 CHAPTER 3 

The Balance Sheet and

Notes to the Financial Statements
MULTIPLE CHOICE QUESTIONS
Theory/Definitional Questions

1 Definition of solvency
2 Definition of a liability
3 Accrued revenues as current assets
4 Classification of current assets
5 Presentation order of current assets
6 Unearned rent as current liability
7 Classification of investment securities
8 Identification of long-term investments
9 Example of change in liability from current to noncurrent
10 Example of change in liability from noncurrent to current
11 Classification of current liabilities
12 Elements of working capital
13 Contingent liability--pending litigation
14 Definition of an asset
15 Share information reported on the balance sheet
16 Recording a loss contingency
17 Items not included in stockholders' equity
18 Definition of contributed capital
19 Recording a loss contingency
20 Disclosing a loss contingency
21 Definition of subsequent event
22 Limitations and weaknesses of a balance sheet
23 Definition of the operating cycle

Computational Questions
24 Computation based on the accounting equation
25 Computation of stockholders' equity
26 Computation of net income from the accounting equation
27 Computation of current liabilities
28 Computation of borrowing ability using debt-to-equity ratio

63
64 Chapter 3  The Balance Sheet and Notes to the Financial Statements

29 Computation of rate of return on assets

30 Computation of current ratio changes
31 Computation of current assets
32 Computation of current assets
33 Computation of current liabilities
34 Computation of working capital
35 Computation of net assets
36 Computation of total liabilities
37 Computation of total assets
38 Computation of current liabilities
39 Computation of stockholders' equity
40 Computation of acid test ratio
41 Computation of stockholders' equity
42 Computation of additional paid-in capital
43 Computation of stockholders' equity
44 Computation of current ratio
45 Effect of collection of accounts receivable on current ratio
46 Computation of return on investment
47 Computation of acid-test (quick) ratio

PROBLEMS
1 Prepare schedule of working capital
2 Prepare properly classified balance sheet in report form
3 Prepare properly classified balance sheet, identify items to be disclosed
4 Prepare corrected and properly classified balance sheet
5 Correct account balances, give totals for current assets, liabilities
6 Correct account balances, give totals for long-term assets, liabilities
7 Calculate account balances, give total of assets
8 Calculate account balances, give total of liabilities
9 Summary of accounting policies
10 Accounting for human resources
11 Reporting receivables on the balance sheet
12 Limitations of the balance sheet

MULTIPLE CHOICE QUESTIONS

a 1. Balance sheet analysis is useful in assessing a firm's liquidity, which is the
LO1 ability to
a. satisfy short-term obligations.
b. main profitable operations.
c. maintain past levels of preferred and common dividends.
d. survive a major economic downturn.
Test Bank, Intermediate Accounting, 14th ed. 65
a 2. For a liability to exist,
LO1 a. there must be a past transaction or event.
b. the exact amount must be known.
c. the identity of the party to whom the liability is owed must be known.
d. there must be an obligation to pay cash in the future.

d 3. Accrued revenues would normally appear on the balance sheet as

LO1 a. plant assets.
b. current liabilities.
c. long-term liabilities.
d. current assets.

d 4. Which of the following would not be classified as a current asset on a

LO1 classified balance sheet?
a. Investment securities (trading).
b. Short-term investments.
c. Prepaid expenses.
d. Intangible assets.

d 5. The correct order to present current assets is

LO1 a. cash, inventories, prepaid items, accounts receivable.
b. cash, inventories, accounts receivable, prepaid items.
c. cash, accounts receivable, prepaid items, inventories.
d. cash, accounts receivable, inventories, prepaid items.

b 6. Unearned rent would normally appear on the balance sheet as a

LO1 a. plant asset.
b. current liability.
c. long-term liability.
d. current asset.

b 7. Investment securities held for the purpose of retiring bonds should be

LO1 classified on a balance sheet as
a. current assets.
b. investments.
c. deferred bond liability.
d. intangible assets.

c 8. Which of the following is not a long-term investment?

LO1 a. Stock held to exert influence on another company.
b. Land held for speculation.
c. Trademarks.
d. Cash surrender value of life insurance.

d 9. Which of the following characteristics may result in the classification of a

66 Chapter 3  The Balance Sheet and Notes to the Financial Statements

LO1 liability being changed from current to noncurrent?

a. Violation of a subjective acceleration clause.
b. Violation of an objective acceleration clause.
c. A demand provision for payment.
d. Refinancing after the balance sheet date.

c 10. Which of the following characteristics may result in the classification of a

LO1 liability as current?
a. Short-term obligations expected to be refinanced with long-term debt.
b. Debts to be liquidated from funds that have been accumulated and are
reported as noncurrent assets.
c. Violation of provisions of a debt agreement.
d. Obligations for advance collections that involve long-term deferment of
the delivery of goods or services.

b 11. Which of the following would not be classified as a current liability on a

LO1 classified balance sheet?
a. Unearned revenue.
b. Deferred income tax liability.
c. The currently maturing portion of long-term debt.
d. Accrued salaries payable to management.

b 12. Which of the following would not be considered an element of working

LO1 capital?
a. Investment securities (current)
b. Organization costs
c. Accrued interest on notes payable
d. Work in process inventories

b 13. Pending litigation would generally be considered a(n)

LO1 a. nonmonetary liability.
b. contingent liability.
c. estimated liability.
d. current liability.

b 14. Which of the following statements regarding assets is not true?

LO1 a. An asset represents a probable future economic benefit.
b. Assets are obtained or controlled as a result of past or probable future
transactions or events.
c. Assets reported on the balance sheet include both monetary and
nonmonetary resources.
d. Assets include costs that have not yet been matched with revenues.
Test Bank, Intermediate Accounting, 14th ed. 67
a 15. Which of the following would not be reported for capital stock in the
LO1 contributed capital section of a classified balance sheet?
a. Dividends per share
b. Shares authorized
c. Shares issued
d. Shares outstanding

c 16. Which of the following circumstances would require recording an accrual

LO1 for a loss contingency under current generally accepted accounting
principles?
a. Event is unusual in nature and occurrence of event is probable
b. Event is unusual in nature and event occurs infrequently
c. Amount of loss is reasonably estimable and occurrence of event is
probable
d. Amount of loss is reasonably estimable and event occurs infrequently

b 17. Which of the following would not be reported in the stockholders’ equity
LO1 section of the balance sheet?
a. Retained earnings appropriated for future plant expansion
b. Dividends declared on preferred stock
c. Paid-in capital in excess of par value
d. Deficit in retained earnings

b 18. Which of the following best describes contributed capital?

