Q16Q - Intermediate Accounting (Kieso)

Question

Where should the following items be shown on the balance sheet, if shown at all? 

(a) Allowance for doubtful accounts. 

(b) Merchandise held on consignment. 

(c) Advances received on sales contract. 

(d) Cash surrender value of life insurance. 

(e) Land. 

(f) Merchandise out on consignment. 

(g) Franchises. 

(h) Accumulated depreciation of equipment. 

(i) Materials in transit—purchased f.o.b. destination.

Step-by-Step Solution

Answer

Item	Balance Sheet Section
Allowance for doubtful accounts	Asset section
Merchandise held on consignment.	Not reported on the balance sheet
Advance received on sales contract.	Liability section
Cash surrender value of life insurance	Asset section
Land	Asset Section
Merchandise out on consignment	Asset Section
Franchise	Asset section
Accumulated depreciation of equipment	Asset section
Material in transit – purchased f.o.b destination.	Not reported on the balance sheet

Definition of Consignment

Consignment can be defined as an arrangement under which the business entity gives possession of goods to any other authorized third party for sale. The third party is provided with the commission based on sales made.

Representation in the balance sheet

1. Allowance for doubtful accounts is reported on the asset side of the balance sheet and deducted from the accounts receivables.
2. Merchandise held on consignment is not reported on the balance sheet by the consignee. It might be written in the notes to the financial statement.
3. Advance received on the sales contract is reported on the liabilities side of the balance sheet as a current liability.
4. The land is reported as a fixed asset of the company on the asset side of the balance sheet.
5. Merchandise out on consignment is reported as inventory on the asset side until the consignee sells it.
6. A franchise is reported as an intangible asset on the asset side of the balance sheet.
7. Accumulated depreciation of equipment is reported on the asset side of the balance sheet and must be deducted from the equipment cost. It is a contra asset account.
8. The material in transit purchased on FOB destination is not reported in the buyer’s balance sheet until they arrive at the buyer’s place.