CHAPTER 5

Balance Sheet and Statement of Cash Flows

ANSWERS TO QUESTIONS
1. The balance sheet provides information about the nature and amounts of investments in enterprise
resources, obligations to enterprise creditors, and the owners’ equity in net enterprise resources. That
information not only complements information about the components of income, but also contributes
to financial reporting by providing a basis for (1) computing rates of return, (2) evaluating the capital
structure of the enterprise, and (3) assessing the liquidity and financial flexibility of the enterprise.
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2. Solvency refers to the ability of an enterprise to pay its debts as they mature. For example, when a
company carries a high level of long-term debt relative to assets, it has lower solvency. Information
on long-term obligations, such as long-term debt and notes payable, in comparison to total assets,
can be used to assess resources that will be needed to meet these fixed obligations (such as interest
and principal payments).
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3. Financial flexibility is the ability of an enterprise to take effective actions to alter the amounts and
timing of cash flows so it can respond to unexpected needs and opportunities. An enterprise with a
high degree of financial flexibility is better able to survive bad times, to recover from unexpected
setbacks, and to take advantage of profitable and unexpected investment opportunities. Generally,
the greater the financial flexibility, the lower the risk of enterprise failure.
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4. Some situations in which estimates affect amounts reported in the balance sheet include:
(a) allowance for doubtful accounts.
(b) depreciable lives and estimated salvage values for plant and equipment.
(c) warranty returns.
(d) determining the amount of revenues that should be recorded as unearned.
When estimates are required, there is subjectivity in determining the amounts. Such subjectivity can
impact the usefulness of the information by reducing the degree to which the measures are faithful
representations, either because of bias or lack of verifiability.
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5. A higher level of inventories increases current assets, which is in the numerator of the current ratio.
Therefore, a higher inventory will increase the current ratio. In general, a higher current ratio
indicates a company has better liquidity since there are more current assets relative to current
liabilities.

Note to instructors—When inventories increase faster than sales, this may not be a good signal
about liquidity. That is, inventory can only be used to meet current obligations when it is sold (and
converted to cash). That is why some analysts use a liquidity ratio—the acid-test ratio—that excludes
inventories from current assets in the numerator.
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6. Liquidity describes the amount of time that is expected to elapse until an asset is converted into
cash or until a liability has to be paid. The ranking of the assets given in order of liquidity is:
(1) (d) Short-term investments
(2) (e) Accounts receivable
(3) (b) Inventory
(4) (c) Buildings

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 (5) (a) Goodwill
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Questions Chapter 5 (Continued)

7. The major limitations of the balance sheet are:

(a) The values stated are generally historical and not at fair value.
(b) Estimates are used in many instances, such as in determining the collectibility of receivables
or finding the approximate useful life of long-term tangible and intangible assets.
(c) Many items, even though they have financial value to the business, are not recorded. One
example is the value of a company’s human resources.
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8. Some items of value to technology companies such as Intel or IBM are the value of research and
development (new products that are being developed but which are not yet marketable), the value
of the “intellectual capital” of its workforce (the ability of the companies’ employees to come up with
new ideas and products in the fast-changing technology industry), and the value of the company
reputation or name brand. In most cases, the reasons why the value of these items are not recorded
in the balance sheet concern the lack of faithful representation of the estimates of the future cash
flows that will be generated by these “assets” (for all three types) and the ability to control the use
of the asset (in the case of employees). Being able to reliably measure the expected future benefits
and to control the use of an item are essential elements of the definition of an asset, according to
the Conceptual Framework.
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9. Classification in financial statements helps users by grouping items with similar characteristics and
separating items with different characteristics. Current assets are expected to be converted to cash
within one year or the operating cycle, whichever is longer—property, plant, and equipment will
provide cash inflows over a longer period of time. Thus, separating long-term assets from current
assets facilitates computation of useful ratios, especially liquidity ratios such as the current ratio.
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10. Separate amounts should be reported for accounts receivable and notes receivable. The amounts
should be reported gross, and an amount for the allowance for doubtful accounts should be
deducted. The amount and nature of any nontrade receivables and any amounts designated or
pledged as collateral should be clearly identified.
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11. No. Available-for-sale securities should be reported as a current asset only if management expects
to convert them into cash as needed within one year or the operating cycle, whichever is longer. If
available-for-sale securities are not held with this expectation, they should be reported as long-term
investments.
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12. The relationship between current assets and current liabilities is that current liabilities are those
obligations that are reasonably expected to be liquidated either through the use of current assets or
the creation of other current liabilities.
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13. The total selling price of the season tickets is $20,000,000 (10,000 X $2,000). Of this amount,
$8,000,000 has been earned by 12/31/20 (16/40 X $20,000,000). The remaining $12,000,000
should be reported as unearned revenue, a current liability in the 12/31/20 balance sheet (24/40 X
$20,000,000) or ($20,000,000 - $8,000,000).
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5-2 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
Questions Chapter 5 (Continued)

14. Working capital is the excess of total current assets over total current liabilities. This excess is
sometimes called net working capital. Working capital represents the net amount of a company’s
relatively liquid resources. That is, it is the liquidity buffer available to meet the financial demands of
the operating cycle.
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15. (a) Stockholders’ Equity. “Treasury stock (at cost).”

Note: This is a reduction of total stockholders’ equity (reported as contra-equity).
(b) Current Assets. Included in “Cash.”
(c) Long-Term Investments. “Land held as an investment.”
(d) Long-Term Investments. “Sinking fund.”
(e) Long-term debt (adjunct account to bonds payable). “Unamortized premium on bonds payable.”
(f) Intangible Assets. “Copyrights.”
(g) Investments. “Employees’ pension fund,” with subcaptions of “Cash” and “Securities” if desired.
(Assumes that the company still owns these assets.)
(h) Stockholders’ Equity. “Additional paid-in capital.”
(i) Investments. Nature of investments should be given together with parenthetical information
as follows: “pledged to secure loans payable to banks.”
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16. (a) Allowance for doubtful accounts should be deducted from accounts receivable in current
assets.
(b) Merchandise held on consignment should not appear on the consignee’s balance sheet
except possibly as a note to the financial statements.
(c) Advances received on sales contract are normally a current liability and should be shown as
such in the balance sheet.
(d) Cash surrender value of life insurance should be shown as a long-term investment.
(e) Land should be reported in property, plant, and equipment unless held for investment.
(f) Merchandise out on consignment should be shown among current assets under the heading
of inventory.
(g) Franchises should be itemized in a section for intangible assets.
(h) Accumulated depreciation of plant and equipment should be deducted from the equipment
account.
(i) Materials in transit should not be shown on the balance sheet of the buyer if purchased f.o.b.
destination.
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17. (a) Trade accounts receivable should be stated at their estimated amount collectible, often
referred to as net realizable value. The method most generally followed is to deduct from the
total accounts receivable the amount of the allowance for doubtful accounts.
(b) Land is generally stated in the balance sheet at cost.
(c) Inventories are generally stated at the lower-of-cost-or-net realizable value. If LIFO or retail
inventory methods are used, market is used instead of net realizable value.
(d) Trading securities (consisting of common stock of other companies) are stated at fair value.
(e) Prepaid expenses should be stated at cost less the amount apportioned to and written off over
the previous accounting periods.
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18. Assets are defined as probable future economic benefits obtained or controlled by a particular entity
as a result of past transactions or events. If a building is leased under a capital lease, the future
economic benefits of using the building are controlled by the lessee (tenant) as the result of a past
event (the signing of a lease agreement).
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Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-3
Questions Chapter 5 (Continued)

19. Battle is incorrect. Retained earnings is a source of assets, but is not an asset itself. For example,
even though the funds obtained from issuing a note payable are invested in the business, the note
payable is not reported as an asset. It is a source of assets, but it is reported as a liability because
the company has an obligation to repay the note in the future. Similarly, even though the earnings
are invested in the business, retained earnings is not reported as an asset. It is reported as part of
shareholders’ equity because it is, in effect, an investment by owners which increases the ownership
interest in the assets of an entity.
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20. The notes should appear as long-term liabilities with full disclosure as to their terms. Each year, as
the profit is determined, notes of an amount equal to two-thirds of the year’s profits should be
transferred from the long-term liabilities to current liabilities until all of the notes have been liquidated.
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21. The purpose of a statement of cash flows is to provide relevant information about the cash receipts
and cash payments of an enterprise during a period. It differs from the balance sheet and the income
statement in that it reports the sources and uses of cash by operating, investing, and financing
activity classifications. While the income statement and the balance sheet are accrual basis
statements, the statement of cash flows is a cash basis statement—noncash items are omitted.
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22. The difference between these two amounts may be due to increases in current assets (e.g., an
increase in accounts receivable from a sale on account would result in an increase in revenue and
net income but have no effect yet on cash). Similarly, a cash payment that results in a decrease in
an existing current liability (e.g., accounts payable would decrease cash provided by operations
without affecting net income).
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23. The difference between these two amounts could be due to noncash charges that appear in the
income statement. Examples of noncash charges are depreciation, depletion, and amortization of
intangibles. Expenses recorded but unpaid (e.g., increase in accounts payable) and collection of
previously recorded sales on credit (i.e., now decreasing accounts receivable) also would cause
cash provided by operating activities to exceed net income.
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24. Operating activities involve the cash effects of transactions that enter into the determination of net
income. Investing activities include making and collecting loans and acquiring and disposing of
debt and equity instruments; property, plant, and equipment and intangibles. Financing activities
involve long-term liability and stockholders’ equity items and include obtaining capital from owners
and providing them with a return on (dividends) and a return of their investment and borrowing
money from creditors and repaying the amounts borrowed.
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5-4 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
Questions Chapter 5 (Continued)

25. (a) Net income is adjusted downward by deducting $5,000 ($39,000 - $34,000) from $90,000 and
reporting cash provided by operating activities as $85,000.