LO1 a. The amount that would be distributed to the stockholders in a liquidation
of the corporation.
b. The amount of capital provided by stockholders’ investments.
c. The amount of capital provided by stockholders’ investments and
undistributed earnings.
d. The value of the common and preferred stock.

d 19. A contingent liability should be recorded when

LO1 a. any lawsuit is actually filed against a company.
b. it is certain that funds are available to pay the amount of the claim.
c. it is probable that a liability has been incurred even though the amount
of the loss cannot be reasonably estimated.
d. the amount of the loss can be reasonably estimated and it is probable
prior to issuance of financial statements that a liability has been
incurred.
68 Chapter 3  The Balance Sheet and Notes to the Financial Statements

c 20. How should a contingent liability be reported in the financial statements

LO1 when it is "reasonably possible" the company will have to pay the liability at
a future date?
a. As a deferred liability.
b. As an accrued liability.
c. As a disclosure only.
d. As an account payable with an additional disclosure explaining the
nature of the transaction.

c 21. Which of the following statements best describes a subsequent event?

LO1 a. A subsequent event affects only subsequent reporting periods.
b. A subsequent event may occur any time after financial statements are
issued.
c. A subsequent event is, in some cases, reflected in the statements of the
preceding period.
d. A subsequent event is not covered by the independent auditor’s report.

d 22. Which of the following generally is considered a limitation of the balance

LO5 sheet?
a. The balance sheet reflects the current value of a business.
b. The balance sheet reflects the instability of the dollar.
c. Balance sheet formats and classifications do not vary to reflect industry
differences.
d. Due to measurement problems, some enterprise resources and
obligations are not reported on the balance sheet.

a 23. The operating cycle

LO1 a. measures the time elapsed between cash disbursement for inventory
and cash collection of the sales price.
b. refers to the seasonal variations experienced by business enterprises.
c. should be used to classify assets and liabilities as current if it is less
than one year.
d. cannot exceed one year.
Test Bank, Intermediate Accounting, 14th ed. 69

c 24. Lobo Co. was incorporated on July 1, 2001, with $200,000 from the
LO1 issuance of stock and borrowed funds of $30,000. During the first year of
operations, net income was $10,000. On December 15, Lobo paid an $800
cash dividend. No additional activities affected owners' equity in 2001. At
December 31, 2001, Lobo's liabilities had increased to $37,600. In Lobo's
December 31, 2001, balance sheet, total assets should be reported at
a. $239,200.
b. $240,000.
c. $246,800.
d. $276,800.

a 25. Mejarus Co.'s adjusted trial balance at December 31, 2001, includes the
LO1 following account balances:

Common Stock, $3 par.................................... $ 360,000

Additional Paid-In Capital................................ 480,000
Treasury Stock, at cost.................................... 30,000
Net Unrealized Loss on Available-for-
Sale Securities.............................................. 12,000
Retained Earnings: Appropriated for
Uninsured Earthquake Losses..................... 90,000
Retained Earnings: Unappropriated................ 120,000

What amount should Mejarus report as total stockholders' equity in its

December 31, 2001, balance sheet?
a. $1,008,000
b. $1,032,000
c. $1,068,000
d. $1,092,000

b 26. The following changes in Patriot Corporation's account balances occurred

LO1 during 2001:
Increase
Assets.............................................................. $ 267,000
Liabilities ......................................................... 81,000
Capital Stock.................................................... 198,000
70 Chapter 3  The Balance Sheet and Notes to the Financial Statements

Patriot paid dividends of $39,000 during the year. There were no changes
in Retained Earnings for 2001 except dividends and net income. What was
Patriot’s net income for 2001?
a. $12,000
b. $27,000
c. $39,000
d. $51,000

a 27. Blues Corporation’s trial balance included the following account balances
LO1 at December 31, 2001:
Accounts Payable............................................ $ 45,000
Bonds Payable, due 2002............................... 75,000
Discount on Bonds Payable, due 2002........... 9,000
Dividends Payable January 31, 2002.............. 24,000
Notes Payable, due January 31, 2005............ 60,000

What amount should be included in the current liability section of Blues'

December 31, 2001, balance sheet?
a. $135,000
b. $153,000
c. $195,000
d. $234,000

d 28. Hogi-Yogi Co. has total debt of $252,000 and stockholders' equity of
LO3 $420,000. Hogi-Yogi is seeking capital to fund an expansion. Hogi-Yogi is
planning to issue an additional $180,000 in common stock, and is
negotiating with a bank to borrow additional funds. The bank requires a
maximum debt ratio of .75. What is the maximum additional amount Hogi-
Yogi will be able to borrow after the common stock is issued?
a. $639,000
b. $852,000
c. $1,236,000
d. $1,548,000

b 29. The following data were taken from the financial statements of Jensen
LO3 Corporation for the year ended December 31, 2001:
Net sales.......................................................... $ 120,000
Net income....................................................... 30,000
Total assets, January 1, 2001......................... 400,000
Total assets, December 31, 2001................... 600,000
Test Bank, Intermediate Accounting, 14th ed. 71

What was Jensen's rate of return on assets for 2001?

a. 5 percent
b. 6 percent
c. 20 percent
d. 24 percent

b 30. Barney Co.'s current ratio is 2:1. Which of the following transactions would
LO3 normally increase Barney’s current ratio?
a. Purchasing inventory on account
b. Borrowing money by signing a long-term note
c. Collecting an account receivable
d. Purchasing land for cash

b 31. The accounts and balances shown below were gathered from Paynter
LO1 Corporation’s trial balance on December 31, 2001. All adjusting entries
have been made
Wages Payable……………………………………………….. $ 25,600
.................................................................Cash
……………………………………………………………. 17,700
...........................................Mortgage Payable
…………………………………………….151,600
Dividends Payable……………………………………………. 14,000
Prepaid Rent....................................................................... 13,600
Inventory............................................................................. 81,800
Sinking Fund Assets........................................................... 52,400
Short-Term Investments..................................................... 15,200
Premium on Bonds Payable............................................... 4,600
Stock Investment in Subsidiary.......................................... 102,400
Taxes Payable.................................................................... 22,800
Accounts Payable............................................................... 24,800
Accounts Receivable.......................................................... 36,600

The amount that should be reported as current assets on Paynter

Corporation’s balance sheet is
a. $151,300.
b. $164,900.
c. $217,300.
d. $267,300.
72 Chapter 3  The Balance Sheet and Notes to the Financial Statements

a 32. Neptune Corporation's trial balance contained the following account

LO1 balances at December 31, 2001:
Accumulated Depreciation--Equipment ............................. $45,000
Short-Term Investments..................................................... 15,000
Prepaid Insurance............................................................... 3,000
Cash.................................................................................... 33,000
Inventory of Merchandise................................................... 90,000
Equipment and Furniture.................................................... 54,000
Patent.................................................................................. 12,000
Accounts Receivable (net).................................................. 48,000
Land Held for Future Business Site.................................... 75,000

