Concept explainers
• LO3–2, LO3–3
The following incomplete balance sheet for the Sanderson Manufacturing Company was prepared by the company’s controller. As
Sanderson Manufacturing Company
Balance Sheet
At December 31, 2 018
($ in thousands)
Assets
Current assets: | |
Cash | $ 1,250 |
3,500 | |
Allowance for uncollectible accounts | (400) |
Finished goods inventory | 6,000 |
Prepaid expenses | 1,200 |
Total current assets | 11,550 |
Long-term assets: | |
Investments | 3,000 |
Raw materials and work in process inventory | 2,250 |
Equipment | 15,000 |
Accumulated depreciation—equipment | (4,200) |
Patent | ? |
Total assets | $ ? |
Liabilities and Shareholders’ Equity
Current liabilities: | ||
Accounts payable | $ 5,200 | |
Note payable | 4,000 | |
Interest payable—note | 100 | |
Deferred revenue | 3,000 | |
Total current liabilities | 12,300 | |
Long-term liabilities: | ||
Bonds payable | 5,500 | |
Interest payable—bonds | 200 | |
Shareholders’ equity: | ||
Common stock | $ ? | |
? | ? | |
Total liabilities and shareholders’ equity | ? |
Additional Information ($ in thousands):
1. Certain records that included the account balances for the patent and shareholders’ equity items were lost. However, the controller told you that a complete, preliminary balance sheet prepared before the records were lost showed a debt to equity ratio of 1.2. That is, total liabilities are 120% of total shareholders’ equity. Retained earnings at the beginning of the year was $4,000. Net income for 2018 was $1,560 and $560 in cash dividends were declared and paid to shareholders.
2. Management intends to sell the investments in the next six months.
3. Interest on both the note and the bonds is payable annually.
4. The note payable is due in annual installments of $1,000 each.
5. Deferred revenue will be recognized as revenue equally over the next two fiscal years.
6. The common stock represents 400,000 shares of no par stock authorized, 250,000 shares issued and outstanding.
Required:
Prepare a complete, corrected, classified balance sheet.
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 prepare: Complete, correct, classified balance sheet.
Explanation of Solution
Prepare the balance sheet of Company SM as on December 31, 2018.
Company SM | ||
Balance sheet | ||
At December 31, 2018 | ||
Amount in $ | Amount in $ | |
Assets | ||
Current assets: | ||
Cash | 1,250 | |
Short term investments | 3,000 | |
Accounts receivables (1) | 3,100 | |
Inventories (2) | 8,250 | |
Prepaid expenses | 1,200 | |
Total current assets | 16,800 | |
Property, plant and equipment: | ||
Equipment | 15,000 | |
less: accumulated depreciation | 4,200 | |
Net property, plant and equipment | 10,800 | |
Intangible assets | ||
Patents (6) | 5,400 | |
Total assets | 33,000 | |
Liabilities and shareholders' equity | ||
Current liabilities: | ||
Accounts payable | 5,200 | |
Note payable (3) | 1,000 | |
Interest payable - note | 100 | |
Deferred revenue (4) | 1,500 | |
Interest payable - bonds | 200 | |
Total current liabilities | 8,000 | |
Long term liabilities | ||
Bonds payable | 5,500 | |
Note payable (3) | 1,500 | |
Deferred revenue (4) | 3,000 | |
Total long term liabilities | 10,000 | |
Total liabilities | 18,000 | |
Shareholders' equity | ||
Common stock, no par,250,000 shares issued and outstanding (5) | 10,000 | |
Retained earnings (5) | 5,000 | |
Total shareholders' equity | 15,000 | |
Total liabilities and shareholders' equity | 33,000 |
Table (1)
Working notes:
- 1. Compute accounts receivables balance at December 31, 2018
- 2. Compute inventory balance at December 31, 2018
- 3. Note payable at December is $4,000. The note payable is due in annual installments of $1,000 each. Thus, $1,000 is reported as a current liability and remaining $3,000 is reported as long term liability.
- 4. Deferred revenue at December 31, 2018 is $3,000. It will be recognized as revenue equally over the next two fiscal years. Thus, $1,500 (half of the $3,000) is reported as current liability and remaining $1,500 reported as long term liability.
- 5. Calculate common stock and retained earnings.
Therefore Equity is $15,000. It includes common stock and retained earnings
Compute retained earnings at December 31, 2018:
Hence, retained earnings are $5,000.
Compute Common stock at December 31, 2018.
Hence, common stock is $10,000
- 6. Calculate patents at December 31, 2018
Hence, Patents are $5,400
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Chapter 3 Solutions
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