(b) The issuance of the preferred stock is a financing activity. The issuance is reported as follows:
Cash flows from financing activities
Issuance of preferred stock (10,000 shares X $115) .................... $1,150,000

(c) Net income is adjusted as follows:

Cash flows from operating activities
Net income........................................................................................ $90,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense .................................................................. 14,000
Bond premium amortization ......................................................... (5,000)
Net cash provided by operating activities .......................................... $99,000

(d) The increase of $20,000 reflects an investing activity. The increase in Land is reported as
follows:
Cash flows from investing activities:
Purchase Land ($10,000 - $30,000)............................................. $(20,000)

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26. The company appears to have good liquidity and reasonable financial flexibility. Its current cash debt
 $1,200,000 
coverage is 1.20   , which indicates that it can pay off its current liabilities in a given
 $1,000,000 
year from its operations. In addition, its cash debt coverage is also good at
 $1,200,000
0.80   , which indicates that it can pay off approximately 80% of its debt out of current
 $1,500,000
operations.
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27. Free cash flow = $860,000 – $75,000 – $30,000 = $755,000.

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28. Free cash flow is net cash provided by operating activities less capital expenditures and dividends.
The purpose of free cash flow analysis is to determine the amount of discretionary cash flow a
company has for purchasing additional investments, retiring its debt, purchasing treasury stock, or
simply adding to its liquidity and financial flexibility.
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Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-5
Questions Chapter 5 (Continued)

29. Some of the techniques of disclosure for the balance sheet are:
(a) Parenthetical explanations.
(b) Notes to the financial statements.
(c) Cross-references and contra items.
(d) Supporting schedules.
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30. A note entitled “Summary of Significant Accounting Policies” would indicate the basic accounting
principles used by that enterprise. This note should be very useful from a comparative standpoint
since it should be easy to determine whether the company uses the same accounting policies as
other companies in the same industry.
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31. General debt obligations, lease contracts, pension arrangements and stock option plans are four
items for which disclosure is mandatory in the financial statements. The reason for disclosing these
contractual situations is that these commitments are of a long-term nature, are often significant in
amount, and are very important to the company’s well-being.
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32. The profession has recommended that the use of the term “surplus” be discontinued in balance
sheet presentations of stockholders’ equity. This term has a connotation outside accounting that is
quite different from its meaning in the accounts or in the balance sheet. The use of the terms capital
surplus, paid-in surplus, and earned surplus is confusing to the nonaccountant and leads to
misinterpretation.
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5-6 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
 SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 5.1

Current assets
Cash................................................................. $ 30,000
Accounts receivable ....................................... $110,000
Less: Allowance for doubtful accounts .. 8,000 102,000
Inventory ......................................................... 290,000
Prepaid insurance........................................... 9,500
Total current assets ............................ $431,500
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BRIEF EXERCISE 5.2

Current assets
Cash................................................................. $ 7,000
Equity Investments ........................................ 11,000
Accounts receivable ....................................... $90,000
Less: Allowance for doubtful accounts .. 4,000 86,000
Inventory ......................................................... 30,000
Prepaid insurance........................................... 5,200
Total current assets ............................ $139,200
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BRIEF EXERCISE 5.3

Long-term investments
Debt investments ............................................ $ 56,000
Land held for investment ............................... 39,000
Note receivables (long-term) ......................... 42,000
Total investments ..................................... $137,000
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Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-7
BRIEF EXERCISE 5.4

Property, plant, and equipment

Land ................................................................. $ 71,000
Buildings ......................................................... $207,000
Less: Accumulated depreciation ............. 45,000 162,000
Equipment ....................................................... 190,000
Less: Accumulated depreciation ............ 19,000 171,000
Timberland ...................................................... 70,000
Total property, plant, and equipment .. $474,000
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BRIEF EXERCISE 5.5

Intangible assets
Goodwill .......................................................... $150,000
Patents............................................................. 220,000
Franchises ....................................................... 130,000
Total intangible assets ............................. $500,000
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BRIEF EXERCISE 5.6

Intangible assets
Goodwill .......................................................... $ 50,000
Franchises ....................................................... 47,000
Patents............................................................. 33,000
Trademarks ..................................................... 10,000
Total intangible assets ............................. $140,000
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BRIEF EXERCISE 5.7

Current liabilities
Notes payable ................................................. $ 22,500
Accounts payable ........................................... 72,000
Salaries and wages payable........................... 4,000
Income taxes payable ..................................... 7,000
Total current liabilities ........................ $105,500
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5-8 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
BRIEF EXERCISE 5.8

Current liabilities
Accounts payable ........................................... $220,000
Unearned rent revenue................................... 41,000
Salaries and wages payable .......................... 27,000
Interest payable .............................................. 12,000
Income taxes payable..................................... 29,000
Total current liabilities ........................ $329,000
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BRIEF EXERCISE 5.9

Long-term liabilities
Bonds payable ................................................ $400,000
Less: Discount on bonds payable ........... 29,000 $371,000
Pension liability .............................................. 375,000
Total long-term liabilities.................... $746,000
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BRIEF EXERCISE 5.10

Stockholders’ equity
Common stock ................................................ $750,000
Paid-in capital in excess of par ..................... 200,000 $950,000
Retained earnings........................................... 120,000
Accumulated other comprehensive loss ...... (150,000)
Equity attributable to Hawthorn Corporation 920,000
Noncontrolling interest .................................. 35,000
Total stockholders’ equity ....................... $955,000
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Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-9
BRIEF EXERCISE 5.11

Stockholders’ equity
Preferred stock ............................................... $152,000
Common stock ................................................ 55,000
Additional paid-in capital ............................... 174,000
Retained earnings ........................................... 114,000
Equity attributable to Stowe Company.......... 495,000
Noncontrolling interest .................................. 63,000
Total stockholders’ equity ........................ $558,000
LO: 2, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

BRIEF EXERCISE 5.12

Cash Flow Statement

Operating Activities
Net income ........................................................ $40,000
Depreciation expense ...................................... $ 4,000
Increase in accounts receivable ..................... (10,000)
Increase in accounts payable .......................... 7,000 1,000
Net cash provided by operating activities.... 41,000

Investing Activities
Purchase of equipment.................................... (8,000)

Financing Activities
Issue notes payable ......................................... 20,000
Dividends paid.................................................. (5,000)
Net cash flow from financing activities .... 15,000
Net increase in cash ($41,000 – $8,000 + $15,000) .. $48,000

Free Cash Flow = $41,000 (Net cash provided by operating activities) – $8,000
(Purchase of equipment) – $5,000 (Dividends) = $28,000.
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5-10 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
BRIEF EXERCISE 5.13

Cash flows from operating activities

Net income ....................................................... $151,000
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation expense ................................ $44,000
Increase in accounts payable ................... 9,500
Increase in accounts receivable ............... (13,000) 40,500
Net cash provided by operating activities ...... $191,500
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BRIEF EXERCISE 5.14

Sale of land and building ....................................... $191,000

Purchase of land .................................................... (37,000)
Purchase of equipment ......................................... (53,000)
Net cash provided by investing activities ...... $101,000
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BRIEF EXERCISE 5.15

Issuance of common stock ................................... $147,000

Purchase of treasury stock ................................... (40,000)
Payment of cash dividend ..................................... (95,000)
Retirement of bonds .............................................. (100,000)
Net cash used by financing activities ............. $ (88,000)
LO: 3, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

BRIEF EXERCISE 5.16

Free Cash Flow Analysis

Net cash provided by operating activities ........... $400,000

Purchase of equipment ............................. (53,000)
Purchase of land* ...................................... (37,000)
Dividends ................................................... (95,000)
Free cash flow ........................................................ $215,000

*If the land were purchased as an investment, it would be excluded in the

computation of free cash flow.
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Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-11
 SOLUTIONS TO EXERCISES

EXERCISE 5.1 (15–20 minutes)

(a) If the debt investment (bonds) is readily marketable and held primarily
for sale in the near term to generate income on short-term price
differences, then the account should appear as a current asset and be
included with trading securities. Available-for-sale securities are
classified as current or noncurrent depending upon the circumstances.
If the debt investment is a held-to-maturity investment, then it would be
reported as noncurrent.

