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Chapter 4: The Classified Balance Sheet and Related Disclosures

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    180518
  • Chapter 4: The Classified Balance Sheet and Related Disclosures

     

    Chapters 1 through 3 discussed and illustrated the steps in the accounting cycle. They also discussed the concepts, assumptions, and procedures that provide a framework for financial accounting as a whole. Chapter 4 expands upon the content and presentation of financial statements. It reinforces what has been learned in previous chapters and introduces the classification or grouping of accounts on the balance sheet. Chapter 4 expands on notes to the financial statements, the auditor's report, and the management's responsibility report which are all integral to meeting disclosure requirements.

    Chapter 4 Learning Objectives

    • LO1 – Explain the importance of and challenges related to basic financial statement disclosure.

    • LO2 – Explain and prepare a classified balance sheet.

    • LO3 – Explain the purpose and content of notes to financial statements.

    • LO4 – Explain the purpose and content of the auditor's report.

    • LO5 – Explain the purpose and content of the report that describes management's responsibility for financial statements.

    Concept Self-Check

    Use the following as a self-check while working through Chapter 4.

    1. What shapes and limits an accountant's measurement of wealth?

    2. Are financial statements primarily intended for internal or external users?

    3. What is a classified balance sheet?

    4. What are the classifications within a classified balance sheet?

    5. What are current assets?

    6. What are non-current assets?

    7. What are current liabilities?

    8. What are long-term liabilities?

    9. What is the current-portion of a long-term liability?

    10. What is the purpose and content of the notes to the financial statements?

    11. What is the purpose and content of the auditor's report?

    12. What is the purpose and content of the report that describes management's responsibility for financial statements?

    NOTE: The purpose of these questions is to prepare you for the concepts introduced in the chapter. Your goal should be to answer each of these questions as you read through the chapter. If, when you complete the chapter, you are unable to answer one or more the Concept Self-Check questions, go back through the content to find the answer(s). Solutions are not provided to these questions.

    4.1 Financial Statement Disclosure Decisions

    LO1 – Explain the importance of and challenges related to basic financial statement disclosure.

    Financial statements communicate information, with a focus on the needs of financial statement users such as a company's investors and creditors. Accounting information should make it easier for management to allocate resources and for shareholders to evaluate management. A key objective of financial statements is to fairly present the entity's economic resources, obligations, equity, and financial performance.

    Fulfilling these objectives is challenging. Accountants must make a number of subjective decisions about how to apply generally accepted accounting principles. For example, they must decide how to measure wealth and how to apply recognition criteria. They must also make practical cost-benefit decisions about how much information is useful to disclose. Some of these decisions are discussed in the following section.

    Making Accounting Measurements

    Economists often define wealth as an increase or decrease in the entity's ability to purchase goods and services. Accountants use a more specific measurement — they consider only increases and decreases resulting from actual transactions. If a transaction has not taken place, they do not record a change in wealth.

    The accountant's measurement of wealth is shaped and limited by the generally accepted accounting principles introduced and discussed in Chapter 1, including cost, the monetary unit, the business entity, timeliness, recognition, and going concern. These principles mean that accountants record transactions in one currency (for example, dollars). They assume the monetary currency retains its purchasing power. Changes in market values of assets are generally not recorded. The entity is expected to continue operating into the foreseeable future.

    Economists, on the other hand, do recognize changes in market value. For example, if an entity purchased land for $100,000 that subsequently increased in value to $125,000, economists would recognize a $25,000 increase in wealth. International Financial Reporting Standards generally do not recognize this increase until the entity actually disposes of the asset; accountants would continue to value the land at its $100,000 purchase cost. This practice is based on the application of the cost principle, which is a part of GAAP.

    Economic wealth is also affected by changes in the purchasing power of the dollar. For example, if the entity has cash of $50,000 at the beginning of a time period and purchasing power drops by 10% because of inflation, the entity has lost wealth because the $50,000 can purchase only $45,000 of goods and services. Conversely, the entity gains wealth if purchasing power increases by 10%. In this case, the same $50,000 can purchase $55,000 worth of goods and services. However, accountants do not record any changes because the monetary unit principle assumes that the currency unit is a stable measure.

