1. The company uses control accounts for inventories and property, plant, and equipment and lists the latter at its book value

Listed here in random order are the balance sheet accounts and related ending balances of the Eubanks Company as of December 31, 2007:

.:.

Additional information:

1. The company uses control accounts for inventories and property, plant, and equipment and lists the latter at its book value.

2. The straight-line method is used to depreciate buildings, machinery, and equipment, based upon their cost and estimated residual values and lives. A breakdown of property, plant, and equipment shows the following: land at a cost of $32,000, buildings at a cost of $182,400 and a book value of $120,200, machinery at a cost of $63,900 and related accumulated depreciation of $18,600, and equipment (40% depreciated) at a cost of $53,000.

3. Patents are amortized on a straight-line basis directly to the patent account.

4. Inventories are listed at the lower of cost or market value using an average cost. The inventories include raw materials $22,200, work in process $34,700, and finished goods $41,600.

5. Common stock has a $10 par value per share, 12,000 shares are authorized, 6,280 shares have been issued.

6. Preferred stock has a $100 par value per share, 1,000 shares are authorized, 400 shares have been issued.

7. The investment in bonds is carried at the original cost, which is the face value, and is being held to maturity.

8. Temporary investments in marketable securities were purchased at year-end.

9. The bonds payable mature on December 31, 2012.

10. The company attaches a one-year warranty on all the products it sells.

Required

1. Prepare the December 31, 2007 balance sheet of the Eubanks Company (including appropriate parenthetical notations).

2. Prepare notes to accompany the balance sheet that itemize company accounting policies, inventories, and property, plant, and equipment.

3. Compute the current ratio. Which current assets would you classify as liquid and which as separable according to the FASB’s conceptual guidelines? Why might these classifications be useful?

SOLUTION

1. EUBANKS COMPANY

Balance Sheet

December 31, 2007

Assets

Current Assets

Cash $11,600

Temporary investments in marketable

securities (Note 1) 19,100

Accounts receivable $32,300

Less: Allowance for doubtful accounts (1,500) 30,800

Inventories (Notes 1 and 2) 98,500

Total current assets $160,000

Long-Term Investments

Investment in bonds (Note 1) $25,000

Land held for building site 19,500

Cash surrender value of life insurance 8,900

Total long-term investments 53,400

Property, plant, and equipment (net) (Notes 1 and 3) 229,300

Intangible Assets

Patents (net) (Note 1) 18,200

Total Assets $460,900

Liabilities

Current Liabilities

Accounts payable $58,000