(b) If the company accounts for the treasury stock on the cost basis, the
account is shown as a reduction of total stockholders’ equity.

(c) Stockholders’ equity.

(d) Current liability.

(e) Property, plant, and equipment (as a deduction).

(f) If the warehouse in process of construction is being constructed for

another party, it is classified as an inventory account in the current
assets section. This account will be shown net of any billings on the
contract. On the other hand, if the warehouse is being constructed for
the use of this particular company, it should be classified as a separate
item in the property, plant, and equipment section.

(g) Current asset.

(h) Current liability.

(i) Stockholder’s equity (Retained earnings).

5-12 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
EXERCISE 5.1 (Continued)

(j) Equity investments are reported as current assets if the shares are
expected to be sold within one year. Otherwise, the equity investment
is reported in the Investments section.

(k) Current liability.

(l) Current liability.

(m) Current asset (inventory).

(n) Current liability.

LO: 1, 2;, Bloom: C, Difficulty: Simple, Time: 15-20, AACSB: AICPA BB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

EXERCISE 5.2 (15–20 minutes)

1. (h) 11. (b)

2. (d) 12. (f)
3. (f) 13. (a)
4. (f) 14. (h)
5 (c) 15. (c)
6. (a) 16. (b)
7. (f) 17. (a)
8. (g) 18. (a)
9. (a) 19. (g)
10. (a) 20. (f)
LO: 1, 2, Bloom: C, Difficulty: Simple, Time: 15-20, AACSB: AICPA BB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-13
EXERCISE 5.3 (15–20 minutes)

1. (a) 10. (f)

2. (b) 11. (a)
3. (f) 12. (f)
4. (a) 13. (a) or (e) (preferably (a))
5 (f) 14. (c) and (n)
6. (h) 15. (f)
7. (j) 16. (x)
8. (d) 17. (f)
9. (a) 18. (c)
19. (i)
LO: 1, 2; Bloom: C, Difficulty: Simple, Time: 15-20, AACSB: AICPA BB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

5-14 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
EXERCISE 5.4 (30–35 minutes)

Denis Savard Inc.

Balance Sheet
December 31, 20–

Assets
Current assets
Cash .......................................................... $XXX
Less: Cash restricted for plant
expansion ........................................ XXX $XXX
Accounts receivable ................................ XXX
Less: Allowance for doubtful
accounts .......................................... XXX XXX
Notes receivable ...................................... XXX
Receivables—officers .............................. XXX
Inventories
Finished goods................................... XXX
Work in process ................................. XXX
Raw materials ..................................... XXX XXX
Total current assets ..................... $XXX

Long-term investments
Preferred stock investments ................... XXX
Land held for future plant site ................. XXX
Restricted cash (plant expansion) .......... XXX
Total long-term investments ....... XXX

Property, plant, and equipment

Buildings .................................................. XXX
Less: Accum. depreciation—
buildings .......................................... XXX XXX

Intangible assets
Copyrights ................................................ XXX
Total assets ....................................... $XXX

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-15
EXERCISE 5.4 (Continued)

Liabilities and Stockholders’ Equity

Current liabilities
Notes payable, short-term ............................ $XXX
Salaries and wages payable ......................... XXX
Unearned subscriptions revenue ................. XXX
Unearned rent revenue ................................. XXX
Total current liabilities ............................ $XXX

Long-term debt
Bonds payable, due in four years ................ $XXX
Less: Discount on bonds payable ............... XXX XXX
Total liabilities ......................................... XXX

Stockholders’ equity
Capital stock:
Common stock ........................................ XXX
Additional paid-in capital:
Paid-in capital in excess of par
(common stock)..................................... XXX
Total paid-in capital ........................... XXX
Retained earnings ......................................... XXX
Total paid-in capital and
retained earnings............................ XXX
Less: Treasury stock, at cost ................ (XXX)
Equity attributable to Denis Savard, Inc. ..... XXX
Equity attributed to noncontrolling interest XXX
Total stockholders’ equity ................ XXX
Total liabilities and
stockholders’ equity....................... $XXX

Note to instructor: An assumption made here is that cash included the

restricted cash for plant expansion. If it did not, then a subtraction from cash
would not be necessary or the cash balance would be “grossed up” and then
the restricted cash for plant expansion deducted.
LO: 1, 2, Bloom: AP, Difficulty: Simple, Time: 30-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

5-16 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
EXERCISE 5.5 (30–35 minutes)

Uhura Company
Balance Sheet
December 31, 2020

Assets
Current assets
Cash ........................................................ $230,000
Equity investments, at fair value .......... 120,000
Accounts receivable ($340,000 + $17,000) $357,000
Less: Allowance for doubtful
accounts ........................................ 17,000 340,000
Inventory, at lower-of-average
cost-or-market ..................................... 401,000
Prepaid expenses .................................. 12,000
Total current assets ......................... $1,103,000

Long-term investments
Land held for future use ........................ 175,000
Cash surrender value of life
insurance ............................................. 90,000 265,000

Property, plant, and equipment

Buildings ($570,000 + $160,000) ................. $730,000
Less: Accum. depr.—buildings ....... 160,000 570,000
Equipment ($160,000 + $105,000)............... 265,000
Less: Accum. depr.—equipment..... 105,000 160,000 730,000

Intangible assets
Goodwill.................................................. 80,000
Total assets ..................................... $2,178,000

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-17
EXERCISE 5.5 (Continued)

Liabilities and Stockholders’ Equity

Current liabilities
Notes payable (due 2021) .................... $ 125,000
Accounts payable ................................ 125,000
Rent payable ......................................... 49,000
Total current liabilities ................... $309,000

Long-term liabilities
Bonds payable...................................... $500,000
Add: Premium on bonds payable........ 53,000 553,000
Pension obligation ............................... 82,000 635,000
Total liabilities ................................ 944,000

Stockholders’ equity
Common stock, $1 par, authorized
400,000 shares, issued 290,000
shares ................................................ 290,000
Additional paid-in capital ..................... 160,000 450,000
Retained earnings ................................ 784,000*
Total stockholders’ equity ............. 1,234,000
Total liabilities and
stockholders’ equity ................... $2,178,000

*$2,178,000 – $944,000 – $450,000

LO: 2, Bloom: AN, Difficulty: Simple, Time: 30-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

5-18 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
EXERCISE 5.6 (30–35 minutes)

Geronimo Company
Balance Sheet
July 31, 2020

Assets
Current assets
Cash ...................................................... $60,000*
Accounts receivable ............................ $38,700**
Less: Allowance for doubtful
accounts ...................................... 3,500 35,200
Inventory............................................... 65,300***
Total current assets ....................... $160,500

Long-term investments
Bond sinking fund ............................... 15,000

Property, plant, and equipment

Equipment ............................................ 112,000
Less: Accumulated depreciation—
equipment .............................. 28,000 84,000

Intangible assets
Patents .................................................. 21,000
Total assets ................................... $280,500

*($69,000 – $15,000 + $6,000)

**($44,000 – $5,300)
***($60,000 + $5,300)

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-19
EXERCISE 5.6 (Continued)

Liabilities and Stockholders’ Equity

Current liabilities
Notes and accounts payable ........................ $ 44,000
Income taxes payable ................................... 6,000
Total current liabilities ............................ $ 50,000

Long-term liabilities ............................................ 75,000

Total liabilities ......................................... 125,000

Stockholders’ equity ........................................... 155,500

Total liabilities and stock-
holders’ equity ...................................... $280,500

LO: 1, 2, Bloom: AN, Difficulty: Complex, Time: 30-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

5-20 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
EXERCISE 5.7 (15–20 minutes)

Current assets
Cash ................................................................. $ 87,000*
Less: Restricted cash (plant expansion) ....... 50,000 $ 37,000
Debt investments (at fair value; cost,
$31,000)......................................................... 29,000
Accounts receivable (of which $50,000 is
pledged as collateral on a bank loan) ......... 161,000
Less: Allowance for doubtful accounts......... 12,000 149,000
Interest receivable [($40,000 X 6%) X 8/12] ... 1,600
Inventories at lower of cost (determined
using LIFO) or market
Finished goods.......................................... 52,000
Work in process ........................................ 34,000
Raw materials ............................................ 207,000 293,000
Total current assets ............................ $509,600

* ($37,000 + $50,000). An acceptable alternative is to report cash at $37,000

and simply report the restricted cash (plant expansion) in the investments
section.
LO: 2, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC: None

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-21
EXERCISE 5.8 (10–15 minutes)

1. Dividends payable of $2,375,000 will be reported as a current liability

[(1,000,000 – 50,000) X $2.50].

