CONCEPTS
FOR ANALYSIS
CA5-1 (Reporting the Financial Effects of Varied Transactions) In an examination of Arenes Corporation as of December 31, 2017, you have learned that the following situations exist. No entries have been made in the accounting records for these items.
1. The corporation erected its present factory building in 2001. Depreciation was calculated by the straight-line method, using an estimated life of 35 years. Early in 2017, the board of directors conducted a careful survey and estimated that the factory building had a remaining useful life of 25 years as of January 1, 2017.
2. An additional assessment of 2016 income taxes was levied and paid in 2017.
3. When calculating the accrual for officers’ salaries at December 31, 2017, it was discovered that the accrual for officers’ salaries for December 31, 2016, had been overstated.
4. On December 15, 2017, Arenes Corporation declared a cash dividend on its common stock outstanding, payable February 1, 2018, to the common stockholders of record December 31, 2017.
Instructions
Describe fully how each of the items above should be reported in the financial statements of Arenes Corporation for the year 2017.
CA5-2 (Identifying Balance Sheet Deficiencies) The assets of Fonzarelli Corporation are presented below (000s omitted).
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Instructions
Indicate the deficiencies, if any, in the foregoing presentation of Fonzarelli Corporation’s assets.
CA5-3 WRITING (Critique of Balance Sheet Format and Content) The following is the balance sheet of Sameed Brothers Corporation (000s omitted).
Instructions
Evaluate the balance sheet presented. State briefly the proper treatment of any item criticized.
CA5-4 ETHICS (Presentation of Property, Plant, and Equipment) Carol Keene, corporate comptroller for Dumaine
Industries, is trying to decide how to present “Property, plant, and equipment” in the balance sheet. She realizes that the statement of cash flows will show that the company made a significant investment in purchasing new equipment this year, but overall she knows the company’s plant assets are rather old. She feels that she can disclose one figure titled “Property, plant, and equipment, net of depreciation,” and the result will be a low figure. However, it will not disclose the age of the assets. If she chooses to show the cost less accumulated depreciation, the age of the assets will be apparent. She proposes the following.
Property, plant, and equipment, net of depreciation $10,000,000 rather than
Property, plant, and equipment $50,000,000
Less: Accumulated depreciation 40,000,000
Net book value $10,000,000
Instructions
Answer the following questions.
(a) What are the ethical issues involved?
(b) What should Keene do?
CA5-5 WRITING (Cash Flow Analysis) The partner in charge of the Kappeler Corporation audit comes by your desk and leaves a letter he has started to the CEO and a copy of the cash flow statement for the year ended December 31, 2017. Because he must leave on an emergency, he asks you to finish the letter by explaining: (1) the disparity between net income and cash flow, (2) the importance of operating cash flow, (3) the renewable source(s) of cash flow, and (4) possible suggestions to improve the cash position.
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Instructions
Complete the letter to the CEO, including the four components requested by your boss.
