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Chapter 5: Question 11Q (page 237)
11. Should available-for-sale securities always be reported as a current asset? Explain.
No, reporting available for sale securities as current assets depends uponthe business entity's expectations to generate cash within the operating period.
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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.
Discuss at least two situations in which estimates could affect the usefulness of the information in the balance sheet.
E5-9 (L02,3) (Current Assets and Current Liabilities) The current assets and current liabilities sections of the balance sheet of Allessandro Scarlatti Company appear as follows.
ALLESSANDRO SCARLATTI COMPANY | ||||
BALANCE SHEET PARTIAL | ||||
December 31, 2017 | ||||
Cash | \(40,000 | Account payable | \)61,000 | |
Accounts receivables | \(89,000 | Note payable | 67,000 | |
Less: Allowance for doubtful accounts | (7,000) | 82,000 | \)128,000 | |
Inventory | 171,000 | |||
Prepaid expenses | 9,000 | |||
\(302,000 |
The following errors in the corporation鈥檚 accounting have been discovered:
1. January 2018 cash disbursements entered as of December 2017 included payments of accounts payable in the amount of \)39,000, on which a cash discount of 2% was taken.
2. The inventory included \(27,000 of merchandise that had been received at December 31 but for which no purchase invoices had been received or entered. Of this amount, \)12,000 had been received on consignment; the remainder was purchased f.o.b. destination, terms 2/10, n/30.
3. Sales for the first four days in January 2018 in the amount of \(30,000 were entered in the sales journal as of December 31, 2017. Of these, \)21,500 were sales on account and the remainder were cash sales.
4. Cash, not including cash sales, collected in January 2018 and entered as of December 31, 2017, totaled \(35,324. Of this amount, \)23,324 was received on account after cash discounts of 2% had been deducted; the remainder represented the proceeds of a bank loan.
Instructions
(a) Restate the current assets and current liabilities sections of the balance sheet in accordance with good accounting practice. (Assume that both accounts receivable and accounts payable are recorded gross.)
(b) State the net effect of your adjustments on Allessandro Scarlatti Company鈥檚 retained earnings balance.
Differentiate between operating activities, investing activities, and financing activities.
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. |
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