    Qualities of Accounting Information

    Financial statements are focused primarily on the needs of external users. To provide information to these users, accountants make cost-benefit judgments. They use materiality considerations to decide how particular items of information should be recorded and disclosed. For example, if the costs associated with financial information preparation are too high or if an amount is not sufficiently large or important, a business might implement a materiality policy for various types of asset purchases to guide how such costs are to be recorded. For example, a business might have a materiality policy for the purchase of office equipment whereby anything costing $100 or less is expensed immediately instead of recorded as an asset. In this type of situation, purchases of $100 or less are recorded as an expense instead of an asset to avoid having to record depreciation expense, a cost-benefit consideration that will not impact decisions made by external users of the business's financial statements.

    Accountants must also make decisions based on whether information is useful. Is it comparable to prior periods? Is it verifiable? Is it presented with clarity and conciseness to make it understandable? Readers' perception of the usefulness of accounting information is determined by how well those who prepare financial statements address these qualitative considerations.

    4.2 Classified Balance Sheet

    LO2 – Explain and prepare a classified balance sheet.

    The accounting cycle and double-entry accounting have been the focus of the preceding chapters. This chapter focuses on the presentation of financial statements, including how financial information is classified (the way accounts are grouped) and what is disclosed.

    A common order for the presentation of financial statements is:

    1. Income statement

    2. Statement of changes in equity

    3. Balance sheet

    4. Statement of cash flows

    5. Notes to the financial statements

    In addition, the financial statements are often accompanied by an auditor's report and a statement entitled "Management's Responsibility for Financial Statements." Each of these items will be discussed below. Financial statement information must be disclosed for the most recent year with the prior year for comparison.

    Because external users of financial statements have no access to the entity's accounting records, it is important that financial statements be organized in a manner that is easy to understand. Thus, financial data are grouped into useful, similar categories within classified financial statements, as discussed below.

    The Classified Balance Sheet

    A classified balance sheet organizes the asset and liability accounts into categories. The previous chapters used an unclassified balance sheet which included only three broad account groupings: assets, liabilities, and equity. The classification of asset and liability accounts into meaningful categories is designed to facilitate the analysis of balance sheet information by external users. Assets and liabilities are classified as either current or non-current. Another common term for non-current is long-term. Non-current assets, also referred to as long-term assets, can be classified further into long-term investments; property, plant and equipment; and intangible assets. The asset and liability classifications are summarized below:

    Assets
     
    Liabilities
    Non-current or long-term assets: Non-current or long-term liabilities
     
    Long-term investments
     
    Property, plant and equipment (PPE)
     
    Intangible assets

    Current Assets

    Current assets are those resources that the entity expects to convert to cash, or to consume during the next year or within the operating cycle of the entity, whichever is longer. Examples of current assets include:

    • cash, comprising paper currency and coins, deposits at banks, cheques, and money orders.

    • short-term investments, the investment of cash that will not be needed immediately, in short-term, interest-bearing notes that are easily convertible into cash.

    • accounts receivable that are due to be collected within one year.

    • notes receivable, usually formalized account receivables — written promises to pay specified amounts with interest, and due to be collected within one year.

    • merchandise inventory that is expected to be sold within one year.

    The current asset category also includes accounts whose future benefits are expected to expire in a short period of time. These are not expected to be converted into cash, and include:

    • prepaid expenses that will expire within the next year, usually consisting of advance payments for insurance, rent, and other similar items.

    • supplies on hand at the end of an accounting year that will be used during the next year.

    On the balance sheet, current assets are normally reported before non-current assets. They are listed by decreasing levels of liquidity — their ability to be converted into cash. Therefore, cash appears first under the current asset heading since it is already liquid.

    Non-current Assets

    Non-current assets are assets that will be useful for more than one year; they are sometimes referred to as long-lived assets. Non-current assets include property, plant, and equipment (PPE) items used in the operations of the business. Some examples of PPE are: a) land, b) buildings, c) equipment, and d) motor vehicles such as trucks.

    Other types of non-current assets include long-term investments and intangible assets. Long-term investments are held for more than one year or the operating cycle and include long-term notes receivable and investments in shares and bonds. Intangible assets are resources that do not have a physical form and whose value comes from the rights held by the owner. They are used over the long term to produce or sell products and services and include copyrights, patents, trademarks, and franchises.

