Exercises

The f o l l o w i n g errors i n the corporation's accounting have been discovered:

1.
2.

3.

4.

January 2011 cash disbursements entered as of December 2010 included payments of accounts
payable i n the amount of $35,000, on w h i c h a cash discount of 2% was taken.
The inventory included $27,000 of merchandise that had been received at December 31 but for which
no purchase invoices had been received or entered. Of this amount, $10,000 had been received on
consignment; the remainder was purchased f.o.b. destination, terms 2/10, n / 3 0 .
Sales for the first four days i n January 2011 i n the amount of $30,000 were entered i n the sales book
as of December 31, 2010. Of these, $21,500 were sales on account and the remainder were cash
sales.
Cash, not i n c l u d i n g cash sales, collected i n January 2011 and entered as of December 31, 2010,
totaled $35,324. O f this amount, $23,324 was received on account after cash discounts of 2% had
been deducted; the remainder represented the proceeds of a bank loan.

Instructions
(a) Restate the current assets and current liabilities sections of the statement of financial position i n
accordance w i t h good accounting practice. (Assume that both accounts receivable and accounts
payable are recorded gross.)
(b) State the net effect of y o u r adjustments on Agincourt Company's retained earnings balance.
f*3| E5-10 (Current L i a b i l i t i e s ) M a r y Pierce is the controller of A r n o l d Corporation and is responsible
for the preparation of the year-end financial statements. The f o l l o w i n g transactions occurred d u r i n g the
year.
(a) Bonuses to key employees based on net income for 2010 are estimated to be $150,000.
(b) O n December 1, 2010, the company borrowed $900,000 at 8% per year. Interest is paid quarterly.
(c) Credit sales for the year amounted to $10,000,000. A r n o l d ' s expense provision for doubtful accounts is estimated to be 2% of credit sales.
(d) O n December 15, 2010, the company declared a $2.00 per share d i v i d e n d on the 40,000 ordinary
shares outstanding, to be paid on January 5, 2011.
(e) D u r i n g the year, customer advances of $160,000 were received; $50,000 of this amount was earned
b y December 31, 2010.
Instructions
For each item above, indicate the dollar amount to be reported as a current liability. I f a liability is not reported, explain why.
f*3]

E5-11 (Statement of Financial Position Preparation)

Abbey Corporation at December 31, 2010.

Presented below is the adjusted trial balance of

Debits
Cash
Office Supplies
Prepaid Insurance
Equipment
Accumulated DepreciationEquipment
Trademarks
Accounts Payable
Wages Payable
Unearned Service Revenue
Bonds Payable, due 2017
Share CapitalOrdinary
Retained Earnings
Service Revenue
Wages Expense
Insurance Expense
Rent Expense
Interest Expense
Total
A d d i t i o n a l information:
1.
2.

Net loss for the year was 2,500.

N o dividends were declared d u r i n g 2010.

Credits

?
1,200
1,000
48,000
9,000
950
10,000
500
2,000
9,000
10,000
20,000
10,000
9,000
1,400
1,200
900

269

270

Chapter 5

Statement of Financial Position and Statement of C a s h Flows

Instructions
Prepare a classified statement of financial position as of December 31, 2010.
p 3 | E5-12 (Preparation of a Statement of Financial Position)
Corporation at December 31, 2010.

Presented below is the trial balance of Vivaldi

Debits

Cash
Sales
Trading Securities (at cost, $145,000) PtJOiKj
- Cost of Goods Sold
Long-term Investments in Bonds
Long-term Investments in Share
CapitalOrdinary
Short-term Notes Payable
Accounts Payable
Selling Expenses
Investment Revenue
Land
Buildings
Dividends Payable
Accrued Liabilities
Accounts Receivable
Accumulated DepreciationBuildings
Allowance for Doubtful Accounts
Administrative Expenses
Interest Expense
Inventories
Provision for Pensions (long-term) -Cc. ;"< c
Long-term Notes Payable
Equipment
Bonds Payable
Accumulated DepreciationEquipment
Franchise
Share CapitalOrdinary ($5 par)
Treasury Shares
Patent
Retained Earnings
Accumulated Other Comprehensive Income

$ 7,900,000
153,000
4,800,000
299,000
277,000
90,000
455,000
2,000,000
63,000
260,000
1,040,000
136,000
96,000
435,000
352,000
25,000
900,000
211,000
597,000
80,000
900,000
600,000
1,000,000 '.
60,000 v
160,000
1,000,000
191,000
195,000
78,000
80,000
$12,315,000

Totals

Credits

197,000

$12,315,000

Instructions
Prepare a statement of financial position at December 31, 2010, for V i v a l d i Corporation. Ignore income
taxes.
PS] E5-13 (Statement of Cash FlowsClassifications) The major classifications of activities reported i n
the statement of cash flows are operating, investing, and financing. Classify each of the transactions listed
below as:
1.
2.
3.
4.
5.

