Practice As You Learn

Know the definitions of the common assets, liabilities, and owner’s equity accounts and understand what each represents.

You will be required to classify items that go on the balance sheet

Determine if it is current or non-current
Determine what section of the balance sheet the item is reported

You will be required to prepare the balance sheet in the proper format and order of liquidity. Memorize the format of the classified balance sheet:

Assets: Liabilities:
Current: Current:
Cash Accounts Payable
Accounts Receivable Accrued Expenses (Liabilities)
Inventory Unearned Revenues
Prepaid Expenses “_______” Payables
Short-term Investments Income Taxes Payable
Short-term Notes Receivable Short-term Notes Payable
Supplies Current Portion of Long-term Debt
Total Current Assets Total Current Liabilities

Long-term Investments Bonds Payable
Long-term Notes Receivable Long-term Debt
Long term Notes Payable
Total Liabilities
Property/Plant/Equipment (P/P/E):
Land
Building
Equipment
Less Accumulated Depreciation
Net P/P/E Stockholder’s Equity:

Intangible Assets Common Stock
Goodwill Additional Paid in Capital
Patents, net Retained Earnings
Trademarks, net less Treasury Stock
Copyrights, net
Total Intangible Assets Total Stockholder’s Equity

Other Assets

Total Assets = Total Liabilities & Stockholder’s Equity

Balance Sheet – Practice Problem 1 – Classification of accounts

For each of the following accounts, indicate where the account is reported on the balance sheet.

CA-Current asset
LTA-Long term asset
SE-Stockholder’s Equity
CL-Current liability
LTL-Long term liability
N-Not reported

______1. retained earnings
______2. supplies
______3. land
______4. trademarks
______5. cash
______6. accounts receivable
______7. unearned revenue
______8. accrued expenses
______9. prepaid expenses
_____10. contributed capital
_____11. long term debt due in less than 1 year
_____12. salaries payable
_____13. accumulated depreciation
_____14. inventory
_____15. depreciation expense
_____16. bonds payable
_____17. notes payable due in 5 years
_____18. notes receivable due in 6 months
_____19. investments to be sold in 3 months
_____20. amount paid above net assets when purchasing a company

Answer

Practice Problem 1

SE 1. retained earnings
CA 2. supplies
LTA   3. land      (PPE)
LTA 4. trademarks     Intangible
CA 5. cash
CA 6. accounts receivable
CL 7. unearned revenue    (customer paid in advance, you owe them)
CL 8. accrued expenses    (expenses not yet paid so you owe them)
CA      9. prepaid expenses     (expenses paid ahead of time, gives you future benefit)
SE 10. contributed capital (also called common stock)
CL 11. Long term debt due in less than 1 year (current maturity of LT D)
CL 12. salaries payable
LTA 13. accumulated depreciation     (contra-asset reported with P/P/E)
CA      14. inventory
N         15. depreciation expense    (goes on the income statement)
LTL     16. bonds payable         (assume long term unless it is specified less 1 year)
LTL     17. notes payable due in 5 years
CA 18. notes receivable due in 6 months
CA 19. investments to be sold in 3 months
LTA     20. amount paid above net assets when purchasing a company (Goodwill)

Balance Sheet – Practice Problem 2 – Prepare a balance sheet

The following items were taken from the records of a company as of December 31st.

Accounts Payable	47,000	Long-term Notes Receivable	35,000
Accounts Receivable	22,000	Patent,net	6,000
Building	215,000	Accrued Expenses	9,000
Cash	15,000	Short-term Notes Payable	135,000
Equipment	76,000	Common Stock	1,000
Retained Earnings	??	Bonds Payable	75,000
Prepaid Expenses	12,000	Accumulated depreciation	92,000
Sales	123,000	Dividends paid	30,000
Depreciation Expense	18,000	Unearned Revenue	8,000
Cost of Goods Sold	75,000	Goodwill	28,000
Long term Investments	100,000	Treasury Stock	25,000
Inventory	79,000	Short Term Investments	50,000
Interest Payable	1,000	Long Term Debt	150,000

Prepare a balance sheet in proper format for the company as of December 31st

Answer

1st – Outline the balance sheet, putting all the major classifications and required subtotals in the correct place:

Current Assets Current Liabilities

Total Current Assets Total Current Liabilities

P/P/E:
– A/D
Net P/P/E Total Liabilities

Intangibles Stockholder’s (Owner’s) Equity:

Total Intangibles Total Owner’s Equity

Total Assets = Total Liabilities and Owner’s Equity

2nd Write the accounts in the categories they belong. Add the amounts and total.

Assets:			Liabilities:

Current Assets:			Current Liabilities:

Cash	15,000		Accounts Payable	47,000
Accounts Receivable	22,000		Accrued Expenses	9,000
Inventory	79,000		Unearned Revenues	8,000
Prepaid Expenses	12,000		Interest Payable	1,000
Short-term Investments	50,000		Short-term Notes Payables	135,000
Total Current Assets	178,000		Total Current Liabilities	200,000

Long-term Investments	100,000		Bonds Payable	75,000
Long-term Notes Rec	35,000		Long-term Debt	150,000
			Total Liabilities	425,000

Property/Plant Equipment:
Building	215,000
Equipment	76,000
Less Accum Depreciation	(92,000)
Net P/P/E	199,000		Stockholder’s Equity:

Intangible Assets			Common Stock	1,000
Goodwill	28,000		Retained Earnings	145,000
Patents, net	6,000		less Treasury Stock	(25,000)
Total Intangible Assets	34,000		Total Stockholder’s Equity	121,000

	_________			__________
Total Assets	546,000	=	Total Liabilities &
			Stockholder’s Equity	546,000

To get the amount for retained earnings:

Total assets have to equal total liabilities plus total owners equity. When you know the amount of total assets you can determine total stockholders equity by total assets less total liabilities (546 – 425 = 121). Once you know total stockholders equity you can determine the amount of retained earnings required to get the total stockholder’s equity to be what it has to be.

Make sure you show subtotals and totals.

Revenues, expenses, gains, and losses are not reported on the balance sheet.

Dividends paid are not reported on the balance sheet. They are included in the retained earnings amount, do not show it separately.

Depreciation expense is not the same thing as accumulated depreciation.

Depreciation expense is for this period only and goes on the income statement.

Accumulated depreciation is the total of all prior years and goes on the balance sheet

Balance Sheet