THE BALANCE SHEET AND STATEMENT OF CHANGES IN STOCKHOLDERS' by eno20265

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									                                         CHAPTER 4


          THE BALANCE SHEET AND STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY



CONTENT ANALYSIS OF EXERCISES AND PROBLEMS


                                                                              Time Range
 Number                                 Content                                 (minutes)

 E4-1        Current Assets. (Easy) Partial balance sheet preparation from       5-10
             listed accounts.

 E4-2        Plant and Equipment. (Easy) Partial balance sheet preparation       10-15
             from general information.

 E4-3        Stockholders' Equity. (Easy) Partial balance sheet preparation      5-10
             from listed accounts.

 E4-4        Balance Sheet. (Moderate) Matching various accounts with            5-10
             major sections.

 E4-5        Balance Sheet. (Moderate) Matching various accounts with            5-10
             major sections.

 E4-6        Balance Sheet. (Moderate) Preparation from accounts listed in       15-20
             random order. Calculation of debt ratio.

 E4-7        Balance Sheet. (Moderate) Preparation from accounts listed in       20-25
             alphabetical order. Calculation of working capital and current
             ratio. IFRS discussion.

 E4-8        Balance Sheet Calculations. (Moderate) Calculate missing            15-25
             information, given amounts of selected balance sheet
             elements.

 E4-9        Balance Sheet Calculations. (Moderate) Calculate missing            25-35
             information, given amounts of selected balance sheet
             elements.

 E4-10       Corrections. (Moderate) Preparation of a properly classified        10-15
             balance sheet from one prepared erroneously.

 E4-11       Changes in Stockholders' Equity. (Moderate) Stock issuance,         10-15
             income earned, dividends paid. Statement of changes in
             stockholders' equity.

 E4-12       Changes in Stockholders' Equity. (Moderate) Stock issuance,         10-15
             income earned, dividends paid. Statement of changes in
             stockholders' equity.




                                             4-1
                                                                         Time Range
Number                              Content                                (minutes)

P4-1     Balance Sheet. (Moderate) Matching various accounts with           15-30
         major sections.

P4-2     Balance Sheet. (Moderate) Format preparation, no amounts.          20-40


P4-3     Balance Sheet. (Moderate) Preparation from accounts listed in      30-45
         alphabetical order. Identification of possible disclosures.
         Computation of working capital and current ratio.

P4-4     Balance Sheet. (Moderate) Preparation from accounts listed in      30-45
         random order under U.S. GAAP and under IFRS.

P4-5     Balance Sheet. (Moderate) Preparation from alphabetical            20-30
         adjusted trial balance. Calculation of debt ratio.

P4-6     Balance Sheet. (Challenging) Preparation from accounts listed      60-75
         in random order. Notes. Calculation of current ratio, liquid
         assets, and separable assets.

P4-7     Comprehensive. (Challenging) Preparation of balance sheet          75-90
         from accounts listed in alphabetical order. Notes. Statement
         of changes in stockholders' equity. Calculation of debt ratio
         and discussion.

P4-8     Corrections. (Moderate) Preparation of a properly classified       30-45
         balance sheet from one prepared incorrectly, using account
         breakdowns.

P4-9     Corrections. (Moderate) Preparation of a properly classified       30-45
         balance sheet from one prepared incorrectly, using additional
         available information.

P4-10    Balance Sheet Calculations. (Moderate) Calculate missing           30-40
         information, given amounts of selected balance sheet
         elements.

P4-11    Errors. (Moderate) Identification of balance sheet errors.         30-45
         Preparation of a properly classified balance sheet from one
         prepared erroneously.

P4-12    (AICPA adapted). Complex Balance Sheet. (Challenging)              60-75
         Preparation of corrected balance sheet from unaudited
         balance sheet and additional information.

P4-13    Changes in Stockholders' Equity. (Moderate) Stock issuance,        15-20
         treasury stock, paid dividends, donation, earned income.
         Statement of changes in stockholders' equity.

P4-14    Balance Sheet Disclosures. (Moderate) Questions relating to        20-40
         the review of The Coca-Cola Company balance sheet
         disclosures in Appendix A.


                                     4-2
ANSWERS TO QUESTIONS

Q4-1     The major financial statements of a company are:

         1.    A balance sheet, which shows the company's financial position at the end of
               the accounting period.

         2.    An income statement, which shows the results of operations of the company for
               the accounting period.

         3.    A statement of cash flows, which shows the cash inflows and cash outflows of a
               company for the accounting period.

         Many companies also include a statement of changes in stockholders' equity, which
         shows the changes in each item of a company's stockholders' equity for the
         accounting period, as a fourth major financial statement.

Q4-2     The financial position of a company includes its economic resources (i.e., assets),
         economic obligations (i.e., liabilities), and equity, and their relationships to each other
         at a moment in time.

Q4-3     One purpose of a company's balance sheet is to provide information about its
         liquidity, financial flexibility, and operating capability. A second purpose of the
         balance sheet is to provide a basis for evaluating the company's income-producing
         performance during a period.

Q4-4     Liquidity refers to how quickly a company can convert an asset into cash to pay its
         bills. Financial flexibility refers to the ability of a company to use its financial resources
         to adapt to change. Operating capability refers to the ability of a company to
         maintain a given physical level of operations.

Q4-5     Financial capital is the monetary value of the net assets invested by stockholders, as
         well as from earnings retained by the corporation. Capital maintenance refers to
         maintaining the stockholders' equity of the corporation to provide a return of
         investment. Information about the maintenance of a corporation's capital is
         important in assessing the adequacy of a corporation's profitability and its ability to
         provide a return on investment.

Q4-6     Recognition is the process of formally recording and reporting an element in the
         financial statements. It includes depiction of an element in both words and numbers,
         with the amount included in the totals.

Q4-7     An asset is a probable future economic benefit obtained or controlled by a
         company as a result of a past transaction or event. To be considered an asset, an
         economic resource must have three characteristics. First, the resource must singly, or
         in combination with other resources, have the capacity to contribute directly or
         indirectly to the company's future net cash inflows. Second, the company must be
         able to obtain the future benefit and control others' access to it. Third, the
         transaction or event giving the company the right to or control over the benefit must
         have occurred.




                                                4-3
Q4-8    A liability is a probable future sacrifice of economic benefits arising from a present
        obligation of a company to transfer assets or provide services in the future as a result
        of a past transaction or event. An obligation of a company must have three
        characteristics to be considered a liability. First, it must entail a responsibility to
        another entity or entities that will be settled by a sacrifice involving the transfer of
        assets, providing services, or other use of assets at a specified or determinable date,
        on occurrence of a specified event, or on demand. Second, the responsibility must
        obligate the company so that it has little or no discretion to avoid the future sacrifice.
        Third, the transaction or other event obligating the company must have occurred.

Q4-9    Stockholders' equity is the residual interest in the assets of a corporation that remains
        after deducting its liabilities.

Q4-10   The two alternatives for measuring (valuing) assets are historical cost and fair value.
        Historical cost is the exchange price in the transaction in which an asset was
        acquired. Fair value is the price that a company would receive to sell an asset in an
        orderly transaction between market participants on the date of measurement.

Q4-11   A company's balance sheet is divided into three major sections each with the
        components as follows:

        1. Assets
           a.   Current assets
           b.   Long-term investments
           c.    Property, plant, and equipment
           d.   Intangible assets
           e.   Other assets

        2. Liabilities
           a.     Current liabilities
           b.     Long-term liabilities
           c.     Other liabilities

        3. Stockholders' equity
           a.   Contributed capital
                (1) Capital stock
                (2) Additional paid-in capital
           b.   Retained earnings
           c.   Accumulated other comprehensive income

Q4-12   Current assets are cash and other assets that a company expects to convert into
        cash, sell, or consume within one year or the normal operating cycle, whichever is
        longer.

        Current assets may include five items: (1) cash (and cash equivalents), (2) temporary
        investments in marketable securities, (3) receivables, (4) inventories, and (5) prepaid
        items.




                                          4-4
Q4-12 (continued)

          Current liabilities are obligations of a company that it expects to liquidate by using
          existing current assets, or creating other current liabilities within one year or the
          normal operating cycle, whichever is longer.

          Examples of current liabilities are accounts payable, taxes payable, unearned rent,
          salaries payable, estimated liabilities for warranties, and the current portion of long-
          term debt.

Q4-13     A company's operating cycle is the average time taken by the company to spend
          cash for inventory, process and sell the inventory, and collect the receivables,
          converting them back into cash.

          Working capital of a company relates primarily to the financial resources it uses in its
          operating cycle.

          Working capital is computed by subtracting current liabilities from current assets.

Q4-14     a. If a company expects to hold investments for more than one year or the
             operating cycle, whichever is longer, these investments are classified as long-
             term. Long-term investments include:

             1. Noncurrent investments in available-for-sale debt and equity securities.

             2. Investments in held-to-maturity debt securities.

             3. Investments in noncurrent notes receivable of unaffiliated companies and
                long-term advances to unconsolidated affiliated companies.

             4. Financial instruments (such as options to buy stock) that are noncurrent.

             5. Investments in property and equipment being held for use in future
                operations.

             6. Special funds established for long-term purposes, such as the retirement of
                bonds or the acquisition of equipment.

             7. Miscellaneous investments, such as the cash surrender value of life insurance.

          b. All tangible assets used in the operations of a company are classified as property,
             plant, and equipment. They include:

             1.   Land
             2.   Buildings
             3.   Equipment
             4.   Natural resources
             5.   Leased equipment under capital leases




                                               4-5
Q4-14 (continued)

         c. Economic resources that are used in the operations of the business but that have
            no physical existence are classified as intangible assets. They include:

              1.        Patents
              2.        Copyrights
              3.        Franchises
              4.        Trademarks
              5.        Goodwill

Q4-15    a. Obligations that a company does not expect to liquidate using current assets or
            creating current liabilities within one year or the normal operating cycle
            (whichever is longer) are classified as long-term liabilities. They include:

                   1.    Bonds payable
                   2.    Long-term notes payable
                   3.    Capital lease contract obligations
                   4.    Mortgages payable
                   5.    Pension obligations
                   6.    Obligations under noncurrent financial instruments

         b.        Other liabilities are miscellaneous liabilities not meeting the definition of either a
                   current or long-term liability. They include:

                   1. Deferred income taxes payable
                   2. Obligations of a segment of the company that is being discontinued
                   3. Long-term advances from customers

Q4-16    A bond is a written promise to pay a specified interest rate and to repay a specific
         amount (its face value) at some future maturity date.

         Bonds payable may be disclosed on a company's balance sheet as follows:

                   Long-term liabilities
                     10% bonds payable outstanding, due
                          January 1, 2016                                                   $100,000
                     Less: Unamortized bond discount                                         (15,000)
                                                                                            $ 85,000

Q4-17    a.        Capital stock are the shares of stock that a corporation is authorized to issue as
                   evidence of ownership in that corporation. There are two types of capital
                   stock, preferred stock and common stock. Preferred stock has a preference
                   over common stock as to dividends. Common stock carries the right to vote at
                   the annual stockholders' meeting and to share in residual profits.

         b.        Additional paid-in capital is the amount paid to the corporation by stockholders
                   in excess of the par value of the stock issued.

         c.        Treasury stock is the capital stock of a corporation that has been issued but
                   reacquired by the corporation.



                                               4-6
Q4-17 (continued)

         d.    Retained earnings is the total amount of corporate net income that has not
               been distributed to stockholders as dividends.

         e.    Deficit is the term used to describe a negative retained earnings balance.

         f.    Accumulated other comprehensive income is the other comprehensive
               income [from items such as unrealized increases (gains)or decreases (losses) in
               the fair value of investments in available-for-sale securities] that a corporation
               has accumulated to date.