    Current Liabilities

    Current liabilities are obligations that must be paid within the next 12 months or within the entity's next operating cycle, whichever is longer. They are shown first in the liabilities section of the balance sheet and listed in order of their due dates, with any bank loans shown first. Examples of current liabilities include:

    • bank loans (or notes payable) that are payable on demand or due within the next 12 months

    • accounts payable

    • accrued liabilities such as interest payable and wages payable

    • unearned revenue

    • the current portion of long-term liabilities

    • income taxes payable.

    The current portion of a long-term liability is the principal amount of a long-term liability that is to be paid within the next 12 months. For example, assume a $24,000 note payable issued on January 1, 2015 where principal is repaid at the rate of $1,000 per month over two years. The current portion of this note on the January 31, 2015 balance sheet would be $12,000 (calculated as 12 months X $1,000/month). The remaining principal would be reported on the balance sheet as a long-term liability.

    Non-Current or Long-Term Liabilities

    Non-current liabilities, also referred to as long-term liabilities, are borrowings that do not require repayment for more than one year, such as the long-term portion of a bank loan or a mortgage. A mortgage is a liability that is secured by real estate.

    Equity

    The equity section of the classified balance sheet consists of two major accounts: share capital and retained earnings.

    The following illustrates the presentation of Big Dog Carworks Corp.'s classified balance sheet after several years of operation.

    img197.png

    The balance sheet can be presented in the account form balance sheet, as shown above where liabilities and equities are presented to the right of the assets. An alternative is the report form balance sheet where liabilities and equity are presented below the assets.

    The Classified Income Statement

    Recall that the income statement summarizes a company's revenues less expenses over a period of time. An income statement for BDCC was presented in Chapter 1 as copied below.

    Big Dog Carworks Corp.
    Income Statement
    For the Month Ended January 31, 2015
    Revenues
     
    Repair revenues
    $10,000
    Expenses
     
    Rent expense
    $1,600
     
    Salaries expense
    3,500
     
    Supplies expense
    2,000
     
    Fuel expense
    700
     
    Total expenses
    7,800
    Net income $2,200

    The format used above was sufficient to disclose relevant financial information for Big Dog's simple start-up operations. Like the classified balance sheet, an income statement can be classified as well as prepared with comparative information. The classified income statement will be discussed in detail in Chapter 5.

    Regardless of the type of financial statement, any items that are material must be disclosed separately so users will not otherwise be misled. Materiality is a matter for judgment. Office supplies of $2,000 per month used by BDCC in January 2015 might be a material amount and therefore disclosed as a separate item on the income statement for the month ended January 31, 2015. If annual revenues grew to $1 million, $2,000 per month for supplies might be considered immaterial. These expenditures would then be grouped with other similar items and disclosed as a single amount.

    icon-exploration2.png An exploration is available on the Lyryx system. Log into your Lyryx course to run Classified Balance Sheets.

    4.3 Notes to Financial Statements

    LO3 – Explain the purpose and content of notes to financial statements.

    As an integral part of its financial statements, a company provides notes to the financial statements. In accordance with the disclosure principle, notes to the financial statements provide relevant details that are not included in the body of the financial statements. For instance, details about property, plant, and equipment are shown in Note 4 in the following sample notes to the financial statements. The notes help external users understand and analyze the financial statements.

    Although a detailed discussion of disclosures that might be included as part of the notes is beyond the scope of an introductory financial accounting course, a simplified example of note disclosure is shown below for Big Dog Carworks Corp.

    Big Dog Carworks Corp.
    Notes to the Financial Statements
    For the Year Ended December 31, 2018

    1. Nature of operations
      The principal activity of Big Dog Carworks Corp. is the servicing and repair of vehicles.

    2. General information and statement of compliance with IFRS
      Big Dog Carworks Corp. is a limited liability company incorporated and domiciled in Canada. Its registered office and principal place of business is 123 Fox Street, Owlseye, Alberta, T1K 0L1, Canada. Big Dog Carworks Corp.'s shares are listed on the Toronto Stock Exchange.

      The financial statements of Big Dog Carworks Inc. have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued the International Accounting Standards Boards (IASB).

      The financial statements for the year ended December 31, 2018 were approved and authorised for issue by the board of directors on March 17, 2019.

    3. Summary of accounting policies
      The financial statements have been prepared using the significant accounting policies and measurement bases summarized below.

