Exercises • 269

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

1. 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.
2. 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 .
3. 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.
4. 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 ac-
counts 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 re-
ported, explain why.

f*3] E5-11 (Statement of Financial Position Preparation) Presented below is the adjusted trial balance of
Abbey Corporation at December 31, 2010.

Debits Credits
Cash E ?
Office Supplies 1,200
Prepaid Insurance 1,000
Equipment 48,000
Accumulated Depreciation—Equipment £ 9,000
Trademarks 950
Accounts Payable 10,000
Wages Payable 500
Unearned Service Revenue 2,000
Bonds Payable, due 2017 9,000
Share Capital—Ordinary 10,000
Retained Earnings 20,000
Service Revenue 10,000
Wages Expense 9,000
Insurance Expense 1,400
Rent Expense 1,200
Interest Expense 900
Total £ ? £ ?

A d d i t i o n a l information:
1. Net loss for the year was £2,500.
2. N o dividends were declared d u r i n g 2010.
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) Presented below is the trial balance of Vivaldi
Corporation at December 31, 2010.
Debits Credits
Cash $ 197,000
Sales $ 7,900,000
Trading Securities (at cost, $145,000) PtJOiKj 153,000
- Cost of Goods Sold 4,800,000
Long-term Investments in Bonds 299,000
Long-term Investments in Share
Capital—Ordinary 277,000
Short-term Notes Payable 90,000
Accounts Payable 455,000
Selling Expenses 2,000,000
Investment Revenue 63,000
Land 260,000
Buildings 1,040,000
Dividends Payable 136,000
Accrued Liabilities 96,000
Accounts Receivable 435,000
Accumulated Depreciation—Buildings 352,000
Allowance for Doubtful Accounts 25,000
Administrative Expenses 900,000
Interest Expense 211,000
Inventories 597,000
Provision for Pensions (long-term) -Cc. ;•»"•< c 80,000
Long-term Notes Payable 900,000
Equipment 600,000
Bonds Payable 1,000,000 '.
Accumulated Depreciation—Equipment 60,000 v
Franchise 160,000
Share Capital—Ordinary ($5 par) 1,000,000
Treasury Shares 191,000
Patent 195,000
Retained Earnings 78,000
Accumulated Other Comprehensive Income 80,000
Totals $12,315,000 $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 Flows—Classifications) 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. Operating a c t i v i t y — a d d to net income.
2. Operating activity—deduct f r o m net income.
3. Investing activity.
4. Financing activity.
5. Reported as significant non-cash activity i n the notes to the financial statements.
The transactions are as follows.
(a) Issuance of ordinary shares. (h) Payment of cash dividends.
(b) Purchase of l a n d and b u i l d i n g . (i) Exchange of furniture for office equipment,
(c) Redemption of bonds. (j) Purchase of treasury shares.
(d) Sale of equipment. (k) Loss on sale of equipment.
(e) Depreciation of machinery. (1) Increase i n accounts receivable d u r i n g the year,
(f) A m o r t i z a t i o n of patent. (m) Decrease i n accounts payable d u r i n g the year.
(g) Issuance of bonds for plant assets.

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 • 271

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

Assets Dec. 31, 2010 Jan. 1,2010 Inc./Dec.

Equipment $ 39,000 $ 22,000 $17,000 Inc.
Less: Accumulated depreciation (17,000) (11,000) 6,000 Inc.
Accounts receivable 91,000 88,000 3,000 Inc.
Cash 45,000 v/ 13,000 V 32,000 Inc.
Total $158,000 $112,000
7*8 Equity and Liabilities
Share capital—ordinary $100,000 $ 80,000 20,000 Inc.
Retained earnings 38,000 17,000 21,000 Inc.
Accounts payable 20,000 15,000 5,000 Inc.
Total $158,000 $112,000

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 com-
parative statements of financial position for Yoon Corporation for the last t w o years at December 31
(000,000 omitted).

2010 2009
Investments W 52,000 W 74,000
Equipment 298,000 240,000
3% to Less: Accumulated depreciation (106,000) (89,000)
Accounts receivable 180,000 185,000
Cash 157,000 78,000
Share capital—ordinary 160,000 160,000
Retained earnings 287,000 177,000
Current liabilities 134,000 151,000

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) A comparative statement of financial position for
Orozco Corporation is presented below.