Q4-18    Investments by owners are increases in the equity of a company resulting from
         transfers of something valuable to the company from other entities to obtain or
         increase ownership interests. Distributions to owners are decreases in the equity of a
         company caused by transferring assets, rendering services, or incurring liabilities to
         owners. Many companies report these items in a statement of changes in
         stockholders' equity.

Q4-19    Examples of accounting policies that are disclosed in the notes accompanying a
         company's financial statements include:

         1.   Basis for consolidation
         2.   Depreciation and amortization methods
         3.   Inventory pricing method
         4.   Method for recognition of profits on long-term contracts
         5.   Revenue recognition method for franchise and leasing operations
         6.   Methods of foreign currency translation

         The disclosure of accounting policies is important because it enables the external
         users of financial statements to see:

         1. What method is employed by the company among existing acceptable
            alternatives.

         2. Whether any method peculiar to the industry is used by the company.

         3. Whether there are any unusual or innovative applications of GAAP.

Q4-20    Financial instruments include items such as notes payable and receivable, contracts
         for loan commitments, collateralized mortgages, interest rate swaps, and put and
         call options on stocks. A company is also required to disclose the fair value of all its
         financial instruments (both assets and liabilities), whether recognized or not on the
         balance sheet, as well as all significant concentrations of credit risk due to its
         financial instruments. A company is required to disclose information such as the types
         of derivative financial instruments it holds, its objectives in holding the instruments,
         and its strategies for achieving these objectives. The description must indicate the
         company's risk management policy in regard to each type of instrument.




                                              4-7
Q4-21   A loss contingency is a situation that exists for a company on its balance sheet date
        involving uncertainty as to possible losses that it may incur if some future event
        occurs.

        The following criteria are required for a company to accrue a loss contingency:

        1. It is probable that a liability has been incurred (or an asset impaired), and

        2. The amount of the loss can be reasonably estimated.

        If one of these criteria is not met, a company discloses a loss contingency in a note
        accompanying its financial statements.

Q4-22   Usually a time lag of several weeks or months exists between the end of a company's
        accounting period and the date when it issues its annual report. During this time, it is
        possible for significant business events and transactions to occur, which, if not
        disclosed in the company's annual report, would cause this report to be misleading.
        When subsequent events occur that provide additional evidence about conditions
        that existed on the balance sheet date and significantly affect the estimates the
        company used in its financial statements, an adjustment is made to the financial
        statements. Subsequent events that provide evidence concerning conditions that
        did not exist on the balance sheet date but occurred after that date are disclosed in
        the form of a note, in pro-forma ("as if") statements, or in an explanatory paragraph in
        the audit report, depending on the materiality of the financial impact.

Q4-23   For related-party transactions, a company must disclose (1) the nature of the
        relationship involved, (2) a description of the transactions, (3) the dollar amount of
        the transactions, and (4) any amounts due to or from the related parties on the
        balance sheet date.

Q4-24   Comparative financial statements provide current as well as past financial
        information about a company. This information enables a trend to be drawn of the
        company's activities, thus yielding useful insights into the prediction of the company's
        future performance.

Q4-25   In an audit the certified public accountant is responsible for making an examination
        of the accounting system, records, and reports of a company in accordance with
        generally accepted auditing standards and, based on this examination, expressing
        an opinion as to the effectiveness of the company’s internal control over its financial
        reporting, and the fairness of the company's financial statements and
        accompanying notes in accordance with generally accepted accounting
        principles. The opinion, or auditor's report, usually provides external users with
        additional confidence that the reported financial statements and notes are a fair
        presentation of the company's financial resources, obligations, and activities.

Q4-26   The SEC "integrated" disclosures that most regulated companies include in their
        annual reports are:

        (1)   Comparative financial statements. These include comparative balance sheets
              for two years and comparative income statements and statements of cash
              flows for three years.



                                         4-8
Q4-26 (continued)

         (2)    Selected financial data. These include (for a five-year period) net sales or
                operating revenues, income (loss) from continuing operations and related
                earnings per share, total assets, long-term obligations and redeemable stock,
                and cash dividends declared per share.

         (3)    Management's discussion and analysis. This involves a discussion and analysis of
                the company's financial condition, changes in financial condition, and results of
                operations. It includes, at a minimum, specific information about short-term
                and long-term liquidity and capital resources, a narrative discussion of the
                impact of inflation on sales and on income from continuing operations,
                explanations of material changes in financial statement items between years,
                and known events and uncertainties expected to impact future operations.

         (4)    Common stock market prices and dividends. Information included here
                consists of the principal trading markets for the company's common stock, the
                high and low market prices for each quarter in the last two years, the
                approximate number of stockholders, the dividends paid in the last two years,
                and any dividend restrictions.

Q4-27    On a balance sheet prepared using IFRS, a company will normally report noncurrent
         assets (property, plant, and equipment, investments, long-term receivables, and
         intangible assets) first followed by current assets. The liabilities and owners’ equity
         sections are also usually ordered differently. Usually, capital and reserves (e.g.,
         common stock, additional paid-in capital) are listed first, followed by noncurrent
         liabilities. Current liabilities are listed last.

Q4-28    The report form of the balance sheet takes a vertical format in which the asset
         accounts are listed first and the liability and stockholders' equity accounts are listed in
         sequential order directly below the assets. In the account form, the balance sheet is
         organized in a horizontal fashion, with the asset accounts listed on the left-hand side
         and liabilities and stockholders' equity accounts listed on the right-hand side.

Q4-29    Additional information not included in the accounts reported on a company's
         financial statements can be disclosed by the following alternative methods.

         1. Notes are used to describe narrative information and to provide additional
            monetary amounts (and sometimes supplemental schedules).
            Examples include:

               1.   Summary of significant accounting policies
               b.   Contingent liabilities

         2. Supporting schedules are used to complement an entire financial statement or
            explain a summary amount on a specific financial statement. Examples include:

               a.   Retained earnings statement
               b.   Categories of inventories

         3. Parenthetical notations are used to explain items such as the method of valuation
            or of determining the ending inventory, or to cross-reference certain related asset
            and liability accounts. Examples include:


                                               4-9
Q4-29 (continued)
3. (continued)

               a.     Lower of cost or market method of valuing inventories
               b.     The FIFO method of valuing ending inventory
               c.     Cross-referencing a bond sinking fund to the related bonds payable

Q4-30       When preparing and writing financial reporting notes, the accountant should (1)
            specify what data are to be disclosed (by reference to related generally accepted
            accounting principles), (2) outline the desired format, (3) use short sentences, (4) use
            terminology understandable to the non-accountant, and (5) be concise but
            complete.



ANSWERS TO MULTIPLE CHOICE


   1.   d        3.    a       5.   a        7.    c        9.   d

   2.   d        4.    a       6.   b        8.    c       10.   b




                                            4-10
SOLUTIONS TO REVIEW EXERCISES

RE4-1
           (1) Assets-C
           (2) Liabilities-A
           (3) Stockholders’ Equity-B

RE4-2

Current Assets*
  Cash                                                              $ 1,500
  Marketable securities                                               3,000
  Accounts receivable                              $ 7,600
  Less: Allowance for doubtful accounts             (1,100)           6,500
  Inventories                                                        23,600
  Prepaid rent                                                        2,400
Total current assets                                                           $37,000

*Note: Accounts payable is not included in the current assets section of the balance
sheet.

RE4-3

Current Liabilities*
  Accounts payable                                                  $ 7,200
  Salaries payable                                                    5,800
  Income taxes payable                                                4,000
  Dividends payable                                                     750
  Short-term notes payable                                            2,500
Total current liabilities                                                      $20,250

*Note: Investment in held-to-maturity bonds is not included in the current liabilities
section of the balance sheet.

RE4-4

           Working capital = Current assets – Current liabilities
           Working capital = $37,000 - $20,250
           Working capital = $16,750

RE4-5

Long-Term Investments*
  Investment in held-to-maturity bonds                              $ 6,500
  Fund to retire long-term bonds payable                              7,750
  Long-term advances to unconsolidated affiliates                     3,500
Total long-term investments                                                    $17,750

                                            4-11
RE4-5 (continued)

*Note: Trademarks are not included in the long-term investments section of the balance
sheet.

RE4-6

Property, Plant, and Equipment*
  Land                                                         $ 50,000
  Buildings                                      $175,000
  Less: Accumulated depreciation                  (57,500)      117,500
  Equipment                                      $ 95,000
  Less: Accumulated depreciation                  (25,000)       70,000
Total property, plant, and equipment                                         $237,500

*Note: Patents and Investment in held-to-maturity bonds are not included in the
property, plant, and equipment section of the balance sheet.

RE4-7

Intangible Assets*
   Trademarks                                                  $ 37,000
   Patents                                                       13,000
   Computer software costs                                        8,500
   Goodwill                                                      11,000
Total intangible assets                                                      $ 69,500

*Note: Prepaid rent, land, and inventories are included in the intangible assets section
of the balance sheet.

RE4-8

Long-Term Liabilities*
  Bonds payable                                  $ 4,500
  Less: Unamortized bond discount                   (600)      $ 3,900
  Mortgage payable                                               5,000
  Accrued pension cost                                           9,000
Total long-term liabilities                                                  $17,900

*Note: Fund to retire long-term bonds payable is not included on the long-term liabilities
section of the balance sheet.

RE4-9

Cash*                                                           1,250,000
  Common stock, $2 par                                                          100,000
  Additional paid-in capital on common stock                                  1,150,000

                                       4-12
RE4-10

Stockholders’ Equity*
   Contributed Capital
     Common stock, $5 par                                     $ 50,000
     Additional paid-in capital on common stock                200,000
   Total contributed capital                                               $250,000
   Retained earnings                                                        120,000
   Accumulated other comprehensive income                                    24,500
Total stockholders’ Equity                                                 $394,500

*Note: Income taxes payable is not included in the stockholders’ equity section of the
balance sheet.


SOLUTIONS TO EXERCISES

E4-1
                                JENKINS COMPANY
                       Current Asset Section of Balance Sheet
                                December 31, 2010

Current Assets
  Cash:
     On hand                                                  $ 1,120
     In bank                                                    5,400      $ 6,520
  Marketable securities (short-term)                                         3,380
  Accounts receivable                                         $15,600
  Less: Allowance for doubtful accounts                        (1,100)      14,500
  Inventory                                                                 19,700
  Prepaid items:
     Insurance                                                $ 1,530
     Office supplies                                              970        2,500
Total current assets                                                       $46,600




                                          4-13
E4-2
                               MOEN CORPORATION
                     Property, Plant, and Equipment Section of
                                   Balance Sheet
                                 December 31, 2010

                                                            Accumulated        Book
                                                Cost        Depreciation      Value
 Land                                         $ 19,000           –           $ 19,000
 Buildings*                                    170,000        $51,000         119,000
 Factory machinery                              44,000         31,100          12,900
 Office equipment                               14,500          8,200           6,300
 Office furniture                               17,900          6,500          11,400
   Totals                                     $265,400        $96,800        $168,600

 *Includes office building with cost and accumulated depreciation of
   $50,000 and $15,000, respectively, and factory building with cost
   and accumulated depreciation of $120,000 and $36,000, respectively.