      1. Revenue

        Revenue arises from the rendering of service. It is measured by reference to the fair value of consideration received or receivable.

      2. Operating expenses

        Operating expenses are recognized in the income statement upon utilization of the service or at the date of their origin.

      3. Borrowing costs

        Borrowing costs directly attributable to the acquisition, construction, or production of property, plant, and equipment are capitalized during the period of time that is necessary to complete and prepare the asset for its intended use or sale. Other borrowing costs are expensed in the period in which they are incurred and reported as interest expense.

      4. Property, plant, and equipment

        Land held for use in production or administration is stated at cost. Other property, plant, and equipment are initially recognized at acquisition cost plus any costs directly attributable to bringing the assets to the locations and conditions necessary to be employed in operations. They are subsequently measured using the cost model: cost less subsequent depreciation.

        Depreciation is recognized on a straight-line basis to write down the cost, net of estimated residual value. The following useful lives are applied:

        • Buildings: 25 years

        • Equipment: 10 years

        • Truck: 5 years

        Residual value estimates and estimates of useful life are updated at least annually.

      5. Income taxes

        Current income tax liabilities comprise those obligations to fiscal authorities relating to the current or prior reporting periods that are unpaid at the reporting date. Calculation of current taxes is based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period.

      6. Share capital

        Share capital represents the nominal value of shares that have been issued.

      7. Estimation uncertainty

        When preparing the financial statements, management undertakes a number of judgments, estimates, and assumptions about the recognition and measurement of assets, liabilities, income, and expenses. Information about estimates and assumptions that have the most significant effect on recognition and measurement of assets, liabilities, income, and expenses is provided below. Actual results may be substantially different.

    4. Property, plant, and equipment

      Details of the company's property, plant, and equipment and their carrying amounts at December 31 are as follows:

      img198.png

    5. Borrowings

      Borrowings include the following financial liabilities measured at cost:

      Current
       
      Non-Current
      2018   2017 2018   2017
      Demand bank loan $  20,000 $  52,250 $   -0- $   -0-
      Subordinated shareholder loan 13,762 30,000 -0- -0-
      Mortgage 5,238 -0- 163,145 -0-
       
      Total carrying amount
      $39,000 $82,250 $163,145 $   -0-

      The bank loan is due on demand and bears interest at 6% per year. It is secured by accounts receivable and inventories of the company.

      The shareholder loan is due on demand, non-interest bearing, and unsecured.

      The mortgage is payable to First Bank of Capitalville. It bears interest at 5% per year and is amortized over 25 years. Monthly payments including interest are $960. It is secured by land and buildings owned by the company. The terms of the mortgage will be re-negotiated in 2021.

    6. Share capital

      The share capital of Big Dog Carworks Corp. consists of fully-paid common shares with a stated value of $1 each. All shares are eligible to receive dividends, have their capital repaid, and represent one vote at the annual shareholders' meeting. There were no shares issued during 2017 or 2018.

    4.4 Auditor's Report

    LO4 – Explain the purpose and content of the auditor's report.

    Financial statements are often accompanied by an auditor's report. An audit is an external examination of a company's financial statement information and its system of internal controls.

    Internal controls are the processes instituted by management of a company to direct, monitor, and measure the accomplishment of its objectives. This includes the prevention and detection of fraud and error. An audit seeks not certainty, but reasonable assurance that the financial statement information is not materially misstated.

    The auditor's report is a structured statement issued by an independent examiner, usually a professional accountant, who is contracted by the company to report the audit's findings to the company's board of directors. An audit report provides some assurance to present and potential investors and creditors that the company's financial statements are trustworthy. Therefore, it is a useful means to reduce the risk of their financial decisions.

    An example of an unqualified auditor's report for BDCC is shown below, along with a brief description of each component. Put in simple terms, an unqualified auditor's report indicates that the financial statements are truthful and a qualified auditor's report is one that indicates the financial statements are not or may not be truthful.

    img199.png

    4.5 Management's Responsibility for Financial Statements

    LO5 – Explain the purpose and content of the report that describes management's responsibility for financial statements.

