Chapter5.docx
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Chapter5.docx
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Chapter5
EXERCISE5-2(15-20minutes)
(a)
8
(l)
6
(b)
4
(m)
1
(c)
6
(n)
7
(d)
6
(o)
3
(e)
3
(p)
2
(f)
1
(q)
1
(g)
6
(r)
1
(h)
7
(s)
7
(i)
1
(t)
6
(j)
1
(u)
11
(k)
6
EXERCISE5-4(35-40minutes)
(a)
BrunoCorp.
BalanceSheet
December31,2011
Assets
Currentassets
Cash
$290,000
Tradingsecurities—atfairvalue
120,000
Accountsreceivable
$357,000
Lessallowancefordoubtfulaccounts
17,000
340,000
Inventories,atlowerofaveragecostornetrealizablevalue
401,000
Prepaidexpenses
12,000
Totalcurrentassets
1,163,000
Long-terminvestments
Landheldforfutureuse
175,000
Heldtomaturityinvestmentsinbonds
90,000
265,000
Property,plant,andequipment
Building
$730,000
Lessaccumulateddepreciation—building
160,000
570,000
Officeequipment
265,000
Lessaccumulateddepreciation—officeequipment
105,000
160,000
730,000
Goodwill
80,000
Totalassets
$2,238,000
EXERCISE5-4(Continued)
LiabilitiesandShareholders’Equity
Currentliabilities
Accountspayable
$195,000
Bankoverdraft
30,000
Notespayable(duenextyear)
125,000
Rentpayable
49,000
Totalcurrentliabilities
399,000
Long-termliabilities
Bondspayable
$500,000
Addpremiumonbondspayable
53,000
$553,000
Pensionobligation
82,000
635,000
Totalliabilities
1,034,000
Shareholders’equity
Commonshares,unlimitedauthorizedissued290,000shares
290,000
Contributedsurplus
180,000
Retainedearnings*
734,000
Totalshareholders’equity
1,204,000
Totalliabilitiesandshareholders’equity
$2,238,000
*$2,238,000–$1,034,000–$290,000–$180,000=$734,000
EXERCISE5-4(Continued)
*(b)Thebankoverdraftisclassifiedasacurrentliability,asthereisnolegalrighttooffsetthebankoverdraftagainstthepositivecashbalance.Thebankaccountsareatdifferentbanks.Hadthebankoverdraftbeensetoff(netted)againstthecashbalanceasoriginallypreparedbythebookkeeper,therewouldhavebeennoeffectonworkingcapital.Thenetamountofcurrentassets,lesscurrentliabilitieswouldnotchangeinabsoluteamount.
Theclassificationchangedoesaffectthecurrentratio(currentassets/bycurrentliabilities):
Overdraftnetted
Properclassification
$1,163–$30
$1,163
$399–$30
$399
=3.07
=2.91
Thosewhopreparedthebalancesheetdidnotlikelydothemisclassificationofthebankoverdraftonpurpose.ThebankaccountinoverdraftislikelyoneofseveralbankaccountsusedbyBrunoCorp.Thisparticularaccounthappenstofallinatemporaryoverdraftpositionasofthefiscalyearendofthebusiness.Thenettingoftheaccountswasdonewithoutrelatingtheeffectofthenettingontheratio.
EXERCISE5-8(10-15minutes)
1.Dividendspayableof$2,500,000willbereportedasacurrentliability(1,000,000X$2.50).
2.Noamountsarereportedasacurrentorlong-termliability.Stockdividendsdistributablearereportedintheshareholders'equitysection.
3.Bondspayableof$25,000,000andinterestpayableof$1,750,000($100,000,000X7%X3/12)willbereportedasacurrentliability.Bondspayableof$75,000,000willbereportedasalong-termliability.
4.Customeradvancesof$27,000,000willbereportedasacurrentliability($12,000,000+$40,000,000–$25,000,000).
5.Noamountsarereportedasacurrentorlong-termliability.Retainedearningsappropriationsarereportedandoftensegregatedintheshareholders'equitysectionorasanotetothefinancialstatementsrelatedtoretainedearnings.