E4-3
                              GRAF CORPORATION
                          Stockholders' Equity Section of
                                 Balance Sheet
                               December 31, 2010
Contributed Capital
  Preferred stock, $100 par                                                $ 65,400
  Common stock, $10 par                                                      47,100
  Premium on preferred stock                                                 39,600
  Premium on common stock                                                    53,900
     Total contributed capital                                             $206,000
Retained Earnings                                                           209,000
Accumulated Other Comprehensive Income                                        8,200
     Total                                                                 $423,200
Less: Treasury stock (at cost)                                               (7,600)
Total Stockholders' Equity                                                 $415,600




                                    4-14
E4-4

   1.    A               5.    G                9.     F       13.   F
   2.    G√              6.    D               10.     G       14.   C
   3.    I               7.    K√+             11.     D       15.   B
   4.    A               8.    I               12.     J√*

  +The unrealized decrease is a negative (although not strictly a contra-
   account) component of Accumulated Other Comprehensive Income.
  *Although the letter is checked, the Deficit account is not a contra-account
   to retained earnings. Instead, it is the title given to a negative retained
   earnings balance.

E4-5

 1.     A      8.   F         15.    H   21.   X Treasury stock (at cost) should be
 2.     G      9.   C√        16.    I           subtracted from the sum of contributed
 3.     C     10.   D         17.    G           capital, retained earnings, and
 4.     J√*   11.   B         18.    A           accumulated other comprehensive
 5.     A     12.   A√        19.    I           income to arrive at total stockholders'
 6.     D     13.   B         20.    C           equity.
 7.     B     14.   F                    22.   K

*Although the letter is checked, the Deficit account is not a contra-account to
 retained earnings. Instead, it is the title given to a negative retained earnings
 balance.




                                                     4-15
E4-6
1.                              BAGGETT COMPANY
                                   Balance Sheet
                                 December 31, 2010

                                        Assets
Current Assets
   Cash                                                      $ 4,300
   Accounts receivable                           $ 12,600
   Less: Allowance for doubtful accounts           (1,600)    11,000
   Inventory                                                   7,400
   Prepaid items                                               1,800
      Total current assets                                             $ 24,500
Long-Term Investments
   Notes receivable (due 2012)                               $16,400
   Sinking fund to retire bonds payable                        5,000
      Total long-term investments                                        21,400
Property, Plant, and Equipment
   Land                                                      $12,200
   Buildings                                     $ 57,400
   Less: Accumulated depreciation                 (21,000)    36,400
   Equipment                                     $ 28,700
   Less: Accumulated depreciation                  (9,700)    19,000
      Total property, plant, and equipment                               67,600
Intangible Assets
   Patents (net)                                                          4,600
Total Assets                                                           $118,100

                                       Liabilities
Current Liabilities
  Accounts payable                                           $13,100
  Income taxes payable                                         3,800
  Wages payable                                                1,400
     Total current liabilities                                         $ 18,300
Long-Term Liabilities
  Bonds payable (due 2020)                       $ 23,000
  Premium on bonds payable                          1,400    $24,400
  Notes payable (due 2013)                                     6,000
     Total long-term liabilities                                         30,400
Other Liabilities
  Advances from customers (long-term)                                     2,600
     Total Liabilities                                                 $ 51,300
                                 (continued on next page)




                                      4-16
E4-6 (continued)
1. (continued)

                                   Stockholders' Equity
Contributed Capital
  Preferred stock, $100 par                                 $18,600
  Common stock, $10 par                                      12,700
  Premium on preferred stock                                  7,900
  Premium on common stock                                     9,300
     Total contributed capital                                        $ 48,500
Retained Earnings                                                       18,300
  Total Stockholders' Equity                                          $ 66,800
Total Liabilities and Stockholders' Equity                            $118,100

2. Debt ratio = Total liabilities ÷ Total assets
      43.4% = $51,300 ÷ $118,100

E4-7
1.                                    HITT COMPANY
                                       Balance Sheet
                                     December 31, 2010

                                       Assets
Current Assets
   Cash                                                     $ 2,900
   Marketable securities (short-term)                         6,100
   Accounts receivable                        $ 21,500
   Less: Allowance for doubtful accounts          (800)      20,700
   Inventory                                                 37,200
      Total current assets                                            $ 66,900
Property, Plant, and Equipment
   Land                                                     $30,000
   Buildings                                  $144,000
   Less: Accumulated depreciation              (53,000)      91,000
   Equipment                                  $ 72,400
   Less: Accumulated depreciation              (35,100)      37,300
      Total property, plant, and equipment                             158,300
Intangible Assets
   Patents (net)                                            $ 9,800
   Trademarks                                                 3,700
      Total intangible assets                                           13,500
Total Assets                                                          $238,700

                                 (continued on next page)




                                              4-17
E4-7 (continued)
1. (continued)
                                        Liabilities
Current Liabilities
  Accounts payable                                              $22,400
  Current taxes payable                                          10,400
  Salaries payable                                                2,000
    Total current liabilities                                              $ 34,800
Long-Term Liabilities
  Bonds payable (due 2021)                                      $77,000
  Less: Discount on bonds payable                                (6,900)
    Total long-term liabilities                                              70,100
  Total Liabilities                                                        $104,900

                                   Stockholders' Equity
Contributed Capital
  Preferred stock, $100 par                                     $21,000
  Common stock, $10 par                                          30,000
  Additional paid-in capital on preferred stock                  11,500
  Additional paid-in capital on common stock                     24,000
     Total contributed capital                                             $ 86,500
Retained Earnings                                                            46,200
Accumulated Other Comprehensive Income
  Unrealized increase in value of marketable securities                       1,100
  Total Stockholders' Equity                                               $133,800
Total Liabilities and Stockholders' Equity                                 $238,700

  2.   Working capital = Current assets - Current liabilities
               $32,100 = $66,900 - $34,800

       Current ratio = Current assets ÷ Current liabilities
                1.92 = $66,900 ÷ $34,800

  3,   If the Hitt Company used IFRS, it would list the non-current assets first and
       would not separate them into Property, Plant, and Equipment and Intangible
       Assets. The total of the Non-current Assets section would be $171,800
       ($158,300 + $13,500). The Current Assets section would be listed next at
       $66,900 so the Total Assets would be $238,700, the same as Requirement 1.

       In the lower portion of the balance sheet, Stockholders’ Equity (or simply,
       Equity) would be listed first, and there would be some different account titles.
       Then Non-current Liabilities would be listed next, followed by Current
       Liabilities. The total of these three sections would be $238,700, the same as
       Requirement 1.



                                        4-18
E4-8

Note to Instructor: The solution is shown in a balance sheet format. The answers are
lettered (a) through (l).

                                   DAWSON COMPANY
                                     Balance Sheet
                                     December 31
                                                      2010               2011
Current assets                                     $ 26,900(a)        $ 25,000
Long-term investments                                19,200             22,200(h)
Property, plant, and equipment (net)                 85,700             92,800
Intangible assets                                    10,400              9,200
Total assets                                       $142,200           $149,200(j)

Current liabilities                                $ 14,500           $ 12,300
Long-term liabilities                                35,800(b)          34,900
Total liabilities                                  $ 50,300(d)        $ 47,200(i)

Capital stock, $5 par                              $ 20,000(e)        $ 20,000
Additional paid-in capital                           15,000             15,000(k)
Total contributed capital                          $ 35,000(c)        $ 35,000(g)
Retained earnings                                    50,000             60,000
Accumulated other comprehensive income                6,900              7,000
Total stockholders' equity                         $ 91,900(f)        $102,000(l)

Total liabilities & stockholders' equity           $142,200           $149,200




                                           4-19
E4-9

Note to Instructor: The solution is shown in a balance sheet format. The answers are
numbered (1) through (14).

                                      FERMER COMPANY
                                        Balance Sheet
                                        December 31

                                                       2010                  2011
Current assets                                      $ 19,100              $ 20,000(8)a
Long-term investments                                 23,700                21,200(13)
Property, plant, and equipment (net)                  79,400(3)             87,500
Intangible assets                                     12,600                12,000
Total assets                                        $134,800(5)           $140,700(11)

Current liabilities                                 $  9,200(2)a          $  9,800
Long-term liabilities                                 28,900(4)             30,200
Total liabilities                                   $ 38,100              $ 40,000(14)

Capital stock, $10 par                              $ 17,000(6)b          $ 18,000(12)c
Additional paid-in capital                            34,000(7)b            36,000
Total contributed capital                           $ 51,000              $ 54,000(9)
Retained earnings                                     40,900                41,700(10)
Accumulated other comprehensive income                 4,800                 5,000
Total stockholders' equity                          $ 96,700(1)           $100,700

Total liabilities & stockholders' equity            $134,800              $140,700

aWorking capital = Current assets - Current liabilities;
2010: $9,900 = $19,100 - $9,200(2); 2011: $10,200 = $20,000(8) - $9,800

bContributed  capital = Common stock(x) + Additional paid-in capital(2x)
$51,000 = x + 2x; $51,000 = 3x; x = $17,000, 2x = $34,000

c$17,000   + (100 shares x $10 par)




                                           4-20
E4-10
                               STEVENS COMPANY
                                  Balance Sheet
                               December 31, 2010

                                      Assets
Current Assets
   Cash                                                   $ 2,300
   Temporary investments in marketable
          securities                                        3,200
   Accounts receivable                         $ 5,900
   Less: Allowance for doubtful accounts          (800)     5,100
   Inventory                                                6,000
   Prepaid items:
      Insurance                                $ 1,200
      Office supplies                              800      2,000
      Total current assets                                            $18,600
Long-Term Investments
   Investment in held-to-maturity bonds                                10,000
Plant and Equipment
   Land                                                   $ 8,100
   Buildings and equipment                     $35,600
   Less: Accumulated depreciation               (9,200)    26,400
      Total plant and equipment                                        34,500
Intangible Assets
   Patents (net)                                                        5,000
Total Assets                                                          $68,100

                                    Liabilities
Current Liabilities
  Accounts payable                                        $ 9,900
  Salaries payable                                          1,500
  Taxes payable                                             2,500
  Unearned rent                                               900
    Total current liabilities                                         $14,800
Long-Term Liabilities
  Bonds payable (due 2013)                                $11,000
  Less: Discount on bonds payable                           (1,000)
    Total long-term liabilities                                        10,000
  Total Liabilities                                                   $24,800

                            (continued on next page)




                                       4-21
E4-10   (continued)
                                   Stockholders' Equity
Contributed Capital
  Common stock, $10 par                                   $12,000
  Premium on common stock                                  10,400
     Total contributed capital                                      $22,400
Retained Earnings                                                    24,200
Total contributed capital and retained earnings                     $46,600
  Less: Treasury stock (at cost)                                      (3,300)
  Total Stockholders' Equity                                        $43,300
Total Liabilities and Stockholders' Equity                          $68,100




                                       4-22
                                                                                                                         E4-11




                                                   POWDER COMPANY
                                       Statement of Changes in Stockholders' Equity
                                            For Year Ended December 31, 2010

                                                                   Additional        Additional
                                    Preferred   Common           Paid-in Capital   Paid-in Capital
                                      Stock       Stock           on Preferred      on Common        Retained
                                    $100 par      $5 par              Stock              Stock        Earnings      Total
       Balances, 1/1/10            $ 92,800      $37,400            $21,500            $58,700       $185,700     $396,100
       Common stock issued                          9,000                                14,400                      23,400
       Preferred stock issued        34,000                             10,200                                       44,200
       Net income                                                                                      38,950        38,950




4-23
       Cash dividend paid on
           preferred*                                                                                  ( 8,876)      (8,876)
       Cash dividend paid on
           common+                 ________       _______              _______         _______          (9,280)      (9,280)
       Balances, 12/31/10          $126,800       $46,400              $31,700         $73,100       $206,494     $484,494

       *Preferred dividend: $7 x (928 + 340 shares) = $8,876.