    The final piece of information often included with the annual financial statements is a statement describing management's responsibility for the accurate preparation and presentation of financial statements. This statement underscores the division of duties involved with the publication of financial statements. Management is responsible for preparing the financial statements, including estimates that underlie the accounting numbers. An example of an estimate is the useful life of long-lived assets in calculating depreciation.

    The independent auditor is responsible for examining the financial statement information as prepared by management, including the reasonableness of estimates, and then expressing an opinion on their accuracy. In some cases, the auditor may assist management with aspects of financial statement preparation. For instance, the auditor may provide guidance on how a new accounting standard will affect financial statement presentation or other information disclosure. Ultimately, however, the preparation of financial statements is management's responsibility.

    An example of a statement describing management's responsibility for the preparation and presentation of annual financial statements is shown below.

    img200.png

    img201.png

    Summary of Chapter 4 Learning Objectives

    LO1 – Explain the importance of and challenges related to basic financial statement disclosure.

    The objective of financial statements is to communicate information to meet the needs of external users. In addition to recording and reporting verifiable financial information, accountants make decisions regarding how to measure transactions. Applying GAAP can present challenges when judgment must be applied as in the case of cost-benefit decisions and materiality.

    LO2 – Explain and prepare a classified balance sheet.

    A classified balance sheet groups assets and liabilities as follows:

    Assets: Liabilities:
    Current assets Current liabilities
    Non-current assets:
    • Property, plant, and equipment

    • Long-term investments

    • Intangible assets

    Non-current or long-term liabilities

    Current assets are those that are used within one year or one operating cycle, whichever is longer, and include cash, accounts receivables, and supplies. Non-current assets are used beyond one year or one operating cycle. There are three types of non-current assets: property, plant, and equipment (PPE), long-term investments, and intangible assets. Long-term investments include investments in shares and bonds. Intangible assets are rights held by the owner and do not have a physical substance; they include copyrights, patents, franchises, and trademarks. Current liabilities must be paid within one year or one operating cycle, whichever is longer. Long-term liabilities are paid beyond one year or one operating cycle. Income statements are also classified (discussed in Chapter 5).

    LO3 – Explain the purpose and content of notes to financial statements.

    In accordance with the GAAP principle of full disclosure, relevant details not contained in the body of financial statements are included in the accompanying notes to financial statements. Notes would include a summary of accounting policies, details regarding property, plant, and equipment assets, and specifics about liabilities such as the interest rates and repayment terms.

    LO4 – Explain the purpose and content of the auditor's report.

    An audit as it relates to the auditor's report is an external examination of a company's financial statement information and its system of internal controls. Internal controls are the processes instituted by management of a company to direct, monitor, and measure the accomplishment of its objectives including the prevention and detection of fraud and error. The auditor's report provides some assurance that the financial statements are trustworthy. In simple terms, an unqualified auditor's report indicates that the financial statements are truthful and a qualified auditor's report is one that indicates the financial statements are not or may not be truthful.

    LO5 – Explain the purpose and content of the report that describes management's responsibility for financial statements.

    This report makes a statement describing management's responsibility for the accurate preparation and presentation of financial statements.

    Discussion Questions

    Refer to the Big Dog Carworks Corp. financial statements for the year ended December 31, 2018 and other information included in this chapter to answer the following questions.
    1. Identify the economic resources of Big Dog Carworks Corp. in its financial statements.

    2. What comprise the financial statements of BDCC?

    3. Why does BDCC prepare financial statements?

    4. From the balance sheet at December 31, 2018 extract the appropriate amounts to complete the following accounting equation: ASSETS = LIABILITIES + EQUITY

    5. If ASSETS – LIABILITIES = NET ASSETS, how much is net assets at December 31, 2018? Is net assets synonymous with equity?

    6. What types of assets are reported by Big Dog Carworks Corp.? What types of liabilities?

    7. What kind of assumptions is made by Big Dog Carworks Corp. about asset capitalisation? Over what periods of time are assets being amortized?

    8. What adjustments might management make to the financial information when preparing the annual financial statements? Consider the following categories:

      1. Current asset accounts.

      2. Non-current asset accounts.

      3. Current liability accounts.

      4. Non-current liability accounts.

      Indicate several examples in each category. Use the BDCC balance sheet and notes 3 and 5 for ideas.
    9. What are the advantages of using a classified balance sheet? Why are current accounts shown before non-current ones on BDCC's balance sheet?