Operating a c t i v i t y a d d to net income.

Operating activitydeduct f r o m net income.
Investing activity.
Financing activity.
Reported as significant non-cash activity i n the notes to the financial statements.

The transactions are as follows.

(a)
(b)
(c)
(d)
(e)
(f)
(g)

Issuance of ordinary shares.

Purchase of l a n d and b u i l d i n g .
Redemption of bonds.
Sale of equipment.
Depreciation of machinery.
A m o r t i z a t i o n of patent.
Issuance of bonds for plant assets.

(h)
(i)
(j)
(k)
(1)
(m)

Payment of cash dividends.

Exchange of furniture for office equipment,
Purchase of treasury shares.
Loss on sale of equipment.
Increase i n accounts receivable d u r i n g the year,
Decrease i n accounts payable d u r i n g the year.

p 6 l E5-14 (Preparation of a Statement of Cash Flows) The comparative statements of financial position
of Connecticut Inc. at the beginning and the end of the year 2010 appear o n the next page.

Exercises

C O N N E C T I C U T INC.
STATEMENTS OF FINANCIAL POSITION

Assets

7*8

Equipment
Less: Accumulated depreciation
Accounts receivable
Cash
Total

Dec. 31, 2010

Jan. 1,2010

$ 39,000
(17,000)
91,000
45,000 v/
$158,000

$ 22,000
(11,000)
88,000
13,000 V
$112,000

$100,000
38,000
20,000

$ 80,000
17,000
15,000

$158,000

$112,000

Inc./Dec.
$17,000
6,000
3,000
32,000

Inc.
Inc.
Inc.
Inc.

Equity and Liabilities

Share capitalordinary
Retained earnings
Accounts payable
Total

20,000 Inc.
21,000 Inc.
5,000 Inc.

Net income of $34,000 was reported, and dividends of $13,000 were paid i n 2010. N e w equipment
was purchased and none was sold.
Instructions
Prepare a statement of cash flows for the year 2010.
E5-15 (Preparation of a Statement of Cash Flows) Presented below is a condensed version of the comparative statements of financial position for Yoon Corporation for the last t w o years at December 31
(000,000 omitted).

3% to

Investments
Equipment
Less: Accumulated depreciation
Accounts receivable
Cash
Share capitalordinary
Retained earnings
Current liabilities

2010

2009

W 52,000
298,000
(106,000)
180,000
157,000
160,000
287,000
134,000

W 74,000
240,000
(89,000)
185,000
78,000
160,000
177,000
151,000

A d d i t i o n a l information:
Investments were sold at a loss of W7,000; no equipment was sold; cash dividends paid were W50,000;
and net income was W160,000.
Instructions
(a) Prepare a statement of cash flows for 2010 for Yoon Corporation.
(b) Determine Yoon Corporation's free cash flow.
71 E5-16 (Preparation of a Statement of Cash Flows)
Orozco Corporation is presented below.

A comparative statement of financial position for

December 31
Assets
Land
Equipment
Accumulated depreciationequipment
Inventories
Accounts receivable
Cash
Total

2010

2009

$ 71,000
270,000
(69,000)
180,000
82,000
63,000

$110,000
200,000
(42,000)
189,000
66,000
22,000

$597,000

$545,000

$214,000
199,000
150,000
34,000

$164,000
134,000
200,000
47,000

$597,000

$545,000

Equity and Liabilities

Share capitalordinary ($1 par)
Retained earnings
Bonds payable
Accounts payable
Total

271

Chapter 5

Statement of Financial Position and Statement of C a s h Flows

A d d i t i o n a l information:
1.
2.

Net income for 2010 was $105,000.

Cash dividends of $40,000 were declared and paid.

3.

Bonds payable amounting to $50,000 were retired through issuance of ordinary shares.

Instructions
(a) Prepare a statement of cash flows for 2010 for Orozco Corporation.
(b) Determine Orozco Corporation's current cash debt coverage ratio, cash debt coverage ratio,
and free cash flow. Comment on its l i q u i d i t y and financial flexibility.
E5-17 (Preparation of a Statement of Cash Flows and a Statement of Financial Position)
poration's statement of financial position at the end of 2009 included the f o l l o w i n g items.

