identical assets or liabilities. Level 2 measures (less reliable) are based on market-based inputs other than those included in Level 1, such as those based on market prices for similar assets or liabilities. Level 3 measures (least reliable) are based on unobservable inputs, such as a company’s own data or assumptions.
For major groups of assets and liabilities, companies must make the following fair value disclosures: (1) the fair value measurement and (2) the fair value hierarchy level of the measurements as a whole, classified by Level 1, 2, or 3.
In addition, companies must provide significant additional disclosure related to Level 3 measurements. The disclosures related to Level 3 are substantial and must identify what assumptions the company used to generate the fair value numbers and any related income effects. Companies will want to use Level 1 and 2 measurements as much as possible. In most cases, these valuations should be very reliable, as the fair value measurements are based on market information. In contrast, a company that uses Level 3 measurements extensively must be carefully evaluated to understand the impact these valuations have on the financial statements.
Balance Sheet and Statement of Cash Flows 5-7 ____________________________________________________________________________
Level 3 fair value measurements may be developed using expected cash flow and present value techniques, as described in Statement of Financial Accounting Concepts No. 7, “Using Cash Flow Information and Present Value in Accounting,” as discussed in Chapter 6.
EXERCISE 5-1
Purpose:
(L.O. 2) This exercise lists examples of balance sheet accounts and enables youto practice determining where they are classified.
Instructions
Indicate which balance sheet classification is the most appropriate for reporting each account listed below by selecting the abbreviation of the corresponding section.
CA Current Assets CL Current Liabilities
INV Long-term Investments LTL Long-term Liabilities PPE Property, Plant, and Equipment CS Capital Stock
ITG Intangible Assets APC Additional Paid-in Capital
OA Other Assets RE Retained Earnings
If the account is a contra account, indicate that fact by putting the abbreviation in parenthesis. If the exact classification depends on facts which are not given, indicate your answer of “depends on” by the abbreviation DEP and the possible classifications. If the account is reported on the income statement rather than the balance sheet, indicate that fact with an IS. Assume all items are material.
Classifi-
Classifi-
cation Account
cation Account
________ 1. Accounts Payable. ________ 11. Advances to Vendors. ________ 2. Accounts Receivable. ________ 12. Advertising Expense. ________ 3. Accrued Interest Receivable on ________ 13. Allowance for Bad Debts. Long-term Investments.
________ 14. Allowance for Depreciation. ________ 4. Accrued Interest Payable.
________ 15. Allowance for Doubtful Accounts. ________ 5. Accrued Taxes Payable.
________ 16. Allowance for Excess of Cost Over ________ 6. Accumulated Depreciation— Market Value of Inventory.
Building.
________ 17. Allowance for Inventory Price ________ 7. Accumulated Depreciation— Declines.
Machinery.
________ 18. Allowance for Purchase Discounts. ________ 8. Mineral Reserves.
________ 19. Allowance for Sales Discounts. ________ 9. Advances by Customers.
________ 20. Allowance for Uncollectible Accts. ________ 10. Advances to Affiliates.
5-8 Problem Solving Survival Guide for Intermediate Accounting, 15th Edition
____________________________________________________________________________
Classifi-
Classifi-
cation Account
cation Account
________ 21. Appropriation for Bond Sinking ________ 39. Current Portion of Mortgage Fund. Payable.
________ 22. Appropriation for Contingencies. ________ 40. Current Portion of Long-term Debt. ________ 23. Appropriation for Future Plant ________ 41. Customers’ accounts with credit Expansion. balances.
________ 24. Appropriation for Treasury ________ 42. Customers’ Deposits. Stock Purchased.
________ 43. Deferred Income Tax Asset. ________ 25. Bank Overdraft.
________ 44. Deferred Income Tax Liability. ________ 26. Bond Interest Payable.
________ 45. Deferred Property Tax Expense. ________ 27. Bond Interest Receivable.
________ 46. Deferred Office Supplies. ________ 28. Bond Sinking Fund.
________ 47. Deferred Rental Income. ________ 29. Building.
________ 48. Deferred Subscription Revenue. ________ 30. Cash.
________ 49. Deferred Service Contract ________ 31. Cash in Preferred Stock Revenue.
Redemption Fund.
________ 50. Deposits on Equipment ________ 32. Cash Surrender Value of Life
Insurance.