On Neptune's December 31, 2001, balance sheet, the current assets total
should be
a. $189,000.
b. $201,000.
c. $219,000.
d. $243,000.

a 33. The accounts and balances shown below were gathered from Paynter
LO1 Corporation’s trial balance on December 31, 2001. All adjusting entries
have been made.
Wages Payable................................................................... $ 25,600
Cash.................................................................................... 17,700
Mortgage Payable............................................................... 151,600
Dividends Payable.............................................................. 14,000
Prepaid Rent....................................................................... 13,600
Inventory............................................................................. 81,800
Sinking Fund Assets........................................................... 52,400
Short-Term Investments..................................................... 15,200
Premium on Bonds Payable............................................... 4,600
Stock Investment in Subsidiary.......................................... 102,400
Taxes Payable.................................................................... 22,800
Accounts Payable............................................................... 24,800
Accounts Receivable.......................................................... 36,600

The amount that should be reported as current liabilities on Paynter

Corporation’s balance sheet is
a. $87,200.
b. $91,800.
c. $73,200.
d. $238,800.
Test Bank, Intermediate Accounting, 14th ed. 73
c 34. The accounts and balances shown below were gathered from Paynter
LO2 Corporation’s trial balance on December 31, 2001. All adjusting entries
have been made.
Wages Payable................................................................... $ 25,600
Cash.................................................................................... 17,700
Mortgage Payable............................................................... 151,600
Dividends Payable.............................................................. 14,000
Prepaid Rent....................................................................... 13,600
Inventory............................................................................. 81,800
Sinking Fund Assets........................................................... 52,400
Short-Term Investments..................................................... 15,200
Premium on Bonds Payable............................................... 4,600
Stock Investment in Subsidiary.......................................... 102,400
Taxes Payable.................................................................... 22,800
Accounts Payable............................................................... 24,800
Accounts Receivable.......................................................... 36,600

Paynter Corporation’s working capital is

a. $62,500.
b. $73,100.
c. $77,700.
d. $125,700.

d 35. Baggins Company prepared a draft of its 2001 balance sheet. The draft
LO1 statement reported total assets of $437,500. Included in this total assets
figure were the following items:
Treasury stock of Baggins Company at cost, which
approximates market value on December 31................ $12,000
Unamortized patents.......................................................... 5,600
Cash surrender value of life insurance on corporate
executives....................................................................... 6,850
Unrealized holding losses on available-for-sale
securities......................................................................... 4,200

At which amount should Baggins' total assets be correctly reported in the

December 31, 2001, balance sheet?
a. $420,850
b. $421,300
c. $425,050
d. $425,500
 a 36. Maryk Electronics Inc. reported the following items on its December 31,
LO1 2001, trial balance:
Accounts Payable............................................................... $108,900
Advances to Employees..................................................... 4,500
Unearned Rent Revenue.................................................... 28,800
Estimated Liability Under Warranties................................. 25,800
Cash Surrender Value of Officers’ Life Insurance.............. 7,500
Bonds Payable.................................................................... 555,000
Discount on Bonds Payable............................................... 22,500
Trademarks......................................................................... 3,900

The amount that should be recorded on Maryk’s balance sheet as total

liabilities is
a. $696,000.
b. $700,500.
c. $703,500.
d. $741,000.

c 37. Troy Co. began operations on January 1, 2001, with $100,000 from the
LO1 issuance of stock and borrowed funds of $15,000. Net income for 2001
was $5,000 and Troy paid a $400 cash dividend on December 15. No
additional activities affected owners' equity in 1999. At December 31, 2001,
Troy's liabilities had increased to $18,800. In Troy's December 31, 2001,
balance sheet, total assets should be reported at
a. $119,600.
b. $120,000.
c. $123,400.
d. $138,400.

b 38. Eagle Co. prepared a draft of its 2001 balance sheet. The draft statement
LO1 reported current liabilities totaling $200,000. However, none of the follow-
ing items were included in this preliminary total at December 31, 2001:
Accounts payable............................................................... $30,000
Bonds payable, due 2002................................................... 50,000
Discount on bonds payable, due 2002............................... 6,000
Dividends payable on January 31, 2002............................ 16,000
Notes payable, due 2003.................................................... 40,000
 At which amount should Eagle's current liabilities be correctly reported in
the December 31, 2001, balance sheet?
a. $230,000
b. $290,000
c. $296,000
d. $302,000

b 39. The December 31, 2001, balance sheet of Madden Inc., reported total
LO1 assets of $1,050,000 and total liabilities of $680,000. The following
information relates to the year 2002:
• Madden Inc. issued an additional 5,000 shares of common stock at $25
per share on July 1, 2002.
• Madden Inc. paid dividends totaling $80,000.
• Net income for 2002 was $110,000.
• No other changes occurred in stockholders’ equity during 2002.

The stockholders’ equity section of the December 31, 2002, balance sheet
would report a balance of
a. $400,000.
b. $525,000.
c. $685,000.
d. $835,000.

c 40. Information from Blain Company's balance sheet is as follows:

LO3
Current assets:
Cash ......................................................................... $ 1,200,000
Investment securities.................................................. 3,750,000
Accounts receivable................................................... 28,800,000
Inventories.................................................................. 33,150,000
Prepaid expenses....................................................... 600,000
Total current assets.................................................... $ 67,500,000
Current liabilities:
Notes payable............................................................. $ 750,000
Accounts payable....................................................... 9,750,000
Accrued expenses...................................................... 6,250,000
Income taxes payable................................................ 250,000
Payments due within one year on long-term debt..... 1,750,000
Total current liabilities................................................. $ 18,750,000
 What is Blain's quick (acid-test) ratio?
a. 0.26 to 1
b. 0.30 to 1
c. 1.80 to 1
d. 3.60 to 1

a 41. Seahawk Company's adjusted trial balance at December 31, 2001, includes
LO1 the following account balances:
Common Stock, $3 par............................................... $ 300,000
Additional Paid-In Capital........................................... 400,000
Treasury Stock, at cost............................................... 25,000
Net Unrealized Holding Loss on Available-For-Sale
Securities............................................................... 10,000
Retained Earnings--Appropriated for Uninsured
Earthquake Losses............................................... 75,000
Retained Earnings--Unappropriated.......................... 100,000

