Chapter 3, Problem 3.7E

To determine

Balance sheet:

 This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

To determine: The find out the errors while reviewing the balance sheet.

Explanation of Solution

Classified balance sheet:

  “A balance sheet with classification of assets and liabilities based on their current and noncurrent status and grouped under separate headings and sub-headings for its enhanced usefulness is known as classified balance sheet”.

Following is the balance sheet of incorporation LG:

Incorporation LG
Balance Sheet
At December 31, 2018
Assets	Amount in $	Amount in $
Current assets:
Cash                                                              (1)		20,000
Accounts receivable, net of allowance for     uncollectible accounts of $5,000                 (2)		55,000
Inventories		55,000
Total current assets		130,000
Investments:
Restricted cash	20,000
Note receivable	20,000
Total investments		40,000
Property, plant, and equipment:
Machinery	190,000
Less: Accumulated depreciation                     (3)	-70,000
Net property, plant, and equipment		120,000
Intangible assets:
Franchise		30,000
Total assets		$320,000
Liabilities and Shareholders' Equity	Amount in $	Amount in $
Current liabilities:
Accounts payable		$50,000
Interest payable		5,000
Note payable                                             (4)		50,000
Total current liabilities		105,000
Long-term liabilities:
Bonds payable		110,000
Total liabilities		215,000
Shareholders’ equity:
Common stock, no par value; 100,000 shares    authorized; 50,000 shares issued and outstanding                                                                             (5)	70,000
Retained earnings	35,000
Total shareholders’ equity		105,000
Total liabilities and shareholders’ equity		$320,000

Working notes:

1. Calculate the amount of cash:

$\begin{array}{c}\text{cash=}\left(\text{Amount}\text{of}\text{cash-Repayment}\text{of}\text{bonds}\text{payable}\right)\\ \text{=\$40,000-\$20,000}\\ \text{=\$20,000}\text{.}\end{array}$ (1)

2. Calculate the amount of accounts receivable:

$\begin{array}{c}\text{Accumulated}\text{depreciation=}\left(\text{Amount}\text{of}\text{accounts}\text{receivables-Note}\text{receivable-Uncollectible}\text{accouts}\right)\\ \text{=\$80,000-\$120,000-\$5,000}\\ \text{=\$15,000}\text{.}\\ \\ \end{array}$ (2)

3. Calculate the amount of accumulated depreciation:

$\begin{array}{c}\text{Accumulated}\text{depreciation=}\left(\text{Cost}\text{of}\text{the}\text{machinery-Net}\text{amount}\text{of}\text{machinery}\right)\\ \text{=\$190,000-\$120,000}\\ \text{=\$70,000}\text{.}\end{array}$ (3)

4. Calculate the amount of note payable:

$\begin{array}{c}\text{Note}\text{payable=}\left(\text{Amount}\text{of}\text{note}\text{payable-Aount}\text{of}\text{accrued}\text{interest}\right)\\ \text{=\$55,000-\$5,000}\\ \text{=\$50,000}\text{.}\end{array}$ (4)

5. Calculate the amount of common stock:

$\begin{array}{c}\text{Common}\text{stock=}\left(\text{Amount}\text{of}\text{shareholders'}\text{equity-Retained}\text{earning}\right)\\ \text{=\$105,000-\$35,000}\\ \text{=\$70,000}\text{.}\end{array}$ (5)

Conclusion

Hence, the total assets and the total liabilities and share holders’ equity agrees to the amount of $320,000.