    10. How does Big Dog Carworks Corp. make it easier to compare information from one time period to another?

    11. Who is the auditor of BDCC? What does the auditor's report tell you about BDCC's financial statements? Does it raise any concerns?

    12. What does the auditor's report indicate about the application of generally accepted accounting principles in BDCC's financial statements?

    13. What is BDCC management's responsibility with respect to the company's financial statements? Do the financial statements belong to management? the auditor? the board of directors? shareholders?

    Exercises

    EXERCISE 4–1 (LO2) Classified Balance Sheet Watch Video

    The following accounts and account balances are taken from the records of Joyes Enterprises Ltd. at December 31, 2016, its fiscal year-end.

    Dr. Cr.
    Accounts Receivable $8,000
    Accounts Payable $7,000
    Accumulated Depreciation – Buildings
     
    1,000
    Accumulated Depreciation – Equipment 4,000
    Bank Loan (due 2017) 5000
    Buildings 25,000
    Cash 2,000
    Dividends Declared 1,000
    Equipment 20,000
    Income Tax Payable 3,000
    Land 5,000
    Merchandise Inventory 19,000
    Mortgage Payable (due 2019) 5,000
    Prepaid Insurance 1,000
    Share Capital 48,000
    Retained Earnings, Jan. 1 2016 -0- 2,000
     
    Totals
    $81,000 $75,000
    Net Income -0- 6,000
     
    Totals
    -0- -0-

    Required:

    1. Using the above information, prepare a classified balance sheet.

    2. Does Joyes Enterprises Ltd. have sufficient resources to meet its obligations in the upcoming year?

    3. Calculate the proportion of shareholders' to creditors' claims on the assets of Joyes.

    EXERCISE 4–2 (LO2,3) Classified Balance Sheet

    The following balance sheet was prepared for Abbey Limited:

    Abbey Limited
    Balance Sheet
    As at November 30, 2015
    Assets Liabilities
    Current Current
     
    Cash
    $1,000
     
    Accounts Payable
    $5,600
     
    Accounts Receivable
    6,000
     
    Notes Payable (due 2016)
     
    2,000
     
    Building
    12,000
     
    Bank Loan (due 2022)
    1,000
     
    Merchandise Inventory
     
    3,000
     
    Total Current Liabilities
    $8,600
     
    Total Current Assets
    $22,000
    Non-current Non-current
     
    Short-Term Investments
    3,000
     
    Mortgage Payable (due 2023)
    7,000
     
    Equipment
    1,500
     
    Retained Earnings
    1,000
     
    Unused Office Supplies
    100
     
    Salaries Payable
    250
     
    Truck
    1,350
     
    Total Non-current Liabilities
    8,250
     
    Total Non-current Assets
    5,950
     
    Total Liabilities
    16,850
     
    Equity
    Share Capital 11,100
    Total Assets $27,950 Total Liabilities and Assets $27,950

    Required:

    1. Identify the errors that exist in the balance sheet of Abbey Limited and why you consider this information incorrect.

    2. Prepare a corrected, classified balance sheet.

    3. Based on the balance sheet categories, what additional information should be disclosed in the notes to the financial statements?

    EXERCISE 4–3 (LO2,3) Accounts Classifications

    Below are various accounts:

     
    Land used in the normal course of business operations
     
    Accrued salaries payable
    Notes payable, due in four months Prepaid advertising
    Truck Advertising expense
    Land held for investment Unearned revenue
    Copyright Service revenue
    Accounts payable Cash
    Cash dividends Mortgage payable, due in fifteen years
    Building Mortgage payable, due in six months
    Furniture Share capital
    Accounts receivable, from customer sales Shop supplies
    Franchise Accumulated depreciation, building
    Utilities expense Depreciation expense
    Utilities payable Office supplies

    Required: Classify each account as one of the following:

    1. current asset

    2. long-term investment

    3. property, plant and equipment

    4. intangible asset

    5. current liability

    6. long-term liability

    7. equity

    8. not reported on the balance sheet

    EXERCISE 4–4 (LO2) Preparing Closing Entries, Balance Sheet and Post-closing Trial balance

    Below are the December 31, 2016, year-end accounts balances for Abled Appliance Repair Ltd. This is the business's third year of operations.