2. Bonds payable of $25,000,000 and interest payable of $3,000,000

($100,000,000 X 12% X 3/12) will be reported as current liabilities. Bonds
payable of $75,000,000 ($100,000,000 - $25,000,000) will be reported as
a long-term liability.

3. Customer advances of $17,000,000 will be reported as a current liability

($12,000,000 + $30,000,000 – $25,000,000).
LO: 1, 2, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

5-22 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
EXERCISE 5.9 (30–35 minutes)

(a) Allessandro Scarlatti Company

Balance Sheet (Partial)
December 31, 2020

Current assets
Cash ....................................................... $ 34,396*
Accounts receivable ............................. $ 91,300**
Less: Allowance for doubtful
accounts ................................ 7,000 84,300
Inventory ................................................ 159,000***
Prepaid expenses .................................. 9,000
Total current assets ........................ $286,696

*Cash balance $ 40,000

Add: Cash disbursement after discount
($39,000 X .98) 38,220
78,220
Less: Cash sales in January ($30,000 – $21,500) $ 8,500
Cash collected on account 23,324
Bank loan proceeds ($35,324 – $23,324) 12,000 43,824
Adjusted cash $ 34,396

**Accounts receivable balance $ 89,000

Add: Accounts reduced from January collection
($23,324 ÷ .98) 23,800
112,800
Deduct: Accounts receivable in January (21,500)
Adjusted accounts receivable $ 91,300

***Inventory $171,000
Less: Inventory received on consignment 12,000
Adjusted inventory $159,000

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-23
EXERCISE 5.9 (Continued)

Current liabilities
Notes payable ............................................... $55,000a
Accounts payable .........................................
115,000b
Total current liabilities ........................... $170,000

a
Accounts payable balance $ 61,000
Add: Cash disbursements $39,000
Purchase invoice omitted
($27,000 – $12,000) 15,000 54,000
Adjusted accounts payable $115,000

b
Notes payable balance $ 67,000
Less: Proceeds of bank loan 12,000
Adjusted notes payable $ 55,000

(b) Adjustment to retained earnings balance:

Add: January sales discounts
[($23,324 ÷ .98) X .02] .......................... $ 476
Deduct: January sales ..................................... $30,000
January purchase discounts
($39,000 X .02) ................................ 780
December purchases ($27,000 - $12,000) 15,000
Consignment inventory .................... 12,000 (57,780)
Change (decrease) to retained earnings ......... $(57,304)

LO: 1, 2, , Bloom: AN, Difficulty: Complex, Time: 30-35, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

5-24 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
EXERCISE 5.10 (15–20 minutes)

(a) In order for a liability to be reported for threatened litigation, the

potential loss must be probable and the amount of the payment must
be reasonably estimable. Since these conditions are not met, an
accrual is not required.

(b) A current liability of $150,000 should be recorded.

(c) A current liability for accrued interest of $4,000 ($600,000 X 8% X 1/12)

should be reported. Also, the $600,000 note payable should be a current
liability if payable in one year. Otherwise, the $600,000 notes payable
would be a long-term liability.

(d) Bad Debt Expense of $300,000 ($10,000,000 x .03) should be debited

and the Allowance for Doubtful Accounts credited for $300,000 ,
assuming that there is a $0 balance in the Allowance for Doubtful
Accounts. However, this does not result in a liability as Chopin does
not have an obligation to expend assets. The allowance for doubtful
accounts is a valuation account (contra asset) and is deducted from
accounts receivable on the balance sheet so that receivables are
reported at net realizable value, or the amount expected to be collected.

(e) A current liability of $80,000 ($2.00 x 40,000) should be reported. The

liability is recorded on the date of declaration.

(f) Customer advances of $110,000 ($160,000 – $50,000) will be reported

as a current liability.

LO: 1, 2, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC:
Communication

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-25
EXERCISE 5.11 (25–30 minutes)
Kelly Corporation
Balance Sheet
December 31, 2020
Assets
Current assets:
Cash ................................................................... $ 6,850 *
Supplies ............................................................. 1,200
Prepaid insurance ............................................. 1,000
Total current assets ................................... $ 9,050
Property, plant and equipment:
Equipment ....................................................... 48,000
Less: Accumulated depr.—equipment .......... 4,000 44,000
Intangible assets:
Trademarks ...................................................... 950
Total assets .................................................. $54,000
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable ............................................. $10,000
Salaries and wages payable ............................. 500
Unearned service revenue ................................ 2,000
Total current liabilities .............................. $12,500
Long-term liabilities
Bonds payable (due 2027) ................................ 9,000
Total liabilities ................................................... 21,500
Stockholders’ equity
Common stock .................................................. 10,000
Retained earnings ($25,000 – $2,500**) ........... 22,500
Total stockholders’ equity .......................... 32,500
Total liabilities and stockholders’ equity....... $54,000

5-26 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
EXERCISE 5.11 (Continued)

*[$54,000 - $950 - $44,000 - $1,000 - $1,200]

**[$10,000 – ($9,000 + $1,400 + $1,200 + $900)]

LO: 2, Bloom: AP, Difficulty: Moderate, Time: 25-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
Commented [TDW1]: Fit on prior page?

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-27
EXERCISE 5.12 (30–35 minutes)

Scott Butler Corporation

Balance Sheet
December 31, 2020

Assets
Current assets
Cash .................................................... $197,000
Debt investments (Trading) ............... 153,000
Accounts receivable .......................... $435,000
Less: Allowance for doubtful
accounts .................................. (25,000) 410,000
Inventory ............................................. 597,000
Total current assets .................... 1,357,000

Long-term investments
Debt investments ............................... 299,000
Equity investments ............................ 277,000
Total long-term investments...... 576,000

Property, plant, and equipment

Land .................................................... 260,000
Buildings............................................. 1,040,000
Less: Accum. depreciation—
building ..................................... 152,000 888,000
Equipment ......................................... 600,000
Less: Accum. depreciation—
equipment ................................. 60,000 540,000
Total property, plant, and
equipment ................................. 1,688,000
Intangible assets
Franchises ................................................... 160,000
Patents ................................................ 195,000
Total intangible assets ................. 355,000
Total assets .................................. $3,976,000

5-28 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
EXERCISE 5.12 (Continued)

Liabilities and Stockholders’ Equity

Current liabilities
Notes payable (short-term)............ $ 90,000
Accounts payable .......................... 455,000
Dividends payable ......................... 136,000
Accrued liabilities .......................... 96,000
Total current liabilities ........... $ 777,000

Long-term debt
Notes payable (long-term) ............. 900,000
Bonds payable ................................ 1,000,000
Total long-term liabilities .......... 1,900,000
Total liabilities ........................... 2,677,000

Stockholder’s equity
Paid-in capital
Common stock ($5 par) ........... $1,000,000
Additional paid-in capital......... 80,000 1,080,000
Retained earnings* ......................... 410,000
Total paid-in capital and
retained earnings ................. 1,490,000
Less: Treasury stock ...................... 191,000
Total stockholders’ equity ...... 1,299,000
Total liabilities and
stockholders’ equity ............ $3,976,000

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-29
EXERCISE 5.12 (Continued)

*Computation of Retained Earnings:

Sales revenue $8,100,000
Investment revenue 63,000
Gain 80,000
Cost of goods sold (4,800,000)
Selling expenses (2,000,000)
Administrative expenses (900,000)
Interest expense (211,000)
Net income $ 332,000

Beginning retained earnings $ 78,000

Net income 332,000
Ending retained earnings $410,000

Or ending retained earnings can be computed as follows:

Total stockholders’ equity ($3,976,000 - $1,299,000

$2,677,000)
Add: Treasury stock 191,000
Less: Paid-in capital in excess of par ($1,000,000 1,080,000
+ $80,000)
Ending retained earnings $ 410,000

Note to instructor: There is no dividends account. Thus, the 12/31/20 retained

earnings balance already reflects any dividends declared.
LO: 2, Bloom: C, Difficulty: Moderate, Time: 30-35, AACSB: AICPA BB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

5-30 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
EXERCISE 5.13 (15–20 minutes)

(a) 4. (f) 1. (k) 1.

(b) 3. (g) 5. (l) 2.
(c) 4. (h) 4. (m) 2.
(d) 3. (i) 5.
(e) 1. (j) 4.
LO: 3, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

EXERCISE 5.14 (25–35 minutes)

Constantine Cavamanlis Inc.