Purchases. ________ 51. Depreciation of Equipment. ________ 33. Certificate of Deposit.
________ 52. Discount on Bonds Payable. ________ 34. Common Stock.
________ 53. Discount on Common Stock. ________ 35. Construction in Process
(entity’s new plant under construction).
________ 54. Discount on Notes Payable. ________ 55. Discount on Notes Receivable. ________ 36. Creditor’s accounts with debit
balances. ________ 56. Dishonored Notes Receivable. ________ 37. Current Maturities of Bonds
Payable (to be paid from Bond Sinking Fund).
________ 57. Dividend Payable in Cash. ________ 58. Dividend Payable in Common
Stock.
________ 38. Current Maturities of Bonds Payable (to be paid from general cash account).
________ 59. Earned Rental Revenue. ________ 60. Accrued Pension Liability.
Balance Sheet and Statement of Cash Flows 5-9 ____________________________________________________________________________
Classifi-
Classifi-
cation Account
cation Account
________ 61. Estimated Liability for Income _________ 82. Leasehold Improvements. Taxes.
_________ 83. Leasehold Costs. ________ 62. Estimated Liability for
Warranties. _________ 84. Loss on Sale of Marketable
Securities.
________ 63. Estimated Premium Claims
Outstanding. _________ 85. Machinery and Equipment. ________ 64. Factory Supplies. ________ 86. Machinery and Equip. Sitting Idle. ________ 65. Finished Goods Inventory. ________ 87. Marketable Securities.
________ 66. Furniture and Fixtures. ________ 88. Merchandise Inventory. ________ 67. Gain on Sale of Equipment. ________ 89. Mortgage Payable. ________ 68. General and Administrative ________ 90. Notes Payable. Expenses.
________ 91. Notes Payable to Banks. ________ 69. Goodwill.
________ 92. Notes Receivable. ________ 70. Income Tax Payable.
________ 93. Notes Receivable from Officers. ________ 71. Income Tax Refund
Receivable. ________ 94. Office Supplies on Hand. ________ 72. Income Tax Withheld (from ________ 95. Office Supplies Prepaid. employees).
________ 96. Office Supplies Expense. ________ 73. Interest Payable.
________ 97. Office Supplies Used. ________ 74. Interest Receivable.
________ 98. Patents. ________ 75. Interest Revenue.
________ 99. Petty Cash Fund. ________ 76. Investment in General Motors
Stock. ________ 100. Plant and Equipment.
________ 77. Investment in U.S. Gov. Bonds. ________ 101. Plant Assets No Longer Used (and now Held for Sale). ________ 78. Investment in Unconsolidated
Subsidiary. ________ 102. Preferred Stock Redemption
Fund.
________ 79. Land.
________ 103. Premium on Bonds Payable. ________ 80. Land Held for Future Plant Site.
________ 104. Premium on Common Stock. ________ 81. Land Used for Parking Lot.
5-10 Problem Solving Survival Guide for Intermediate Accounting, 15th Edition
____________________________________________________________________________
Classifi-
Classifi-
cation Account
cation Account
________ 105. Prepaid Advertising. ________ 119. Store Supplies. ________ 106. Prepaid Insurance. ________ 120. Store Supplies Used. ________ 107. Prepaid Insurance Expense. ________ 121. Tools and Dies (5-year life). ________ 108. Prepaid Office Supplies. ________ 122. Tools and Dies (6-mos. life). ________ 109. Prepaid Royalty Payments. ________ 123. Treasury Stock Common (at
cost).
________ 110. Prepaid Property Taxes.
________ 124. Unamortized Bond Issue Costs. ________ 111. Provision for Bad Debts. .
________ 125. Unamortized Discount on ________ 112. Provision for Income Taxes. Bonds Payable.
________ 113. Rent Revenue. ________ 126. Unearned Rental Income. ________ 114. Salaries Payable. ________ 127. Unearned Royalties.
. ________ 115. Sales Discounts and ________ 128. Unearned Subscription Income. Allowances.
________ 129. Unexpired Insurance. ________ 116. Selling Expense Control.
________ 130. Vacation Pay Payable. ________ 117. Stock Dividends Distributable.
________ 131. Vouchers Payable. ________ 118. Stock Dividends Payable.
________ 132. Work in Process.