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Chapter 5: 7 (page 237)
What are the major limitations of the balance sheet as a source of information?
Balance information has some limitations because of the historical cost concept, estimations, and eliminating some items having value.
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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).
Where should the following items be shown on the balance sheet, if shown at all?
(a) Allowance for doubtful accounts.
(b) Merchandise held on consignment.
(c) Advances received on sales contract.
(d) Cash surrender value of life insurance.
(e) Land.
(f) Merchandise out on consignment.
(g) Franchises.
(h) Accumulated depreciation of equipment.
(i) Materials in transit鈥攑urchased f.o.b. destination.
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.
E5-10 (L02,3) (Current Liabilities) Norma Smith is the controller of Baylor Corporation and is responsible for the preparation of the year-end financial statements. The following transactions occurred during the year.
(a) On December 20, 2017, a former employee filed a legal action against Baylor for \(100,000 for wrongful dismissal. Management believes the action to be frivolous and without merit. The likelihood of payment to the employee is remote.
(b) Bonuses to key employees based on net income for 2017 are estimated to be \)150,000.
(c) On December 1, 2017, the company borrowed \(600,000 at 8% per year. Interest is paid quarterly.
(d) Accounts receivable at December 31, 2017, is \)10,000,000. An aging analysis indicates that Baylor鈥檚 expense provision for doubtful accounts is estimated to be 3% of the receivables balance.
(e) On December 15, 2017, the company declared a \(2.00 per share dividend on the 40,000 shares of common stock outstanding, to be paid on January 5, 2018.
(f) During the year, customer advances of \)160,000 were received; $50,000 of this amount was earned by December 31, 2017.
Instructions For each item above, indicate the dollar amount to be reported as a current liability. If a liability is not reported, explain why.
E5-8 (L02) (Current vs. Long-term Liabilities) Frederic Chopin Corporation is preparing its December 31, 2017, balance sheet. The following items may be reported as either a current or long-term liability.
1. On December 15, 2017, Chopin declared a cash dividend of \(2.50 per share to stockholders of record on December 31. The dividend is payable on January 15, 2018. Chopin has issued 1,000,000 shares of common stock, of which 50,000 shares are held in treasury.
2. At December 31, bonds payable of \)100,000,000 are outstanding. The bonds pay 12% interest every September 30 and mature in installments of \(25,000,000 every September 30, beginning September 30, 2018.
3. At December 31, 2016, customer advances were \)12,000,000. During 2017, Chopin collected \(30,000,000 of customer advances; advances of \)25,000,000 should be recognized in income.
Instructions For each item above, indicate the dollar amounts to be reported as a current liability and as a long-term liability if any.
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