What amount should Seahawk report as total owners' equity in its

December 31, 2001, balance sheet?
a. $840,000
b. $860,000
c. $890,000
d. $910,000

b 42. Martin Corporation was organized on January 3, 2001. Martin was

LO1 authorized to issue 50,000 shares of common stock with a par value of $10
per share. On January 4, Martin issued 30,000 shares of common stock at
$25 per share. On July 15, Martin issued an additional 10,000 shares at
$20 per share. Martin reported income of $33,000 during 2001. In
addition, Martin declared a dividend of $.50 per share on December 31,
2001. The amount reported on Martin Corporation’s December 31, 2001,
balance sheet as additional paid-in capital was
a. $400,000.
b. $550,000.
c. $563,000.
d. $950,000.

d 43. Martin Corporation was organized on January 3, 2001. Martin was

LO1 authorized to issue 50,000 shares of common stock with a par value of $10
per share. On January 4, Martin issued 30,000 shares of common stock at
$25 per share. On July 15, Martin issued an additional 10,000 shares at
$20 per share. Martin reported income of $33,000 during 2001. In
addition, Martin declared a dividend of $.50 per share on December 31,
2001. The
 amount reported on Martin Corporation’s December 31, 2001, balance
sheet as stockholders’ equity was
a. $400,000.
b. $550,000.
c. $950,000.
d. $963,000.

d 44. Information from Blain Company's balance sheet is as follows:

LO3 Current assets:
Cash...................................................................... $ 1,200,000
Investment securities............................................ 3,750,000
Accounts receivable.............................................. 28,800,000
Inventories............................................................. 33,150,000
Prepaid expenses................................................. 600,000
Total current assets.............................................. $ 67,500,000
Current liabilities:
Notes payable....................................................... $ 750,000
Accounts payable.................................................. 9,750,000
Accrued expenses................................................. 6,250,000
Income taxes payable........................................... 250,000
Payments due within one year on long-term debt 1,750,000
Total current liabilities........................................... $ 18,750,000

What is Blain's current ratio?

a. 0.26 to 1
b. 0.30 to 1
c. 1.80 to 1
d. 3.60 to 1

a 45. What is the effect of the collection of accounts receivable on the current
LO3 ratio and net working capital, respectively?

Current Ratio Net Working Capital

a. No effect No effect
b. Increase Increase
c. Increase No effect
d. No effect Increase
 a 46. Which of the following is an appropriate computation for return on
LO3 investment?
a. Net income divided by total assets
b. Net income divided by sales
c. Sales divided by total assets
d. Sales divided by stockholders’ equity

c 47. Which item describes whether the following accounts would be included in
LO3 the calculation of the acid-test (quick) ratio?

Accounts Receivable Inventories

a. No No
b. No Yes
c. Yes No
d. Yes Yes

PROBLEMS
Problem 1
Below are selected accounts and their balances for the Stonefly Company as of
December 31, 2001:
Accounts Payable.................................................................. $ 98,000
Accounts Receivable............................................................. 216,000
Allowance for Doubtful Notes and Accounts......................... 25,000
Cash...................................................................................... 22,400
Wages Payable..................................................................... 10,800
Trademarks........................................................................... 45,000
Long-Term Advances to Officers.......................................... 150,000
Inventory................................................................................ 83,000
Income Taxes Payable.......................................................... 72,000
Notes Receivable (short-term).............................................. 97,000
Bond Redemption Fund........................................................ 180,000
Bonds Payable...................................................................... 500,000
Premium on Bonds Payable.................................................. 40,000
Treasury Stock...................................................................... 57,600

Based on the above information, determine the amount of working capital at

December 31, 2001.
Solution 1
LO2
Stonefly Company
Schedule of Working Capital
December 31, 2001

Current assets:
Cash ............................................ $ 22,400
Notes receivable........................... $ 97,000
Accounts receivable..................... 216,000
$313,000
Less allowance for doubtful notes
and accounts........................... 25,000 288,000
Inventory....................................... 83,000 $ 393,400
Current liabilities:
Accounts payable......................... $ 98,000
Wages payable............................. 10,800
Income taxes payable.................. 72,000 180,800
Working capital................................ $ 212,600

Problem 2
Account balances and supplemental information for the Bighorn Corporation as of
December 31, 2001, are given below:
Accounts Payable.......................................................................... $ 75,900
Accounts Receivable........................................................................ 141,600
Accumulated Depreciation--Equipment........................................... 84,000
Bonds Payable................................................................................. 300,000
Cash................................................................................................. 243,900
Common Stock.................................................................................1,560,000
Deferred Income Tax Liability (noncurrent)..................................... 6,900
Dividends Payable............................................................................ 45,000
Equipment........................................................................................ 840,000
Income Taxes Payable..................................................................... 91,500
Inventory........................................................................................... 395,100
Investment in Land........................................................................... 510,000
Investment in Stock of Subsidiary.................................................... 492,000
Note Payable.................................................................................... 120,000
Notes Receivable............................................................................. 150,000
Prepaid Insurance............................................................................ 7,200
Retained Earnings............................................................................ 453,600
Salaries and Wages Payable........................................................... 42,900
 (a) $300,000 of 12% bonds were sold on November 1, 2001, at par.
(b) 40,000 shares of $30 par value common stock were sold for $1,560,000.
(c) All the equipment was purchased on January 2, 2000. The depreciation
rate is 10 percent per year.
(d) 5 percent of accounts receivable are expected to be uncollectible.
(e) A two-year insurance policy was purchased on May 1, 2001, for $7,200.
(f) Accrued interest on $150,000 of short-term notes receivable from
customers was $5,100 at December 31, 2001.
(g) $120,000 was borrowed from the bank on a 5-year, 10% note payable
dated December 31, 2001. The loan is to be repaid in 10 semiannual
payments of $12,000 plus interest, with the first payment due June 30,
2002.

Prepare a properly classified balance sheet in report form for Bighorn Corporation
as of December 31, 2001.

