P 3-6 The following is the balance sheet of McDonald Company: McDONALD COMPANY D

Question

P 3-6 The following is the balance sheet of McDonald Company: McDONALD COMPANY December 31, 2012 Assets Current assets: Cash (including $10,000 restricted for payment of note) $ 40,000 Marketable equity securities 20,000 Accounts receivable, less allowance for doubtful accounts of $12,000 70,000 Inventory 60,000 Total current assets $190,000 Plant assets: Land $ 40,000 Buildings, net 100,000 Equipment $80,000 Less: Accumulated depreciation 20,000 60,000 Patent 20,000 Organizational costs 15,000 235,000 Other assets: Prepaid insurance 5,000 Total assets $430,000 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 60,000 Wages payable 10,000 Notes payable, due July 1, 2014 20,000 Bonds payable, due December 2018 100,000 Total current liabilities $190,000 Dividends payable 4,000 Deferred tax liability, long term 30,000 Stockholders’ equity: Common stock ($10 par, 10,000 shares authorized, 5,000 shares outstanding) $ 50,000 Retained earnings 156,000 Total stockholders’ equity 206,000 Total liabilities and stockholders’ equity $430,000 Required Indicate your criticisms of the balance sheet and briefly explain the proper treatment of any item criticized.

Explanation / Answer

Assets:

1. Cash and cash equivalent should not include restricted cash as it inflates the free cash amount. Restricted cash being vaialable only for a specific purpose is not freely available

2. Prepaid insurance is a current asset and in this case it is traeted as non current asset.

Liabilities

1. Both notes payable and bonds pable are due after more than one year and are being treated as current liabilities, however, these should be part of non current liabilities

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