Q2CA. - Intermediate Accounting (Kieso)

Question

(Identifying Balance Sheet Deficiencies) The assets of Fonzarelli Corporation are presented below (000s omitted).

FONZARELLI CORPORATION
BALANCE SHEET (PARTIAL)
DECEMBER 31, 2018
Assets
Cash		\(100,000
Unclaimed payroll check		27,500
Debt investment (trading) (fair value \)30,000) at cost		37,000
Accounts receivables (less bad debt reserves)		75,000
Inventory—at lower-of-cost (determined by the next-in, first-out method) or net realizable value		240,000
Total current assets		479,500
Tangible assets
Land (less accumulated depreciation)		80,000
Building and equipment	\(800,000
Less: Accumulated depreciation	(250,000)	550,000
Net tangible assets		630,000
Long-term investment
Stock and bonds		100,000
Treasury stock		70,000
Total long-term investment		170,000
Other assets
Discount on bonds payable		19,400
Sinking funds		975,000
Total other assets		994,400
Total assets		\)2,273,900

Instructions 

Indicate the deficiencies, if any, in the foregoing presentation of Fonzarelli Corporation’s assets.

Step-by-Step Solution

Answer

Incorrect represented items include:

1. Unclaimed payroll checks.

2. Debt investments.

3. Bad debt reserves.

4. Next in, first out.

5. Heading of tangible assets.

6. Treasury stock.

7. Discount on bonds payable.

8. Sinking funds

9. Land

10. Investment in Stock.

Balance Sheet

Every business entity prepares a financial statement at the end that includes balances of all the permanent accounts is known as a balance sheet. In general, it includes the resources and the obligations of the business entity.

Deficiencies in the Presentation of Balance Sheet

1. Unclaimed payroll checks are the company’s liability and must be reported under the current liabilities section.

2. Debt investments are recorded at cost. Instead, they must be recorded at their fair value.

3. Bad debt reserve is not the correct terminology. The business entity must report it as an allowance for doubtful accounts and must be reported separately and deduction from accounts receivable.

4. Next, the first-out method is not allowed for inventory valuation. Another method of inventory valuation must be adopted.

5. Heading tangible assets is not appropriate. The business entity must use property, plant, and equipment in the heading.

6. Treasury stock must be reported in the section of owner’s equity and must be shown as a deduction from the common stock.

7. Discounts on bonds payable must be reported on the liabilities side of the balance sheet and shown as a deduction from the amount of bonds payable.

8. Sinking funds must be reported as long-term investments or non-current assets rather than other assets.

9. Land is a resource that does not have a limited life, and therefore, it is not charged with depreciation. Therefore, no accumulated depreciation must be represented on the balance sheet.

10. Stock represented as a long-term investment must be represented separately from the investment in bonds. It is represented as a non-controlling interest in the equity section.