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Chapter 5: Question 4ISTQ (page 262)

4. Franco Company uses IFRS and owns property, plant, and equipment with a historical cost of \(5,000,000. At December 31, 2016, the company reported a valuation reserve of \)690,000. At December 31, 2017, the property, plant, and equipment was appraised at \(5,325,000. The valuation reserve will show what balance at December 31, 2017?

(a) \)365,000.

(b) \(325,000.

(c) \)690,000.

(d) $0.

Short Answer

Expert verified

The correct option is(b) $325,000.

Step by step solution

01

Definition of Valuation Reserve

The reserve made by the business entity for getting protection against fluctuations in value of the asset is known as valuation reserve.

02

The Explanation for Correct Options

Valuation reserve on the balance sheet will be equal to:

Particular

Amount $

Appraised value of the asset

$5,325,000

Less: Historical cost

(5,000,000)

Valuation Reserve

$325,000

03

The Explanation for Incorrect Options

All other options are incorrect because they do not reflect the difference between the appraised value and the historical cost of the asset.

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Most popular questions from this chapter

Crane Corporation has the following accounts included in its December 31, 2017, trial balance: Equity Investments (trading) \(21,000, Goodwill \)150,000, Prepaid Insurance \(12,000, Patents \)220,000, and Franchises $130,000. Prepare the intangible assets section of the balance sheet.

BE5-7 (L03) Thomas Corporation鈥檚 adjusted trial balance contained the following liability accounts at December 31, 2017: Bonds Payable (due in 3 years) \(100,000, Accounts Payable \)72,000, Notes Payable (due in 90 days) \(22,500, Salaries and Wages Payable \)4,000, and Income Taxes Payable $7,000. Prepare the current liabilities section of the balance sheet.

Case 2: Sherwin-Williams Company Sherwin-Williams, based in Cleveland, Ohio, manufactures a wide variety of paint and other coatings, which are marketed through its specialty stores and in other retail outlets. The company also manufactures paint for automobiles. The Automotive Division has had financial difficulty. During a recent year, five branch locations of the Automotive Division were closed, and new management was put in place for the remaining branches.

The following titles were shown on Sherwin-Williams鈥檚 balance sheet for that year.

Account payable

Machinery and Equipment

Accounts receivable, less allowance

Other accruals

Accrued taxes

Other capital

Building

Other current assets

Cash and Cash equivalents

Other long term liabilities

Common stock

Postretirement obligation other than pension

Employee compensation payable

Retained earnings

Finished good inventories

Short-term investment

Intangible and other assets

Taxes payable

Land

Work in process and raw material inventories.

Long-term debt

Instructions

(a) Organize the accounts in the general order in which they would have been presented in a classified balance sheet.

(b) When several of the branch locations of the Automotive Division were closed, what balance sheet accounts were most likely affected? Did the balance in those accounts decrease or increase?

Lansbury Inc. had the following balance sheet on December 31, 2016.

LANSBURY INC.

BALANCE SHEET

DECEMBER 31, 2016

Cash

\(20,000

Account payable

\)30,000

Accounts receivables

21,200

Note payable

41,000

Investment

32,000

Common stock

100,000

Plant assets (net)

81,000

Retained earnings

23,200

Land

40,000

\(194,200

\)194,200

During 2017, the following occurred.

1. Lansbury Inc. sold part of its debt investment portfolio for \(15,000. This transaction resulted in a gain of \)3,400 for the firm. The company classifies these investments as available for sale.

2. A tract of land was purchased for \(13,000 cash.

3. Long-term notes payable in the amount of \)16,000 were retired before maturity by paying \(16,000 cash.

4. An additional \)20,000 in common stock was issued at par.

5. Dividends of \(8,200 were declared and paid to stockholders.

6. Net income for 2017 was \)32,000 after allowing for depreciation of \(11,000.

7. Land was purchased through the issuance of \)35,000 in bonds.

8. At December 31, 2017, Cash was \(37,000, Accounts Receivable was \)41,600, and Accounts Payable remained at $30,000.

Instructions

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

(b) Prepare an unclassified balance sheet as it would appear at December 31, 2017.

(c) How might the statement of cash flows help the user of the financial statements? Compute two cash flow ratios.

(Preparation of a Corrected Balance Sheet) Uhura Company has decided to expand its operations. The bookkeeper recently completed the balance sheet presented below in order to obtain additional funds for expansion.

UHURA Company

Balance Sheet

For the year ended 2017

Current assets

Cash

\(230,000

Accounts receivables (Net)

340,000

Inventory (Lower of average cost or market)

401,000

Equity investment (Trading)

140,000

Property, Plant and Equipment

Building (net)

570,000

Equipment (net)

160,000

Land held for future use

175,000

Intangible assets

Goodwill

80,000

Cash surrender value of life insurance

90,000

Prepaid expenses

12,000

Current liabilities

Account payable

135,000

Note payable

125,000

Pension obligation

82,000

Rent payable

49,000

Premium on bond payable

53,000

Long-term Liabilities

Bond payable

500,000

Stockholders equity

Common stock \)1 par, authorized 400,000 shares, issued 290,000

290,000

Additional paid in capital

160,000

Retained earnings

Instructions

Prepare a revised balance sheet given the available information. Assume that the accumulated depreciation balance for the buildings is \(160,000 and for the equipment, \)105,000. The allowance for doubtful accounts has a balance of $17,000. The pension obligation is considered a long-term liability.
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