Question

Exercise 3-8 (Algo) Balance sheet; current versus long-term classification [LO3-2, 3-3] 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: $55,000 in cash restricted in a savings account to pay bonds payable. The bonds mature in 2025. Prepaid rent of $29,000, covering the period January 1, 2022, through December 31, 2023. Notes payable of $210,000. The notes are payable in annual installments of $25,000 each, with the first installment payable on March 1, 2022. Accrued interest payable of $17,000 related to the notes payable. Investment in equity securities of other corporations, $90,000. 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.

Answer 1

The balance sheet classification involves dividing assets and liabilities into current and non-current categories, based on their liquidity and timing of use or payment. Restricted cash for bond repayment due beyond one year is non-current, prepaid rent and notes payable need to be apportioned by time.

Step-by-step explanation:

The student's question pertains to the classification of assets and liabilities on a balance sheet. To correctly classify these items, one must understand the distinction between current and long-term assets and liabilities.

The $55,000 in cash restricted to pay bonds payable which mature in 2025 would be classified as a non-current or long-term investment because it is not expected to be used within one year.

The prepaid rent of $29,000 covering the period from January 1, 2022, through December 31, 2023, is a bit trickier as it should be split into two parts: the amount covering the year 2022 is a current asset, while the amount covering 2023 would be a non-current asset.

The notes payable of $210,000 should also be divided into current and long-term portions. The $25,000 due on March 1, 2022, will be a current liability, while the remaining balance will be a long-term liability.

The accrued interest payable of $17,000 is a current liability as it is due within one year, and the investment in equity securities of $90,000 should be half classified as a current asset, with the other half being non-current, because Cone Corporation intends to sell one-half of these securities within one year.

Answer 2

Account of Current Assets , the criteria is to have a liquidity speed less of one year

Cash

Prepaid Rent - Half of the prepaid rent it's on Non-Current Assets because it cover part of year 2023.

Investment in Equity Sec - Half of the Investment it's on Current Assets because part will be sell on 2022.

Account of Non Current Assets , the criteria is to have a liquidity speed more than one year and are known as fixed assets

Investment in Equity Sec

Prepaid Rent

Account of Current Liabilities , the criteria is to have a liquidity speed less of one year

Interest Payable - Accrued interest to be paid corresponds to the note payable.

Note Payable - Correspond to the installments to be paid on March 2022.

Account of Non-Current Liabilities , the criteria is to have a liquidity speed more than of one year

Note Payable - The note payable with mature more than one year.

Bond Payable - Bonds to mature in 2025 with the reserve on cash.

Step-by-step explanation:

2021 Balance Sheet

$55,000 Cash

$14,500 Prepaid Rent

$45,000 Investment in Equity Sec

$114,500 TOTAL CURRENT ASSETS

$45,000 Investment in Equity Sec

$14,500 Prepaid Rent

$59,500 TOTAL NONCURRENT ASSETS

$174,000 TOTAL ASSETS

$17,000 Interest Payable

$25,000 Note Payable

$42,000 TOTAL CURRENT LIABILITIES

$185,000 Note Payable

$55,000 Bond Payable

$240,000 TOTAL NONCURRENT LIABILITIES

$282,000 TOTAL LIABILITIES