Preparing a Balance Sheet; Discussion of Accounting Principles
Big Scripts is a service-type enterprise in the entertainment field, and its manager, William Pippin, has only a limited knowledge of accounting. Pippin prepared the following balance sheet, which, although arranged satisfactorily, contains certain errors with respect to such concepts as the business equity and the asset valuation. Pippin owns all of the corporation's outstanding stock.
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BIG SCREEN SCRIPTS
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Balance Sheet
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November 30, 2002
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Assets
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Liabilities & Owner's Equity
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Cash
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Rs. 5,150
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Liabilities:
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Notes Receivable
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2,700
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Notes Payable
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Rs. 67,000
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Accounts Receivable
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2,450
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Accounts Payable
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35,805
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Land
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70,000
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Total Liabilities
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Rs. 102,805
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Building
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54,320
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Owner's Equity:
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Office Furniture
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8,850
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Capital Stock
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5,000
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Other Assets
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22,400
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Retained Earnings
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58,065
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Total
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Rs. 165,870
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Total
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Rs.165,870
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In discussion with Pippin and by inspection of the accounting records, you discover the following facts:
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The amount of cash, Rs. 5,150, includes Rs. 3,400 in the company's bank account, Rs. 540 on hand in the company's safe, and Rs. 1,210 in Pippin's personal savings account.
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One of the notes receivable in the amount of Rs. 500 is an IOU that Pippin received in a poker game several years ago. The IOU is signed by "B.K.," whom Pippin met at the game but has not heard from since.
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Office furniture includes Rs. 2,900 for a Persian rug for the office purchased on November 20. The total cost of the rug was Rs. 9,400. The business paid Rs. 2,900 in cash and issued a note payable to Zoltan Carpet for the balance due (Rs. 6,500). As no payment on the note is due until January, this debt is not included in the liabilities above.
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Also included in the amount for office furniture is a computer that cost Rs. 2,525 but is not on hand because Pippin donated it to a local charity.
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The "Other Assets" of Rs. 22,400 represent the total amount of income taxes Pippin has paid the federal government over a period of years. Pippin believes the income tax law to be unconstitutional, and a friend who attends law school has promised to help Pippin recover the taxes paid as soon as he passes the bar exam.
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The asset "Land" was acquired at a cost of Rs. 39,000 but was increased to a valuation of Rs. 70,000 when a friend of Pippin offered to pay that much for it if Pippin would move the building off the lot.
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The accounts payable include business debts of Rs. 32,700 and the Rs. 3,105 balance owed on Pippin's personal MasterCard.
Instructions
a. Prepare a corrected balance sheet at November 30, 2005.
b. For each of the seven numbered items above, use a separate numbered paragraph to explain whether the treatment followed by Pippin is in accordance with generally accepted accounting principles.