Balance Sheet Calculation quiz level 2

Trading securities are reported in the balance sheet at fair value. At the end of the year, the fair value of the securities was $980,000 ($435,000 + $545,000). The unrealized gains and losses from trading securities are recognized in the income statement. Thus, Ponca would recognize an unrealized gain of $30,000 ($980,000 fair value – $950,000 cost).

Under IFRS, research costs must be expensed . but development costs under certain circumstances may be capitalized.

Quick ratio = [100(cash) + 750(AR) + 300(marketable securities)] / [300(AP) + 130(shortterm debt)] = (1,150 / 430) = 2.67

The acquisition goodwill is equal to $1.8 million [$4 million purchase price – $2.2 million fair value of net assets acquired ($3.5 million assets at fair value – $1.3 million liabilities at fair value)]. Under IFRS or U.S. GAAP, goodwill is not amortized but is subject to an annual impairment test.

The trading securities classification includes the unrealized gain from the bond in net income, which increases retained earnings. Unrealized gains on available-for-sale securities are reported as other comprehensive income for the period and are recorded in accumulated other comprehensive income, a component of owner's equity. Unrealized gains on held-to-maturity securities are not reported on the financial statements .

Purchase price of $7,500,000 [$15 per share × 500,000 shares] – fair value of net assets of $7,000,000 [$6,000,000 book value + $1,000,000 increase in property and equipment] = goodwill of $500,000.

Liabilities are equal to $3,790 million ($240 million unearned revenue + $1,570 long term debt + $1,150 accounts payable + $830 accrued expenses).

Stockholders' equity is equal to $3,420 million ($30 common stock at par + $440 capital in excess of par – $2,000 treasury stock + $5,160 retained earnings – $210 accumulated other comprehensive loss).

Common-size balance sheets express each balance sheet item as a percentage of total assets. Contributed capital from issuing common shares may be included in common stock (at par value) or additional paid-in capital (for proceeds in excess of par value). Shareholders' equity is unlikely to consist only of common and preferred stock, as it also includes components such as retained earnings and accumulated other comprehensive income.

If equity = 40 % of assets, total liabilities = 60 % of assets, thus  60 / 40 = 1.5 .

Common-size balance sheets for the two firms are as follows :

Working capital (current assets minus current liabilities) is 32.4% – 6.5% = 25.9% of assets for Amplus and 26.1% – 5.7% = 20.4% of assets for Brevis. Fixed assets (property, plant, and equipment) are relatively larger for Brevis than for Amplus. Based on long-term borrowing and total liabilities, Brevis is significantly more leveraged than Amplus.

Unrealized gains and losses from trading securities are recognized in the income statement while unrealized gains and losses from available-for-sale securities bypass the income statement and are reported as other comprehensive income, a component of stockholders' equity. Cash dividends are recognized in the income statement for both trading and available-for-sale securities. Thus, Alpha will recognize only the $2,000 dividend if the shares are considered available-for-sale and will recognize $22,000 ($2,000 dividend + $20,000 unrealized gain) if the shares are considered trading securities.

Debt securities acquired with the intent to sell before maturity are reported on the balance sheet at their fair values.

Current ratio = (CA / CL) = (1,660 / 550) = 3.018

Total stockholders’ equity consists of common stock of $550,000, preferred stock of $175,000, retained earnings of $893,000, and accumulated other comprehensive income of $46,000, for a total of $1,664,000. The $30,000 unrealized gain from the investment in Beta is already included in accumulated other comprehensive income.

The customer list is the only identifiable intangible asset, and it should be amortized on a straight-line basis over its expected future life:

$100,000/4 = $25,000/year.

Goodwill is an unidentifiable intangible and should be tested for impairment but not amortized. All advertising and promotion costs, such as the media placements, are typically expensed. If the reputation of the company has been enhanced as the CEO suggests, it is an internally generated intangible that is not recorded on the balance sheet and is thus not amortized.

($85,000) is incorrect. It includes the $300,000 of donation amortized over 5 years (300,000/5 = 60,000) added to the customer list amortization: 25,000 + 60,000 = 85,000.

($45,000) is incorrect. It amortizes the goodwill over 10 years and adds it to the $25,000 amortization of the customer list: $200,000/10 + $100,000/4 = $45,000.