Concept explainers
Exercise 1-38 Identifying Current Assets and Liabilities
Dunn Sporting Goods sells athletic clothing and footwear 10 retail customers. Dunn’s accountant indicates that the firm’s operating cycle averages 6 months. At December 31, 2019, Dunn has the following assets and liabilities:
- Prepaid rent in the amount of 58,500. Dunn’s rent is $500 per month.
- A $9,700 account payable due in 45 days.
- Inventory in the amount of $46,230. Dunn expects to sell $38,000 of the inventory within 3 months. The remainder will be placed in storage until September 2020. The items placed in storage should be sold by November 2020.
- An investment in marketable securities in the amount of $1,900. Dunn expects to sell $700 of the marketable securities in 6 months. The remainder are not expected to be sold until 2022.
- Cash in the amount of $1,050.
- An equipment loan in the amount of $60,000 due in March 2024. Interest of $4,500 is due in March 2020 ($3,750 of the interest relates to 2019. with the remainder relating to the first 3 months of 2020).
- An account receivable from a local university in the amount of $2,850. The university has promised to pay the full amount in 3 months.
- Store equipment at a cost of $9,200.
Accumulated depreciation has been recorded on the store equipment in the amount of 51,250.
Required:
- Prepare the current asset and current liability portions of Dunn’s December 31, 20191 balance-sheet.
- Compute Dunn’s
working capital andcurrent ratio at December 31, 2019. - CONCEPTUAL CONNECTION As in investor or creditor. what do these ratios tell you about Dunn’s liquidity?
Concept Introduction:
Balance Sheet: The Balance sheet is a summary of Assets, Liabilities and equity accounts that reports the financial position of the business as on a specific date. Assets are further classifies into Current Assets, Long Term Investments, Plant Assets and Intangible assets. And Liabilities are further classified into Current Liabilities and Long term liabilities.
Income Statement:
Income Statement is the part of the financial statement which is prepared to calculate the net income earned by the organization. In the income statement, all expenses are subtracted from the revenues to calculate the net income. It is prepared for a particular period.
Requirement-1:
To Prepare:
The Current assets and Current Liabilities section of the balance sheet.
Answer to Problem 38E
The Current assets and Current Liabilities section of the balance sheet is as follows:
Dunn Sporting Goods | ||
Current Assets: | ||
Cash | $ 1,050 | |
Prepaid Rent | $ 8,500 | |
Accounts Receivable | $ 2,850 | |
Marketable securities | $ 700 | |
Inventory | $ 38,000 | |
Total Current Assets | $ 51,100 | |
Current Liabilities: | ||
Account Payable | $ 9,700 | |
Interest Payable | $ 3,750 | |
Total Current Liabilities | $ 13,450 |
Explanation of Solution
Balance sheet is a summary of Assets, Liabilities and equity accounts that reports the financial position of the business as on a specific date. Assets are further classifies into Current Assets, Long Term Investments, Plant Assets and Intangible assets. And Liabilities are further classified into Current Liabilities and Long term liabilities. The Current assets and Current Liabilities section of the balance sheet is prepared as follows:
Dunn Sporting Goods | ||
Current Assets: | ||
Cash | $ 1,050 | |
Prepaid Rent | $ 8,500 | |
Accounts Receivable | $ 2,850 | |
Marketable securities | $ 700 | |
Inventory | $ 38,000 | |
Total Current Assets | $ 51,100 | |
Current Liabilities: | ||
Account Payable | $ 9,700 | |
Interest Payable | $ 3,750 | |
Total Current Liabilities | $ 13,450 |
Concept Introduction:
Balance Sheet: The Balance sheet is a summary of Assets, Liabilities and equity accounts that reports the financial position of the business as on a specific date. Assets are further classifies into Current Assets, Long Term Investments, Plant Assets and Intangible assets. And Liabilities are further classified into Current Liabilities and Long term liabilities.
Income Statement:
Income Statement is the part of the financial statement which is prepared to calculate the net income earned by the organization. In the income statement, all expenses are subtracted from the revenues to calculate the net income. It is prepared for a particular period.
