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LOS a: Analyze and evaluate the balance sheet for assets and liabilities that are not recorded, and for assets and liabilities for which the amounts shown on the balance sheet differ from their current values. ffice ffice" />
Q1. Short Haul Airlines reports a commitment to purchase 10 new aircraft at a total cost of $1.2 billion over the next 5 years in its
footnotes. The present value of these purchases is estimated to be $780 million. What are the appropriate balance sheet
adjustments need to adequately reflect the commitment? Increase long-term liabilities and:
A) long-term assets by $780 million.
B) decrease equity by $780 million.
C) long-term assets by $1.2 billion.
Correct answer is A)
Increase long-term liabilities and long-term assets by $780 million. Recall that the balance sheet adjustment is done using present values, not total commitments.
Q2. Northern Bottling (NB) currently shows minimum expected operating leases over the next 5 years of $3 million, $2.5 million, $2
million, $2 million, and $1.5 million. The firm’s current financing rate is 6.75% and the rate implicit in the lease contract is 7%.
What adjustments would an analyst make to modify the balance sheet of NB to include this off-balance sheet financing?
Increase long-term:
A) assets and long-term liabilities by $9.22 million.
B) assets and long-term liabilities by $9.27 million.
C) liabilities by $9.27 million and decrease equity by $9.27 million.
Correct answer is B)
Recall that the interest rate in this present value computation is the lower of the firm’s financing rate or the interest rate that is implicit in the lease. Therefore, the PV (operating leases) is:
= 3 / (1 + 0.0675) + 2.5 / (1 + 0.0675)2 + 2 / (1+ 0.0675)3 + 2 / (1 + 0.0675)4 + 1.5 / (1 + 0.0675)5
= 9.27 million
The proper adjustment is to increase both long-term assets and liabilities by the same amount.
Q3. Lucky Strike Mining Corp. (LSMC) reports in a footnote to the financial statements that it is party to a variable interest entity
(VIE) through which it leases heavy equipment. LSMC has chosen not to report a residual value guarantee of $120 million for
the equipment because it is not required to do so under accounting standards. However, the standards will change next year. What is the appropriate analytical treatment of this residual value guarantee?
A) Ignore the liability because current accounting standards do not require it to be included on the balance sheet. Include it in next year’s balance sheet adjustments.
B) Increase long-term liabilities by $120 million and decrease equity by $120 million.
C) Increase long-term liabilities and long-term assets by $120 million.
Correct answer is C)
Increase long-term liabilities and long-term assets by $120 million.
The UNI Company Balance Sheet
As of December 31, 2002
(in millions)
|
|
2001 |
2002 |
|
|
2001 |
2002 |
|
Cash |
$50 |
$60 |
Accounts payable |
$100 |
$150 |
|
Accounts receivable |
100 |
110 |
Long-term debt |
400 |
300 |
|
Inventory |
200 |
180 |
Common Stock |
50 |
50 |
|
|
Retained earnings |
400 |
500 |
|
Fixed assets (gross) |
800 |
900 |
Total liabilities and equity |
$950 |
$1,000 |
|
Accumulated depreciation |
200 |
250 |
|
|
Fixed assets (net) |
600 |
600 |
|
Total assets |
$950 |
$1,000 |
|
The UNI Company Income Statement |
|
|
For year ended December 31, 2002 |
|
|
(in millions) |
|
|
|
|
|
Sales |
$1,000 |
|
|
Cost of goods sold (COGS) |
600 |
|
|
Depreciation |
50 |
|
|
Selling, general, and administrative
expenses (SG&A) |
160 |
|
|
Interest expense |
23 |
|
|
Income before taxes |
$167 |
|
|
Tax |
67 |
|
|
Net income |
$100 |
|
|
|
|
|
|
|
|
|
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Additional information:
- UNI uses the last in first out (LIFO) inventory valuation method. The LIFO reserve is $20 for 2002 and $10 for 2001.
- UNI leases equipment. These leases are classified as operating leases and require annual, end-of-year payments of $10 million for each of the next 5 years.
The COGS using first in, first out (FIFO) inventory valuation is:
A) $580 million.
B) $590 million.
C) $610 million.
Correct answer is B)
Purchases = $600 + 180 ? 200 = $580 million
Beginning inventory (FIFO) = $200 + 10 = $210 million
Ending inventory (FIFO) = $180 + $20 = $200 million
COGS (FIFO) = $210 + 580 ? 200 = $590 million
Check:
FIFO: $210 + 580 = $590 + 200
LIFO: $200 + 580 = $600 + 180
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发表于 2009-3-3 11:06
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