Chapter5.docx
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Chapter5
EXERCISE5-2（15-20minutes）
（a）
8
（l）
6
（b）
4
（m）
1
（c）
6
（n）
7
（d）
6
（o）
3
（e）
3
（p）
2
（f）
1
（q）
1
（g）
6
（r）
1
（h）
7
（s）
7
（i）
1
（t）
6
（j）
1
（u）
11
（k）
6
EXERCISE5-4（35-40minutes）
（a）
BrunoCorp.
BalanceSheet
December31,2011
Assets
Currentassets
Cash
$290,000
Tradingsecurities—atfairvalue
120,000
Accountsreceivable
$357,000
Lessallowancefordoubtfulaccounts
17,000
340,000
Inventories,atlowerofaveragecostornetrealizablevalue
401,000
Prepaidexpenses
12,000
Totalcurrentassets
1,163,000
Long-terminvestments
Landheldforfutureuse
175,000
Heldtomaturityinvestmentsinbonds
90,000
265,000
Property,plant,andequipment
Building
$730,000
Lessaccumulateddepreciation—building
160,000
570,000
Officeequipment
265,000
Lessaccumulateddepreciation—officeequipment
105,000
160,000
730,000
Goodwill
80,000
Totalassets
$2,238,000
EXERCISE5-4（Continued）
LiabilitiesandShareholders’Equity
Currentliabilities
Accountspayable
$195,000
Bankoverdraft
30,000
Notespayable（duenextyear）
125,000
Rentpayable
49,000
Totalcurrentliabilities
399,000
Long-termliabilities
Bondspayable
$500,000
Addpremiumonbondspayable
53,000
$553,000
Pensionobligation
82,000
635,000
Totalliabilities
1,034,000
Shareholders’equity
Commonshares,unlimitedauthorizedissued290,000shares
290,000
Contributedsurplus
180,000
Retainedearnings*
734,000
Totalshareholders’equity
1,204,000
Totalliabilitiesandshareholders’equity
$2,238,000
*$2,238,000–$1,034,000–$290,000–$180,000=$734,000
EXERCISE5-4（Continued）
*（b）Thebankoverdraftisclassifiedasacurrentliability,asthereisnolegalrighttooffsetthebankoverdraftagainstthepositivecashbalance.Thebankaccountsareatdifferentbanks.Hadthebankoverdraftbeensetoff（netted）againstthecashbalanceasoriginallypreparedbythebookkeeper,therewouldhavebeennoeffectonworkingcapital.Thenetamountofcurrentassets,lesscurrentliabilitieswouldnotchangeinabsoluteamount.
Theclassificationchangedoesaffectthecurrentratio（currentassets/bycurrentliabilities）:
Overdraftnetted
Properclassification
$1,163–$30
$1,163
$399–$30
$399
=3.07
=2.91
Thosewhopreparedthebalancesheetdidnotlikelydothemisclassificationofthebankoverdraftonpurpose.ThebankaccountinoverdraftislikelyoneofseveralbankaccountsusedbyBrunoCorp.Thisparticularaccounthappenstofallinatemporaryoverdraftpositionasofthefiscalyearendofthebusiness.Thenettingoftheaccountswasdonewithoutrelatingtheeffectofthenettingontheratio.
EXERCISE5-8（10-15minutes）
1.Dividendspayableof$2,500,000willbereportedasacurrentliability（1,000,000X$2.50）.
2.Noamountsarereportedasacurrentorlong-termliability.Stockdividendsdistributablearereportedintheshareholders'equitysection.
3.Bondspayableof$25,000,000andinterestpayableof$1,750,000（$100,000,000X7%X3/12）willbereportedasacurrentliability.Bondspayableof$75,000,000willbereportedasalong-termliability.
4.Customeradvancesof$27,000,000willbereportedasacurrentliability（$12,000,000+$40,000,000–$25,000,000）.
5.Noamountsarereportedasacurrentorlong-termliability.Retainedearningsappropriationsarereportedandoftensegregatedintheshareholders'equitysectionorasanotetothefinancialstatementsrelatedtoretainedearnings.
