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Intermediate Accounting (Kieso)
Found in: Page 256

Short Answer

Early in January 2018, Hopkins Company is preparing for a meeting with its bankers to discuss a loan request. Its bookkeeper provided the following accounts and balances at December 31, 2017.

Debit $

Credit $

Cash

$75,000

Accounts receivable (net)

38,500

Inventory (net)

65,300

Equipment (net)

84,000

Patent

15,000

Notes and Accounts payable

$52,000

Note payable (due 2019)

75,000

Common stock

100,000

Retained earnings

50,800

$277,800

$277,800

Except for the following items, Hopkins has recorded all adjustments in its accounts.

1. Cash includes $500 petty cash and $15,000 in a bond sinking fund.

2. Net accounts receivable is comprised of $52,000 in accounts receivable and $13,500 in allowance for doubtful accounts.

3. Equipment had a cost of $112,000 and accumulated depreciation of $28,000.

4. On January 8, 2018, one of Hopkins’ customers declared bankruptcy. At December 31, 2017, this customer owed Hopkins $9,000.

Accounting

Prepare a corrected December 31, 2017, balance sheet for Hopkins Company.

Analysis

Hopkins’ bank is considering granting an additional loan in the amount of $45,000, which will be due December 31, 2018. How can the information in the balance sheet provide useful information to the bank about Hopkins’ ability to repay the loan?

Principles

In the upcoming meeting with the bank, Hopkins plans to provide additional information about the fair value of its equipment and some internally generated intangible assets related to its customer lists. This information indicates that Hopkins has significant unrealized gains on these assets, which are not reflected on the balance sheet. What objections is the bank likely to raise about the usefulness of this information in evaluating Hopkins for the loan renewal?

The balance sheet of the company totals $277,800.

See the step by step solution

Step by Step Solution

Definition of Financial Analysis

The process of evaluating a business entity or any project from the perspective of finance is known as financial analysis. It uses various figures from the financial statement to determine liquidity, solvency, stability, and profitability.

Balance Sheet

Particular

Amount $

Amount $

Assets:

Current assets

Cash

$58,500

Petty cash

1,500

Accounts receivables

$52,000

Less: Allowance for doubtful account

(13,500)

38,500

Inventory

65,300

Total current assets

163,800

Long-term investment

Bonds sinking fund

15,000

Property, Plant and Equipment

Equipment

112,000

Less: Accumulated depreciation

(28,000)

84,000

Intangible assets

Patent

15,000

Total Assets

$277,800

Liabilities and shareholder’s equity

Current liabilities

Note and Accounts payable

52,000

Non-Current liabilities

Note payable (due 2019)

75,000

Total liabilities

127,000

Shareholders’ equity

Common stock

100,000

Retained earnings

50,800

Total liabilities and shareholder’s equity

$277,800

Analysis

The loan will become due within one year; therefore, the liquidity of the business entity will be used to assess the capacity to make repayment. Thus, the current ratio will be calculated:

The current ratio is more than the ideal current ratio two times. Therefore, it can be said that a business entity can repay the loan.

Principles

The business entity has not followed the entire disclosure principle because information relating to unrealized gain is not reported in the company’s financial statement. However, the bank will not object to the usefulness of the information because the bank does not provide loans considering the unrealized gains. Bank evaluates the liquidity and solvency, which is determined using the current and non-current assets and liabilities.

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