Question

(Preparation of Corrected Statement of Financial Position) Bruno Corp. has decided to expand its operations. The bookkeeper recently completed the following statement of financial position in order to obtain additional funds for expansion:

Bruno Corp.
Statement of Financial Position
For the Year Ended December 31, 2020
Current assets  
 Cash (net of bank overdraft of $30,000)  
$260,000
 Accounts receivable (net)  
340,000
 Inventory at the lower of cost and net realizable value  
401,000
 FV-NI investments (at cost—fair value $120,000)  
140,000
Property, plant, and equipment  
 Buildings (net)  
570,000
 Equipment (net)  
160,000
 Land held for future use  
175,000
Intangible assets  
 Goodwill  
$ 80,000
 Investment in bonds to collect cash flows, at amortized cost  
90,000
 Prepaid expenses  
12,000
Current liabilities  
 Accounts payable  
195,000
 Notes payable (due next year)  
125,000
 Pension obligation  
82,000
Rent payable  
49,000
Long-term liabilities  
 Bonds payable  
553,000
Shareholders' equity  
 Common shares, unlimited authorized, 290,000 issued  
290,000
 Contributed surplus  
180,000
 Retained earnings  
?
Instructions
a. Prepare a revised statement of financial position using the available information. Assume that the bank overdraft relates to a bank account held at a different bank from the account with the cash balance. Assume that the accumulated depreciation balance for the buildings is $160,000 and that the accumulated depreciation balance for the equipment is $105,000. The allowance for doubtful accounts has a balance of $17,000. The pension obligation is considered a long-term liability.

*b. What effect, if any, does the classification of the bank overdraft have on the working capital and current ratio of Bruno Corp.? What is the likely reason why the bank overdraft was given that particular classification?

Answer 1

b. The classification of bank overdraft has been done under current liability because it can not be offset against the positive cash balance. The working capital under both the cases will remain unchanged. However, this classification will have an impact on the current ratio in the following way:

Current ratio= Current assets / Current liabilities

Earlier, when bank overdraft was set off against the cash balance, the current ratio was calculated as follows:

Current asset= 1163 – 30= $1,133

Current liabilities= 399 – 30= $369

Current ratio= 3.07

Now, as the bank overdraft has been classified as current liability, the new current ratio is 2.91 (1163 / 399).

The bank overdraft was given such classification because it falls under a temporary overdraft position. It is an overdraft with one of the several banks accounts B corp. have with various banks.