6.Demandbankloansmustbeclassifiedascurrentliabilities.
EXERCISE5-11(35-40minutes)
(a)
ZeitzCorporation
BalanceSheet
December31,2011
Assets
Currentassets
Cash
$205,000
Tradingsecurities
153,000
Accountsreceivable
$515,000
Lessallowancefordoubtful
accounts
(25,000)
490,000
Inventories
687,000
Totalcurrentassets
$1,535,000
Long-terminvestments
Investmentsinbondstobeheldtomaturity
299,000
Investmentsinshares(fairvaluethroughOCI)
345,000
Totallong-terminvestments
644,000
Property,plant,andequipment
Land
260,000
Building
1,040,000
Lessaccumulateddepreciation
(152,000)
888,000
Equipment
600,000
Lessaccumulateddepreciation
(60,000)
540,000
Totalproperty,plant,andequipment
1,688,000
Intangibleassets
Franchise(net)
160,000
Patent(net)
195,000
Totalintangibleassets
355,000
Totalassets
$4,222,000
EXERCISE5-11(Continued)
LiabilitiesandShareholders’Equity
Currentliabilities
Accountspayable
$545,000
Short-termnotespayable
98,000
Dividendspayable
136,000
Accruedliabilities
96,000
Totalcurrentliabilities
$875,000
Long-termdebt
Long-termnotespayable
900,000
Bondspayable
1,000,000
Totallong-termliabilities
1,900,000
Totalliabilities
2,775,000
Shareholders’equity
Commonshares
$809,000
Retainedearnings**
490,000
Accumulatedothercomprehensiveincome
148,000*
Totalshareholders’equity
1,447,000
Totalliabilitiesandshareholders’equity
$4,222,000
*Long-terminvestmentsinshares–gain:
Shares–fairvaluethroughOCI
($345,000–$277,000)
$68,000
Addopeningbalance
80,000
$148,000
**ComputationofRetainedEarnings:
Sales
$7,960,000
Investmentgains
63,000
Unusualgain
160,000
Costofgoodssold
(4,800,000)
Sellingexpenses
(1,860,000)
Administrativeexpenses
(900,000)
Interestexpense
(211,000)
Netincome
$412,000
Beginningretainedearnings
$218,000
Netincome
412,000
Correctionofprioryear’serror
(140,000)
Endingretainedearnings
$490,000
EXERCISE5-11(Continued)
(b)Theclassificationisusedformeasurementofliquidityandrequiresthereportingofcurrentassetsandliabilities.Thelengthoftheoperatingcyclewilldeterminewhatitemsareclassifiedascurrentwheretheoperatingcycleislongerthanoneyear.Shouldthebusinesshaveseveralsegments,suchasinthecaseofBombardierInc.,(aerospace,transportationandfinancingservices)andtheoperatingcyclesareverydifferent,applyingonecyclelengthtoallbusinesssegmentsbecomesmeaningless.Incasessuchasthis,theconsolidatedbalancesheetisnotclassified.
(C)Currentratio=totalcurrentassets/totalcurrentliabilities
=1,535,000/875,000
=1.75times
Debttototalassets=2,775,000/4,222,000
=65.7%
Zeitzhasastrongcurrentratioat1.75times.Thisindicatesthecompanyshouldnothaveproblemsmeetingitsobligationsintheshortterm.However,wemustconsiderthecompositionofcurrentassets.45%ofcurrentassetsisininventory.Wewouldneedtoconsiderhowquicklyinventoryisturnedoverandwhethertheremaybeobsolescenceissues.Accountsreceivablesare32%ofcurrentassets.Considerationwouldneedtobegiventotheadequacyoftheallowanceaccount.
Approximately66%ofZeitz’sassetsarefinancedbydebt.Thisisapproachingthehighside.Thereislikelyroomtoadddebt;however,creditorswilllikelybecomeconcernediftheratiocontinuestoincrease.
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