       +Common     dividend: $1 x (7,480 + 1,800 shares) = $9,280.




                                                                4-23
                                                                                                                      E4-12
                                                                                                                  E3-11




                                                 OSBORNE COMPANY
                                     Statement of Changes in Stockholders' Equity
                                          For Year Ended December 31, 2010

                                                       Additional           Additional
                                  Preferred   Common Paid-in Capital          Paid-in
                                    Stock      Stock  on Preferred           Capital      Retained
                                  $100 par     $5 par     Stock            on Common                   Total
                                                                               Stock      Earnings
        Balances, 1/1/10          $ 60,000     $80,000      $12,000         $170,000      $209,000    $531,000
        Common stock issued                      6,000                         24,000                   30,000




4-24
        Preferred stock issued      50,000                   12,500                                     62,500




 3-30
        Net income                                                                          99,000      99,000
        Cash dividend paid on
          preferred*                                                                       ( 8,800)     (8,800)
        Cash dividend paid on
          common+                  _______     _______      _______            ________    (64,500)    (64,500)
        Balances, 12/31/10         110,000     $86,000      $24,500            $194,000   $234,700    $649,200

        *Preferred dividend: $8 x [($60,000 ÷ $100 par) + 500] = $8,800.

        +Common    dividend: $1.50 x [($80,000 ÷ $2 par) + 3,000] = $64,500.




                                                          4-24
SOLUTIONS TO PROBLEMS

P4-1

  1.   D
  2.   F
  3.   A
  4.   F
  5.   G√
  6.   C
  7.   C
  8.   B
  9.   C    Timberland is considered to be a natural resource.
 10.   X    Treasury stock (at cost) should be subtracted from the sum of
                contributed capital, retained earnings, and accumulated other
                comprehensive income to arrive at total stockholders' equity.
 11.   A    Advances to sales personnel are considered to be prepaid items.
 12.   E
 13.   H
 14.   A
 15.   B
 16.   C
 17.   E
 18.   X    This is a miscellaneous item of stockholders' equity
 19.   D
 20.   A
 21.   F
 22.   B
 23.   A
 24.   J
 25.   B
 26.   B
 27.   C
 28.    I
 29.   A
 30.   A
 31.   G    This represents the company's obligation for future pension payments to
                  retiring employees.
 32.   G
 33.   B
 34.   F
 35.   F
 36.   K√   The unrealized decrease is a negative (although not strictly a contra-
              account) component of Accumulated Other Comprehensive Income
 37.   A

                                          4-25
 P4-2                          OLIVER MANUFACTURING COMPANY
                                         Balance Sheet
                                       December 31, 2010
       Assets                                       Liabilities
 Current Assets                               Current Liabilities
  Cash on hand                                  Notes payable (short-term)
  Cash in bank                                  Accounts payable
  Temporary investments in                      Salaries payable
      marketable securities                     Mortgage payable (current portion)
  Notes receivable (short-term)                 Interest payable
  Accounts receivable                           Dividends payable
  Less: Allowance for doubtful accounts         Income taxes payable
  Interest receivable                           Unearned rent
  Inventory                                     Estimated warranty obligations
    Raw materials                                  Total current liabilities
    Work in process
    Finished goods                            Long-Term Liabilities
  Prepaid items                                 Bonds payable (due 2022)
3-30




    Insurance                                   Premium on bonds payable
    Office supplies                             Mortgage payable (long-term portion)
      Total current assets                      Accrued pension cost
                                                   Total long-term liabilities
 Long-Term Investments
   Investment in available-for-sale           Other Liabilities
       securities                               Deferred taxes payable
   Land for future plant site                      Total other liabilities
   Bond sinking fund
   Cash surrender value of life
       insurance
     Total long-term investments              Total Liabilities
 Property, Plant, and Equipment
   Land                                           Stockholders' Equity
   Buildings
   Less: Accumulated depreciation             Contributed Capital
   Machinery                                     Preferred stock
   Less: Accumulated depreciation                Common stock
   Equipment                                     Additional paid-in capital on:
   Less: Accumulated depreciation                   Preferred stock
     Total property, plant, and                     Common stock
          equipment                                   Total contributed capital
                                              Retained Earnings
 Intangible Assets                            Accumulated Other Comprehensive
   Trademarks                                       Income
   Patents (net)                                 Unrealized increase in value of
     Total intangible assets                          available-for-sale securities
                                              Total contributed capital, retained
                                                    earnings, and accumulated other
                                                    comprehensive income
                                              Less: Treasury stock, at cost
                                              Total Stockholders' Equity
 Total Assets                                    Total Liabilities and Stockholders' Equity

                                           4-26
P4-3
                       GREEN MANUFACTURING COMPANY
                                Balance Sheet
                              December 31, 2010

                                       Assets
Current Assets
   Cash                                                     $ 7,200
   Marketable securities (short-term)                         8,400
   Accounts receivable                          $15,300
   Less: Allowance for doubtful accounts          (1,000)    14,300
   Inventory
      Raw materials                             $10,100
      Work in process                            14,700
      Finished goods                             23,800      48,600
   Prepaid insurance                                          2,600
      Total current assets                                            $ 81,100
Long-Term Investments
   Bond sinking fund                                        $ 7,700
   Investment in available-for-sale stock                    16,400
      Total long-term investments                                       24,100
Property, Plant, and Equipment
   Land                                                     $17,000
   Buildings                                    $92,500
   Less: Accumulated depreciation                (32,400)    60,100
   Machinery and equipment                      $57,800
   Less: Accumulated depreciation                (30,000)    27,800
      Total property, plant, and equipment                             104,900
Intangible Assets
   Patents (net)                                                         8,600
Total Assets                                                          $218,700




                             (continued on next page)




                                        4-27
 P4-3 (continued)

                                     Liabilities
 Current Liabilities
   Notes payable                                          $ 5,000
   Accounts payable                                        20,900
   Interest payable                                           500
   Wages payable                                            2,700
   Dividends payable                                        5,600
   Income taxes payable                                     8,900
   Unearned rent                                            5,000
      Total current liabilities                                     $ 48,600
 Long-Term Liabilities
   Bonds payable (due 2024)                    $29,000
   Less: Discount on bonds payable              (2,500)   $26,500
   Accrued pension cost                                    13,300
3-30




      Total long-term liabilities                                     39,800
 Other Liabilities
   Deferred taxes payable                                              2,800
   Total Liabilities                                                $ 91,200

                               Stockholders' Equity
 Contributed Capital
   Preferred stock, $100 par                              $30,000
   Common stock, $10 par                                   44,100
   Premium on preferred stock                               7,000
   Premium on common stock                                 16,300
      Total contributed capital                                     $ 97,400
 Retained Earnings                                                    28,100
 Accumulated Other Comprehensive Income
   Unrealized increase in value of
          available-for-sale stock                                     2,000
   Total Stockholders' Equity                                       $127,500
 Total Liabilities and Stockholders' Equity                         $218,700

 Additional parenthetical or note disclosures which might be made include:
     1. Inventory costing and valuation methods(s) for raw materials, goods in
         process, and finished goods.
     2. Valuation method for marketable securities and investment in stock.
     3. Number of shares of preferred and common stocks authorized and issued.
     4. Pension plan information.
     5. Bond indenture provisions, including sinking fund information.




                                        4-28
P4-3 (continued)

Working capital = Current assets - Current liabilities
      $32,500 = $81,100 - $48,600

Current ratio = Current assets ÷ Current liabilities
      1.67 = $81,100 ÷ $48,600

P4-4
1.
                        INTERNATIONAL PRODUCTS COMPANY
                                  Balance Sheet
                                December 31, 2010

                                        Assets
Current Assets
   Cash                                                       $ 8,200
   Accounts receivable                            $13,800
   Less: Allowance for doubtful accounts             (700)     13,100
   Inventory                                                   24,400
   Prepaid items
      Insurance                                   $     900
      Office supplies                                 1,900     2,800
          Total current assets                                          $ 48,500
Long-Term Investments
   Investment in held-to-maturity bonds                       $ 9,000
   Sinking fund for bond retirement                             4,000
      Total long-term investments                                         13,000
Property, Plant, and Equipment
   Land                                                       $ 9,500
   Buildings                                      $50,000
   Less: Accumulated depreciation                 (12,400)     37,600
   Equipment                                      $29,000
   Less: Accumulated depreciation                  (8,300)     20,700
      Total property, plant, and equipment                                67,800
Intangible Assets
   Patents (net)                                                           2,400
Total Assets                                                            $131,700

                               (continued on next page)




                                           4-29
 P4-4 (continued)
 1. (continued)

                                        Liabilities
 Current Liabilities
   Accounts payable                                       $16,500
   Current interest payable                                 2,900
   Dividends payable                                        1,800
   Accrued wages                                            3,700
   Current income taxes payable                             4,200
     Total current liabilities                                        $ 29,100
 Long-Term Liabilities
   Bonds payable (due 2016)                               $29,000
   Less: Discount on bonds payable                         (2,000)
                                                          $27,000
       Notes payable (due 1/1/2013)                        17,000
         Total long-term liabilities                                    44,000
3-30




       Total Liabilities                                              $ 73,100

                                   Stockholders' Equity
 Contributed Capital
   Preferred stock $50 par                                $10,000
   Common stock, $10 par                                   15,000
   Additional paid-in capital on preferred stock             1,600
   Additional paid-in capital on common stock                7,700
      Total contributed capital                           $34,300
 Retained Earnings                                         25,800
   Total contributed capital and retained earnings        $60,100
 Less: Treasury stock (at cost)                             (1,500)
   Total Stockholders' Equity                                         $ 58,600
 Total Liabilities and Stockholders' Equity                           $131,700




                                           4-30
P4-4 (continued)

2. Note: The account titles in this IFRS solution are the same as in the book. They may
   be different in an actual IFRS balance sheet.

                       INTERNATIONAL PRODUCTS COMPANY
                                 Balance Sheet
                               December 31, 2010

                                        Assets
Noncurrent Assets
  Investment in held-to-maturity bonds                       $ 9,000
  Sinking fund for bond retirement                             4,000
  Land                                                         9,500
  Buildings                                      $50,000
  Less: Accumulated depreciation                 (12,400)     37,600
  Equipment                                      $29,000
  Less: Accumulated depreciation                  (8,300)     20,700
  Patents (net)                                                2,400
         Total noncurrent assets                                          $ 83,200
Current Assets
  Cash                                                       $ 8,200
  Accounts receivable                            $13,800
  Less: Allowance for doubtful accounts             (700)     13,100
  Inventory                                                   24,400
  Prepaid items
     Insurance                                   $     900
     Office supplies                                 1,900     2,800
  Total current assets                                                      48,500
Total Assets                                                              $131,700

                                Stockholders' Equity
Contributed Capital
  Preferred stock $50 par                                    $10,000
  Common stock, $10 par                                       15,000
  Additional paid-in capital on preferred stock                 1,600
  Additional paid-in capital on common stock                    7,700
     Total contributed capital                               $34,300
Retained Earnings                                             25,800
  Total contributed capital and retained earnings            $60,100
Less: Treasury stock (at cost)                                 (1,500)
  Total Stockholders' Equity                                              $ 58,600

                              (continued on next page)



                                         4-31
 P4-4 (continued)
 2. (continued)

                                         Liabilities
 Noncurrent Liabilities
   Bonds payable (due 2016)                            $29,000
   Less: Discount on bonds payable                       (2,000)
                                                       $27,000
   Notes payable (due /1/2013)                          17,000
      Total noncurrent liabilities                                 $ 44,000
 Current Liabilities
   Accounts payable                                    $16,500
   Current interest payable                              2,900
   Dividends payable                                     1,800
   Accrued wages                                         3,700
   Current income taxes payable                          4,200
      Total current liabilities                                      29,100
3-30