Solution 2
LO1
Bighorn Corporation
Balance Sheet
December 31, 2001

Assets
Current assets:
Cash......................................................................... $ 243,900
Notes receivable...................................................... 150,000
Accounts receivable, less allowance for doubtful
accounts of $7,080............................................. 134,520
Interest receivable................................................... 5,100
Inventory.................................................................. 395,100
Prepaid insurance.................................................... 4,800 $ 933,420
Investments:
Investment in land.................................................... $ 510,000
Investment in stock of subsidiary............................. 492,000 1,002,000
Equipment.................................................................... $ 840,000
Less accumulated depreciation--equipment............... 168,000 672,000
Total assets.................................................................. $ 2,607,420
Liabilities
Current liabilities:
Accounts payable..................................................... $ 75,900
Dividends payable.................................................... 45,000
Income taxes payable.............................................. 91,500
Salaries and wages payable.................................... 42,900
Interest payable....................................................... 6,000
Current portion of long-term note payable.............. 24,000 $ 285,300
Noncurrent liabilities:
Long-term debt:
Note payable...................................................... $ 96,000
Bonds payable.................................................... 300,000
Deferred income tax liability.................................... 6,900 402,900
Total liabilities............................................................... $ 688,200

Owners’ Equity
Contributed capital:
Common stock, $30 par.......................................... $ 1,200,000
Additional paid-in capital.......................................... 360,000
Retained earnings ($453,600 - $7,080 + $5,100 - $2,400 -
$84,000 - $6,000 = $359,220)........................................... 359,220 1,919,220
Total liabilities and owners’ equity............................... $ 2,607,420

Problem 3
McMaster, Inc., a nonpublic enterprise, is negotiating a loan for expansion
purposes and the bank requires audited financial statements. Before closing the
accounting records for the year ended December 31, 2001, McMaster’s controller
prepared the following comparative financial statements for 2001 and 2000:

McMaster, Inc.
Balance Sheets
December 31, 2001 and 2000
2001 2000
Cash.......................................................................... $ 550,000 $ 300,000
Investment securities (reported at market; cost, $142,000). 156,000 0
Accounts receivable.................................................. 974,000 784,000
Allowance for doubtful accounts............................... (100,000) (64,000)
Inventories................................................................. 850,000 770,000
Property and equipment............................................ 620,000 434,000
Accumulated depreciation......................................... (300,000) (242,000)
Total assets........................................................... $2,750,000 $1,982,000
Accounts payable...................................................... $ 180,000 $ 154,000
Accrued expenses..................................................... 160,000 40,000
Note payable, 5-year................................................. 600,000 600,000
Estimated contingent liability..................................... 200,000 0
Common stock, $10 par............................................ 420,000 420,000
Additional paid-in capital........................................... 260,000 260,000
Retained earnings..................................................... 930,000 508,000
Total liabilities & owners’ equity............................ $ 2,750,000 $1,982,000

McMaster, Inc.
Income Statements
For the Years Ended December 31, 2001 and 2001

2001 2000
Net sales................................................................... $ 3,160,000 $ 2,500,000
Operating expenses:
Cost of sales.......................................................... $ 1,510,000 $ 1,380,000
Selling & administrative......................................... 984,000 730,000
Depreciation.......................................................... 58,000 36,000
Estimated loss from lawsuit.................................. 200,000 0
$ 2,752,000 $ 2,146,000
Operating income...................................................... $ 408,000 $ 354,000
Unrealized gain on investment securities................. 14,000 0
Net income................................................................ $ 422,000 $ 354,000

During the audit, the following additional information was obtained:

(a) The investment portfolio consists of investments in trading securities with a
total market value of $156,000 at December 31, 2001. The securities were
purchased February 3, 2001, at a cost of $142,000.

(b) As a result of errors in physical count, inventories were overstated by

$30,000 at December 31, 2001.

(c) On January 2, 2001, the cost of equipment purchased for $80,000 was
mistakenly charged to repairs and maintenance. McMaster depreciates this
type of equipment over a 5-year life using the straight-line method, with no
residual or salvage value.

(d) McMaster was named as a defendant in a lawsuit in October 2001.

McMaster’s counsel is of the opinion that McMaster has a good defense
and does not anticipate any impairment of McMaster’s assets or that any

significant liability will be incurred. However, McMaster’s counsel admits

that loss of the suit is "possible." McMaster’s management wished to be
 conservative and established a loss contingency of $200,000 at December
31, 2001.

(e) On January 24, 2002, before the 2001 financial statements were issued,
McMaster was notified that one of its largest customers had filed for
bankruptcy as the result of a flood that destroyed a substantial portion of
the company’s assets on January 16, 2002. The customer’s accounts
receivable balance at December 31, 2001, was $144,000.

(f) $100,000 of 5-year notes payable will mature September 30, 2002. In view
of McMaster’s plans for expansion, management is seriously considering
refinancing the notes when they become due.

(1) Prepare a properly classified balance sheet for McMaster, Inc., as of

December 31, 2001. (Income tax considerations should be ignored.)

(2) Identify the events and other information that should be disclosed in the notes
to McMaster’s financial statements. (Do not prepare the notes.)

Solution 3
LO1

(1) McMaster, Inc.

Balance Sheet
December 31, 2001

Assets
Current assets:
Cash.............................................................. $ 550,000
Investment securities (reported at market;
cost, $142,000)................................................ 156,000 (a)
Accounts receivable...................................... $ 974,000
Less allowance for doubtful accounts........ 100,000 874,000
Inventories..................................................... 820,000 (b)
Total current assets...................................... $2,400,000
Property and equipment............................... $ 700,000
Less accumulated depreciation................. 316,000 384,000 (c)
Total assets....................................................... $2,784,000
Liabilities & Stockholders’ Equity
Current liabilities:
Accounts payable.......................................... $ 180,000
Accrued expenses........................................ 160,000
Notes payable (due September 30, 2002). . . 100,000
Total current liabilities....................................... $ 440,000
Long-term notes payable.............................. 500,000
Total liabilities.................................................... $ 940,000
Contributed capital:
Common stock, $10 par................................ $ 420,000
Additional paid-in capital............................... 260,000 680,000
Retained earnings [$930,000 - $30,000 (b) +
$80,000 (c) - $16,000 (c) + $200,000 (d)].................. 1,164,000
Total liabilities & stockholders’ equity............... $2,784,000

Note: Letters correspond to letters in problem identifying additional information.

(2) Notes to the financial statements of McMaster, Inc. should include:

• Summary of significant accounting policies. A description of accounting

principles and methods used in recognizing revenues and allocating asset
costs to current and future periods. Specifically, McMaster should disclose
accounting policies relating to valuation of receivables, inventories, and
depreciable assets and any other policies that would influence the decisions
of users.

• Information regarding loss contingency. A description of the pending legal

action, including information and data to assist users in evaluating the risk
of potential loss. Based on the opinion of McMaster’s counsel, the
estimated loss of $200,000 should not be reported in the financial
statements, but the contingency should be described in a note, since the
incurrence of a loss is “reasonably possible.”

• Information regarding the bankruptcy of a major customer. This type of

subsequent event does not affect the amounts reported in the financial
statements, because the casualty giving rise to the bankruptcy occurred
after McMaster’s balance sheet date.

