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Chapter 24: 4CA_1 (page 1454)

At December 31, 2017, Coburn Corp. has assets of \(10,000,000, liabilities of \)6,000,000, common stock of \(2,000,000 (representing 2,000,000 shares of \)1 par common stock), and retained earnings of \(2,000,000. Net sales for the year 2017 were \)18,000,000, and net income was \(800,000. As auditors of this company, you are making a review of subsequent events on February 13, 2018, and you find the following.

  1. On February 3, 2018, one of Coburn鈥檚 customers declared bankruptcy. At December 31, 2017, this company owed Coburn \)300,000, of which $60,000 was paid in January 2018.

Instructions

State in each case how the 2017 financial statements would be affected, if at all.

Short Answer

Expert verified

A loss of $240,000 should be adjusted in financial statements.

Step by step solution

01

Meaning of Balance sheet

The balance sheet is a report that lists all of an entity's assets, liabilities, and equity as of a specific date. Lenders, investors, and creditors commonly use it to evaluate a company's liquidity. A balance sheet is one of the papers that make up a company's financial statements.

02

Explaining the effect in the financial statements

Financial accounts must be reconciled to reflect a loss estimated at $240,000 in balances receivable. As of December 31, 2017, this adjustment should reduce accounts receivable to their realizable value.

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Most popular questions from this chapter

Jane Ellerby and Sam Callison are discussing the recent fraud that occurred at LowRental Leasing, Inc. The fraud involved the improper reporting of revenue to ensure that the company would have income in excess of $1 million. What is fraudulent financial reporting, and how does it differ from an embezzlement of company funds?

Identify the segment information that is required to be disclosed by GAAP.

The following statement is an excerpt from the FASB pronouncement related to interim reporting. Interim financial information is essential to provide investors and others with timely information as to the progress of the enterprise. The usefulness of such information rests on the relationship that it has to the annual results of operations. Accordingly, the Board has concluded that each interim period should be viewed primarily as an integral part of an annual period. In general, the results for each interim period should be based on the accounting principles and practices used by an enterprise in the preparation of its latest annual financial statements unless a change in an accounting practice or policy has been adopted in the current year. The Board has concluded, however, that certain accounting principles and practices followed for annual reporting purposes may require modification at interim reporting dates so that the reported results for the interim period may better relate to the results of operations for the annual period.

Instructions

The following six independent cases present how accounting facts might be reported on an individual company鈥檚 interim financial reports. For each of these cases, state whether the method proposed to be used for interim reporting would be acceptable under generally accepted accounting principles applicable to interim financial data. Support each answer with a brief explanation.

a) J. D. Long Company takes a physical inventory at year-end for annual financial statement purposes. Inventory and cost of sales reported in the interim quarterly statements are based on estimated gross profit rates, because a physical inventory would result in a cessation of operations. Long Company does have reliable perpetual inventory records.

Distinguish between ratio analysis and percentage analysis relative to the interpretation of financial statements. What is the value of these two types of analyses?

What are interim reports? Why are balance sheets often not provided with interim data?
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