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Case E 1.1 Solution: Which Elements Should Not Be Recognized in The Balance Sheet?

The document discusses elements that should not be recognized in a balance sheet. It analyzes a sample balance sheet for a company and identifies items that should not be included, such as personal residences of shareholders. It also raises questions about accurately measuring some items like trucks and equipment. The equity amount is calculated as assets minus liabilities but is noted as possibly being less than the amount due to uncertain valuations of certain assets.

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Tamim Hasan
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85 views2 pages

Case E 1.1 Solution: Which Elements Should Not Be Recognized in The Balance Sheet?

The document discusses elements that should not be recognized in a balance sheet. It analyzes a sample balance sheet for a company and identifies items that should not be included, such as personal residences of shareholders. It also raises questions about accurately measuring some items like trucks and equipment. The equity amount is calculated as assets minus liabilities but is noted as possibly being less than the amount due to uncertain valuations of certain assets.

Uploaded by

Tamim Hasan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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23/09/2020

Case E 1.1
Solution

23/09/2020 1

Which elements should not be recognized in the balance sheet?

Balance sheet
Cash 12 000 12 000
Inventories 7 000 7 000
Service truck 68 000 68 000
Personal residences of shareholders 190 000 -
Service equipment used in the business 30 000 30 000
Invoices due from customers (for services completed) 15 000 15 000
Total uses 132 000
Unpaid wages 19 000 19 000
Unpaid taxes 8 000 8 000
Owed to suppliers 10 000 10 000
Owed on service trucks and equipment 50 000 50 000
Loan granted by a shareholder 10 000 10 000
Total financing 97 000

1
23/09/2020

What additional questions would you raise about the measurement of


items on the list?

The value of the truck and of the equipment is quite uncertain (‘practically new’).
A banker would like to know the net book value of these assets as well as their
net realisable value.

23/09/2020 3

What is the amount of equity?

Assets = Liabilities + Equity


Assets – Liabilities = Equity
132 000 – 97 000 = 35 000
Equity amounts probably to less than 35000 because of the uncertain values for
trucks and equipment.
The profit of the year would be 5000, given the initial contribution of 3 * 10000 of
the shareholders.

23/09/2020 4

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