Statement of Cash Flows
For the Year Ended December 31, 2020

Cash flows from operating activities

Net income ........................................................ $44,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense ................................. $ 6,000
Increase in accounts receivable ................ (3,000)
Increase in accounts payable .................... 5,000 8,000
Net cash provided by operating activities ....... 52,000
Cash flows from investing activities
Purchase of equipment .................................... (17,000)
Cash flows from financing activities
Issuance of common stock .............................. 20,000
Payment of cash dividends .............................. (23,000)
Net cash used by financing activities .............. (3,000)
Net increase in cash ............................................... 32,000
Cash at beginning of year ...................................... 13,000
Cash at end of year ................................................. $45,000
LO: 3, Bloom: AN, Difficulty: Moderate, Time: 25-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-31
EXERCISE 5.15 (25–35 minutes)

(a) Zubin Mehta Corporation

Statement of Cash Flows
For the Year Ended December 31, 2020
Cash flows from operating activities
Net income ......................................................... $160,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense ($106,000 - $89,000) .... $17,000
Loss on sale of investments ...................... 10,000
Decrease in accounts receivable ............... 5,000
Decrease in current liabilities ..................... (17,000) 15,000
Net cash provided by operating activities ....... 175,000
Cash flows from investing activities
Sale of investments .......................................... 12,000
[($74,000 – $52,000) – $10,000]
Purchase of equipment ($298,000 - $240,000)...... (58,000)
Net cash used by investing activities .............. (46,000)
Cash flows from financing activities
Payment of cash dividends .............................. (30,000)
Net increase in cash ............................................... 99,000
Cash at beginning of year ...................................... 78,000
Cash at end of year ................................................. $177,000

(b) Free Cash Flow Analysis

Net cash provided by operating activities ............. $175,000

Less: Purchase of equipment ............................... (58,000)
Dividends ...................................................... (30,000)
Free cash flow ......................................................... $ 87,000
LO: 3, 4, Bloom: AP, Difficulty: Moderate, Time: 25-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

5-32 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
EXERCISE 5.16 (20–25 minutes)

(a) Shabbona Corporation

Statement of Cash Flows
For the Year Ended December 31, 2020

Cash flows from operating activities

Net income ......................................................... $125,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense ($69,000 - $42,000) ...... $27,000
Increase in accounts receivable ................. (16,000)
Decrease in inventory .................................. 9,000
Decrease in accounts payable .................... (13,000) 7,000
Net cash provided by operating activities ........ 132,000
Cash flows from investing activities
Sale of land ($110,000 - $71,000) ........................... 39,000
Purchase of equipment ($260,000 - $200,000) ...... (60,000)
Net cash used by investing activities ............... (21,000)
Cash flows from financing activities
Payment of cash dividends ............................... (60,000)
Net increase in cash ................................................ 51,000
Cash at beginning of year ....................................... 22,000
Cash at end of year .................................................. $ 73,000
Noncash investing and financing activities
Issued common stock to retire $50,000 of bonds outstanding

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-33
EXERCISE 5.16 (Continued)

(b) Current cash debt coverage =

Net cash provided by operating activities

= Average current liabilities

$132,000
=
($34,000 + $47,000) / 2

= 3.26 to 1

Cash debt coverage =

Net cash provided by operating activities

=
Average total liabilities

$184,000 + $247,000
$132,000 ÷ =
2

.61 to 1

Free Cash Flow Analysis

Net cash provided by operating activities ....................... $132,000

Less: Purchase of equipment ......................................... (60,000)
Dividends ................................................................ (60,000)
Free cash flow ................................................................... $ 12,000

Shabbona has excellent liquidity. Its financial flexibility is good. It might be

noted that it substantially reduced its long-term debt in 2020, which
improved its financial flexibility.
LO: 3, 4, Bloom: AP, Difficulty: Moderate, Time: 25-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

5-34 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
EXERCISE 5.17 (30–35 minutes)

(a) Grant Wood Corporation

Statement of Cash Flows
For the Year Ended December 31, 2020

Cash flows from operating activities

Net income ............................................................ $55,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Loss on sale of equipment ............................. $ 2,000*
Depreciation expense ($9,000 + $4,000) ........ 13,000
Patent amortization ......................................... 2,500
Increase in current assets (other than cash) .... (29,000)
Increase in current liabilities .......................... 13,000 1,500
Net cash provided by operating activities ........... 56,500
Cash flows from investing activities
Sale of equipment ................................................. 10,000
Addition to building .............................................. (27,000)
Investment in stock............................................... (16,000)
Net cash used by investing activities .................. (33,000)
Cash flows from financing activities
Issuance of bonds................................................. 50,000
Payment of dividends ........................................... (30,000)
Purchase of treasury stock .................................. (11,000)
Net cash provided by financing activities ........... 9,000
Net increase in cash ................................................... 32,500a
Cash at the beginning of the year ... 82,000
Cash at the end of the year $114,500
*[$10,000 – ($20,000 – $8,000)]
a
An additional proof to arrive at the increase in cash is provided as follows:

Total current assets—end of period $296,500 [from part (b)]

Total current assets—beginning of period 235,000
Increase in current assets during the period 61,500
Increase in current assets other than cash 29,000
Increase in cash during year $ 32,500

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-35
EXERCISE 5.17 (Continued)
(b) Grant Wood Corporation
Balance Sheet
December 31, 2020
Assets
Current assets ................................................ $296,500b
Equity investments (Long-term) ................... 16,000
Property, plant, and equipment
Land .......................................................... $ 30,000
Building ($120,000 + $27,000) .................. $147,000
Less: Accum. depreciation—building
($30,000 + $4,000) .................................. (34,000) 113,000
Equipment ($90,000 – $20,000) ................ 70,000
Less: Accum. depreciation—equipment
($11,000 – $8,000 + $9,000) ................... (12,000) 58,000
Total property, plant, and equipment ..... 201,000
Intangible assets—patents
($40,000 – $2,500) .................................. 37,500
Total assets ....................................... $551,000
Liabilities and Stockholders’ Equity
Current liabilities ($150,000 + $13,000) .................... $163,000
Long-term liabilities
Bonds payable ($100,000 + $50,000) .................. 150,000
Total liabilities ............................................... 313,000
Stockholders’ equity
Common stock .................................................... $180,000
Retained earnings ($44,000 + $55,000 – $30,000) .... 69,000
Total paid-in capital and retained earnings.... 249,000
Less: Cost of treasury stock .............................. 11,000
Total stockholders’ equity ............................ 238,000
Total liabilities and stockholders’ equity ..... $551,000

b The amount determined for current assets could be computed last and then is a “plug”
figure. That is, total liabilities and stockholders’ equity is computed because
information is available to determine this amount. Because the total assets amount is
the same as total liabilities and stockholders’ equity amount, the amount of total assets
is determined. Information is available to compute all the asset amounts except current
assets and therefore current assets can be determined by deducting the total of all the
other asset balances from the total asset balance (i.e., $551,000 – $37,500 – $201,000 –
$16,000). Another way to compute this amount, given the information, is that beginning
current assets plus the $29,000 increase in current assets other than cash plus the
$32,500 increase in cash equals $296,500.
LO: 2, 3, Bloom: AP, Difficulty: Moderate, Time: 30-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

5-36 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
EXERCISE 5.18 (25–35 minutes)

(a) Madrasah Corporation

Statement of Cash Flows
For the Year Ended December 31, 2020

Cash flows from operating activities

Net income ........................................................ $44,000
Adjustment to reconcile net income
to net cash provided by operating activities:
Depreciation expense ....................................... $ 6,000
Increase in accounts payable .......................... 5,000
Increase in accounts receivable ...................... (18,000) (7,000)
Net cash provided by operating activities ....... 37,000

Cash flows from Investing activities

Purchase of equipment .................................... (17,000)

Cash flows from financing activities

Issuance of stock .............................................. 20,000
Payment of dividends ....................................... (33,000)
Net cash used by financing activities .............. (13,000)
Net increase in cash ............................................... 7,000
Cash at beginning of year ...................................... 13,000
Cash at end of year ................................................. $20,000

2020 2019
(b) Current ratio 6.3 6.73
($20,000 +$126,000) ($13,000 + $88,000)
$ 20,000 $ 15,000

Free Cash Flow Analysis

Net cash provided by operating activities ......................... $ 37,000

Less: Purchase of equipment ............................................ (17,000)
Pay dividends ............................................................ (33,000)
Free cash flow ...................................................................... $ (13,000)

(c) Although Madrasah’s current ratio has declined from 2019 to 2020, it is
still in excess of 6. It appears the company has good liquidity and
financial flexibility, even though is has a negative free cash flow.
LO: 3, 4, Bloom: AP, Difficulty: Moderate, Time: 25-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-37
 SOLUTIONS TO PROBLEMS