    Cash $80,000
     
    Share capital $1,000
    Accounts receivable 66,000 Retained earnings 116,600
    Office supplies inventory 2,000 Revenue 35,000
    Prepaid insurance 5,000 Rent expense 3,000
    Land 20,000 Salaries expense 8,000
    Office equipment 10,000 Utilities expense 500
    Accumulated depreciation, office equipment 2,000 Travel expense 1,500
    Accounts payable 35,000 Insurance expense 600
    Unearned consulting fees 10,000 Supplies and postage expense 3,000

    Required:

    1. Prepare the closing entries.

    2. Prepare a classified balance sheet.

    3. Prepare a post-closing trial balance.

    EXERCISE 4–5 (LO2) Classified Balance Sheet

    Below is the post-closing trial balance for Mystery Company Ltd. All accounts have normal balances.

    Mystery Company Ltd.
    Trial Balance
    November 30, 2016
     
    Accounts payable $ 95,960
    Accounts receivable 99,520
    Accrued salaries payable 58,580
    Accumulated depreciation, building 43,530
    Accumulated depreciation, vehicle 8,650
    Building 270,000
    Cash 150,650
    Copyright 51,600
    Current portion of long-term debt 72,000
    Income taxes payable 32,500
    Interest payable 12,000
    Notes payable, due 2025 145,000
    Office supplies 1,300
    Prepaid insurance expense 10,000
    Prepaid rent expense 12,000
    Retained earnings 74,850
    Share capital ??
    Unearned revenue 150,000
    Vehicle 108,000

    Required: Prepare a classified balance sheet.

    EXERCISE 4–6 (LO2) Classified Balance Sheet

    Below is the adjusted trial balance for Hitalle Heights Corp. All accounts have normal balances.

    Hitalle Heights Corp.
    Trial Balance
    May 31, 2016
     
    Accounts payable $ 13,020
    Accounts receivable 59,808
    Accrued salaries and benefits payable 4,872
    Accumulated depreciation, furniture 1,792
    Cash 8,888
    Cash dividends 2,800
    Depreciation expense 1,333
    Furniture 8,400
    Income tax expense 2,520
    Income taxes payable 3,320
    Insurance expense 2,072
    Interest expense 84
    Interest payable 224
    Land 58,048
    Bank loan payable (long-term) 16,800
    Shop supplies 1,008
    Prepaid insurance expense 7,162
    Rent expense 12,600
    Travel expense 840
    Retained earnings 192,355
    Revenue 94,000
    Salaries expense 23,352
    Share capital 840
    Shop supplies expense 420
    Franchise 155,868
    Unearned revenue 21,000
    Utilities expense 3,020

    Additional information:

    The bank loan will be reduced by $5,200 next year.

    There were 200 additional shares issued during the year for $200.

    Required: Prepare a classified balance sheet and a statement of changes in equity for May 31, 2016.

    Problems

    PROBLEM 4–1 (LO2) Classified Balance Sheet

    The following list of accounts is taken from the records of the Norman Company Ltd. at December 31, 2015:

    Account Title Balance
    Accounts Payable $125
    Accounts Receivable 138
    Building 400
    Cash 250
    Share Capital 400
    Equipment 140
    Land 115
    Mortgage Payable (due 2022) 280
    Bank Loan, due within 90 days 110
    Notes Receivable, due within 90 days
     
    18
    Prepaid Insurance 12
    Retained Earnings 214
    Salaries Payable 14
    Unused Office Supplies 70

    Required: Prepare a classified balance sheet.

    PROBLEM 4–2 (LO2) Classified Balance Sheet

    The following adjusted trial balance has been extracted from the records of Dark Edge Sports Inc. at December 31, 2015, its second fiscal year-end.

    Account Balances
    Dr. Cr.
    Accounts Payable $8,350
    Accounts Receivable $18,700
    Accumulated Depreciation – Equipment
     
    2,000
    Advertising Expense 7,200
    Bank Loan, due May 31, 2016 10,000
    Cash 1,500
    Depreciation Expense 1,100
    Dividends 600
    Equipment 12,500
    Income Taxes Expense 2,300
    Income Taxes Payable 4,600
    Insurance Expense 1,200
    Interest and Bank Charges Expense 1,300
    Prepaid Insurance 1,300
    Prepaid Rent 600
    Retained Earnings 2,000
    Rent Expense 17,950
    Revenue 80,000
    Salaries Expense 39,000
    Share Capital 3,000
    Telephone Expense 1,100
    Utilities Expense 3,600
     
    Totals
    $109,950 $109,950

    Note: No shares were issued during 2015.

