Intermediate Accounting: Chapter 3

Janson Corporation Co.'s trial balance included the following account balances at December 31, 2013: Accounts receivable $13,200 Inventories 41,000 Patent 13,900 Investments 30,800 Prepaid insurance 7,900 Note receivable, due 2016 51,800 Investments consist of treasury bills that were purchased in November and mature in January. Prepaid insurance is for the next two years. What amount should be included in the current assets section of Janson's December 31, 2013, balance sheet?

$ 88,950 $13,200 + 41,000 + 30,800 + 3,950 (1/2 of prepaid insurance) = $88,950

The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below. Assets Liabilities and Equity Cash $ 76 Accounts payable $222 Accounts receivable (net) 186 Other liabilities 77 Notes receivable 54 Total current liabilities 299 Inventories 201 Long-term liabilities 102 Prepaid expenses 37 Total liabilities 401 Total current assets 554 Shareholders' equity: Plant assets (net) 269 Capital stock 134 Retained earnings 288 Total shareholders' equity 422 Total assets $823 Total liabilities and equity $823 Working capital is

$255 Working capital: $554 - 299 = 255

The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below. Assets Liabilities and Equity Cash $ 64 Accounts payable $238 Accounts receivable (net) 181 Other liabilities 79 Notes receivable 59 Total current liabilities 317 Inventories 217 Long-term liabilities 107 Prepaid expenses 35 Total liabilities 424 Total current assets 556 Shareholders' equity: Plant assets (net) 273 Capital stock 141 Retained earnings 264 Total shareholders' equity 405 Total assets $829 Total liabilities and equity $829 Consider Notes receivable to be liquid assets.

$304 Quick assets: $556 - (217 + 35) = 304

Janson Corporation Co.'s trial balance included the following account balances at December 31, 2013: Accounts payable $26,400 Bond payable, due 2020 23,700 Salaries payable 16,300 Note payable, due 2014 20,000 Note payable, due 2016 41,100 What amount should be included in the current liability section of Janson's December 31, 2013, balance sheet?

$62,700 $26,400 + 16,300 + 20,000 = $62,700

The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below. Assets Liabilities and Equity Cash $ 63 Accounts payable $236 Accounts receivable (net) 185 Other liabilities 71 Notes receivable 54 Total current liabilities 307 Inventories 214 Long-term liabilities 92 Prepaid expenses 35 Total liabilities 399 Total current assets 551 Shareholders' equity: Plant assets (net) 271 Capital stock 131 Retained earnings 292 Total shareholders' equity 423 Total assets $822 Total liabilities and equity $822 Consider Notes receivable to be liquid assets. The acid-test ratio is (Round your answers to two decimal places.):

0.98 Acid test ratio: ($551 - 214 - 35) / $307 = .98

The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below. Assets Liabilities and Equity Cash $ 77 Accounts payable $226 Accounts receivable (net) 185 Other liabilities 74 Notes receivable 59 Total current liabilities 300 Inventories 202 Long-term liabilities 104 Prepaid expenses 41 Total liabilities 404 Total current assets 564 Shareholders' equity: Plant assets (net) 262 Capital stock 137 Retained earnings 285 Total shareholders' equity 422 Total assets $826 Total liabilities and equity $826 The current ratio is (Round your answers to two decimal places.):

1.88 Current ratio: $564/$300 = 1.88

A subsequent event for an entity with a December 31, 2013, year-end would not include:

A change in the estimated useful lives of equipment in January 2014

Rent collected in advance is:

A liability account in the balance sheet

Which of the following is not a required segment reporting disclosure according to International Financial Reporting Standards?

All are required disclosures

An exception that is so serious that even a qualified opinion is not justified would result in:

An adverse opinion

The balance sheet reports:

Assets and equities at a point in time

The Management Discussion and Analysis section of the annual report can best be described as:

Biased but informative

Notes payable:

Cannot determine its classification without additional information

An example of an error would be:

Counting an inventory item twice when taking a physical inventory

The current ratio is given by:

Current assets divided by current liabilities

Working capital is equal to:

Current assets minus current liabilities

The quick ratio is:

Current assets minus inventory and prepaid items divided by current liabilities

Which of the following is not a financing ratio?

