Question

For each item, state where it is to be shown in the statement

1.

Fixed assets that had cost $20,000 6½ years before and were being depreciated on a 10-year basis, with no estimated scrap value, were sold for $4,750.

2.		During the year, goodwill of $15,000 was considered impaired and was completely written off to expense.

3.		During the year, 500 shares of common stock with a stated value of $25 a share were issued for $32 a share.

4.		The company sustained a net loss for the year of $2,100. Depreciation amounted to $2,000 and patent amortization was $400.

5.		Uncollectible accounts receivable in the amount of $2,000 were written off against Allowance for Doubtful Accounts.

6.		Debt investments (available-for-sale) that cost $12,000 when purchased 4 years earlier were sold for $10,600.

7.		Bonds payable with a par value of $24,000 on which there was an unamortized bond premium of $2,000 were redeemed at 101.

Answer 1

As per accounting standards the answers are as follows:-

1. Loss on sale of Fixed Asset :

In the given case WDV (written down value) of the fixed assets at the end of 6 and a half year will be $7,000. The FA is sold for $ 4,750. Therefore, it is sold at a loss of $2,250.
The loss on sale of FA is debited to PnL a/c and the amount of FA show in Balance Sheet will be reduced by the carrying value of the asset sold.

2. Goodwill written off :

Goodwill being an intangable asset is always impared. It means that when an asset is carried more than its recoverable amount then the asset is called to be impiared and the entity has to recognise impairement loss. The imparement loss is generally recognised in PnL a/c and the value of Goodwill in the balance sheet is reduced by the amount of impairement loss reported in PnL. In the given case $ 15,000 will be charged to PnL and Goodwill in the balance sheet will be reduced by $15,000.

3. Premium on issue of shares :

Premium on issue of shares means when the shares are issued at a price more the par value of the shares. The diffrence between the issue price and par value is the share premium. It is never a profit and will be credited to PnL. Premium on issue of shares is shown up in shareholder's equity portion of balance sheet. In the given case shares are issued at a premium of $7 per share [32-25]. Therefore, the amount of $3,500 [500*7] will be shown in shareholder's equity fund as Securities Premium reserve a/c under the head Reserves and Surplus.

4. Non Cash Expense :

Non cash expenses refers to those expenses which does not lead to a cash outflow like depeciation, amortisation etc. These expenses are added back while preparing cash flow statement. It is added back in net income while calculating cash from operating activities.
Therefore in the ginven case $2,400 will be added back and hence net profit of $300 will shown as cash from operating activities.

5. Writing off bad debts :

Bad debts written off against allowance for doubtful account nowhere impacts the PnL. There is only a reduction of the accounts receivable and allowance for doubtful accounts line items in the balance sheet (which offset each other). In the given case accounts receivable will be reduced by $2,000 by issuing a credit memo to the debtor. And allowance for doubtful assets account will be credited and bad debts expense a/c will be debited.

6. Loss on sale of Investment :

The loss on sale of investments held for sale will be treated as impairment loss and charged to PnL as per accounting standard. In the given case loss of $1,400 incurred due to sale of investment at a lower price will be charged to PnL and the Investments held for sale in Balance sheet will be reduced by the carrying amount.