    Required:

    1. Calculate net income for year ended December 31, 2015.

    2. Prepare a statement of changes in equity for the year ended December 31, 2015.

    3. Prepare a classified balance sheet at December 31, 2015.

    4. By what amounts do total current liabilities exceed total current assets at December 31, 2015?

    5. Assume a $5,000 bank loan is received, payable in six months. Will this improve the negative working capital situation calculated in (4) above? Calculate the effect on your answer to (4) above?

    6. As the bank manager, what questions might you raise regarding the loan?

    PROBLEM 4–3 (LO2) Closing Entries and Financial Statements

    Below is the adjusted trial balance with accounts in alphabetical order for MayBee Services Ltd. All accounts have normal balances.

    MayBee Services Ltd.
    Trial Balance
    At June 30, 2016
    Accounts payable $ 32,550
    Accounts receivable 149,520
    Accrued salaries payable 12,180
    Accumulated depreciation, building 280
    Accumulated depreciation, equipment 4,480
    Advertising expense 5,670
    Building 145,400
    Cash 122,220
    Cash dividends 7,000
    Depreciation expense 3,332
    Equipment 21,000
    Income tax expense 6,300
    Income taxes payable 6,300
    Insurance expense 5,180
    Interest expense 210
    Interest payable 210
    Notes payable, due 2018 42,000
    Office supplies 2,520
    Prepaid insurance expense 17,906
    Rent expense 31,500
    Repairs expense 10,920
    Retained earnings 343,058
    Revenue 135,000
    Salaries expense 58,380
    Share capital 2,100
    Shop supplies expense 1,050
    Trademark 10,000
    Unearned revenue 52,500
    Utilities expense 32,550

    Additional Information: For the note payable, its account balance will be reduced by $14,000 as at June 30, 2017.

    Required:

    1. Prepare the closing entries.

    2. Prepare a classified balance sheet.

    3. Prepare a post-closing trial balance.

    PROBLEM 4–4 (LO2) Challenge Question – Closing Entries and Financial Statements

    Below is the unadjusted trial balance with accounts in alphabetical order for Jennette Ltd. All accounts have normal balances.

    Jennette Ltd.
    Unadjusted Trial Balance
    At September 30, 2016
    Accounts payable $ 39,983
    Accounts receivable 321,468
    Accrued salaries payable 21,909
    Accumulated depreciation, building 9,632
    Accumulated depreciation, vehicle 602
    Advertising expense 12,191
    Building 312,610
    Cash 262,773
    Cash dividends 15,050
    Copyright 21,500
    Depreciation expense 7,164
    Income tax expense 13,545
    Income taxes payable 13,545
    Insurance expense 11,137
    Interest expense 452
    Interest payable 4,730
    Mortgage payable, due 2019 90,300
    Office supplies 5,418
    Prepaid insurance expense 8,498
    Rent expense 67,725
    Repairs expense 23,478
    Retained earnings 737,575
    Revenue 290,250
    Salaries expense 155,517
    Share capital 4,515
    Shop supplies expense 2,259
    Unearned revenue 112,875
    Utilities expense 39,981
    Vehicle 45,150

    Additional information:

    Adjustments not yet recorded are:

    1. Revenue earned but not yet billed is $20,000.

    2. Depreciation expense for the vehicle is $3,000.

    3. The building's estimated residual value is $100,000 and its estimated useful life is 25 years.

    4. Salaries not yet paid are $2,500.

    5. Revenue that was paid in cash as an advance of $50,000 is now earned.

    6. Rent for October 2016 of $5,150 was paid and recorded to rent expense.

    7. One-half of the prepaid insurance is has now been used.

    Mortgage payments for the next fiscal year will total $36,000, which includes interest expense of $6,000.

    Required:

    1. Update all the account balances with appropriate adjusting entries based on the six missing adjustments above. (Hint: Use a trial balance format with adjusting entry columns.)

    2. Prepare an adjusted trial balance.

    3. Prepare a classified balance sheet.