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Stevens Company’s bookkeeper prepared the following balance sheet with items erroneously classified

You may use the attached spreadsheet to help you complete this activity, but you are not required to do so. You will find the spreadsheet by clicking on the green Excel icon in the upper left-hand corner of the activity.

Correction of Balance Sheet

On December 31, Year 7, Stevens Company’s bookkeeper prepared the following balance sheet with items erroneously classified.

Current Assets:  Current Liabilities: 
   Inventory$ 6,000    Accounts payable$ 9,900
   Accounts receivable5,900    Allowance for doubtful accounts800
   Cash2,300    Salaries payable1,500
   Treasury stock (at cost)3,300    Taxes payable2,500
Long-Term Investments:  Long-Term Liabilities: 
   Temporary investments in marketable securities3,200    Bonds payable (due Year 10)11,000
   Investment in held-to-maturity bonds10,000    Unearned rent (for 3 months)900
Property, Plant, and Equipment:  Shareholders’ Equity: 
   Land8,100    Retained earnings24,200
   Office supplies800    Accumulated depreciation on buildings and equipment9,200
   Buildings and equipment35,600    Additional paid-in capital on common stock10,400
Intangibles:     Common stock, $10 par12,000
   Patents (net)5,000   
   Prepaid insurance (for 6 months)1,200   
   Discount on bonds payable1,000   
Total Assets$82,400 Total Credits$82,400

Next Level You determine that the account balances listed on the balance sheet are correct but, in certain cases, incorrectly classified. Prepare a properly classified balance sheet for Stevens as of December 31, Year 7

Answer and Explanation

Stevens Company
Balance Sheet
December 31, Year 7

Assets
Current Assets:
Cash           2,300
Temporarty Investment in marketable securities           3,200
Accounts receivable          5,900
Less: Allowance for doubtful accounts        (8,000)           5,100
Inventory           6,000
Prepaid Items:
Insurance          1,200
Office Supplies              800           2,000
Total Current Assets         18,600
Long-term Investments:
Investment in held-to-maturity bonds         10,000
Property, Plant and Equipment
Land           8,100
Buildings and equipment        35,600
Less: Accumulated Depreciation        (9,200)         26,400
Total property, plant and equipment         34,500
Intangible Assets:
Patent (net)           5,000
Total Assets         68,100
Liabilities:
Current Liabilities:
Accounts payables           9,900
Salaries payable           1,500
Taxes payable           2,500
Unearned rent               900
Total Current liabilities         14,800
Long-term liabilities:
Bonds payable (due Year 10)         11,000
Less: Discount on bonds payable         (1,000)
Total long-term liabilities         10,000
Total liabilities         24,800
Shareholders’ Equity:
Contributed Capital
Common stock, $10 par         12,000
Additional paid-in capital on common stock         10,400
Total contributed capital         22,400
Retained earnings         24,200
Total contributed capital and retained earnings         46,600
Less: Treasury stock (at cost)         (3,300)
Total shareholder’s equity         43,300
Total liabilities and shareholders’ equity         68,100
Explanation:
  1. Current assets are cash and other assets that a company expects to convert into cash, sell, or consume within one year or the normal operating cycle, whichever is longer. An operating cycle is the average length of time taken by a company to spend cash to purchase or produce inventory, sell the inventory, and collect the receivables, converting them back into cash. Companies commonly report the following types of current assets:
  2. Cash and Cash Equivalents
  3. Short-Term Investments
  4. Receivables
  5. Inventories
  6. Other Current Assets: Prepaid items such as insurance, rent, office supplies, and taxes will not be converted into cash but will be consumed.
  7. Long-term investments include:
  8. investments in available-for-sale debt and equity securities that the company does not intend to convert into cash within one year or the operating cycle
  9. investments in debt securities (e.g., bonds) expected to be held to maturity when maturity is beyond one year
  10. investments in affiliated companies notes receivable, advances to customers or suppliers, and other financial instruments that are noncurrent
  11. property being held for investment purposes (such as a building held for rental activities rather than operating activities) or future operations (such as land being held for a future building site)
  12. special funds established to retire bonds payable or preferred stock (often called sinking funds) or to acquire future facilities
  13. miscellaneous long-term investments (such as the cash surrender value of life insurance policies)
  14. The property, plant, and equipment section of a company’s balance sheet includes the long-lived tangible assets used in its operations. Often these are called fixed assets because of their relative permanency in the company’s operations. Long-lived assets that have a physical existence, such as land, buildings, equipment, machinery, furniture, and natural resources are listed in this category. Property, plant, and equipment held under certain long-term lease contracts also are included in this section. In addition, companies that have made substantial improvements to assets held under lease will also report leasehold improvements in this category. Finally, companies that are building new productive facilities will report the costs incurred to date as construction in progress.
  15. Intangible assets are noncurrent economic resources that have no physical or financial nature. They generally derive their value from the legal, intellectual, and intangible benefits they convey to the company. Companies may acquire intangibles by purchasing them from an external third party and by developing them internally through research and development, marketing and advertising, training of executives and personnel, developing production processes, and similar activities. Intangible resources are normally recognized as assets only when they have been acquired by a company in an external transaction. The following three categories of intangible assets that have been acquired in external market transactions are commonly recognized on balance sheets:
  16. Intangible Assets with Finite Useful Lives
  17. Intangible Assets with Indefinite Lives
  18. Goodwill
  19. Other assets include miscellaneous assets that do not fit in one of the other categories. Examples of items that are sometimes classified in this section include long-term prepayments (such as for rent, insurance, or licenses), deferred tax assets (net), assets of a component of the company that is being discontinued, advances to officers, security deposits paid by the company, and assets temporarily restricted by foreign countries.
  20. Current liabilities are obligations that the company expects to settle or satisfy within one year or the normal operating cycle, whichever is longer. Companies commonly report the following types of current liabilities:
  21. Payables and accrued expenses
  22. Deferred revenues
  23. Short term debt
  24. Long-term liabilities (noncurrent liabilities) are obligations that a company does not expect to settle within one year or the normal operating cycle (whichever is longer). Companies commonly report three types of long-term liabilities:
  25. Long-Term Accruals
  26. Long-Term Financing Instruments
  27. Other Liabilities
  28. Shareholders’ equity most commonly consists of two components: contributed capital and earned capital. A third component can arise when equity capital is invested by noncontrolling interests.
  29. Contributed capital is recognized when a shareholder acquires shares directly from the corporation rather than when the investor purchases shares on the stock market or from another investor. Accounting for contributed capital can involve as many as four (and sometimes more) components:
  30. common stock
  31. additional paid-in capital
  32. treasury stock
  33. preferred stock
  34. Earned capital always consists of Retained earnings and, for some companies, accumulated other comprehensive income. A negative (debit) Retained earnings balance (due to cumulative net losses and/or dividends exceeding cumulative net income), called a deficit, is subtracted in shareholders’ equity.
  35. Accumulated other comprehensive income (loss), is the cumulative amount of other comprehensive income (or loss) items. Comprehensive income includes both net income and other comprehensive income items. Other comprehensive income items for a given period may include:
  36. unrealized fair value gains or losses on investments in available-for-sale securities
  37. translation adjustments from converting the financial statements of a company’s foreign operations into U.S. dollars
  38. certain gains and losses on derivative financial instruments designated as cash flow hedges
  39. certain pension plan gains, losses, and prior service cost adjustments

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