What are the major limitations of the balance sheet as a source of information?
Balance information has some limitations because of the historical cost concept, estimations, and eliminating some items having value.
The accounting concept established by the authorized board stating that the business entity might report all the resources at historical price is known as the historical cost concept.
The bookkeeper for Geronimo Company has prepared the following balance sheet as of July 31, 2017.
As of July 31, 2017
Notes and accounts payable
Account receivable (net)
The following additional information is provided.
1. Cash includes $1,200 in a petty cash fund and $15,000 in a bond sinking fund.
2. The net accounts receivable balance is comprised of the following two items: (a) accounts receivable $44,000 and (b) allowance for doubtful accounts $3,500.
3. Inventory costing $5,300 was shipped out on consignment on July 31, 2017. The ending inventory balance does not include the consigned goods. Receivables in the amount of $5,300 were recognized on these consigned goods.
4. Equipment had a cost of $112,000 and an accumulated depreciation balance of $28,000.
5. Income taxes payable of $6,000 were accrued on July 31. Geronimo Company, however, had set up a cash fund to meet this obligation. This cash fund was not included in the cash balance but was offset against the income taxes payable amount.
Prepare a corrected classified balance sheet as of July 31, 2017, from the available information, adjusting the account balances using the additional information.
(Classification of Balance Sheet Accounts) Presented below are the captions of Faulk Company’s balance sheet.
(a) Current assets
(f) Current liabilities
(g) Noncurrent liabilities
(c) Property, plant, and equipment
(h) Capital stock
(d) Intangible assets
(i) Additional paid-in capital
(e) Other assets
(j) Retained earnings
Indicate by letter where each of the following items would be classified.
1. Preferred stock
11. Cash surrender value of life insurance
12. Note payable
3. Salaries and wages payable
4. Account payable
14. Common stock
6. Equity investment (trading)
16. Bond sinking fund
7. Current maturity of long-term debt
8. Premium on bond payable
18. Prepaid insurance
9. Allowance for doubtful accounts
19. Bond payable
10. Accounts receivable
20. Income tax payable
(Presentation of Property, Plant, and Equipment) Carol Keene, corporate comptroller for Dumaine Industries, is trying to decide how to present “Property, plant, and equipment” in the balance sheet. She realizes that the statement of cash flows will show that the company made a significant investment in purchasing new equipment this year, but overall she knows the company’s plant assets are rather old. She feels that she can disclose one figure titled “Property, plant, and equipment, net of depreciation,” and the result will be a low figure. However, it will not disclose the age of the assets. If she chooses to show the cost less accumulated depreciation, the age of the assets will be apparent. She proposes the following.
Property, Plant, and Equipment (net of depreciation)
Property, Plant, and Equipment
Less: Accumulated depreciation
Net book value
Answer the following questions.
(a) What are the ethical issues involved?
(b) What should Keene do?
E5-8 (L02) (Current vs. Long-term Liabilities) Frederic Chopin Corporation is preparing its December 31, 2017, balance sheet. The following items may be reported as either a current or long-term liability.
1. On December 15, 2017, Chopin declared a cash dividend of $2.50 per share to stockholders of record on December 31. The dividend is payable on January 15, 2018. Chopin has issued 1,000,000 shares of common stock, of which 50,000 shares are held in treasury.
2. At December 31, bonds payable of $100,000,000 are outstanding. The bonds pay 12% interest every September 30 and mature in installments of $25,000,000 every September 30, beginning September 30, 2018.
3. At December 31, 2016, customer advances were $12,000,000. During 2017, Chopin collected $30,000,000 of customer advances; advances of $25,000,000 should be recognized in income.
Instructions For each item above, indicate the dollar amounts to be reported as a current liability and as a long-term liability if any.
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