Question

"Problem 1-5 Micado Corporation was formed on January 1, 2017. At December 31, 2017, Miko Liu, the president and sole stockholder, decided to prepare a balance sheet, which appeared as follows. Micado Corporation Balance Sheet December 31, 2017 Liabilities and Stockholders 9.20.000 Actie 530. 35.000 S uity Miko willingly admits that she is not an accountant by training. She is concerned that her balance sheet might not be correct. She has provided you with the following additional information. 1. The boat actually belongs to Miko, not to Micado Corporation. However, because she thinks she might take customers out on the boat occasionally, she decided to list it as an asset of the company. To be consistent, she also listed as a liability of the corporation her personal loan that she took out at the bank to buy the boat. 2. The inventory was originally purchased for $25,000, but due to a surge in demand Miko now thinks she could sell it for $36,000. She thought it would be best to record it at $36,000. Included in the accounts receivable balance is $10,000 that Miko loaned to her brother 5 years ago. Miko included this in the receivables of Micado Corporation so she wouldn't forget that her brother owes her money. (b) Provide a corrected balance sheet for Micado Corporation. (Hint: To get the balance sheet to balance, adjust stockholders' equity.) (List assets in order of liquidity.) Micado Corporation Balance Sheet Assets Liabilities and Stockholders' Equity Question An d

Answer 1

Solution: Note-1: Boat and Boat Loan: The Boat is actually related to the owner, Miko Liu, not to Micado Crporation (Business). It will not be recorded as an Asset of the business. Because the Boat is not in the ownership of Micado Corporation, it is in the ownership of the owner. So the Boat of $24,000 will be unlisted from the assets. Now the Boat Loan represents the personal loan taken by the ownerfor purchase of Boat. It is a personal loan not a business loan. So this loan should not be recorded anywhere in the books of accounts of the business (Micado Corporation). So the Boat Loan of $22,000 will be unlisted from the Liabilities. As we know that Total Assets = Stockholder's Equity + Liabilities. So the treatment of Boat and Boat Loan will be as follows: Assets = Stockholder's Equity + Liabilities $24,000 = $2,000 + $ 22,000 In this case we have to reduce $2,000 from the Stockholder's Equity. And Boat $24,000 will be unlisted and Boat Loan $22,000 will be unlisted.

Note-2: Inventory: Inventory's original purchase price was $25,000. And it is shown in Balance Sheet as $36,000, which is market price of that inventory. According to Prudence, "Inventory is valued at Cost or Market Price, whichever is lower." Thus we have to reduced Inventory by $11,000 (36,000 - 25,000). So inventory will be shown at $25,000. And Stockholder's Equity should be reduced by $11,000 to give double effect correctly. Stockholder's Equity is overstated by $11,000 because of overvaluation of Inventory, so it will be decreased. Note-3: Accounts Receivable: Accounts Receivable includes $10,000 that ownerloaned to her brother. It is a personal transaction and not a business transaction, so it will be reduced from Accounts Receivable. Accounts Receivable will be shown at $40,000 (50,000 - 10,000). And Stockholder's Equity should be reduced by $10,000. Because stockholder's Equity overstated by $10,000, so it will be reduced.

of Calculation of Stockholder's Equity after adjustments: Stock Holder's Equity before adjustment $63,000 Note-1 Less: Adjustment of Boat and Boat Loan (2,000) Note-2 Less: Inventory overvalued (11,000) Note-3 Less: Adjustment of Accounts Receivable (10,000) Stockholder's Equity after adjustments | 40,000

Corrected Balance Sheet of Micado Corporation: Micado Corporation Balance Sheet 31-Dec-17 Assets Cash $20,000 Accounts Receivable 40,000 Inventory 25,000 Total $85,000 Liabilities and Stockholder's Equity Liabilities Accounts Payable $30,000 Notes Payable 15,000 Total Liabilities $45,000 Stockholder's Equity 40,000 Total Liabilites and Stockholder's Equity $85,000