PROBLEM 5.1

COMPANY NAME
Balance Sheet
December 31, 20XX
Assets
Current assets
Cash on hand (including petty cash) ............ $XXX Commented [GV2]: The two cash accounts are typically
combined on a balance sheet rather than being reported separately.
Cash in bank ................................................... XXX $XXX
Debt investments (trading) ............................ XXX
Accounts receivable ...................................... XXX
Less: Allowance for doubtful
accounts ........................................ XXX XXX
Interest receivable .......................................... XXX
Advances to employees ................................ XXX
Inventory ......................................................... XXX
Prepaid rent .................................................... XXX
Total current assets ................................. $XXX

Long-term investments
Bond sinking fund .......................................... XXX
Cash surrender value of life insurance ........ XXX
Land for future plant site ............................... XXX
Total long-term investments ................... XXX

Property, plant, and equipment

Land ................................................................ XXX
Buildings......................................................... XXX
Less: Accum. depreciation—buildings .... XXX XXX
Equipment ...................................................... XXX
Less: Accum. depreciation—equipment ... XXX XXX
Total property, plant, and equipment...... XXX

Intangible assets
Copyrights ...................................................... XXX
Patents ............................................................ XXX
Total intangible assets ............................. XXX
Total assets .................................................... $XXX

5-38 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
PROBLEM 5.1 (Continued)

Liabilities and Stockholders’ Equity

Current liabilities
Notes payable................................................. $XXX
Payroll taxes payable..................................... XXX
Salaries and wages payable .......................... XXX
Dividends payable ......................................... XXX
Unearned subscriptions revenue.................. XXX
Total current liabilities ............................. $XXX

Long-term debt
Bonds payable ............................................... $XXX
Add: Premium on bonds payable ........... XXX XXX
Pension liability .............................................. XXX
Total long-term liabilities ......................... XXX
Total liabilities .......................................... XXX

Stockholders’ equity
Capital stock
Preferred stock (description) .................. XXX
Common stock (description) ................... XXX XXX
Paid-in capital in excess of par –
Preferred stock XXX
Total paid-in capital ................................. XXX
Retained earnings .......................................... XXX
Total paid-in capital and
retained earnings ................................. XXX
Accumulated other comprehensive
income ...................................................... XXX
Less: Treasury stock .................................... XXX
Equity attributable to Company .................... XXX

Equity attributable to noncontrolling

interest ....................................................... XXX
Total stockholders’ equity ....................... XXX
Total liabilities and
stockholders’ equity ............................. $XXX

LO: 2, Bloom: AN, Difficulty: Moderate, Time: 30-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-39
 PROBLEM 5.2

MONTOYA, INC.
Balance Sheet
December 31, 2020

Assets
Current assets
Cash ................................................. $ 360,000
Debt investments (trading) ............. 121,000
Notes receivable.............................. 445,700
Income taxes receivable .................. 97,630
Inventory .......................................... 239,800
Prepaid expenses ............................ 87,920
Total current assets .................. $1,352,050

Property, plant, and equipment

Land ................................................. 480,000
Buildings.......................................... $1,640,000
Less: Accum. depreciation—
buildings ......................... 270,200 1,369,800
Equipment ....................................... 1,470,000
Less: Accum. depreciation—
equipment ....................... 292,000 1,178,000 3,027,800

Intangible assets
Goodwill ........................................... 125,000
Total assets ............................... $4,504,850

5-40 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
PROBLEM 5.2 (Continued)

Liabilities and Stockholders’ Equity

Current liabilities
Notes payable................................... $ 265,000
Accounts payable ........................... 490,000
Payroll taxes payable....................... 177,591
Income taxes payable ...................... 98,362
Rent payable..................................... 45,000
Total current liabilities ............... $1,075,953

Long-term liabilities
Notes payable
(long-term) .................................... 1,600,000
Bonds payable ................................. $300,000
Less: Discount on bonds
payable ............................. 15,000 285,000
Rent payable (long-term) ................ 480,000 2,365,000
Total liabilities ............................ 3,440,953

Stockholders’ equity
Capital stock
Preferred stock, $10 par; 20,000
shares authorized, 15,000
shares issued .......................... 150,000
Common stock, $1 par;
400,000 shares authorized,
200,000 issued ......................... 200,000 350,000
Retained earnings
($1,063,897 – $350,000) ................. 713,897
Total stockholders’ equity
($4,504,850 – $3,440,953) ........ 1,063,897
Total liabilities and
stockholders’ equity ............... $4,504,850
LO: 2, Bloom: AP, Difficulty: Moderate, Time: 35-40, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-41
 PROBLEM 5.3

EASTWOOD COMPANY
Balance Sheet
December 31, 2020
Assets
Current assets
Cash .................................................... $ 41,000
Accounts receivable .......................... $163,500
Less: Allowance for doubtful
accounts ............................ 8,700 154,800
Inventory (LIFO) ................................. 208,500
Prepaid insurance .............................. 5,900
Total current assets ..................... $ 410,200

Long-term investments
Equity investments
($120,000 have been pledged as
security for notes payable)—
at fair value ...................................... 339,000

Property, plant, and equipment

Land ................................................... 85,000
Construction in process
(building) ................................... 124,000
Equipment .......................................... 400,000
Less: Accum. depreciation—
equipt. ................................ 240,000 160,000 369,000

Intangible assets
Patents (less $4,000 amortization) .... 36,000
Total assets .................................. $1,154,200

5-42 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
PROBLEM 5.3 (Continued)

Liabilities and Stockholders’ Equity

Current liabilities
Notes payable (secured by
investments of $120,000)................... $ 94,000
Accounts payable ............................... 148,000
Accrued liabilities ............................... 49,200
Total current liabilities .................. $ 291,200

Long-term liabilities
8% Bonds payable, due
January 1, 2031 ................................ 200,000
Less: Discount on bonds payable .... 20,000 180,000
Total liabilities ............................... 471,200

Stockholders’ equity
Common stock
Authorized 600,000 shares of $1
par value; issued and
outstanding, 500,000 shares ....... $500,000
Paid in capital in excess of
par—common stock........................ 45,000 545,000
Retained earnings ............................... 138,000 683,000
Total liabilities and
stockholders’ equity .................. $1,154,200

LO: 2, Bloom: AP, Difficulty: Moderate, Time: 40-45, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-43
 PROBLEM 5.4

KISHWAUKEE CORPORATION
Balance Sheet
December 31, 2020
Assets
Current assets
Cash ................................................... $175,900
Accounts receivable ......................... 170,000
Inventory ............................................ 312,100
Total current assets .................... $ 658,000

Long-term investments
Assets allocated to trustee for
expansion:
Cash in bank ............................... 70,000
Debt investments
(held-to-maturity).................... 138,000 208,000

Property, plant, and equipment

Land ................................................... 950,000
Buildings............................................ $1,070,000a
Less: Accum. depreciation—
buildings ........................... 410,000 660,000 1,610,000
Total assets ................................. $2,476,000

Liabilities and Stockholders’ Equity

Current liabilities
Notes payable—current installment .. $100,000
Income taxes payable ....................... 75,000
Total current liabilities ................ $ 175,000

5-44 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
PROBLEM 5.4 (Continued)

Long-term liabilities
Notes payable ($600,000 - $100,000)....... 500,000b
Total liabilities ................................ 675,000

Stockholders’ equity
Common stock, no par; 1,000,000
shares authorized and issued;
950,000d shares outstanding ............ 1,150,000
Retained earnings ................................ 683,000c
1,833,000
Less: Treasury stock, at cost
(50,000 shares)........................... 87,000
Equity attributable to Kishwaukee ...... 1,746,000
Equity attributable to noncontrolling
interest .............................................. 55,000
Total stockholders’ equity ............. 1,801,000
Total liabilities and
stockholders’ equity ................... $2,476,000

a
$1,640,000 – $570,000 (to eliminate the excess of appraisal value over cost
from the Buildings account. Note that the appreciation capital account is
also deleted).
b
$600,000 – $100,000 (to reclassify the currently maturing portion of the
notes payable as a current liability).
c
$803,000 – $120,000 (to remove the value of goodwill from retained earnings.
Note 2 indicates that retained earnings was credited. Note that the goodwill
account is also deleted).
d
1,000,000 shares issued – 50,000 Treasury shares

Note: As an alternate presentation, the cash restricted for plant expansion

would be added to the general cash account and then subtracted. The
amount reported in the investments section would not change.
LO: 2, Bloom: AP, Difficulty: Complex, Time: 40-45, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-45
 PROBLEM 5.5

