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Q12. Which of the following adjustments should Kelley make to Landesign’s balance sheet to account for deferred taxes? Kelley ffice ffice" />
should:
A) add $56,000 to equity and subtract $56,000 from liabilities.
B) add $350,000 to equity and subtract $350,000 from liabilities.
C) add $56,000 to assets and subtract $56,000 from liabilities.
Correct answer is B)
Deferred tax liabilities are shown to be growing over the last three years, indicating a low probability of reversal in the near future. In this case, Kelley should assume zero deferred tax liabilities on the adjusted balance sheet, and an increase in equity of $350,000. Note that if the deferred taxes were expected to reverse, Kelley would have needed to calculate the present value of the expected tax liability.
Q13. Which of the following adjustments should Schmidt make to Landesign’s financial statements for the agreement to purchase
stone at a discount?
A) A prepaid expense needs to be added to the asset side of the balance sheet.
B) An estimate of the future liability should be recognized on the balance sheet.
C) No changes are necessary since Landesign expenses the costs as part of normal operating expense.
Correct answer is B)
The adjustment for a take-or-pay contract is similar to adjusting for operating leases. The present value of future payments needs to be recognized as a liability on Landesign's balance sheet.
Q14. Which of the following adjustments should Schmidt make to Landesign’s financial statements to account for the greenhouse
that Landesign uses to grow plants and store mulch?
A) Increase both liabilities and assets by $341,500.
B) Increase liabilities and decrease equity by $440,000.
C) Increase both liabilities and assets by $328,400.
Correct answer is A)
The rental agreement for the greenhouse is an operating lease and essentially represents off-balance sheet financing. To adjust Landesign’s balance sheet for the operating lease, Schmidt needs to capitalize the lease by increasing both liabilities and assets by the present value of the lease payments. The interest rate used in the present value computation is the lower of the firm’s financing rate or the rate implicit in the lease. We are told that the rental payments of $55,000 are based on an interest rate of 7%. However, we are told in another footnote that Landesign expects to be able to borrow funds in the future at a rate of 6%. We therefore use the lower firm financing rate of 6% in our computation. The present value of the lease payments is: N = 8; I/Y = 6%; PMT = -55,000; FV = 0; CPT PV = $341,539.
Q15. Regarding the comments made about Landesign’s growth through acquisition strategy:
A) Kelley’s comment was incorrect; Schmidt’s comment was incorrect.
B) Kelley’s comment was incorrect; Schmidt’s comment was correct.
C) Kelley’s comment was correct; Schmidt’s comment was incorrect.
Correct answer is A)
Kelley and Schmidt both made incorrect comments concerning Landesign’s growth through acquisition strategy. Kelley was correct that purchase method accounting will lead to higher depreciation, and potentially lower quality earnings as a result of restating asset values to fair market value. However, Kelley was incorrect insofar as the comment on balance sheet restatement, since only the assets of the target are restated to fair value – the value of the acquirer, in this case Landesign, would not be revalued. Schmidt was incorrect in stating that liquidity ratios such as the quick ratio and cash ratio should improve. The current ratio is likely to improve in a purchase method acquisition due to the revaluation of the target’s inventory. However, the quick ratio and cash ratio do not include inventory in their calculation, so the effect of the acquisition on those ratios is inconclusive.
Q16. Which of the following statements regarding the adjustments that Schmidt should make to Landesign’s financial statements for
its sale of receivables is most accurate?
A) Accounts receivable should be increased by $123,500, cash should be decreased by $123,500, and a loss of $6500 should be recognized on the income statement.
B) $123,500 should be added to cash flow from financing, and $123,500 should be subtracted from cash flow from operations.
C) Accounts receivable should be increased by $123,500, loans payable should be increased by $123,500, and a loss of $6,500 should be recognized on the income statement.
Correct answer is B)
When receivables are sold with recourse, the risk of noncollection of sold receivable is retained by Landesign. Therefore, Schmidt should make two adjustments: (1) The sale of receivables should be reclassified as CFF instead of CFO, meaning that $123,500 should be added to cash flow from financing, and $123,500 should be subtracted from cash flow from operations. (2) The full amount of the receivables, $130,000, should be added to accounts receivable, and a liability called loan payable of $123,500 should be added to the liabilities side of the balance sheet. Note that no adjustments to income are made at this time. As the receivables are collected, the 5% discount ($6,500) is amortized as interest expense.
Q17. Inventories are listed on the balance sheet at $600,000, retained earnings are $1.9 Million. In the notes to financial statements,
you find a LIFO reserve of $125,000. Also, the probability of a LIFO liquidation is high. Assuming a tax rate of 36%, what will
be the adjusted value of retained earnings?
A) $1,980,000.
B) $1,820,000.
C) $1,855,000.
Correct answer is A)
The adjustment to retained earnings will be: $125,000 × (1 ? 0.36).
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发表于 2009-3-3 12:23
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