   Total Liabilities                                               $ 73,100
 Total Stockholders’ Equity and Liabilities                        $131,700




                                              4-32
P4-5
                              MEADOWS COMPANY
                                 Balance Sheet
                               December 31, 2010

                                          Assets
Current Assets
   Cash                                                 $    7,900
   Marketable securities (short-term)                       10,100
   Accounts receivable                                      18,000
   Inventories                                              32,000
   Prepaid insurance                                         5,000
      Total current assets                                           $ 73,000
Long-Term Investments
   Investment in held-to-maturity bonds                 $ 36,000
   Long-term receivables                                  38,600       74,600
Property, Plant, and Equipment
   Property, plant, and equipment                       $148,000
   Less: Accumulated depreciation                         (44,000)    104,000
Intangible Assets
   Patents (net)                                                       13,000
Total Assets                                                         $264,600

                                      Liabilities
Current Liabilities
  Accounts payable                                      $    9,800
  Accrued payables                                           6,500
  Income taxes payable                                       7,500
  Current portion of long-term debt                          6,200
     Total current liabilities                                       $ 30,000
Long-Term Liabilities
  Long-term debt                                                       56,300
Other Liabilities
  Deferred taxes payable                                               12,500
  Total Liabilities                                                  $ 98,800

                             (continued on next page)




                                           4-33
 P4-5 (continued)

                                      Stockholders' Equity
 Contributed Capital
   Common stock, $5 par                                      $ 29,600
   Additional paid-in capital                                  50,600
      Total contributed capital                                          $ 80,200
 Retained Earnings                                                         86,600a
 Accumulated Other Comprehensive Loss
   Unrealized decrease in value of
          available-for-sale securities                                     (1,000)
   Total Stockholders' Equity                                            $165,800
 Total Liabilities and Stockholders' Equity                              $264,600

 aBeginning  retained earnings + Net income - Dividends; $64,800 + ($278,000 -
  $8,000 - $175,500 - $21,500 - $27,560 - $4,300 - $12,340) - $7,000
3-30




  Debt ratio = Total liabilities ÷ Total assets
    37.3% = $98,800 ÷ $264,600

 P4-6

 1.                                  EUBANKS COMPANY
                                       Balance Sheet
                                     December 31, 2010

                                         Assets
 Current Assets
    Cash                                                     $11,600
    Temporary investments in marketable
          securities (Note 1)                                 19,100
    Accounts receivable                         $32,300
    Less: Allowance for doubtful accounts        (1,500)      30,800
    Inventories (Notes 1 and 2)                               98,500
       Total current assets                                              $160,000
 Long-Term Investments
    Investment in bonds (Note 1)                             $25,000
    Land held for building site                               19,500
    Cash surrender value of life insurance                     8,900
       Total long-term investments                                         53,400
 Property, plant, and equipment (net) (Notes 1 and 3)                     229,300
 Intangible Assets
    Patents (net) (Note 1)                                                 18,200
 Total Assets                                                            $460,900
                                (continued on next page)

                                                  4-34
P4-6 (continued)
1. (continued)

                                       Liabilities
Current Liabilities
  Accounts payable                                        $58,000
  Income taxes payable                                     24,700
  Miscellaneous current payables                            6,200
  Estimated liability for product warranties                7,300
     Total current liabilities                                          $ 96,200
Long-Term Liabilities
  Bonds payable (mature on 12/31/2015)                    $80,000
  Premium on bonds payable                                  4,800
     Total long-term liabilities                                          84,800
  Total Liabilities                                                     $181,000

                                  Stockholders’ Equity
Contributed Capital
  Preferred stock, $100 par, 1,000 shares
         authorized, 400 shares issued                    $40,000
  Common stock, $10 par, 12,000 shares
         authorized, 6,280 shares issued                    62,800
  Additional paid-in capital on:
     Preferred stock                                        23,400
     Common stock                                           30,300
         Total contributed capital                                      $156,500
Retained Earnings                                                        123,400
  Total Stockholders’ Equity                                            $279,900
Total Liabilities and Stockholders’ Equity                              $460,900

2. (1) Summary of significant accounting policies:

       a. Inventories are valued at the lower of average cost or market.
       b. Property, plant, and equipment are reported at cost less accumulated
          depreciation. The straight-line method is used to depreciate all property,
          plant, and equipment, except land.
       c. Patents are amortized on a straight-line basis directly to the Patent
          account.
       d. Temporary investments in marketable securities are reported at their
          market value.
       e. Investment in bonds is carried at original cost (face value) and is being
          held to maturity.




                                          4-35
 P4-6 (continued)
 2. (continued)

       (2)   Composition of inventories:

             The inventories of the company as of December 31, 2010 are made up of
             the following components:

                  Raw materials                         $22,200
                  Work in process                        34,700
                  Finished goods                         41,600
                     Total                              $98,500

       (3)   Composition of property, plant, and equipment:

             The property, plant, and equipment of the company as of December 31,
             2010 consists of the following:
3-30




                                                   Accumulated       Book
                   Item             Cost           Depreciation      Value

              Land               $ 32,000                 –        $ 32,000
              Buildings           182,400              $ 62,200     120,200
              Machinery            63,900                18,600      45,300
              Equipment            53,000                21,200      31,800
               Total             $331,300              $102,000    $229,300

 3.    Current ratio = Current assets ÷ Current liabilities
                1.66 = $160,000 ÷ $96,200

          Liquid Assets                              Separable Assets
       Cash                           $11,600     Accounts receivable (net)   $ 30,800
       Temporary investments           19,100     Inventories                   98,500
          Total                       $30,700                                 $129,300

       These classifications might be useful in helping to better assess the company's
       liquidity and financial flexibility.




                                                4-36
P4-7

1.                                 BLAZER COMPANY
                                     Balance Sheet
                                   December 31, 2010

                                           Assets
Current Assets
  Cash                                                         $ 13,800
  Notes receivable                                               17,000
  Accounts receivable                               $37,100
  Less: Allowance for doubtful accounts              (1,600)     35,500
  Inventory (Note 1)                                             85,300
     Total current assets                                                   $151,600
Long-Term Investments
  Investment in affiliate, at cost (Note 2)                    $ 30,000
  Bond sinking fund                                              12,500
     Total long-term investments                                              42,500
Property, Plant, and Equipment (Notes 1 and 3)                 $296,700
  Less: Accumulated depreciation                                (109,300)
     Total property, plant, and equipment                                    187,400
Total Assets                                                                $381,500
                                         Liabilities
Current Liabilities
  Accounts payable                                             $ 44,200
  Income taxes payable                                           19,700
  Miscellaneous current payables                                  6,800
     Total current liabilities                                              $ 70,700
Long-term liabilities (Note 4)                                                91,000
  Total Liabilities                                                         $161,700
                                   Stockholders' Equity
Contributed Capital
  Preferred stock, $50 par, 2,000 shares
       authorized, 640 shares issued                           $ 32,000
  Common stock, $10 par, 10,000 shares
       authorized, 8,000 shares issued                           80,000
  Additional paid-in capital on:
     Preferred stock                                              3,200
     Common stock                                                20,000
         Total contributed capital                                          $135,200
Retained Earnings                                                             84,600
  Total Stockholders' Equity                                                $219,800
Total Liabilities and Stockholders' Equity                                  $381,500




                                            4-37
                                                                                                                       2.
                                                                                                                       P4-7 (continued)




                                                    BLAZER COMPANY
                                       Statement of Changes in Stockholders' Equity
                                            For Year Ended December 31, 2010


                                                             Additional        Additional
                                   Preferred   Common      Paid-in Capital   Paid-in Capital
                                     Stock      Stock       on Preferred      on Common        Retained
                                    $50 par    $10 par         Stock             Stock         Earnings       Total
         Balances, 1/1/10*          $25,000    $70,000        $2,500            $17,000         $55,100    $169,600
         Common stock issued                    10,000                             3,000                     13,000




4-38
         Preferred stock issued       7,000                      700                                          7,700
         Net income                                                                              50,500      50,500
         Dividends paid                                                                         (21,000)    (21,000)
         Balances, 12/31/10         $32,000     $80,000       $3,200            $20,000         $84,600    $219,800

       *Each of the beginning balances must be derived by taking the ending balances as given and adjusting
        for the transactions that occurred during the year affecting each respective account.
P4-7 (continued)

3. (1) Summary of significant accounting policies:
         a. The straight-line method is used to depreciate property and equipment
            based upon cost, estimated residual value, and estimated useful life.
         b. Inventory is valued at the lower of average cost or market.
   (2) Guarantee to affiliate:
            The company has guaranteed the interest on 12%, $50,000, 15-year
            bonds issued by the affiliate.
   (3) Composition of property, plant, and equipment:

                                                     Accumulated        Book
                  Item                Cost           Depreciation       Value

          Land                     $ 29,500             –            $ 29,500
          Buildings                 164,600          $ 54,600         110,000
          Store fixtures             72,600            37,400          35,200
          Office equipment           30,000            17,300          12,700
             Total                 $296,700          $109,300        $187,400

   (4) Composition of long-term liabilities:
                                                              Unamortized         Book
        Item          Maturity Date     Face Value         Premium (Discount)    Value
    12% bonds           12/31/2015       $36,000               $(1,000)         $35,000
    11% bonds           12/31/2019        48,000                 1,800           49,800
    13% note            01/01/2013         6,200                   --             6,200
      Total                              $90,200               $ 800            $91,000

   (5) Subsequent events:
         On January 15, 2011, a building with a cost of $20,000 and a book value of
         $7,000 was totally destroyed. Insurance proceeds will amount to $5,000.
4. (a)     Debt ratio = Total liabilities ÷ Total assets
               42.4% = $161,700 ÷ $381,500

   The debt ratio for 2010 has increased by over 3% compared to 2009. This
   indicates that there may be slightly more risk for investors and creditors because
   of higher interest payments that may have to be made by the company. On
   the other hand, stockholders may benefit if the company can make a higher
   return on the additional debt equity than the interest paid.




