Chapter 5: Q2Q (page 237)
Question: What is meant by solvency? What information in the balance sheet can be used to assess a company’s solvency?
Answer
Solvency reflects the ability to repay the borrowed money. It can be determined using the liabilities and the assets classified as current in nature
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1. Which of the following statements about IFRS and GAAP accounting and reporting requirements for the balance sheet is not correct?
(a) Both IFRS and GAAP distinguish between current and non-current assets and liabilities.
(b) The presentation formats required by IFRS and GAAP for the balance sheet are similar.
(c) Both IFRS and GAAP require that comparative information be reported.
(d) One difference between the reporting requirements under IFRS and those of the GAAP balance sheet is that an IFRS balance sheet may list long-term assets first.
Grant Wood Corporation’s balance sheet at the end of 2016 included the following items.
Current assets (\(Cash 82,000) | \)235,000 | Current liabilities | \(150,000 |
Land | 30,000 | Bond payable | 100,000 |
Building | 120,000 | Common stock | 180,000 |
Equipment | 90,000 | Retained earnings | 44,000 |
Accumulated depreciation – Building | (30,000) | ||
Accumulated depreciation – Equipment | (11,000) | ||
Patents | 40,000 | ||
Total | \)474,000 | Total | \(474,000 |
The following information is available for 2017.
1. Net income was \)55,000.
2. Equipment (cost \(20,000 and accumulated depreciation \)8,000) was sold for \(10,000.
3. Depreciation expense was \)4,000 on the building and \(9,000 on equipment.
4. Patent amortization was \)2,500.
5. Current assets other than cash increased by \(29,000. Current liabilities increased by \)13,000.
6. An addition to the building was completed at a cost of \(27,000.
7. A long-term investment in stock was purchased for \)16,000.
8. Bonds payable of \(50,000 were issued.
9. Cash dividends of \)30,000 were declared and paid.
10. Treasury stock was purchased at a cost of $11,000.
Instructions
(Show only totals for current assets and current liabilities.)
(a) Prepare a statement of cash flows for 2017.
(b) Prepare a balance sheet at December 31, 2017.
A recent financial magazine indicated that the airline industry has poor financial flexibility. What is meant by financial flexibility, and why is it important?
What types of contractual obligations must be disclosed in great detail in the notes to the balance sheet? Why do you think these detailed provisions should be disclosed?
E5-10 (L02,3) (Current Liabilities) Norma Smith is the controller of Baylor Corporation and is responsible for the preparation of the year-end financial statements. The following transactions occurred during the year.
(a) On December 20, 2017, a former employee filed a legal action against Baylor for \(100,000 for wrongful dismissal. Management believes the action to be frivolous and without merit. The likelihood of payment to the employee is remote.
(b) Bonuses to key employees based on net income for 2017 are estimated to be \)150,000.
(c) On December 1, 2017, the company borrowed \(600,000 at 8% per year. Interest is paid quarterly.
(d) Accounts receivable at December 31, 2017, is \)10,000,000. An aging analysis indicates that Baylor’s expense provision for doubtful accounts is estimated to be 3% of the receivables balance.
(e) On December 15, 2017, the company declared a \(2.00 per share dividend on the 40,000 shares of common stock outstanding, to be paid on January 5, 2018.
(f) During the year, customer advances of \)160,000 were received; $50,000 of this amount was earned by December 31, 2017.
Instructions For each item above, indicate the dollar amount to be reported as a current liability. If a liability is not reported, explain why.
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