Chapter 3, Problem 3.8P

Balance sheet; errors; missing amounts

• LO3–2, LO3–3

The following incomplete balance sheet for the Sanderson Manufacturing Company was prepared by the company’s controller. As accounting manager for Sanderson, you are attempting to reconstruct and revise the balance sheet.

Sanderson Manufacturing Company

Balance Sheet

At December 31, 2 018

($ in thousands)

Assets

Current assets:
Cash	$ 1,250
Accounts receivable	3,500
Allowance for uncollectible accounts	(400)
Finished goods inventory	6,000
Prepaid expenses	1,200
Total current assets	11,550
Long-term assets:
Investments	3,000
Raw materials and work in process inventory	2,250
Equipment	15,000
Accumulated depreciation—equipment	(4,200)
Patent	?
Total assets	$ ?

Liabilities and Shareholders’ Equity

Current liabilities:
Accounts payable		$ 5,200
Note payable		4,000
Interest payable—note		100
Deferred revenue		3,000
Total current liabilities		12,300
Long-term liabilities:
Bonds payable		5,500
Interest payable—bonds		200
Shareholders’ equity:
Common stock	$ ?
Retained earnings	?	?
Total liabilities and shareholders’ equity		?

Additional Information ($ in thousands):

1. Certain records that included the account balances for the patent and shareholders’ equity items were lost. However, the controller told you that a complete, preliminary balance sheet prepared before the records were lost showed a debt to equity ratio of 1.2. That is, total liabilities are 120% of total shareholders’ equity. Retained earnings at the beginning of the year was $4,000. Net income for 2018 was $1,560 and $560 in cash dividends were declared and paid to shareholders.

2. Management intends to sell the investments in the next six months.

3. Interest on both the note and the bonds is payable annually.

4. The note payable is due in annual installments of $1,000 each.

5. Deferred revenue will be recognized as revenue equally over the next two fiscal years.

6. The common stock represents 400,000 shares of no par stock authorized, 250,000 shares issued and outstanding.

Required:

Prepare a complete, corrected, classified balance sheet.

To determine

Balance sheet:

This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

To prepare: Complete, correct, classified balance sheet.

Explanation of Solution

Prepare the balance sheet of Company SM as on December 31, 2018.

Company SM
Balance sheet
At December 31, 2018
	Amount in $	Amount in $
Assets
Current assets:
Cash	1,250
Short term investments	3,000
Accounts receivables     (1)	3,100
Inventories      (2)	8,250
Prepaid expenses	1,200
Total current assets		16,800
Property, plant and equipment:
Equipment	15,000
less: accumulated depreciation	4,200
Net property, plant and equipment		10,800
Intangible assets
Patents (6)		5,400
Total assets		33,000
Liabilities and shareholders' equity
Current liabilities:
Accounts payable	5,200
Note payable      (3)	1,000
Interest payable - note	100
Deferred revenue      (4)	1,500
Interest payable - bonds	200
Total current liabilities		8,000
Long term liabilities
Bonds payable	5,500
Note payable      (3)	1,500
Deferred revenue      (4)	3,000
Total long term liabilities		10,000
Total liabilities		18,000
Shareholders' equity
Common stock, no par,250,000 shares issued and outstanding     (5)	10,000
Retained earnings   (5)	5,000
Total shareholders' equity		15,000
Total liabilities and shareholders' equity		33,000

Table (1)

Working notes:

1. 1. Compute accounts receivables balance at December 31, 2018

$\begin{array}{l}\left(\begin{array}{l}\text{Accounts receivables at}\\ \text{ December 31, 2018}\end{array}\right)=\left(\begin{array}{l}\text{Accounts receivable}-\text{Allowance for }\\ \text{ uncollectible accounts}\end{array}\right)\\ =\$3,500-\$400\\ =\$3,100\end{array}$

1. 2. Compute inventory balance at December 31, 2018

$\begin{array}{l}\left(\text{Inventory at December 31, 2018}\right)=\left(\begin{array}{l}\text{Finished}\text{goods}\text{+}\text{Raw}\text{material}\\ \text{and}\text{Work}\text{In}\text{Progress}\end{array}\right)\\ =\left(\$6,000+\$2,250\right)\\ =\$8,250\end{array}$

1. 3. Note payable at December is $4,000. The note payable is due in annual installments of $1,000 each. Thus, $1,000 is reported as a current liability and remaining $3,000 is reported as long term liability.
2. 4. Deferred revenue at December 31, 2018 is $3,000. It will be recognized as revenue equally over the next two fiscal years. Thus, $1,500 (half of the $3,000) is reported as current liability and remaining $1,500 reported as long term liability.
3. 5. Calculate common stock and retained earnings.

$\begin{array}{l}\text{Debt to equity ratio = 1}\text{.2}\\ \text{Liabilities }÷\text{ Equity = 1}\text{.2}\\ \text{\$18,000 }÷\text{ Equity =1}\text{.2}\\ \text{Equity = \$18,000 }÷\text{ 1}\text{.2 = \$15,000}\end{array}$

Therefore Equity is $15,000. It includes common stock and retained earnings

Compute retained earnings at December 31, 2018:

$\begin{array}{l}\left(\begin{array}{l}\text{Retained}\text{earnings}\text{at}\\ \text{December}\text{31,}\text{2018}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Retained}\text{earnings}\text{at}\text{December}\text{31,}\text{2017}\\ \text{+}\text{net}\text{income}\text{for}\text{2018}\text{-}\text{dividends}\text{paid}\end{array}\right)\\ =\$4,000+\$1,560-\$560\\ =\$5,000\end{array}$

Hence, retained earnings are $5,000.

Compute Common stock at December 31, 2018.

$\begin{array}{l}\text{Equity = Common stock + Retained earnings}\\ \text{\$15,000}\text{=}\text{Common stock + \$5,000}\\ \text{Common stock = \$15,000 - \$5,000}\\ \text{= \$10,000}\end{array}$

Hence, common stock is $10,000

1. 6. Calculate patents at December 31, 2018

$\begin{array}{l}\text{Assets}\text{=}\text{Equity}\text{+}\text{Liabilities}\\ \text{All}\text{other}\text{assets}\text{+}\text{Patents}\text{=}\text{Equity}\text{+}\text{Liabilities}\\ \$27,600+\text{Patents}=\$15,000+\$18,000\\ \text{Patents}=\$15,000+\$18,000-\$27,600\\ \text{Patents}=\$5,400\end{array}$

Hence, Patents are $5,400