                                              4-39
P4-8
                               CABLE COMPANY
                                 Balance Sheet
                               December 31, 2010

                                      Assets
Current Assets
  Cash                                                      $12,300
  Temporary investments in marketable
         securities                                          17,000
  Accounts receivable                          $ 18,000
  Less: Allowance for doubtful accounts           (1,400)    16,600
  Inventories                                                32,000
  Prepaid items:
     Insurance                                                2,400
     Office supplies                                          3,500
         Total current assets                                         $ 83,800
Long-Term Investments
  Investment in available-for-sale stock                                29,000
Property, Plant, and Equipment
  Land                                                      $12,000
  Buildings and equipment                      $100,000
  Less: Accumulated depreciation                 (40,000)    60,000
     Total property, plant, and equipment                               72,000
Total Assets                                                          $184,800

                                    Liabilities
Current Liabilities
  Accounts payable                                          $22,700
  Income taxes payable                                       16,400
  Wages payable                                               3,600
     Total current liabilities                                        $ 42,700
Long-Term Liabilities
  Bonds payable (due 2020)                     $ 33,000
  Less: Discount on bonds payable                 (3,000)   $30,000
  Notes payable (due 2012)                                   17,000
  Accrued pension cost                                        6,500
     Total long-term liabilities                                        53,500
  Total Liabilities                                                   $ 96,200

                            (continued on next page)




                                       4-40
P4-8 (continued)
                                    Stockholders' Equity
Contributed Capital
  Preferred stock, $100 par                                   $12,000
  Common stock, $5 par                                         25,000
  Premium on preferred stock                                    2,600
  Premium on common stock                                      15,600
     Total contributed capital                                          $ 55,200
Retained Earnings                                                         40,000
Accumulated Other Comprehensive Loss
  Unrealized decrease in value of
        available-for-sale securities                                     (1,300)
Total contributed capital, retained earnings,
     and accumulated other comprehensive
      income                                                            $ 93,900
Less: Treasury stock (at cost)                                             (5,300)
  Total Stockholders' Equity                                            $ 88,600
Total Liabilities and Stockholders' Equity                              $184,800

P4-9                              BRANDT COMPANY
                                    Balance Sheet
                                  December 31, 2010

                                      Assets
Current Assets
  Cash                                                        $ 3,800
  Temporary investments in
        available-for-sale securities                           4,600
  Accounts receivable                             $18,500
  Less: Allowance for doubtful accounts              (700)     17,800
  Inventory                                                    30,500
  Prepaid insurance                                             2,900
     Total current assets                                               $ 59,600
Long-Term Investments
  Notes receivable (due 2012)                                 $10,000
  Investment in Dray Company bonds                              9,000
  Sinking fund for bond retirement                              7,000
     Total long-term investments                                          26,000
Property, Plant, and Equipment
  Land                                                        $12,000
  Buildings                                       $63,400
  Less: Accumulated depreciation                   (21,000)    42,400
  Equipment                                       $29,600
  Less: Accumulated depreciation                   (13,000)    16,600
     Total property, plant, and equipment                                 71,000

                               (continued on next page)


                                           4-41
P4-9 (continued)

Intangible Assets
   Patents (net)                                        $ 5,900
   Trademarks                                             3,700
      Total intangible assets                                        9,600
Total Assets                                                      $166,200

                                   Liabilities
Current Liabilities
  Accounts payable                                      $19,400
  Income taxes payable                                    7,200
  Wages payable                                           4,100
  Current portion of mortgage payable                     4,000
     Total current liabilities                                    $ 34,700
Long-Term Liabilities
  Mortgage payable                                      $16,000
  Bonds payable (due 2021)                    $40,000
  Add: Premium on bonds payable                 4,300    44,300
     Total long-term liabilities                                    60,300
  Total Liabilities                                               $ 95,000

                                Stockholders' Equity
Contributed Capital
  Preferred stock, $100 par                             $ 6,000
  Common stock, $5 par                                   11,000
  Premium on preferred stock                              2,400
  Premium on common stock                                14,700
     Total contributed capital                                    $ 34,100
Retained Earnings                                                   37,800
Accumulated Other Comprehensive Income
  Unrealized increase in value of
     available-for-sale securities                                   1,100
Total contributed capital, retained earnings,
     and accumulated other comprehensive
      income                                                      $ 73,000
Less: Treasury stock (at cost)                                       (1,800)
  Total Stockholders' Equity                                      $ 71,200
Total Liabilities and Stockholders' Equity                        $166,200




                                        4-42
P4-10

Note to Instructor: The solution is shown in a balance sheet format. The answers are
lettered (a) through (p). The more difficult explanations are explained in footnotes
(1) through (6).

                                     JOHN COMPANY
                                      Balance Sheet
                                      December 31
                                                                  2010          2011
Current assets                                                $ 35,200(d)2   $ 39,800
Long-term investments                                            40,100         42,300(o)
Property, plant, and equipment                                 153,000(h)     180,000
Less: Accumulated depreciation                                 ( 37,500)       (48,600)
Intangible assets                                                19,100         18,600
Total assets                                                  $209,900(e)    $232,100(m)

Current liabilities                                           $ 17,300(g)1   $ 20,000(p)2
Long-term liabilities                                           34,600(a)1     33,100
Total liabilities                                             $ 51,900       $ 53,100(j)

Capital stock, $10 par                                        $ 29,000(b)3   $ 30,000(i)4
Additional paid-in capital                                      37,700(f)      39,200(n)5
Total contributed capital                                     $ 66,700       $ 69,200(l)
Retained earnings                                               83,300        100,900(k)6
Accumulated other comprehensive income                           8,000          8,900
Total stockholders' equity                                    $158,000(c)    $179,000

Total liabilities & stockholders' equity                      $209,900       $232,100

     liabilities = Current liabilities(x) + Long-term liabilities(2x)
1Total

$51,900 = x + 2x; $51,900 = 3x; x = $17,300, 2x = $34,600.

2Workingcapital = Current assets - Current liabilities;
2010: $17,900 = $35,200(d) - $17,300;
2011: $19,800 = $39,800 - $20,000(p).

32,900   shares x $10 par

4$29,000   + ($10 x 100 shares issued)

5$37,700   + [($25 - $10) x 100]

6$83,300 beginning retained earnings + $20,600 net income -
[$1 x (2,900 + 100 shares)] dividends


                                             4-43
P4-11
1.    (1)   "Balance Report" should be "Balance Sheet."
      (2)   Balance sheet is reported on a certain date. Therefore, "For year ended
            December 31, 2010" should be altered to "December 31, 2010."
      (3)   Major headings should be included for assets, liabilities, and stockholders'
            equity.
      (4)   Inventory should be valued at the lower of cost or market.
      (5)   Treasury stock should not be classified under Long-Term Investments. It is a
            deduction from the total of contributed capital and retained earnings.
      (6)   Marketable securities (short-term) should be classified under Current Assets
            rather than Long-Term Investments.
      (7)   Patents should be classified under Intangibles rather than Property, Plant,
            and Equipment.
      (8)   Patents are usually reported at book value.
      (9)   Cash surrender value of life insurance should be classified under Long-
            Term Investments.
     (10)   Discount on bonds payable is a contra-liability account and should be
            placed immediately after the Bonds Payable account under Long-Term
            Liabilities.
     (11)   Accumulated depreciation: buildings is not a current liability. It is a
            contra-asset account and should be placed immediately after the
            Buildings account in Property, Plant, and Equipment.
     (12)   Additional paid-in capital on common stock should be included in the
            Contributed Capital section of Stockholders' Equity.
     (13)   Sinking fund to retire bonds is a long-term investment.
     (14)   Preferred stock should be included in the Contributed Capital section.
     (15)   Premium on preferred stock should be included in the Contributed Capital
            section.
     (16)   Accumulated depreciation: equipment should be listed as a contra
            account to the Equipment account in Property, Plant, and Equipment.
     (17)   Current taxes payable should be listed as a current liability.
     (18)   "Stockholders' equity" is a better term than "Owners' equity" for a
            corporation.
     (19)   The unrealized "gain" on write-up of marketable securities should be titled
            unrealized "increase" to avoid confusion with a gain reported on the
            income statement. Furthermore, it should be reported as a component of
            accumulated other comprehensive income.
     (20)   The unrealized "gain" on write-up of inventory should be eliminated
            because generally accepted accounting principles do not allow
            inventories to be valued at higher of cost or market.
     (21)   Allowance for doubtful accounts is a contra-asset account and should be
            listed directly after Accounts Receivable.
     (22)   "Total equities" should be altered to "Total liabilities and stockholders'
            equity."
     (23)   Each section of the balance sheet should be subtotaled.
                                           4-44
P4-11 (continued)
2.                              CUTLER CORPORATION
                                   Balance Sheet
                                 December 31, 2010

                                         Assets
Current Assets
   Cash                                                      $ 6,300
   Marketable securities, short-term                          10,000
   Accounts receivable                            $15,900
   Less: Allowance for doubtful accounts             (700)    15,200
   Inventory, at cost (market value, $28,000)                 27,200
      Total current assets                                               $ 58,700
Long-Term Investments
   Investment in D Company bonds (at book value)             $ 7,300
   Cash surrender value of life insurance                      5,000
   Sinking fund to retire bonds                                6,000
      Total long-term investments                                          18,300
Property, Plant, and Equipment
   Land                                                      $11,300
   Buildings                                      $40,800
   Less: Accumulated depreciation                 (17,100)    23,700
   Equipment                                      $19,000
   Less: Accumulated depreciation                  (7,000)    12,000
      Total property, plant, and equipment                                 47,000
Intangibles
   Patents (net)                                             $ 5,200
   Trademarks                                                  5,700
      Total intangibles                                                    10,900
Total Assets                                                             $134,900
                                       Liabilities
Current Liabilities
   Accounts payable                                          $13,000
   Wages payable                                               3,000
   Current taxes payable                                       9,600
      Total current liabilities                                          $ 25,600
Long-Term Liabilities
   Bonds payable                                             $46,000
   Less: Discount on bonds payable                             (3,900)     42,100
   Total Liabilities                                                     $ 67,700

                               (continued on next page)




                                           4-45
P4-11 (continued)
2. (continued)

                                 Stockholders' Equity
Contributed Capital
  Preferred stock, $50 par                                    $15,000
  Common stock, $2 par                                          8,000
  Premium on preferred stock                                    5,100
  Additional paid-in capital on common stock                   23,200
     Total contributed capital                                          $ 51,300
Retained Earnings                                                         16,000
Accumulated Other Comprehensive Income
  Unrealized increase in value of available-for-sale securities            1,300
Total contributed capital, retained earnings, and accumulated
     other comprehensive income                                         $ 68,600
Less: Treasury stock (at cost)                                             (1,400)
  Total Stockholders' Equity                                            $ 67,200
Total Liabilities and Stockholders' Equity                              $134,900




                                         4-46
P4-12 (AICPA adapted solution)
Note to Instructor: This problem includes many topics that are covered in depth in
later chapters. Students should be able to develop most of the correct answers
from reading Chapter 4, and the content of this problem provides for a good
introduction to the more advanced topics.
                        ZUES MANUFACTURING CORPORATION
                                  Balance Sheet
                                December 31, 2010

                                          Assets
Current Assets
   Cash                                                       $ 109,000a
   Accounts receivable (net)                                    317,700b
   Inventories                                                  560,000
      Total current assets                                                   $ 986,700
Long-Term Investment, at fair value                                             47,000c,j
Property, Plant, and Equipment at cost
   Land                                                       $ 200,000d
   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, & equipment                                      3,494,000
Intangible Asset
   Goodwill                                                                      37,000
Other Assets
   Cash restricted for building purposes                      $ 100,000a
   Officer's note receivable1                                    30,000b
   Land held for future building site                           250,000d        380,000
Total Assets                                                                 $4,944,700
                                        Liabilities
Current Liabilities
   Accounts payable                                           $ 119,800e
   Current installments of long-term debt                       200,000f,g
   Lawsuit liability                                             80,000
   Income taxes payable                                          21,200h
   Deferred tax liability                                         5,000
      Total current liabilities                                              $ 426,000
Long-Term Debt
   Mortgage payable                                           $ 800,000f
   Note payable                                                 400,000g
   Deferred tax liability                                        23,000
      Total long-term debt                                                    1,223,000
   Total Liabilities                                                         $1,649,000
                                (continued on next page)

                                           4-47
P4-12    (continued)

                                   Stockholders' Equity

Contributed Capital
  Common stock, authorized 100,000 shares
         of $50 par value; issued 40,000 shares;
         outstanding 39,800 shares                        $2,000,000i
  Additional paid-in capital                                 231,000i
     Total paid-in capital                                $2,231,000
Accumulated Other Comprehensive Loss
  Unrealized decrease in value of long-term
         investment                                            (4,300)j
Retained Earnings                                          1,075,400
  Total                                                   $3,302,100
Less: Cost of treasury stock                                   (6,400)c
  Total Stockholders' Equity                                               3,295,700
Total Liabilities and Stockholders' Equity                                $4,944,700

