Question

Cone Corporation is in the process of preparing its December 31, 2021, balance sheet. There are some questions as to the proper classification of the following items: $51,000 in cash restricted in a savings account to pay bonds payable. The bonds mature in 2025. Prepaid rent of $25,000, covering the period January 1, 2022, through December 31, 2023. Notes payable of $202,000. The notes are payable in annual installments of $21,000 each, with the first installment payable on March 1, 2022. Accrued interest payable of $13,000 related to the notes payable. Investment in equity securities of other corporations, $82,000. Cone intends to sell one-half of the securities in 2022. Required: Prepare the asset and liability sections of a classified balance sheet to show how each of the above items should be reported.

balance sheet

Answer 1

This question require us to prepare balance sheet along with proper classification of each item. Classification of each item along with proper explanation are as follows:

1. $ 51,000 in cash restricted in a savings account to pay bonds payable- This is a part of current assets in balance sheet. current assets can be defined as the assets which can be feasibly turned into cash in the space of a year. This is cash available for use immediately inspite of the fact that company reserve this cash in a savings account to pay bonds payable

2. Prepaid Rent of $ 25,000- This is a part of current assets. prepaid expenses are expenditures paid in one accounting period, but will not be recognized until a later accounting period. Prepaid expenses are initially recorded as assets, because they have future economic benefits, and are expensed at the time when the benefits are realized (the matching principle).

3. Notes Payable $ 2,02,000- It will be classified as long term liabilities or non- current liabilities. However, some portion of the notes payable within 12 months should be classified as current maturities of long term debt. The term current maturities of long-term debt refers to the portion of a company's liabilities that are coming due in the next 12 months. So in this case amount payable in next 12 months is $ 21,000 , out of which accrued interest payable on notes is $ 13,000. So principal payment comes out to $ 8,000 ($ 21,000-13,000) which needs to be classified as current maturities of long term debt. Non current liabilities comes out to $ 1,94,000 ($ 2,02,000-8,000)

4. Investment in equity securities of other corporations $ 82,000- Generally for the purpose of classification in the balance sheet investments are of two types Long term and short term. Investments are classified as current assets if the company intends to sell within a year. Long-term investments are assets the company intends to hold for more than a year. In the given question it is stated that company intends to liquidate its one half of the investment in securities in the year 2022. So, half of the investment i.e. $ 41,000 to be classified as long term investment and balance $ 41,000 to be classified as current investment in current assets.

After classification of each item, as discussed above, here is the balance sheet:

Liabilities	Amount (in $)	Assets	Amount (in $)
Equity		Fixed Assets
Non-Current Liabilities		Investments
Notes Payable	8,000	Investment in equity instruments	41,000
		Current Assets
Current Liabilities		Cash	51,000
Current Maturities of Long term Debt	1,94,000	Prepaid Rent	25,000
		Current Investment in equity instruments	41,000