• Additional information to support totals in financial statements. For

example, McMaster might present additional detail for inventory and cost of
sales, property and equipment, and/or selling and administrative expenses.
Problem 4
The following balance sheet was prepared by the accountant for Logan Farms
Corp.:
Logan Farms Corp.
Balance Sheet
December 31, 2001

Assets
Cash.................................................................................................. $ 271,500
Investment securities......................................................................... 315,000
Accounts receivable........................................................................... 270,000
Inventories......................................................................................... 501,000
Total current assets....................................................................... $ 1,357,500
Land, buildings, and equipment........................................................ 1,452,000
Total assets........................................................................................ $ 2,809,500

Liabilities and Stockholders’ Equity

Accounts payable.............................................................................. $ 342,420
Estimated losses from future crop failures........................................ 360,000
Salaries payable................................................................................ 150,000
Total current liabilities.................................................................... $ 852,420
10% Bonds payable (due in 10 years).............................................. 525,000
Capital stock...................................................................................... 450,000
Retained earnings.............................................................................. 982,080
Total liabilities and stockholders’ equity............................................ $ 2,809,500

Additional information:

(a) Cash is held in a checking account and a savings account with balances of
$69,450 and $202,050, respectively. The cash in the savings account will
be used to support operations in the event of a crop failure.

(b) A loan to the president for $180,000 that is to be repaid in quarterly

installments of $15,000 is included in “Accounts receivable.” Other
accounts receivable are considered to be 95 percent collectible.

(c) Inventories include:

Finished products.............................................................. $ 390,000
Supplies............................................................................. 19,500
Storage buildings (net of $30,480 depreciation)......................... 91,500
Total............................................................................... $ 501,000

(d) “Land, buildings, and equipment” includes 5 tractors that were purchased
near the end of the year for $360,000 (shown net of a $300,000, 5-year
 loan used to buy the tractors). The balance of the account consists of land
that was purchased for $1,200,000 and buildings that were purchased for
$255,000 (shown net of depreciation of $63,000).

(e) Included in “Accounts payable” are $105,000 of advances from customers

for delivery of goods in August of the next year.

(f) The company has 90,000 shares of $5 par common stock issued and
outstanding. The common stock was originally sold for $7 per share, and
the premium was included in “Retained earnings.”

(g) After reading a U.S. Meteorological Service report, the president believes
that next year will be a bad crop year due to freak hailstorms and estimates
the company will lose about $360,000. An appropriation of Retained
Earnings has been made for this amount.

Using the balance sheet and the additional information, prepare a properly
classified and corrected balance sheet.

Solution 4
LO1

Logan Farms Corp.

Balance Sheet
December 31, 2001
Assets
Current assets:
Cash……............................................................….. $ 69,450
Investment securities............................................... 315,000
Accounts receivable................................................. $ 90,000
Less allowance for doubtful accounts..................... 4,500 85,500
Inventories............................................................... 390,000
Advances to officers (due in 1 year)........................ 60,000
Supplies…................................................................ 19,500
Total current assets................................................. $ 939,450
Investments:
Cash fund for future losses...................................... 202,050

Land, buildings, and equipment:

Land…….................................................................. $ 1,200,000
Buildings ................................................................. 376,980
Equipment................................................................ 360,000
Less accumulated depreciation--buildings and
equipment.............................................................. (93,480) 1,843,500
Other noncurrent assets:
Advances to officers (long-term)............................. 120,000
Total assets ................................................................. $3,105,000

Liabilities
Current liabilities:
Accounts payable..................................................... $ 237,420
Salaries payable...................................................... 150,000
Advances from customers....................................... 105,000
Total current liabilities.............................................. $ 492,420
Long-term debt:
5-year loan payable................................................. $ 300,000
10% bonds payable................................................. 525,000 825,000
Total liabilities............................................................... $ 1,317,420

Stockholders’ Equity
Contributed capital:
Common stock ($5 par, 90,000 shares issued and
outstanding)............................................................... $ 450,000
Additional paid-in capital.......................................... 180,000 $ 630,000
Retained earnings:
Appropriated for future losses................................. $ 360,000
Unappropriated [$982,080 - $4,500 (b) - $180,000(f) +
$360,000(g) = $1,157,580 (adjusted total retained earnings);
$1,157,580 - $360,000 = $797,580].................................. 797,580 1,157,580
Total stockholders’ equity............................................ $ 1,787,580
Total liabilities and stockholders’ equity...................... $ 3,105,000
Problem 5
The following totals are taken from the December 31, 2001, balance sheet of
Streamer Company:

Current assets.............................................................................. $ 350,000

Long-term assets......................................................................... 800,000
Current liabilities........................................................................... 240,000
Long-term liabilities...................................................................... 270,000

Additional information:

(a) Cash of $38,000 has been placed in a fund for the retirement of long-term
debt. The cash and long-term debt have been offset and are not reflected
in the financial statements.

(b) Long-term assets include $50,000 in treasury stock.

(c) Cash of $14,000 has been set aside to pay taxes due. The cash and taxes
payable have been offset and do not appear in the financial statements.

(d) Advances on salespersons’ commissions in the amount of $21,000 have

been made. Also, sales commissions payable total $24,000. The net
liability of $3,000 is included in Current Liabilities.

After making any necessary changes, what are the totals for Streamer’s current
assets and current liabilities?

Solution 5
LO1

Current Assets Current Liabilities

Beginning ................................................ $ 350,000 $ 240,000
(a) No adjustment
(b) No adjustment
(c) Offsetting cash and taxes payable.. 14,000 14,000
(d) Netting commission advances and
commissions payable................ 21,000 21,000
Totals...............................................$ 385,000 $ 275,000
Problem 6
The following totals are taken from the December 31, 2001, balance sheet of
Bartholomew Company:

Current assets.............................................................................. $ 350,000

Long-term assets......................................................................... 800,000
Current liabilities........................................................................... 240,000
Long-term liabilities...................................................................... 270,000

Additional information:

(a) A building costing $100,000 was purchased by taking out a $100,000

mortgage. Since the building serves as collateral on the mortgage loan,
both have been excluded from the financial statements.

(b) Cash in the amount of $45,000 is in a restricted fund for the purchase of
equipment. This cash has been included in Current Assets.

(c) Long-term liabilities include a bank loan of $80,000. Of this loan, $15,000
must be repaid within the coming year.

(d) Investment securities totaling $27,000 are included in Current Assets.

These securities represent stock purchases made as a long-term equity
investment in a major supplier.

After making any necessary changes, what are the totals for Bartholomew’s long-
term assets and long-term liabilities?