SARGENT CORPORATION
Balance Sheet
December 31, 2020
Assets
Current assets
Cash ................................................... $150,000
Equity investments (at fair value) .... 80,000
Accounts receivable ......................... $ 170,000
Less: Allowance for doubtful
accounts ........................... 10,000 160,000
Inventory (lower-of-FIFO cost -
or-net realizable value) ................. 180,000
Total current assets .................... $ 570,000

Long-term investments
Equity investments
(at fair value) ................................... 270,000
Bond sinking fund ............................. 250,000
Cash surrender value of life
insurance ........................................ 40,000
Land held for future use ................... 270,000 830,000

Property, plant, and equipment

Land ................................................... 500,000
Buildings............................................ 1,040,000
Less: Accum. depreciation—
buildings ........................... 360,000 680,000
Equipment ......................................... 450,000
Less: Accum. depreciation—
equipment ......................... 180,000 270,000 1,450,000

Intangible assets
Franchise ........................................... 165,000
Goodwill ............................................. 100,000 265,000
Total assets ................................. $3,115,000

5-46 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
PROBLEM 5.5 (Continued)

Liabilities and Stockholders’ Equity

Current liabilities
Notes payable.................................... $ 80,000
Accounts payable ............................. 140,000
Income taxes payable ....................... 40,000
Unearned rent revenue ..................... 5,000
Total current liabilities ................. $ 265,000

Long-term liabilities
Notes payable.................................... 120,000
Bonds payable, due 2028 ................ $1,000,000
Less: Discount on bonds payable .. 40,000 960,000 1,080,000
Total liabilities .............................. 1,345,000

Stockholders’ equity
Capital stock
Preferred stock, no par value;
200,000 shares authorized,
70,000 issued and outstanding ... 450,000
Common stock, $1 par value;
400,000 shares authorized,
100,000 issued and outstanding . 100,000
Paid-in capital in excess of par—
common stock [100,000 X
($10.00 – $1.00)].......................... 900,000 1,450,000
Retained earnings ............................. 320,000
Total stockholders’ equity ........... 1,770,000
Total liabilities and
stockholders’ equity ................. $3,115,000

LO: 2, Bloom: AN, Difficulty: Complex, Time: 40-45, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-47
 PROBLEM 5.6

(a) LANSBURY INC.

Statement of Cash Flows
For the Year Ended December 31, 2020
Cash flows from operating activities
Net income ......................................................... $32,000
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation expense ................................. $ 11,000
Gain on sale of investments ....................... (3,400)
Increase in account receivable
($41,600 – $21,200) ................................... (20,400) (12,800)
Net cash provided by operating activities ....... 19,200

Cash flows from investing activities

Sale of investments .......................................... 15,000
Purchase of land ............................................... (13,000)
Net cash provided by investing activities ....... 2,000

Cash flows from financing activities

Issuance of common stock .............................. 20,000
Retirement of notes payable ............................ (16,000)
Payment of cash dividends .............................. (8,200)
Net cash used by financing activities .............. (4,200)

Net increase in cash ............................................... 17,000

Cash at beginning of year ...................................... 20,000
Cash at end of year ................................................. $37,000
Noncash investing and financing activities
Land purchased through issuance of $35,000 of bonds

5-48 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
PROBLEM 5.6 (Continued)

(b) LANSBURY INC.

Balance Sheet
December 31, 2020
Assets Liabilities and Stockholders’ Equity
Cash $37,000 Accounts payable $30,000
Accounts Notes payable
receivable 41,600 (long-term) 25,000 (4)
Debt Bonds payable 35,000 (5)
investments 20,400 (1) Common stock 120,000 (6)
Plant assets (net) 70,000 (2) Retained earnings 47,000 (7)
Land 88,000 (3)
$257,000 $257,000

(1) $32,000 – ($15,000 – $3,400)

(2) $81,000 – $11,000
(3) $40,000 + $13,000 + $35,000
(4) $41,000 – $16,000
(5) $0 + $35,000
(6) $100,000 + $20,000
(7) $23,200 + $32,000 – $8,200

(c) Cash flow information is useful for assessing the amount, timing, and
uncertainty of future cash flows. For example, by showing the specific
inflows and outflows from operating activities, investing activities, and
financing activities, the user has a better understanding of the liquidity
and financial flexibility of the enterprise. Similarly, these reports are
useful in providing feedback about the flow of enterprise resources. This
information should help users make more accurate predictions of
future cash flows. In addition, some individuals have expressed
concern about the quality of the earnings because the measurement of
the income depends on a number of accruals and estimates which may
be somewhat subjective. As a result, the higher the ratio of cash
provided by operating activities to net income, the more comfort some
users have in the reliability of the earnings. In this problem, the ratio of
cash provided by operating activities to net income is 52% ($19,200 ÷
$37,000).

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-49
PROBLEM 5.6 (Continued)

An analysis of Lansbury’s free cash flow indicates it is negative as shown

below:

Free Cash Flow Analysis

Net cash provided by operating activities .......................... $19,200

Less: Purchase of land ...................................................... 13,000
Dividends ................................................................. 8,200
Free cash flow ...................................................................... $ (2,000)

æ$19,200 ö ÷
Its current cash debt coverage is 0.64 to 1çç ÷
÷and its cash debt coverage
çè $30,000 ø
æ $71,000 + $90,000 ÷ ö
is 0.24 to 1çç$19,200
$ ¸ ÷
, which are reasonable. Overall, it
çè 2 ÷
ø
appears that its liquidity position is average and overall financial flexibility
and solvency should be improved.
LO: 2, 3, 4, Bloom: AP, Difficulty: Complex, Time: 35-45, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC:
Communication

5-50 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
 PROBLEM 5.7

(a) AERO INC.

Statement of Cash Flows
For the Year Ended December 31, 2020

Cash flows from operating activities

Net income ........................................................ $35,000
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation expense ................................. $12,000
Loss on sale of investments ...................... 5,000
Increase in accounts payable
($40,000 – $30,000) ................................ 10,000
Increase in accounts receivable
($42,000 – $21,200) ................................ (20,800) 6,200
Net cash provided by operating activities ....... 41,200

Cash flows from investing activities

Sale of debt investments ($32,000 - $5,000) .... 27,000
Purchase of land ............................................... (38,000)
Net cash used by investing activities .............. (11,000)

Cash flows from financing activities

Issuance of common stock .............................. 30,000
Payment of cash dividends .............................. (10,000)
Net cash provided by financing activities ....... 20,000

Net increase in cash ............................................... 50,200

Cash at beginning of year ...................................... 20,000
Cash at end of year ................................................. $70,200
Noncash investing and financing activities
Land purchased through issuance of $30,000 of bonds

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-51
PROBLEM 5.7 (Continued)

(b) AERO INC.

Balance Sheet
December 31, 2020
Assets Liabilities and Stockholders’ Equity
Cash $ 70,200 Accounts payable $ 40,000
Accounts Bonds payable 71,000 (3)
receivable 42,000 Common stock 130,000 (4)
Plant assets (net) 69,000 (1) Retained earnings 48,200 (5)
Land 108,000 (2) $289,200
$289,200

(1) $81,000 – $12,000

(2) $40,000 + $38,000 + $30,000
(3) $41,000 + $30,000
(4) $100,000 + $30,000
(5) $23,200 + $35,000 – $10,000

(c) An analysis of Aero’s free cash flow indicates it is negative as shown

below:

Free Cash Flow Analysis

Net cash provided by operating activities ........................... $41,200

Less: Purchase of land......................................................... 38,000
Dividends .................................................................... 10,000
Free cash flow ....................................................................... $ (6,800)

5-52 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
PROBLEM 5.7 (Continued)

$41,200
Its current cash debt coverage is 1.18 to 1 . Overall, it appears that
$35,000 *
its liquidity position is average and overall financial flexibility should be
improved.

*($30,000 + $40,000) ÷ 2

(d) This type of information is useful for assessing the amount, timing, and
uncertainty of future cash flows. For example, by showing the specific
inflows and outflows from operating activities, investing activities, and
financing activities, the user has a better understanding of the liquidity
and financial flexibility of the enterprise. Similarly, these reports are
useful in providing feedback about the flow of enterprise resources.
This information should help users make more accurate predictions of
future cash flow. In addition, some individuals have expressed concern
about the quality of the earnings because the measurement of the
income depends on a number of accruals and estimates which may be
somewhat subjective. As a result, the higher the ratio of cash provided
by operating activities to net income, the more comfort some users
have in the reliability of the earnings.
LO: 2, 3, 4, Bloom: AP, Difficulty: Complex, Time: 40-50, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC:
Communication

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-53
 TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS

CA 5.1 (Time 20–25 minutes)

Purpose—to provide a varied number of financial transactions and then determine how each of these
items should be reported in the financial statements. Accounting changes, additional assessments of
income taxes, prior period adjustments, and changes in estimates are some of the financial transactions
presented.

