E5-9 (L02,3) (Current Assets and Current Liabilities) The current assets and current liabilities sections of the balance sheet of Allessandro Scarlatti Company appear as follows.
ALLESSANDRO SCARLATTI COMPANY
BALANCE SHEET PARTIAL
December 31, 2017
Less: Allowance for doubtful accounts
The following errors in the corporation’s accounting have been discovered:
1. January 2018 cash disbursements entered as of December 2017 included payments of accounts payable in the amount of $39,000, on which a cash discount of 2% was taken.
2. The inventory included $27,000 of merchandise that had been received at December 31 but for which no purchase invoices had been received or entered. Of this amount, $12,000 had been received on consignment; the remainder was purchased f.o.b. destination, terms 2/10, n/30.
3. Sales for the first four days in January 2018 in the amount of $30,000 were entered in the sales journal as of December 31, 2017. Of these, $21,500 were sales on account and the remainder were cash sales.
4. Cash, not including cash sales, collected in January 2018 and entered as of December 31, 2017, totaled $35,324. Of this amount, $23,324 was received on account after cash discounts of 2% had been deducted; the remainder represented the proceeds of a bank loan.
(a) Restate the current assets and current liabilities sections of the balance sheet in accordance with good accounting practice. (Assume that both accounts receivable and accounts payable are recorded gross.)
(b) State the net effect of your adjustments on Allessandro Scarlatti Company’s retained earnings balance.
The correct balance of the current asset is $286,696, and the current liability is $140,000.
Cash discount can be defined as the advantages of making early cash payments. It is provided to motivate the borrower to make early payments.
Calculation of adjusted cash balance
Reported cash balance
Add: Cash disbursement of 2018 after discount of 2% for $39,000
Less: Cash Sales of 2018
Less: Cash collected on account
Less: Proceed from bank loan
Adjusted Cash balance
Calculation of adjusted inventory balance
Reported inventory balance
Less: Consignment inventory (35,324 – 23,324)
Adjusted Balance of inventory
Calculation of adjusted balance of receivables
Less: Account sales of January 2018
Add: Collection in January 2018 (23,324/.98)
Calculation of adjusted Balance of account payable
Add: Cash disbursement
Less: Purchase invoice omitted (27,000 – 12,000)
Adjusted balance of account payable
Calculation of adjusted balance of note payable
Less: Proceed from bank loan
Adjusted balance of note payable
Sales discount of January (39,000/0.98)*0.02
January Purchase discount (39,000*2%)
December Purchases (27,000 – 12,000)
Net decrease in the retained earnings
Case 1: Uniroyal Technology Corporation
Uniroyal Technology Corporation (UTC), with corporate offices in Sarasota, Florida, is organized into three operating segments. The high-performance plastics segment is responsible for research, development, and manufacture of a wide variety of products, including orthopedic braces, graffiti-resistant seats for buses and airplanes, and a static-resistant plastic used in the central processing units of microcomputers. The coated fabrics segment manufactures products such as automobile seating, door and instrument panels, and specialty items such as waterproof seats for personal watercraft and stain-resistant, easy-cleaning upholstery fabrics. The foams and adhesives segment develops and manufactures products used in commercial roofing applications.
The following items relate to operations in a recent year.
1. Serious pressure was placed on profitability by sharply increasing raw material prices. Some raw materials increased in price 50% during the past year. Cost containment programs were instituted and product prices were increased whenever possible, which resulted in profit margins actually improving over the course of the year.
2. The company entered into a revolving credit agreement, under which UTC may borrow the lesser of $15,000,000 or 80% of eligible accounts receivable. At the end of the year, approximately $4,000,000 was outstanding under this agreement. The company plans to use this line of credit in the upcoming year to finance operations and expansion.
(a) Should investors be informed of raw materials price increase, such as described in item 1? Does the fact that the company successfully met the challenge of higher prices affect the answer? Explain.
(b) How should the information in item 2 be presented in the financial statements of UTC?
EXCEL (Balance Sheet Preparation) Presented below are a number of balance sheet items for Montoya, Inc., for the current year, 2017.
Accumulated depreciation - equipment
Payroll tax payable
Rent payable (short-term)
Discount on bond payable
Income tax payable
Rent payable (long-term)
Common stock, $1 par value
Preferred stock, $10 par value
Debt investment (trading)
Income tax receivable
Accumulated depreciation – building
Note payable (Long-term)
Prepare a classified balance sheet in good form. Common stock authorized was 400,000 shares, and preferred stock authorized was 20,000 shares. Assume that notes receivable and notes payable are short-term unless stated otherwise. The cost and fair value of equity investments (trading) are the same.
Case 2: Sherwin-Williams Company Sherwin-Williams, based in Cleveland, Ohio, manufactures a wide variety of paint and other coatings, which are marketed through its specialty stores and in other retail outlets. The company also manufactures paint for automobiles. The Automotive Division has had financial difficulty. During a recent year, five branch locations of the Automotive Division were closed, and new management was put in place for the remaining branches.
The following titles were shown on Sherwin-Williams’s balance sheet for that year.
Machinery and Equipment
Accounts receivable, less allowance
Other current assets
Cash and Cash equivalents
Other long term liabilities
Postretirement obligation other than pension
Employee compensation payable
Finished good inventories
Intangible and other assets
Work in process and raw material inventories.
(a) Organize the accounts in the general order in which they would have been presented in a classified balance sheet.
(b) When several of the branch locations of the Automotive Division were closed, what balance sheet accounts were most likely affected? Did the balance in those accounts decrease or increase?
E5-12 (L03) (Preparation of a Balance Sheet) Presented below is the trial balance of Scott Butler Corporation at December 31, 2017.
Debt investment (trading) (at cost $145,000)
Cost of goods sold
Debt investment (long-term)
Equity Investment (long-term)
Notes payable (Short-term)
Accumulated depreciation – Building
Allowance for doubtful accounts
Accumulated depreciation – Equipment
Paid-in-capital in excess of par
Instructions Prepare a balance sheet at December 31, 2017, for Scott Butler Corporation. (Ignore income taxes.)
5. A company has purchased a tract of land and expects to build a production plant on the land in approximately five years. During the 5 years before construction, the land will be idle. Under IFRS, the land should be reported as:
(a) land expense.
(b) property, plant, and equipment.
(c) an intangible asset.
(d) a long-term investment.
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