1Alternatively,   this could be reported under Long-Term Investments

Explanations of Amounts

aCash, 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

bAccounts  receivable (net), per unaudited balance sheet                    $345,700
Add charge-back for NSF check [see (a)]                                         2,000
Less: Officer's note receivable (reported in other assets)                    (30,000)
Corrected balance                                                           $317,700

cInvestments, per unaudited balance sheet                                   $ 57,700
Less: Long-term investment [reported separately, see (j)]                     (51,300)
    Treasury stock (reported in stockholders' equity)                          (6,400)
Corrected balance                                                           $       0

dLand, per unaudited balance sheet                                          $450,000
Less: Land acquired for future building site
  (reported in other assets)                                                 (250,000)
Corrected balance                                                           $200,000
                             (continued on next page)

                                           4-48
P4-12   (continued)

eAccounts payable, per unaudited balance sheet             $133,800
Less: Unrecorded payments [see (a)]                          (14,000)
Corrected balance                                          $119,800

fMortgage  payable, per unaudited balance sheet            $900,000
Less: Current portion ($50,000 x 2)                         (100,000)
Refinanced as long-term mortgage payable                   $800,000

gNote payable, per unaudited balance sheet                 $500,000
Less: Current portion                                       (100,000)
Long-term note payable                                     $400,000

hIncome  taxes payable, per unaudited balance sheet        $ 61,200
Less: Prepaid income taxes                                   (40,000)
Corrected balance                                          $ 21,200

iCommon  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

jLong-terminvestment, at cost [see (c)]                    $ 51,300
Less: Unrealized decrease in value                            (4,300)
Long-term investment, at fair value                        $ 47,000




                                          4-49
                                                                                                                                 P4-13
                                                                                                                                   P3-13




                                                             KNOX COMPANY
                                               Statement of Changes in Stockholders' Equity
                                                    For Year Ended December 31, 2010

                                                       Additional   Additional
                                                        Paid-in       Paid-in                      Accumulated
                                    Preferred Common    Capital      Capital                           Other
                                      Stock    Stock  on Preferred on Common           Retained    Comprehen- Treasury
                                    $100 par $10 par     Stock         Stock           Earnings     Sive Income Stock         Total
          Balances, 1/1/10           $50,000 $100,000     $6,000       $130,000        $224,000                            $510,000
          Unrealized increase
               in value of
               available-for-sale
               securities                                                                             $9,000                  9,000




4-50
          Common stock issued                    20,000                       30,000                                         50,000




   3-50
          Preferred stock issued      11,000                 1,760                                                           12,760
          Common stock                                                                                         $(10,400)    (10,400)
          reacquired                                                                     57,000                              57,000
          Net income
          Cash dividend paid on                                                          (4,270)                             (4,270)
               preferred*
          Cash dividend paid on      _______   ________     ______          ________    (14,500)      ______   _______    (14,500)
               common+               $61,000   $120,000     $7,760          $160,000   $262,230       $9,000   $(10,400) $609,590
          Balances, 12/31/10

      *Preferred dividend: $7 x (500 + 110 shares) = $4,270.

      +Common       dividend: $1.25 x (10,000 + 2,000 - 400 treasury shares) = $14,500.




                                                                     4-50
P4-14
 1.     Current assets, December 31, 2007: $12,105 million (p. 67).
 2.     Allowance for doubtful accounts, December 31, 2007: $56 million
        (p. 67).
 3.     The common stock has a $0.25 par value; 3,519 million shares had
        been issued at the end of 2007 (p. 67).
 4.     The total amount of inventories on December 31, 2007 was $2,220
        million (p. 67). The principal categories of inventory were: Raw
        materials and packaging (including ingredients and supplies), and
        finished goods (which includes concentrates, syrups, and finished
        beverages) (p. 74).
 5.     Long-term debt, December 31, 2007: $3,277 million (p. 67). Portion
        related to 5 3/4% U.S. dollar notes due 2011: $499 million (p. 88).
 6.     Amount of accumulated depreciation on December 31, 2007: $5,951
        million (p. 85). Depreciation is recorded principally by the straight-line
        method (p. 74).
 7.     Accounts payable and accrued expenses, December 31, 2007: $6,915
        million (p. 67). Accrued marketing expenses were $1,749 million (p. 87).
 8.     Inventory costing method for inventories: Average cost or first-in, first-
        out (p. 74).
 9.     Reinvested earnings, December 31, 2007: $36,235 million (p. 67).
10.     Total property, plant, and equipment on December 31, 2007: Before
        accumulated depreciation, $14,444 million; after accumulated
        depreciation, $8,493 million (p. 67 and 85).
11.     Total assets on December 31, 2007: $43,269 million (p. 67).
12.     Current liabilities, December 31, 2007: $13,225 million (p. 67).
13.     Number of shares of treasury stock, December 31, 2007: 1,201 million.
        Cost of treasury stock, December 31, 2007: $23,375 million (p. 67).
14.     Marketable securities on December 31, 2007: $215 million (p. 67). The
        unrealized gain on available for sale securities on December 31, 2007:
        $161 million (p. 89).
15.     The company was contingently liable for guarantees of indebtedness
        of $267 million owed by third parties on December 31, 2007 (p. 95).

Note to Instructor: Some of the preceding answers may be located on other
pages within the financial statements and related notes.



                                            4-51
ANSWERS TO CASES


C4-1

       Historical cost is the valuation method primarily used on a company’s balance sheet to
       report its assets. It has been criticized, however, because some users of financial
       statements argue that the historical cost of an asset is not as relevant as the fair value of
       the asset. That is the historical cost of an asset may not represent the amount of future
       cash inflows (or cash outflows) that the company is likely to obtain for the asset. As a result,
       sometimes a company is required (or elects) to report an asset at its fair value.

       Fair value is the price that a company would receive to sell an asset in an orderly
       transaction between market participants on the date of measurement. Thus, fair value is
       based on market prices and is a measure of exit value. A fair value measurement is the
       “selling price” for a particular asset held by a company. The measurement assumes that
       the asset is sold in a “hypothetical transaction” on the measurement date. The transaction
       is hypothetical because the company is not actually planning to sell the asset. In other
3-52




       words, for that particular asset, the company is asking the question, “What price could the
       company get for the asset if we sold it now in our usual market?”

       To measure fair value, a company must use a valuation method. To increase consistency
       and comparability in fair value measurements, a company uses a hierarchy which
       prioritizes the inputs it uses in its valuation method. The hierarchy consists of three levels of
       inputs as follows:

            •   Level 1 inputs are quoted prices in active markets for identical assets that the
                company can access on the measurement date. A quoted market price is an
                “observable value” that provides the most reliable evidence of fair value and is
                used whenever available.
            •   Level 2 inputs are exit values (other than the quoted prices included in Level 1)
                that are observable for the asset. These inputs include, for example, quoted
                market prices for similar assets in active markets, adjusted for the asset’s
                differences. Level 2 inputs are used when Level 1 inputs are not readily available.
            •   Level 3 inputs are unobservable inputs for the asset. These inputs are used to
                measure fair value only when Level 1 or Level 2 inputs are not available, or the
                costs of obtaining them exceed the benefits. Unobservable inputs reflect the
                company’s assumptions about how market participants would price the asset.
                These inputs should be developed based on the best information available,
                which might include the company’s own data about its expected cash flows.

C4-2

       Loss contingencies are situations that exist on a company's balance sheet date involving
       uncertainty as to possible losses that the company may incur if some future event occurs.
       Two types of disclosures are generally made relating to loss contingencies:

       1.   An estimated loss is accrued (reported) if it is probable that a liability has been
            incurred and the amount of the loss can be reasonably estimated.



                                                  4-52
C4-2 (continued)

     2.    If either of the above conditions is not met, the company discloses the loss
           contingency in the notes to its financial statements.

     The disclosure of loss contingencies is important in providing external users with additional
     information which may help them in predicting the use of financial resources by the
     company in the future.

     Subsequent events are significant business events or transactions that occur between a
     company's balance sheet date and the date of issuance of its annual report. There are
     two different types of subsequent events:

     1.    Those that provide additional evidence concerning conditions that existed on the
           balance sheet date and significantly affect the estimates the company used in
           preparing its financial statements. For these subsequent events, an adjustment is
           made to the financial statements.

     2.    Those that provide evidence concerning conditions that did not exist on the
           company's balance sheet date, but instead occurred after that date. For these,
           disclosure is in the form of a note, pro-forma ("as if") statements, or in an explanatory
           paragraph of the audit report.

     Since a company's annual report is not issued for some time after the close of the year,
     disclosure of subsequent events is necessary for a set of fair, more informative, and
     complete financial statements. The failure to report subsequent events may cause its
     financial statements to be misleading.

C4-3 (CMA adapted solution)

     Note to Instructor: This case is slightly more advanced than the text explanation, but is
     useful for class discussion.

1.   The major classes of information that must be included in both the annual report to
     shareholders and Form 10-K filed with the SEC are:

     •    audited financial statements.
     •    five-year summary of selected financial data.
     •    management's discussion and analysis of financial condition and results of operations.
     •    market data disclosure for common stock and related security holder matters.

2.   a.    Incorporation by reference permits the corporation to cross-reference schedules from
           other documents. Information from the proxy or corporate annual report may be
           substituted by reference for various sections of the 10-K to avoid repetition of already
           available data.

     b.    The integrated disclosure system reduces management's efforts in filing annual
           reports with the SEC because the SEC is asking for essentially the same information as
           is already provided on the uniform financial statements or other documents. Thus,
           repetition of already available data is avoided, and the time and cost to file reports
           are reduced.

                                                4-53
C4-3 (continued)
2. (continued)

       c.    The SEC's principal reasons for making the changes in the annual reporting process
             are to improve disclosure to investors and other users of financial information and to
             achieve a single disclosure system at a reduced cost.

       d.    Potential problems the integrated disclosure system could have on the annual
             reporting process from the aspect of financial information are that:

             • Information overload in the annual report could cause users greater difficulty in
              understanding and analyzing the report.

             • The quality of disclosure may decline as there may be less control over how data
              are presented.

C4-4

       To:     President
3-54




       From: Accountant

       I am writing in response to your question concerning the recording of property, plant, and
       equipment at its appraised value. Although this method would increase our reported 2010
       earnings, it is not appropriate.

       According to GAAP, property, plant, and equipment is measured and recorded at the
       exchange price (historical cost) minus any accumulated depreciation. Consequently,
       reporting it at appraised value would violate this historical cost concept. In addition, by
       using appraised value and showing a gain in this year, we would be reducing
       comparability, not only between our own financial statements of past years, but also
       between our financial statements and those of other companies that follow GAAP. This
       would create an ethical issue because we would appear to have higher earnings than a
       company using GAAP, which might put us at an unfair advantage regarding the market
       price of our stock and our ability to sell stock and borrow money.

       Furthermore, because we are using a method which is not in compliance with GAAP, our
       auditor would be required to disclose this in the auditor's report. If the difference between
       using historical cost and appraised value were material enough, it may prevent the
       auditor from giving us an unqualified opinion. Such a result would greatly harm our
       reputation to external users.

       Although our goal is ultimately to increase the value of our company's stock and satisfy
       the investment requirements of our stockholders, using a method which is not GAAP to
       manipulate our asset values and earnings is unethical in that it is unfair to (justice criterion),
       violates the rights of (rights criterion), and does not optimize the satisfaction (utility
       criterion) of our various stakeholders (e.g., current and potential investors, creditors,
       suppliers, community, etc). Therefore, it will be more beneficial to our company in the
       long run if we report our property, plant, and equipment at historical cost in accordance
       with GAAP, even though it results in lower earnings, than to ignore GAAP and mislead our
       external users.



