.
(a) Issuance of common stock. | (h) Payment of cash dividends. |
(b) Purchase of land and building. | (i) Exchange of furniture for office equipment. |
(c) Redemption of bonds | (j) Purchase of treasury stock. |
(d) Sale of equipment. | (k) Loss on sale of equipment. |
(e) Depreciation of machinery. | (l) Increase in accounts receivable during the year. |
(f) Amortization of patent. | (m) Decrease in accounts payable during the year. |
(g) Issuance of bonds for plant assets. |
What is meant by solvency? What information in the balance sheet can be used to assess a company鈥檚 solvency?
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