Requirement-2:
To Calculate:
The working capital and current ration as on Dec. 31, 2019.
Answer to Problem 38E
The working capital and current ration as on Dec. 31, 2019 is as follows:
Working Capital | $ 37,650 |
Current Ratio | 3.80 |
Explanation of Solution
The working capital and current ration as on Dec. 31, 2019 is calculated as follows:
Total Current Assets (A) | $ 51,100 |
Total Current Liabilities (B) | $ 13,450 |
Working Capital (A-B) | $ 37,650 |
Current Ratio (A/B) | 3.80 |
Concept Introduction:
Balance Sheet: The Balance sheet is a summary of Assets, Liabilities and equity accounts that reports the financial position of the business as on a specific date. Assets are further classifies into Current Assets, Long Term Investments, Plant Assets and Intangible assets. And Liabilities are further classified into Current Liabilities and Long term liabilities.
Income Statement:
Income Statement is the part of the financial statement which is prepared to calculate the net income earned by the organization. In the income statement, all expenses are subtracted from the revenues to calculate the net income. It is prepared for a particular period.
Requirement-3:
To Discuss:
The liquidity of the company.
Answer to Problem 38E
The firm is more liquid because its current ratio is higher than 2.
Explanation of Solution
The working capital and current ration as on Dec. 31, 2019 is calculated as follows:
Total Current Assets (A) | $ 51,100 |
Total Current Liabilities (B) | $ 13,450 |
Working Capital (A-B) | $ 37,650 |
Current Ratio (A/B) | 3.80 |
The firm is more liquid because its current ratio is higher than 2.
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Chapter 1 Solutions
Cornerstones of Financial Accounting
- Exercise 1-39 Current Assets and Current Liabilities Hanson Construction has an operating cycle of '5' months. On December 31. 2019, Hanson has the following assets and liabilities: A note receivable in the amount of $1500 10 be collected in 6 months Cash totaling $1,380 Accounts payable totaling $2,100, all of which will be paid within 2 months Accounts receivable totaling $12,000, including an account for $7,000 that will be paid in 2 months and an account for $5,000 that will be paid in 18 months Construction supplies coming $6,200, all of which will be used in construction within the next 12 months Construction equipment costing $60,000 on which depreciation of $22,400 has accumulated A note payable to the bank in the amount of $6,800 is to be paid within the next year Required: Calculate the amounts of current assets and current liabilities reported on Hansons balance sheet at December 31, 2019. CONCEPTUAL CONNECTION Comment on Hansons liquidity.arrow_forwardBrief Exercise 3-33 Preparing an Income Statement The adjusted trial balance of Pelton Company at December 31, 2019, includes the following accounts: Wages Expense, $22,400; Service Revenue. Rent Expense, $3,200; Dividends, $4,000; Retained Earnings, $12,200; and Prepaid Rent, $1,000. Required: Prepare a single-step income Statement for Pelton for 2019.arrow_forwardExercise 3-44 Revenue Expense and Recognition Carrico Advertising Inc. performs advertising services for several Fortune 500 companies. The following information describes Carricos activities during 2019. At the beginning of 2019, customers owed Carrico $45,800 for advertising services formed during 2018. During 2019, Carrico performed an additional $695,100 of advertising services on account. Carrico collected $708,700 cash from customers during 2019. At the beginning of 2019, Carrico had $13,350 of supplies on hand for which it owed suppliers SS, 150. During 2019, Carrico purchased an additional $14,600 of supplies on account. Carrico also paid $19,300 cash owed to suppliers for goods previously purchased on credit. Carrico had of supplies on hand at the end of 2019. Carricos 2019 operating and interest were $437 and $133,400, respectively. Required: Calculate Carricos 2019 income before taxes. Calculate the ending balance of receivable, the supplies used, and the ending balance of accounts payable. CONCEPTUAL CONNECTION Explain the underlying principles behind why the three accounts computed in Requirement 2 exist.arrow_forward
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