Complex
Your company has been engaged to perform an audit, during which you discover the following information:
- 1. Checks totaling $14,000 in payment of accounts payable were mailed on December 31, 2019, but were not recorded until 2020. Late in December 2019, the bank returned a customer’s $2,000 check marked “NSF,” but no entry was made. Cash includes $100,000 restricted for building purposes.
- 2. Included in accounts receivable is a $30,000 note due on December 31, 2022, from Zeus’s president.
- 3. During 2019, Zeus purchased 500 shares of common stock of a major corporation that supplies Zeus with raw materials. Total cost of this stock was $51,300, and fair value on December 31, 2019, was $51,300. Zeus plans to hold these shares indefinitely.
- 4.
Treasury stock was recorded at cost when Zeus purchased 200 of its own shares for $32 per share in May 2019. This amount is included in investments. - 5. On December 31, 2019, Zeus borrowed $500,000 from a bank in exchange for a 10% note payable, manning December 31, 2024. Equal principal payments are due December 31 of each year beginning in 2020. This note is collateralized by a $250,000 tract of land acquired as a potential future building site, which is included in land.
- 6. The mortgage payable requires $50,000 principal payments, plus interest, at the end of each month. Payments were made on January 31 and February 28, 2020. The balance of this mortgage was due June 30, 2020. On March 1, 2020, prior to issuance of the audited financial statements, Zeus consummated a non-cancelable agreement with the lender to refinance this mortgage. The new terms require $100,000 annual principal payments, plus interest, on February 28 of each year, beginning in 2021. The final payment is due February 28, 2028.
- 7. The lawsuit liability will be paid in 2020.
- 8. Of the total
deferred tax liability ; $5,000 is considered a current liability. - 9. The current income tax expense reported in Zeus’s 2019 income statement was $61,200.
- 10. The company was authorized to issue 100,000 shares of $50 par value common stock.
Prepare a corrected classified balance sheet as of December 31, 2019.
Explanation of Solution
Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.
Prepare a corrected classified balance sheet of Company Z:
Company Z | |||
Balance Sheet | |||
December 31,2019 | |||
Current Assets: | Amount ($) | Amount ($) | Amount ($) |
Cash (1) | 109,000 | ||
Accounts receivable (net) (2) | 317,700 | ||
Inventories | 560,000 | ||
Total current assets | 986,700 | ||
Long-Term Investment, at fair value (3) | 51,300 | ||
Property, Plant, and Equipment (at cost): | |||
Land (4) | 200,000 | ||
Building | 1,750,000 | ||
Machinery and equipment | 1,964,000 | ||
Total | 3,714,000 | ||
Less: Accumulated depreciation | (420,000) | 3,294,000 | |
Total property, plant, and equipment | 3,494,000 | ||
Intangible Asset: | |||
Goodwill | 37,000 | ||
Other Assets: | |||
Cash restricted for building purposes [ Refer working note (1) ] | 100,000 | ||
Officer’s note receivable [ Refer working note (2) ] | 30,000 | ||
Land held for future building site [ Refer working note (4) ] | 250,000 | 380,000 | |
Total Assets | 4,949,000 | ||
Liabilities | |||
Current Liabilities: | |||
Accounts payable (5) | 119,800 | ||
Current instalments of long-term debt[ Refer working notes (6) & (7) ] | 200,000 | ||
Lawsuit liability | 80,000 | ||
Income taxes payable (8) | 21,200 | ||
Deferred tax liability | 5,000 | ||
Total current liabilities | 426,000 | ||
Long-Term Debt: | |||
Mortgage payable (6) | 800,000 | ||
Notes payable (7) | 400,000 | ||
Deferred tax liability | 23,000 | ||
Total long-term debt | 1,223,000 | ||
Total Liabilities | 1,649,000 | ||
Shareholders’ Equity: | |||
Contributed Capital: | |||
Common stock, authorized 100,000 shares of $50 par value; issued 40,000 shares; outstanding 39,800 shares (9) | 2,000,000 | ||
Additional paid-in capital [ Refer working note (9) ] | 231,000 | ||
Total paid-in capital | 2,231,000 | ||
Retained earnings | 1,075,400 | ||
Total | 3,306,400 | ||
Less: Cost of treasury stock capital [ Refer working note (3) ] | (6,400) | ||
Total Shareholders’ Equity | 3,300,000 | ||
Total Liabilities and Shareholders’ Equity | 4,949,000 |
Table (1)
Therefore, the total of assets and total liabilities and shareholders’ equity equals to $4,949,000.
Working notes:
(1) Calculate corrected amount of cash balance:
Cash, per unaudited balance sheet | $225,000 |
Less: Unrecorded checks in payment of accounts payable | ($14,000) |
NSF check not recorded | ($2,000) |
Cash restricted for building purposes (reported in other assets) | ($100,000) |
Corrected balance | 109,000 |
Table (2)
(2) Calculate the corrected amount of accounts receivable:
Accounts receivable (net), per unaudited balance sheet | $345,700 |
Add charge-back for NSF check [refer working note (1)] | $2,000 |
Less: Officer’s note receivable (reported in other assets) | ($30,000) |
Corrected balance | $317,700 |
Table (3)
(3) Calculate the corrected amount of investments:
Investments, per unaudited balance sheet | $57,700 |
Less: Long-term investment [reported separately as an asset] | ($51,300) |
Treasury stock [reported in shareholders’ equity] | ($6,400) |
Corrected balance | $0 |
Table (4)
(4) Calculate the corrected amount of land:
Land, per unaudited balance sheet | $450,000 |
Less: Land acquired for future building site (reported in other assets) | ($250,000) |
Corrected balance | $200,000 |
Table (5)
(5) Calculate the corrected amount of accounts payable:
Accounts payable, per unaudited balance sheet | $133,800 |
Less: Unrecorded payments [refer working note (1)] | ($14,000) |
Corrected balance | $119,800 |
Table (6)
(6) Calculate the corrected amount of mortgage payable:
Mortgage payable, per unaudited balance sheet | $900,000 |
Less: Current portion | (100,000) |
Refinanced as long-term mortgage payable | $800,000 |
Table (7)
(7) Calculate the corrected amount of long-term note payable:
Notes payable, per unaudited balance sheet | $500,000 |
Less: Current portion | ($100,000) |
Long-term note payable | $400,000 |
Table (8)
(8) Calculate the corrected amount of income taxes payable:
Income taxes payable, per unaudited balance sheet | $61,200 |
Less: Prepaid income taxes | ($40,000) |
Corrected balance | $21,200 |
Table (9)
(9) Calculate the corrected amount of common stock:
Common stock, per unaudited balance sheet | $2,231,000 |
Less: Additional paid-in capital in excess of par value | ($231,000) |
Corrected balance | $2,000,000 |
Table (10)
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Chapter 4 Solutions
Intermediate Accounting: Reporting And Analysis
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