Question

3) Webb Corporation's trial balance for July 31, the end of its fiscal year, included the following accounts:

Accounts Receivable $35,000

Inventories 50,000 Franchise

35,000 Investments

50,000 Prepaid Insurance

5,000 Note Receivable 90,000

Cash in Bank 8,000

The investment account consists of marketable securities of which management plans to sell half of by December 31. Prepaid insurance is a two year policy that was purchased on July 31. The note receivable is an installment note that will be paid in three equal installments on December 31 of each year.

The amount that should be classified as current assets in the July 31 balance sheet is ________.

A) $150,500

B) $153,000

C) $175,500

D) $210,500

Answer 1

Ans: (A) 150,500$

Overview: Current assets include all the assets expected to be realised through the standard business cycle, i.e. can be converted to cash within one year from the date of Balance sheet.

Solution: The following is the calculation of current assets:

WN1: In case of prepaid insurance, not all prepaid insurance is to be treated as current asset, but only the part that pertains to prepaid insurance w.r.t 1 year from the date of balance sheet., i.e. 1/2 of 5000 = 2500

WN2: In case of notes receivable, not all notes receivable are to be treated as current asset, but only the part that pertains to notes recievable within 1 year from the date of balance sheet., i.e. 1/3rd of 90000 = 30,000

WN3: In case of Investments, not all Investments are to be treated as current asset, but only the part that is realisable within 1 year from the date of balance sheet., i.e. 1/2 of 50,000 = 25,000

Note: It is assumed that the date of Balance sheet is 31 July