Solution 6
LO1
Long-Term Assets Long-Term Liabilities
Beginning.....................................................$ 800,000 $ 270,000
(a) Offsetting building and mortgage.... 100,000 100,000
(b) Restricted fund................................ 45,000
(c) Current portion of long-term debt.... (15,000)
(d) Long-term investment..................... 27,000
Totals...............................................$ 972,000 $ 355,000
Problem 7
Berton Company reported assets totaling $870,000 as of December 31, 2001. The
following information relates to those assets:

(a) Breakstone Labs, a rival company, recently offered to give a $100,000

signing bonus to the head of Berton’s fabrication department if she would
leave Berton and join Breakstone. She declined. Berton has consequently
recorded a long-term asset, “Employees Under Contract,” for $100,000.

(b) Berton purchased a patent from a small research firm for $75,000.
Subsequent research has shown that the patented technology doesn’t work
as well as originally thought and the technology actually has no economic
use. Berton reports the patent at its amortized cost of $60,000.

(c) An independent appraiser recently set Berton’s market value at $500,000.

This exceeded the book value of equity by $120,000. Accordingly, Berton
recorded Goodwill totaling $120,000.

(d) Near the end of the year, Berton paid $30,000 for the exclusive right to
market electronic equipment to be imported from abroad. Berton reported
this as a $30,000 “Intangible Asset.”

(e) When Berton started business three years ago, it was required to deposit
$5,000 with the local electric utility. The deposit is refundable if Berton
cancels its electric service. Berton earns no interest on the deposit. The
deposit is recorded as an “Other Long-Term Asset.”

After considering the items above, what should be the total of Berton’s reported
assets?

Solution 7
LO1

Reported Assets
Beginning................................................................................ $ 870,000
(a) Employees under contract.......................................... (100,000)
(b) Obsolete patent.......................................................... (60,000)
(c) Unpurchased goodwill................................................ (120,000)
(d) No adjustment
(e) No adjustment
Total...................................................................... $ 590,000
Problem 8
Orvis Company reported liabilities totaling $1,230,000 as of December 31, 2001.
The following information relates to those liabilities:

(a) Orvis reported a $100,000 bank loan payable. However, Orvis intends to
repay this loan on January 10, 2002.

(b) Orvis has reported a $40,000 liability for the estimated cost of future
warranty repairs based on product sales for the past year.

(c) Orvis is being sued for $350,000 by a disgruntled employee. Orvis’

attorney thinks that it is possible that Orvis will lose the case. Orvis has not
yet recorded any liability for this potential loss.

(d) Orvis receives consulting services from a local CPA. Expected services by
the CPA for the coming year will cost $35,000. No liability has been
recorded.

(e) Orvis has reached an agreement with a major customer. Orvis expects to
provide services totaling $400,000 over the coming three years. The
customer has already paid Orvis $100,000. No liability has been recorded.

After considering these items, what should be the total of Orvis’ reported liabilities?

Solution 8
LO1
Reported Liabilities
Beginning............................................................................... $1,230,000
(a) No adjustment
(b) No adjustment
(c) No adjustment
(d) No adjustment
(e) Unearned revenue...................................................... 100,000
Total........................................................................................ $1,330,000
Problem 9
Knowledgeable users of financial statements recognize that the numbers reported
in company’s financial statements depend on the accounting policies used to
generate the numbers. Various choices of accounting policies exist, such as LIFO

vs. FIFO for inventory costing and straight-line vs. double-declining balance for
depreciation. APB Opinion No. 22 requires that a company disclose the accounting
policies used to ensure that statement users have the information they need to
make sound decisions.

What problems or problems arise from the large variety of accounting choices
available?

Solution 9
LO4
The greatest problem posed by the array of accounting choices available is the
difficulty of achieving comparability between firms (and even among firms in the
same industry). A statement user not only must be informed of the basic
differences that exist, but also must adjust balances to achieve comparability. As
might be expected, differences between financial statement items (such as
inventory) can be significant as a result of the use of different accounting policies
and procedures.

Problem 10
Certain assets currently are omitted from the balance sheet. For example, the
value of the human resources of the firm are not reported. Nevertheless, investors
and others might greatly benefit from a knowledge of the extent to which human
assets have increased or decreased during a given period. Values certainly may
be attributed to individuals or groups based on their ability to render future
economic services. A major issue is the method that should be employed in
measuring human assets.

Identify some possible ways of measuring human resources.

Solution 10
LO4
Possible methods for measuring human assets would include:
1. The historical-cost method in which the costs associated with recruiting,
selecting, hiring, training, and developing an employee are capitalized and
amortized over the expected period over which the enterprise expects to benefit
from the employee’s services.
2. The replacement cost method in which estimated costs of replacing a
firm’s existing human resources are estimated and recorded. Such costs include
all of the costs of recruiting, selecting, hiring, training, and developing new
employees until they reach the competence of old employees.

3. The present value of the remaining earnings to be paid an employee.

Problem 11
As a member of the audit staff of Brown & Co., CPAs, you have been assigned to
the audit of a new client, Black Corporation. Upon arriving at the client’s offices,
the controller provides you with copies of the company’s annual financial
statements. You quickly observe that the balance of accounts receivable has
increased materially over the amount reported on the prior year’s balance sheet.
Your inquiry of the controller produces the following response:

“This year we have included several other items with our trade receivables. All of
these items represent receivables and include:

(a) Advances made to officers and employees,

(b) Advances to our subsidiary company, and
(c) A refund from the Internal Revenue Service resulting from the
favorable resolution of a disputed tax matter.

I have included a description of the tax item in the note to the financial statements.
Since the other two items represent internal matters, I saw no reason to disclose
them or present them as separate items on the balance sheet.”

Do you concur with the controller’s treatment of these items? Explain.

Solution 11
LO1
Trade receivables represent amounts owed by customers for goods sold and
services rendered as part of normal business operations. The term
“accounts receivable: is assumed to connote trade receivables. Inclusion of other
forms of receivables under the caption “accounts receivable” thus may be
confusing and misleading. The nature of the items included with accounts
receivable on the Black Corporation statements suggests that they be classified
and reported as separate items on the balance sheet and in the notes to the
financial statements where necessary. This is particularly true of advances to
officers, employees, and subsidiaries since these represent transactions with
related parties which may not have been conducted at arm’s-length.
Problem 12
The balance sheet provides information concerning liquidity, financial flexibility, and
information for calculating various financial ratios. The balance sheet serves as a
major indicator of an enterprise’s ability to survive. Nevertheless, the analysis of
the balance sheet should be approached with a clear understanding of the
limitations of the statement.

What are the major limitations of the balance sheet that should be recognized in
analyzing the statement?

Solution 12
LO5
Values reported in the balance sheet may represent a mixture of values. Cash is a
current value item but plant assets are not. A summation of these numbers is thus
questionable as are the ratios using these mixed values.