Current ratio

Disclosure notes would not include:

Data to adjust the financial statements so that they are not misleading

Cash equivalents would include:

Debt instruments with maturity dates of less than three months from the date of the purchase

Red Onion Restaurant classifies a six-month prepaid insurance policy as a current asset. Its rationale is based on:

Definition

The principal concern with accounting for related-party transactions is:

Differences between economic substance and legal form

The usual difference between accounts payable and notes payable is:

Explicitly stated interest

A company's market value is generally less than its book value.

False

Horizontal analysis involves expressing each item in the financial statements as a percentage of an appropriate total, or base amount, within the same year.

False

Illegal acts will only need to be disclosed if the impact of the act is material.

False

Intangible assets usually are reported in the balance sheet as current assets.

False

Liquidity refers to the riskiness of a company with regard to the amount of liabilities in its capital structure.

False

The ultimate responsibility for the financial statements lies with the auditors.

False

An asset that is not expected to be converted to cash or consumed within one year or the operating cycle is:

Goodwill

Which of the following accounts are closed at the end of the accounting period?

Income tax expense

When a company pays its bill from a plumber for previous services on account:

Its debt to equity ratio always decreases

An example of fraud would be:

Knowingly classifying a material noncurrent receivable as a current receivable

Noncurrent assets include:

Land held for a possible future plant site

Which of the following would be disclosed in the summary of significant accounting policies disclosure note? Composition of Long-term debt Depreciation Method a. No Yes b. Yes No c. Yes Yes d. No No

Option a

How are management's responsibility and the auditors' opinion on internal controls represented in the standard auditor's report? Management's Responsibility Auditors' Responsibility a. Implicitly Explicitly b. Explicitly Explicitly c. Implicitly Implicitly d. Explicitly Implicitly

Option b

Assets do not include:

Paid-in capital

Which is a shareholders' equity account in the balance sheet?

Paid-in capital

Which of the following is never a current liability account?

Prepaid rent

The final paragraph of the audit report:

Provides the auditor's opinion on the effectiveness of internal control

The acid-test ratio is also known as the:

Quick ratio

Which of the following is not a characteristic that defines a reportable operating segment according to U.S. GAAP?

Represents more than 20% of total company revenues, assets, or net income

Accrued expenses:

Result from services received before payment

Lack of long-term solvency refers to:

Risk of nonpayment relative to liabilities in the capital structure

Which of the following is not a required segment reporting disclosure according to U.S. GAAP?

Segment liabilities

Which of the following is not a required disclosure for related-party transactions?

The impact of the transactions on current year's income

Liquidity refers to:

The readiness of an asset to be converted to cash

New Oaks Winery requires two months to make wine, two years to age it, one month to bottle it, two months to sell it, and one month to collect the receivable. Its operating cycle is:

Thirty months

A payment on account has no effect on working capital but will increase the current ratio if it is already greater than 1.0.

True

Accrued salaries and wages in a balance sheet represent salary and wages that have been earned by employees but not yet paid.

True

All current assets are either cash or assets that will be converted into cash or consumed within 12 months or the operating cycle, whichever is longer.

True

Payment terms, interest rates, and other details of long-term liabilities usually are reported in disclosure notes.

True

Prepaid expenses are classified as current assets if the services purchased are expected to expire within 12 months or the operating cycle, whichever is longer.

True

The balance of net receivables represents the amount expected to be collected.

True

The balance sheet reports a company's financial position at a point in time.

True

The compensation of top executives is disclosed in the proxy statement.

True

The criteria for determining which items comprise cash equivalents often is disclosed in the summary of significant accounting policies.

True

Current assets include cash and all other assets expected to become cash or be consumed:

Within one year or one operating cycle, whichever is longer