CA 5.2 (Time 30–35 minutes)

Purpose—to present the asset section of a partial balance sheet that must be analyzed to assess its
deficiencies. Items such as improper classifications, terminology, and disclosure must be considered.

CA 5.3 (Time 20–25 minutes)

Purpose—to present a balance sheet that must be analyzed to assess its deficiencies. Items such as
improper classification, terminology, and disclosure must be considered.

CA 5.4 (Time 20–25 minutes)

Purpose—to present the student an ethical issue related to the presentation of balance sheet information.
The reporting involves “net presentation” of property, plant, and equipment.

CA 5.5 (Time 40–50 minutes)

Purpose—to present a cash flow statement that must be analyzed to explain differences in cash flow and
net income, and sources and uses of cash flow and ways to improve cash flow.

5-54 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
 SOLUTIONS TO CONCEPTS FOR ANALYSIS

CA 5.1
1. The new estimate would be used in computing depreciation expense for 2020. No adjustment of the
balance in accumulated depreciation at the beginning of the year would be made. Instead, the
remaining depreciable cost would be divided by the estimated remaining life. This is a change in an
estimate and is accounted for prospectively (in the current and future years). Disclosure in the notes
to the financial statements is appropriate if material.

2. The additional assessment should be shown on the current period’s income statement. If material it
should be shown separately; if immaterial it could be included with the current year’s tax expense.
This transaction does not represent a prior period adjustment.

3. The effect of the error at December 31, 2019, should be shown as an adjustment of the beginning
balance of retained earnings on the retained earnings statement. The current year’s expense should
be adjusted (if necessary) for the possible carryforward of the error into the 2020 expense
computation.

4. Generally, an entry is made for a cash dividend on the date of declaration. The appropriate
entry would be a debit to Retained Earnings (or Dividends) for the amount to be paid, with a
corresponding credit to Dividends Payable. Dividends Payable is reported as a current liability.
LO: 2, Bloom: AP, Difficulty: Moderate, Time: 20-25, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

CA 5.2
1. Unclaimed payroll checks should be shown as a current liability if these are claims by employees.

2. Debt investments (trading) should be reported at fair value, not cost.

3. Bad Debt Reserve is an improper terminology; Allowance for Doubtful Accounts is considered more
appropriate. The amount of estimated uncollectible accounts should be disclosed.

4. Next-in, First-out (NIFO) is not an acceptable inventory valuation method.

5. Heading “Tangible assets” should be changed to “Property, Plant, and Equipment”; also label for
corresponding $630,000 should be changed to “net property, plant, and equipment.”

6. Land should not be depreciated.

7. Buildings and equipment and their related accumulated depreciation balances should be separately
disclosed.

8. The valuation basis for stocks should be disclosed (fair value or equity) and the description should
be Debt investment (Available-for-Sale) or Equity investment in X Company. The Long-term
investments section should precede Property, plant, and equipment.

9. Treasury stock is not an asset and should be shown in the stockholders’ equity section as a deduction.

10. Discount on bonds payable is not an asset and should be shown as a deduction from bonds payable.

11. Sinking fund should be reported in the long-term investments section.

LO: 1, 2, Bloom: AN, Difficulty: Moderate, Time: 20-25, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-55
CA 5.3
Criticisms of the balance sheet of the Sameed Brothers Corporation:

1. The basis for the valuation of marketable securities should be shown. Marketable securities are
valued at fair value. In addition, they should be classified as either debt or equity and as either debt
trading securities, debt available-for-sale securities, or debt held-to-maturity securities.

2. An allowance for doubtful accounts receivable is not indicated.

3. The basis for the valuation and the method of pricing for Inventory are not indicated.

4. A stock investment in a subsidiary company is not ordinarily held to be sold within one year or the
operating cycle, whichever is longer. As such, this account should not be classified as a current
asset, but rather should be included under the heading “Investments.” The basis of valuation of the
investment should be shown.

5. Treasury stock is not an asset. It should be presented as a deduction in the shareholders’ equity
section of the balance sheet. The class of stock, number of shares, and basis of valuation should
be indicated.

6. Buildings and land should be segregated. The Reserve for Depreciation should be shown as a
subtraction from the Buildings account only. Also, the term “reserve for” should be replaced by
“accumulated.”

7. Cash Surrender Value of Life Insurance would be more appropriately shown under the heading of
“Investments.”

8. Reserve for Income Taxes should appropriately be entitled Income Tax Payable.

9. Customers’ Accounts with Credit Balances is an immaterial amount. As such, this account need not
be shown separately. The $1,000 credit could readily be netted against Accounts Receivable without
any material misstatement.

10. Unamortized Premium on Bonds Payable should be appropriately shown as an addition to the
related Bonds Payable in the long-term liability section. The use of the term deferred credits is
inappropriate.

11. Bonds Payable is inadequately disclosed. The interest rate, interest payment dates, and maturity
date should be indicated.

12. Additional disclosure relative to the Common Stock account is needed. This disclosure should
include the number of shares authorized, issued, and outstanding.

13. Earned Surplus should appropriately be entitled Retained Earnings. Also, a separate heading should
be shown for this account; it should not be shown under the heading “Common Stock.” A more
appropriate heading would be “Shareholders’ or Stockholders’ Equity.”

14. Cash Dividends Declared should be disclosed on the retained earnings statement as a reduction of
retained earnings. Dividends Payable, in the amount of $8,000, should be shown on the balance
sheet among the current liabilities, assuming payment has not occurred.
LO: 1, 2, Bloom: AN, Difficulty: Simple, Time: 20-25, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC:
Communication

5-56 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
CA 5.4
(a). The ethical issues involved are integrity and honesty in financial reporting, full disclosure,
transparency, and the accountant’s professionalism.

(b). While presenting property, plant, and equipment net of depreciation on the balance sheet may be
acceptable under GAAP, it is inappropriate to attempt to hide information from financial statement
users. Information must be useful, and the presentation Keene is considering would not be. Users
would not grasp the age of plant assets and the company’s need to concentrate its future cash
outflows on replacement of these assets. This information could be provided in a note disclosure.

Because of the significant impact on the financial statements of the depreciation method(s) used,
the following disclosures should be made.
a. Depreciation expense for the period.
b. Balances of major classes of depreciable assets, by nature and function.
c. Accumulated depreciation, either by major classes of depreciable assets or in total.
d. A general description of the method or methods used in computing depreciation with respect
to major classes of depreciable assets.
LO: 2, Bloom: AN, Difficulty: Simple, Time: 20-25, AACSB: Ethics, Communication, Professional Demeanor, AICPA FC: Reporting, AICPA PC: Communication

CA 5.5
Date
President Kappeler, CEO
Kappeler Corporation
125 Wall Street
Middleton, Kansas 67458

Dear Mr. Kappeler:

I have good news and bad news about the financial statements for the year ended December 31, 2020.
The good news is that net income of $100,000 is close to what we predicted in the strategic plan last
year, indicating strong performance this year. The bad news is that the cash balance is seriously low.
Enclosed is the Statement of Cash Flows, which best illustrates how these situations occurred
simultaneously.
If you look at the operating activities, you can see that no cash was generated by operations due to the
increase in accounts receivable and inventory and reduction in accounts payable. In effect, these events
caused net cash flow provided by operating activities to be lower than net income; they reduced your
cash balance by $116,000.
The corporation made significant investments in equipment and land. These were paid from cash
reserves. These purchases used 75% of the company’s cash. In addition, the redemption of the bonds
improved the equity of the corporation and reduced interest expense. However, it also used 25% of the
corporation’s cash. It is normal to use cash for investing and financing activities. But when cash is used,
it must also be replenished.
Operations normally provide the cash for investing and financing activities. Since there is a finite amount
of assets to sell and funds to borrow or raise from the sale of capital stock, operating activities are the
only renewable source of cash. That is why it is important to keep the operating cash flows positive. Cash
management requires careful and continuous planning.

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 5-57
CA 5.5 (Continued)
There are several possible remedies for the current cash problem. First, prepare a detailed analysis of
monthly cash requirements for the next year. Second, investigate the changes in accounts receivable
and inventory and work to return them to more normal levels. Third, look for more favorable terms with
suppliers to allow the accounts payable to increase without loss of discounts or other costs. Finally, since
the land represents a long-term commitment without immediate plans for use, consider shopping for a
low interest loan to finance the acquisition for a few years and return the cash balance to a more normal
level.
If you have additional questions or need one of our staff to address this problem, please contact me at
your convenience.

Sincerely yours,

Partner in Charge
LO: 3, 4, Bloom: AN, Difficulty: Complex, Time: 40-50, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

5-58 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)