Some entity resources and obligations are not reported on the balance sheet.
Many intangible assets, such as a reputation for superior products or customer
service, are not recognized on the balance sheet. As a result, the numbers on the
balance sheet frequently are not a good reflection of what a company is worth.
Dollar amounts shown on the balance sheet represent different levels of
purchasing power. Assets, liabilities, and equities shown on the balance sheet are
reflected in terms of unequal purchasing power units. Variations in purchasing
power of the amounts reported on the balance sheet make comparisons among
companies, and even within single companies, difficult.

Finally, all companies do not classify and report all like items similarly. Titles and
account classifications vary, some companies provide more detail than others, and
different companies report similar transactions in different manners. Comparisons
between companies thus are made more difficult.
CHAPTER 3 -- QUIZ A
Name _________________________
Section ________________________

T F 1. Sinking fund assets consisting of cash and securities held for the redemption
of bonds or stocks are normally classified as investments.

T F 2. When a bond issue classified as a long-term obligation becomes payable

within a year, it should normally be reclassified and presented as a current
liability.

T F 3. All current assets are reported at their estimated realizable values.

T F 4. Short-term obligations expected to be refinanced with long-term debt are

normally classified as long-term debt.

T F 5. Plant rearrangement costs and developmental and improvement costs are

frequently reported as land, buildings, and equipment.

T F 6. The long-term rights and privileges of a physical nature acquired for use in
business operations are often reported under the heading “Intangible assets.”

T F 7. Any obligation that is due on demand or will become due on demand within
one year from the balance sheet date should be classified as current.

T F 8. A contingent liability is a definite obligation with only the amount of the

obligation in question and subject to estimation at the balance sheet date.

T F 9. Current assets are normally listed on the balance sheet in the order of their
dollar value.

T F 10. “Deferred charges“ are typically included in the noncurrent liabilities section
of a classified balance sheet.

95
CHAPTER 3 -- QUIZ B
Name _________________________
Section ________________________

T F 1. Additional paid-in capital may arise only from the issuance of stock.

T F 2. Contingent liabilities are always reported on the balance sheet.

T F 3. Owners’ equity is sometimes referred to as net assets.

T F 4. The account form of balance sheet presentation is not allowed under

generally accepted accounting principles.

T F 5. Contributed capital is sometimes referred to as additional paid-in capital.

T F 6. Treasury stock is normally reported in the investment section of the balance

sheet.

T F 7. Retained earnings represents the total amount of undistributed earnings of

previous periods.

T F 8. Events that take place during the “subsequent events” period may have an
impact upon the balance sheet and the other basic financial statements for
the preceding year, but these events cannot affect the amounts reported in
the statements.

T F 9. When a corporation has more than one class of stock, all classifications
should be reported as a single amount in the balance sheet.

T F 10. A negative retained earnings balance is reported in the asset section of the
balance sheet.

96
CHAPTER 3 -- QUIZ C
Name _________________________
Section ________________________

A. Summary of accounting policies J. Subsequent event

B. Liquidity K. Objective acceleration clause
C. Sinking fund L. Treasury stock
D. Normal operating cycle M. Owners’ equity
E. Balance sheet--report form N. Liabilities
F. Deficit O. Subjective acceleration clause
G. Working capital P. Callable obligation
H. Contributed capital Q. Capital stock
I. Assets R. Balance sheet--account form

Select the term that best fits each of the following definitions and descriptions. Indicate
your answer by placing the appropriate letter in the space provided.

____ 1. A balance sheet that presents assets, liabilities, and owners’ equity sections
in a vertical arrangement.
____ 2. Information often included in the initial note to the financial statements.
____ 3. The residual interest in the assets of an entity that remains after deducting its
liabilities.
____ 4. An occurrence between the balance sheet date and the date financial
statements are issued and made available to external users.
____ 5. The claims of creditors against an entity’s resources.
____ 6. The time required for cash to be converted to inventories; inventories into
receivables; and receivables into cash.
____ 7. Assets that have been accumulated in order to repay a loan.
____ 8. Current assets less current liabilities.
____ 9. Equity in a corporation arising from the stockholders’ investments.
____ 10. A provision in a debt instrument that identifies specific conditions that will
cause the debt to be callable immediately.
____ 11. Stock issued by a corporation but subsequently reacquired by the corporation
and held for possible future reissuance or retirement.
____ 12. The portion of the contribution by stockholders assignable to the shares of
stock as par or stated value.
____ 13. Probable future economic benefits obtained or controlled by a particular
entity as a result of past transactions or events.
____ 14. The ability of an entity to meet its short-term obligations.
____ 15. An excess of dividend payments and losses over retained earnings resulting
in a negative retained earnings balance.

97
CHAPTER 3 -- QUIZ D
Name _________________________
Section ________________________

A classified balance sheet contains the following categories:

A. Current assets
B. Noncurrent assets
C. Current liabilities
D. Noncurrent liabilities
E. Contributed capital
F. Not on balance sheet

Identify which category each of the following items would be placed in when
constructing a classified balance sheet. Indicate your answer by placing the
appropriate letter in the space provided.

____ 1. Trading securities

____ 2. Intangible assets
____ 3. Accrued expenses
____ 4. Other noncurrent liabilities, such as pension obligations
____ 5. Accounts and notes receivable
____ 6. Long-term lease obligations
____ 7. Gain on sale of plant assets
____ 8. Deferred income tax liability
____ 9. Other current liabilities, such as unearned revenues
____ 10. Capital stock
____ 11. Cash
____ 12. Accounts and notes payable
____ 13. Inventories
____ 14. Other current assets, such as prepaid expenses
____ 15. Long-term debt, such as notes, bonds, and mortgages payable
____ 16. Property, plant, and equipment
____ 17. Additional paid-in capital
____ 18. Other noncurrent assets, such as deferred income tax assets
____ 19. Current portion of long-term obligations
____ 20. Investments
CHAPTER 3 -- QUIZ SOLUTIONS

Quiz A Quiz B Quiz C Quiz D

1. T 1. F 1. E 1. A
2. T 2. F 2. A 2. B
3. F 3. T 3. M 3. C
4. T 4. F 4. J 4. D
5. F 5. F 5. N 5. A
6. F 6. F 6. D 6. D
7. T 7. T 7. C 7. F
8. F 8. F 8. G 8. D
9. F 9. F 9. H 9. C
10. F 10. F 10. K 10. E
11. L 11. A
12. Q 12. C
13. I 13. A
14. B 14. A
15. F 15. D
16. B
17. E
18. B
19. C
20. B
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