December 31
Assets 2010 2009
Land $ 71,000 $110,000
Equipment 270,000 200,000
Accumulated depreciation—equipment (69,000) (42,000)
Inventories 180,000 189,000
Accounts receivable 82,000 66,000
Cash 63,000 22,000
Total $597,000 $545,000

Equity and Liabilities

Share capital—ordinary ($1 par) $214,000 $164,000
Retained earnings 199,000 134,000
Bonds payable 150,000 200,000
Accounts payable 34,000 47,000
Total $597,000 $545,000
 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. Net income for 2010 was $105,000.
2. 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) Chekov Cor-
poration's statement of financial position at the end of 2009 included the f o l l o w i n g items.

Land $ 30,000 Bonds payable $100,000

Building 120,000 Current liabilities 150,000
Equipment 90,000 Share capital—ordinary 180,000
Accum. depr.—building (30,000) Retained earnings 44,000
Accum. depr.—equipment (11,000)
vlH
Total $474,000
13 Patents 40,000
Current assets 235,000
Total $474,000

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

1. Net income was $55,000.
2. Equipment (cost $20,000 and accumulated depreciation $8,000) was sold for $9,000.
3. Depreciation expense.was $4,000 on the b u i l d i n g and $9,000 on equipment.
4. Patent amortization was $2,500.
5. Current assets other than cash increased by $25,000. Current liabilities increased b y $13,000.
6. A n addition to the b u i l d i n g was completed at a cost of $27,000.
7. A long-term investment i n debt securities was purchased for $16,000. ^
8. Bonds payable of $50,000 were issued.
9. Cash dividends of $25,000 were declared and p a i d .
10. 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 Dec. 31, 2010 Jan. 1,2010 Inc/Dec.

Equipment € 37,000 € 22,000 €15,000 Inc.
Less: Accumulated depreciation (17,000) (11,000) 6,000 Inc.
Accounts receivable 106,000 88,000 18,000 Inc.
is- P d> Cash 22,000 13,000 9,000 Inc.
Total €148,000 €112,000
Equity and Liabilities
Share capital—ordinary €100,000 € 80,000 20,000 Inc.
Retained earnings 28,000 17,000 11,000 Inc.
Accounts payable 20,000 15,000 5,000 Inc.
Total €148,000 €112,000

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
PLUS

f*3] P5-1 (Preparation of a Classified Statement of Financial Position, Periodic Inventory) Presented
below is a list of accounts i n alphabetical order.

Accounts Receivable Land for Future Plant Site

Accrued Wages Loss from Flood
Accumulated Depreciation—Buildings Minority Interest
Accumulated Depreciation—Equipment Notes Payable (due next year)
Advances to Employees Patent
Advertising Expense Payroll Taxes Payable
Allowance for Doubtful Accounts Petty Cash
Bond Sinking Fund Prepaid Rent
Bonds Payable Provision for Pension Benefits
Building Purchases
Cash in Bank Purchase Returns and Allowances
Cash on Hand Retained Earnings
Commission Expense Sales
Copyright Sales Discounts
Dividends Payable Sales Salaries
Equipment Share Capital—Ordinary
Gain on Sale of Equipment Share Capital—Preference
Interest Receivable Share Premium—Ordinary
Inventory—Beginning Trading Securities
Inventory—Ending Transportation-in
Land 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
€ 125,000
177,591
285,000
Accumulated depreciation—
equipment
Inventories
€ 292,000
239,800
Cash 360,000 Rent payable—short-term 45,000
Land 480,000 Taxes payable 98,362
Notes receivable 445,700 Long-term rental obligations 480,000
Notes payable to banks 265,000 Share capital—ordinary, $1 par value 200,000
Accounts payable 490,000 Share capital—preference, $10 par value 150,000
Retained earnings ? Prepaid expenses 87,920
Income taxes receivable 97,630 Equipment 1,470,000
Unsecured notes payable Trading securities 121,000
(long-term) 1,600,000 Accumulated depreciation—
building 270,200
Building 1,640,000