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Chapter 5: Q16Q (page 238)

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.

Short Answer

Expert verified

Item

Balance Sheet Section

Allowance for doubtful accounts

Asset section

Merchandise held on consignment.

Not reported on the balance sheet

Advance received on sales contract.

Liability section

Cash surrender value of life insurance

Asset section

Land

Asset Section

Merchandise out on consignment

Asset Section

Franchise

Asset section

Accumulated depreciation of equipment

Asset section

Material in transit 鈥� purchased f.o.b destination.

Not reported on the balance sheet

Step by step solution

01

Definition of Consignment

Consignment can be defined as an arrangement under which the business entitygives possession of goods to any other authorized third party for sale. The third party is provided with the commission based on sales made.

02

Representation in the balance sheet

  1. Allowance for doubtful accounts is reported on the asset side of the balance sheet and deducted from the accounts receivables.
  2. Merchandise held on consignment is not reported on the balance sheet by the consignee. It might be written in the notes to the financial statement.
  3. Advance received on the sales contract is reported on the liabilities side of the balance sheet as a current liability.
  4. The land is reported as a fixed asset of the company on the asset side of the balance sheet.
  5. Merchandise out on consignment is reported as inventory on the asset side until the consignee sells it.
  6. A franchise is reported as an intangible asset on the asset side of the balance sheet.
  7. Accumulated depreciation of equipment is reported on the asset side of the balance sheet and must be deducted from the equipment cost. It is a contra asset account.
  8. The material in transit purchased on FOB destination is not reported in the buyer鈥檚 balance sheet until they arrive at the buyer鈥檚 place.

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Most popular questions from this chapter

Included in Outkast Company鈥檚 December 31, 2017, trial balance are the following accounts: Prepaid Rent \(5,200, Debt Investments (to be held to maturity until 2020) \)56,000, Unearned Fees \(17,000, Land (held for investment) \)39,000, and Notes Receivable (long-term) $42,000. Prepare the long-term investments section of the balance sheet.

How does information from the balance sheet help users of the financial statements?

Case 1: Uniroyal Technology Corporation

Uniroyal Technology Corporation (UTC), with corporate offices in Sarasota, Florida, is organized into three operating segments. The high-performance plastics segment is responsible for research, development, and manufacture of a wide variety of products, including orthopedic braces, graffiti-resistant seats for buses and airplanes, and a static-resistant plastic used in the central processing units of microcomputers. The coated fabrics segment manufactures products such as automobile seating, door and instrument panels, and specialty items such as waterproof seats for personal watercraft and stain-resistant, easy-cleaning upholstery fabrics. The foams and adhesives segment develops and manufactures products used in commercial roofing applications.

The following items relate to operations in a recent year.

1. Serious pressure was placed on profitability by sharply increasing raw material prices. Some raw materials increased in price 50% during the past year. Cost containment programs were instituted and product prices were increased whenever possible, which resulted in profit margins actually improving over the course of the year.

2. The company entered into a revolving credit agreement, under which UTC may borrow the lesser of \(15,000,000 or 80% of eligible accounts receivable. At the end of the year, approximately \)4,000,000 was outstanding under this agreement. The company plans to use this line of credit in the upcoming year to finance operations and expansion.

Instructions

(a) Should investors be informed of raw materials price increase, such as described in item 1? Does the fact that the company successfully met the challenge of higher prices affect the answer? Explain.

(b) How should the information in item 2 be presented in the financial statements of UTC?

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.

BE5-8 (L03) Included in Adams Company鈥檚 December 31, 2017, trial balance are the following accounts: Accounts Payable \(220,000, Pension Liability \)375,000, Discount on Bonds Payable \(29,000, Unearned Rent Revenue \)41,000, Bonds Payable \(400,000, Salaries and Wages Payable \)27,000, Interest Payable \(12,000, and Income Taxes Payable \)29,000. Prepare the current liabilities section of the balance sheet.
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