                                                  4-54
C4-5

       Historical cost is used on a company’s balance sheet to report the "value" of its non-
       financial assets (and liabilities). In general, each asset is recorded at the exchange price
       of the transaction in which the asset is obtained. Usually this exchange price is then
       reported in the company’s balance sheet until another exchange has taken place.
       Certain modifications to this general rule are made for some non-financial assets. On the
       other hand, fair value may be used on a company’s balance sheet to report the value of
       its financial assets (and liabilities). The valuation and reporting of specific assets are
       discussed below.

       Cash is reported at its monetary value. Temporary investments in marketable securities
       are reported at their fair value. Receivables are reported at their estimated collectible
       amounts (net realizable values). Inventories are reported at their historical cost or market
       value (current cost), whichever is lower. Finally, prepaid items are reported at their
       historical cost, less any amortized amount.

       Long-term investments can be reported in several ways. They may be listed at their fair
       value, historical cost, or book value, depending on the type of investment. Property,
       plant, and equipment, on the other hand, are measured and reported at their historical
       cost adjusted for depreciation, with the exception of land which is listed at its historical
       cost. Property, plant, and equipment that has been impaired is reported at its lower fair
       value. In addition, a capital lease is initially recorded as an asset at the present value of
       the future lease payments and is amortized in a manner similar to other legally owned
       assets of the company. Intangible assets with a finite useful life are reported on the
       balance sheet at their book values. Intangible assets that have been impaired are
       reported at their lower fair value.

       The "value" of the $1,100,000 total assets is determined by summing the "values" reported
       for the individual assets. Thus, the $1,100,000 total assets reported in the balance sheet
       does not represent the total current value of the company's assets.

       With respect to the common stock, the $1,000,000 total value of the outstanding common
       stock will ordinarily not agree with the total "value" of the assets reported on the balance
       sheet for several reasons. First, as discussed above, the amount reported for total assets
       does not reflect the current values of the individual assets. Second, the company may
       hold economic resources that are valuable but are not reported on the balance sheet
       because they do not meet the definition of an asset. Finally, the accounting equation
       states that the total of the assets is equal to the sum of the liabilities and stockholders'
       equity; that is, assets are not only financed by common stockholders, but by creditors and
       preferred stockholders as well. The comparison has totally ignored the liabilities and
       preferred stockholders' equity.




                                                 4-55
C4-6

1.     A description of all significant accounting policies of a company must be included as an
       integral part of its financial statements. Generally, the disclosures should encompass a
       discussion of the principles relating to revenue recognition and asset allocation,
       particularly when these principles and methods involve (1) a selection from existing
       acceptable alternatives, (2) principles and methods peculiar to the industry in which the
       company operates, and (3) unusual or innovative applications of generally accepted
       accounting principles. Examples cited include, among others, those policies related to
       the basis for consolidation, depreciation methods, amortization of intangibles, inventory
       pricing, recognition of profits on long-term contracts, and revenue recognition from
       franchise and leasing operations.

2.     a.   The company recognizes revenue when persuasive evidence of an arrangement
            exists, delivery of products has occurred, the sales price charged is fixed or
            determinable, and collectibility is reasonably assured (p. 71).

       b.   Marketable securities that are highly liquid and have maturities of three months or less
            at the date of purchase are classified as cash equivalents (p. 73).
3-56




       c.   Inventories are valued at the lower of cost or market. Cost is determined on the basis
            of average cost or first-in, first-out (FIFO) methods (p. 74).

       d.   Property, plant, and equipment are stated at cost and are depreciated principally
            by the straight-line method over the estimated useful lives of the assets (p. 74).

       e.   The company records its trade accounts receivable at net realizable value. It wrote
            off $32 million of its trade accounts receivable in 2007 (p. 73).

       f.   The company expenses production costs of print, radio, television, and other
            advertisements as of the first date the advertisements take place. Advertising and
            production costs of approximately $224 million were included in prepaid expenses
            and other assets and in noncurrent other assets as of December 31, 2007 (p. 72).

C4-7

       Note to Instructor: This case does not have a definitive answer. From a financial reporting
       perspective, GAAP is identified and summarized. From an ethical perspective, various
       issues are raised for discussion purposes.

       From a financial reporting perspective, this is considered a subsequent event. If a
       subsequent event occurs that provides additional evidence about conditions that existed
       on the balance sheet date and significantly affects an estimate used in preparing the
       financial statements, an adjustment is made to them. If the subsequent event occurred
       after the balance sheet date, an adjustment is not made. Instead, the information is
       disclosed in a note, pro forma statements, or an explanatory paragraph in the audit
       report, depending on its materiality. Thus, if there is sufficient evidence that some or all of
       Travis Company's $50,000 account receivable will not be collected and the uncollectibility
       existed at the end of 2010, then recognition of a loss and a writedown of the accounts
       receivable should be made in Davenport's 2010 financial statements. If there is sufficient
       evidence of the uncollectibility but it did not occur until 2011, then a note (or other)
       disclosure is appropriate.


                                                 4-56
C4-7 (continued)

       From an ethical perspective there are several primary stakeholders, including the creditors
       and stockholders of Davenport Corporation, the creditors and stockholders of Travis
       Corporation, Jim Davenport, and Ted Travis. If the loss and writedown are recognized, this
       will decrease Davenport Corporation's income and working capital which may have an
       adverse affect on Davenport's ability to provide a return to stockholders and pay
       creditors. It may also affect users' perceptions of Jim Davenport's ability to manage the
       company. Recognition of the loss by Davenport may also provide "corroborating"
       evidence of Travis Corporation's financial difficulty, which may adversely affect its
       creditors, stockholders, and president. Disclosure in the notes (or elsewhere) may have
       similar, but less significant effects. From an ethical perspective, the critical questions are
       what, if any, reporting of the financial difficulty of Travis in Davenport's annual report is fair
       and just, and whether the reporting would respect the rights of stakeholders?

       The questions that are important from financial reporting and ethical perspectives in this
       situation are how reliable is the newspaper report, what is meant by financial difficulty,
       and when did the financial difficulty of Travis occur. Additional information must be
       gathered concerning each of these questions. For instance, there are times when
       newspaper reports misstate the facts. What is the source of the newspaper report; can it
       be corroborated? In regard to financial difficulty, how is this defined and how serious is it?
       Financial difficulty may mean that sales or income have decreased, but cash flows are
       sufficient to pay creditors. And, if there is serious financial difficulty, was this in existence at
       the end of 2010 or did some significant event occur in early 2011 to cause it? There are
       three alternative courses of action from financial reporting and ethical perspectives: (1)
       recognize the loss, (2) disclose the financial difficulty in a note (or other means) to the
       financial statements, or (3) not report anything in regard to Travis. The action to select will
       depend on the answers to the preceding questions. If there is sufficient evidence that
       Travis Company is in serious enough financial difficulty to jeopardize the collection of its
       receivable and the difficulty existed at the end of 2010, then from financial and ethical
       perspectives, it is appropriate for Davenport Company to recognize a loss and writedown
       the receivable.

C4-8

       Note to Instructor: This case does not have a definitive answer. From a financial reporting
       perspective, GAAP is identified and summarized. From an ethical perspective, various
       issues are raised for discussion purposes.

       From a financial reporting perspective, the note receivable from the president is the result
       of a related party transaction of Spaedy Company. For this transaction, GAAP requires
       disclosures of the nature of the relationship involved, a description of the transaction, the
       dollar amount, and the amount due from the president. GAAP does not specify where (or
       how) on the balance sheet the receivable from a related party should be classified. The
       note could be classified as a current asset if it is expected to be collected in 2011, or as a
       noncurrent asset if it is expected to be collected later than 2011.




                                                   4-57
C4-8 (continued)

       From an ethical perspective, where this note is classified and how it is reported may have
       an impact on the rights of, and fairness to, the various stakeholders. These stakeholders
       include the creditors, stockholders, and president of Spaedy Company. If the note is
       classified as a current asset in the usual manner (which would increase the working capital
       and current ratio) as suggested by the president, this might reflect positively on
       perceptions of the president's management. However, since there is no specified due
       date, there is considerable uncertainty that it will be collected in 2011. Without additional
       evidence (say, from the board of directors) that the note will be collected in 2011, a
       normal current asset classification would misrepresent the liquidity of and risk associated
       with the company. This would violate the rights of and be unfair to creditors who might
       expect the proceeds from the collection to be available for payments to them, as well as
       the stockholders who might perceive there is less risk of investment in the company
       because of its higher current ratio and working capital. Even if it was determined that
       repayment by the president is likely to occur in 2011, so that the note is classified as a
       current asset, for full disclosure the note should not be reported as a routine note
       receivable. Rather, it should be labeled something like "note receivable from officer" so
       that users can make whatever adjustments they feel are appropriate to the current ratio
3-58




       and working capital. If additional evidence does not support a likely payment in 2011,
       then a noncurrent classification with a similar title is appropriate for the note receivable.


ANSWER TO RESEARCH SIMULATION

R4-1

       Note to Instructor: Students are expected to cite references to GAAP in their research of
       this issue. They might use the FARS electronic database, pronouncements listed on the
       FASB web site, the FASB Original Pronouncements, the FASB Current Text, or other primary
       sources of GAAP to obtain these references. They may also use the FASB Accounting
       Standards Codification which is cited in parentheses.

       To:    Head Accountant

       From: Assistant Accountant

       I have researched the issue of how to report the $100,000 note payable (that is due on
       March 6, 2011) on the Tyler Corporation's December 31, 2010 balance sheet. Recall that
       the company issued common stock for $80,000 on January 5, 2011 and intends to use the
       proceeds (plus $20,000 cash it already has on hand) to repay the note payable on March
       6. This situation falls under the category of a "short-term obligation expected to be
       refinanced." According to FAS 6, par. 9-11, (FASB Cod. #470-10-45-13 and 14) a company
       excludes a short-term obligation from its current liabilities if it intends to refinance the
       obligation on a long-term basis and it has the ability to do so. The company can
       demonstrate its ability to refinance the short-term obligation by issuing equity securities
       after the date of its balance sheet but before the date that the balance sheet is issued.
       FAS 6, par. 12 (FASB Cod. #470-10-45-16) goes on to state that the amount of the short-
       term obligation that is excluded from current liabilities shall not exceed the proceeds of
       the equity securities issued. FAS 6, par 11, footnote 2 (FASB Cod. #470-10-45-14) also states
       that the amount of the short-term obligation excluded from current liabilities (because of
       the issuance of equity securities) is not included in owners' equity. Finally, FAS 6, par. 15


                                                4-58
R4-1 (continued)

(FASB Cod. #470-10-50-4) indicates that the company must include a general description
of the equity securities issued in the refinancing.

The Tyler Corporation intends to refinance the $100,000 note payable on a long-
term basis and has demonstrated its ability to do so by issuing its common stock for
$80,000. Therefore, based on the preceding generally accepted accounting
principles, I recommend that Tyler Corporation report $20,000 of the note payable
as a current liability and $80,000 as a long-term liability. My reasoning in regard to
the amounts is that only the portion of the short-term obligation that is equal to the
proceeds ($80,000) may be excluded from current liabilities. My reasoning as to
the classification of the $80,000 as a long-term liability is that the excluded amount
should not be reported as stockholders' equity because the common stock had
not yet been issued on the balance sheet date. I also recommend that Tyler
Corporation include a note to its financial statements which indicates that $80,000
of the $100,000 note payable is to be refinanced by the issuance of 2,000 shares of
the company's $10 par common stock after the balance sheet date.




                                         4-59

								
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