6.Demandbankloansmustbeclassifiedascurrentliabilities.
EXERCISE5-11（35-40minutes）
（a）
ZeitzCorporation
BalanceSheet
December31,2011
Assets
Currentassets
Cash
$205,000
Tradingsecurities
153,000
Accountsreceivable
$515,000
Lessallowancefordoubtful
accounts
（25,000）
490,000
Inventories
687,000
Totalcurrentassets
$1,535,000
Long-terminvestments
Investmentsinbondstobeheldtomaturity
299,000
Investmentsinshares（fairvaluethroughOCI）
345,000
Totallong-terminvestments
644,000
Property,plant,andequipment
Land
260,000
Building
1,040,000
Lessaccumulateddepreciation
（152,000）
888,000
Equipment
600,000
Lessaccumulateddepreciation
（60,000）
540,000
Totalproperty,plant,andequipment
1,688,000
Intangibleassets
Franchise（net）
160,000
Patent（net）
195,000
Totalintangibleassets
355,000
Totalassets
$4,222,000
EXERCISE5-11（Continued）
LiabilitiesandShareholders’Equity
Currentliabilities
Accountspayable
$545,000
Short-termnotespayable
98,000
Dividendspayable
136,000
Accruedliabilities
96,000
Totalcurrentliabilities
$875,000
Long-termdebt
Long-termnotespayable
900,000
Bondspayable
1,000,000
Totallong-termliabilities
1,900,000
Totalliabilities
2,775,000
Shareholders’equity
Commonshares
$809,000
Retainedearnings**
490,000
Accumulatedothercomprehensiveincome
148,000*
Totalshareholders’equity
1,447,000
Totalliabilitiesandshareholders’equity
$4,222,000
*Long-terminvestmentsinshares–gain:
Shares–fairvaluethroughOCI
（$345,000–$277,000）
$68,000
Addopeningbalance
80,000
$148,000
**ComputationofRetainedEarnings:
Sales
$7,960,000
Investmentgains
63,000
Unusualgain
160,000
Costofgoodssold
（4,800,000）
Sellingexpenses
（1,860,000）
Administrativeexpenses
（900,000）
Interestexpense
（211,000）
Netincome
$412,000
Beginningretainedearnings
$218,000
Netincome
412,000
Correctionofprioryear’serror
（140,000）
Endingretainedearnings
$490,000
EXERCISE5-11（Continued）
（b）Theclassificationisusedformeasurementofliquidityandrequiresthereportingofcurrentassetsandliabilities.Thelengthoftheoperatingcyclewilldeterminewhatitemsareclassifiedascurrentwheretheoperatingcycleislongerthanoneyear.Shouldthebusinesshaveseveralsegments,suchasinthecaseofBombardierInc.,（aerospace,transportationandfinancingservices）andtheoperatingcyclesareverydifferent,applyingonecyclelengthtoallbusinesssegmentsbecomesmeaningless.Incasessuchasthis,theconsolidatedbalancesheetisnotclassified.
（C）Currentratio=totalcurrentassets/totalcurrentliabilities
=1,535,000/875,000
=1.75times
Debttototalassets=2,775,000/4,222,000
=65.7%
Zeitzhasastrongcurrentratioat1.75times.Thisindicatesthecompanyshouldnothaveproblemsmeetingitsobligationsintheshortterm.However,wemustconsiderthecompositionofcurrentassets.45%ofcurrentassetsisininventory.Wewouldneedtoconsiderhowquicklyinventoryisturnedoverandwhethertheremaybeobsolescenceissues.Accountsreceivablesare32%ofcurrentassets.Considerationwouldneedtobegiventotheadequacyoftheallowanceaccount.
Approximately66%ofZeitz’sassetsarefinancedbydebt.Thisisapproachingthehighside.Thereislikelyroomtoadddebt;however,creditorswilllikelybecomeconcernediftheratiocontinuestoincrease.
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