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Chapter 5: Q1CA. (page 252)

(Reporting the Financial Effects of Varied Transactions) In an examination of Arenes Corporation as of 31 Dec, 2017, you have learned that the following situations exist. No entries have been made in the accounting records for these items.

1. The corporation erected its present factory building in 2001. Depreciation was calculated by the straight-line method, using an estimated life of 35 years. Early in 2017, the board of directors conducted a careful survey and estimated that the factory building had a remaining useful life of 25 years as of 1 Jan, 2017.

2. An additional assessment of 2016 income taxes was levied and paid in 2017.

3. When calculating the accrual for officers鈥� salaries at 31 Dec, 2017, it was discovered that the accrual for officers鈥� salaries for 31 Dec, 2016, had been overstated.

4. On 15 Dec, 2017, Arenes Corporation declared a cash dividend on its common stock outstanding, payable 1 Feb, 2018, to the common stockholders of record 31 Dec, 2017.

Instructions

Describe fully how each of the items above should be reported in the financial statements of Arenes Corporation for the year 2017.

Short Answer

Expert verified

1. Retrospective reporting is not required to change the asset鈥檚 useful life.

2. Retrospective adjustments are not required. The additional assessment will be included in the current year鈥檚 taxes.

3. Adjustments must be made to the beginning balance of the retained earnings.

4. A journal entry will be made for the declaration of dividends.

Step by step solution

01

Definition of Useful Life

Useful life is the estimate made by the business entity in respect of the number of years for which the respective asset will be used.Such an estimate is used for calculating the depreciation expenses.

02

Reporting Change in Financial Statements

  1. The change in the asset鈥檚 useful life is considered a change in the estimates of the financial reporting that are not reported retrospectively. Therefore, the depreciation for the current year and future period will be calculated considering new useful life. The disclosure must be made in the notes to the financial statement.
  2. The additional assessment for the income taxes does not require any adjustments to the previous periods' financial statements. It must be reflected in the income statement of the current year. It will be separately represented if it is material. Otherwise, it must be included in the tax expenses of the current year.
  3. The error made on 31 Dec 2016 must be reported in the statement of retained earnings and adjusted against the beginning balance of the retained earnings in the year 2017. The business entity must adjust the expenses of the year 2017.
  4. The business entity will make a journal entry to record the dividend declaration. The retained earnings will be debited, and the dividend payable account will be credited with the same amount.

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Most popular questions from this chapter

E5-11 (L03) EXCEL (Balance Sheet Preparation) Presented below is the adjusted trial balance of Kelly Corporation at December 31, 2017.

Particular

Debit

Credit

Cash

\(?

Supplies

1,200

Prepaid insurance

1,000

Equipment

48,000

Accumulated depreciation 鈥� Equipment

\)4,000

Trademarks

950

Accounts payable

10,000

Salaries and wages payable

500

Unearned service revenue

2,000

Bonds payable (due 2024)

9,000

Common stock

10,000

Retained earnings

25,000

Service revenue

10,000

Salaries and wages expenses

9,000

Insurance expenses

1,400

Rent expenses

1,200

Interest expenses

900

Total

\(?

\)?

Additional information:

1. Net loss for the year was $2,500.

2. No dividends were declared during 2017.

Instructions

Prepare a classified balance sheet as of December 31, 2017.

Grant Wood Corporation鈥檚 balance sheet at the end of 2016 included the following items.

Current assets (\(Cash 82,000)

\)235,000

Current liabilities

\(150,000

Land

30,000

Bond payable

100,000

Building

120,000

Common stock

180,000

Equipment

90,000

Retained earnings

44,000

Accumulated depreciation 鈥� Building

(30,000)

Accumulated depreciation 鈥� Equipment

(11,000)

Patents

40,000

Total

\)474,000

Total

\(474,000

The following information is available for 2017.

1. Net income was \)55,000.

2. Equipment (cost \(20,000 and accumulated depreciation \)8,000) was sold for \(10,000.

3. Depreciation expense was \)4,000 on the building and \(9,000 on equipment.

4. Patent amortization was \)2,500.

5. Current assets other than cash increased by \(29,000. Current liabilities increased by \)13,000.

6. An addition to the building was completed at a cost of \(27,000.

7. A long-term investment in stock was purchased for \)16,000.

8. Bonds payable of \(50,000 were issued.

9. Cash dividends of \)30,000 were declared and paid.

10. Treasury stock was purchased at a cost of $11,000.

Instructions

(Show only totals for current assets and current liabilities.)

(a) Prepare a statement of cash flows for 2017.

(b) Prepare a balance sheet at December 31, 2017.

Net income for the year for Tanizaki, Inc. was \(750,000, but the statement of cash flows reports that net cash provided by operating activities was \)860,000. Tanizaki also reported capital expenditures of \(75,000 and paid dividends in the amount of \)30,000. Compute Tanizaki鈥檚 free cash flow

According to generally accepted accounting principles, what is the balance sheet valuation of each of the following assets?

(a) Trade accounts receivable.

(b) Land.

(c) Inventories.

(d) Trading securities (common stock of other companies).

(e) Prepaid expenses.

What are the major limitations of the balance sheet as a source of information?
See all solutions

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