13

vlH

Land
Building
Equipment
Accum. depr.building
Accum. depr.equipment
Patents
Current assets

$ 30,000
120,000
90,000
(30,000)
(11,000)
40,000
235,000

Total

Bonds payable
Current liabilities
Share capitalordinary
Retained earnings
Total

Chekov Cor-

$100,000
150,000
180,000
44,000
$474,000

$474,000

The f o l l o w i n g information is available for 2010.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Net income was $55,000.

Equipment (cost $20,000 and accumulated depreciation $8,000) was sold for $9,000.
Depreciation expense.was $4,000 on the b u i l d i n g and $9,000 on equipment.
Patent amortization was $2,500.
Current assets other than cash increased by $25,000. Current liabilities increased b y $13,000.
A n addition to the b u i l d i n g was completed at a cost of $27,000.
A long-term investment i n debt securities was purchased for $16,000.
^
Bonds payable of $50,000 were issued.
Cash dividends of $25,000 were declared and p a i d .
Treasury shares were purchased at a cost of $11,000.

Instructions
(Show only totals for current assets and current liabilities.)
(a) Prepare a statement of cash flows for 2010.
(b) Prepare a statement of financial position at December 31, 2010.

pSlf-?]

E5-18 (Preparation of a Statement of Cash Flows, Analysis) The comparative statements of financial
position of Menachem Corporation at the beginning and end of the year 2010 appear below.

MENACHEM CORPORATION
STATEMENTS OF FINANCIAL POSITION

Assets

is- P d>

Equipment
Less: Accumulated depreciation
Accounts receivable
Cash
Total

Dec. 31, 2010

Jan. 1,2010

37,000
(17,000)
106,000
22,000

22,000
(11,000)
88,000
13,000

148,000

112,000

100,000
28,000
20,000

80,000
17,000
15,000

148,000

112,000

Inc/Dec.
15,000
6,000
18,000
9,000

Inc.
Inc.
Inc.
Inc.

Equity and Liabilities

Share capitalordinary
Retained earnings
Accounts payable
Total

20,000 Inc.
11,000 Inc.
5,000 Inc.

Net income of 34,000 was reported, and dividends of 23,000 were paid i n 2010. N e w equipment
was purchased and none was sold.

Problems

273

Instructions
(a) Prepare a statement of cash flows for the year 2010.
(b) Compute the current ratio (current assets + current liabilities) as of January 1, 2010, and
December 31, 2010, and compute free cash flow for the year 2010.
(c) I n light of the analysis i n (b), comment on Menachem's l i q u i d i t y and financial flexibility.

PROBLEMS
f*3]

P5-1 (Preparation of a Classified Statement of Financial Position, Periodic Inventory)

below is a list of accounts i n alphabetical order.
Accounts Receivable
Accrued Wages
Accumulated DepreciationBuildings
Accumulated DepreciationEquipment
Advances to Employees
Advertising Expense
Allowance for Doubtful Accounts
Bond Sinking Fund
Bonds Payable
Building
Cash in Bank
Cash on Hand
Commission Expense
Copyright
Dividends Payable
Equipment
Gain on Sale of Equipment
Interest Receivable
InventoryBeginning
InventoryEnding
Land

Presented

Land for Future Plant Site

Loss from Flood
Minority Interest
Notes Payable (due next year)
Patent
Payroll Taxes Payable
Petty Cash
Prepaid Rent
Provision for Pension Benefits
Purchases
Purchase Returns and Allowances
Retained Earnings
Sales
Sales Discounts
Sales Salaries
Share CapitalOrdinary
Share CapitalPreference
Share PremiumOrdinary
Trading Securities
Transportation-in
Treasury Shares (at cost)
Unearned Subscriptions Revenue

Instructions
Prepare a classified statement of financial position i n good f o r m . ( N o monetary amounts are to be
shown.)
[*3] P5-2 (Statement of Financial Position Preparation) Presented below are a number of statement of
financial position items for M o n t o y a , Inc., for the current year, 2010.

3.

Goodwill
Payroll taxes payable
Bonds payable
Cash
Land
Notes receivable
Notes payable to banks
Accounts payable
Retained earnings
Income taxes receivable
Unsecured notes payable
(long-term)

125,000
177,591
285,000
360,000
480,000
445,700
265,000
490,000
?

97,630
1,600,000

Accumulated depreciation
equipment
Inventories
Rent payableshort-term
Taxes payable
Long-term rental obligations
Share capitalordinary, $1 par value
Share capitalpreference, $10 par value
Prepaid expenses
Equipment
Trading securities
Accumulated depreciation
building
Building

292,000
239,800
45,000
98,362
480,000
200,000
150,000
87,920
1,470,000
121,000
270,200
1,640,000

PLUS