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Reading 33: Understanding the Balance Sheet - LOS i ~ Q6

Q6. Coleman Corporation’s unadjusted trial balance at the end of 2007 reflected compensation expense of $90 million. The trial balance did not include the following:

  • Because of the holidays, no salary accrual was made for the last week of the year. Salaries for the last week totaled $3.5 million and were paid on January 4, 2008.

  • Employee bonuses for 2007 totaled $5 million. The bonuses were paid on January 31, 2008.

Ignoring payroll taxes, what is Coleman’s adjusted compensation expense for the year ended 2007 and what impact will the adjustment have on Coleman’s 2007 current ratio?

          Compensation expense           Current ratio

 

A) $98.5 million                                    Decrease

B) $94.5 million                                    Decrease

C) $98.5 million                                    No effect

答案和详解如下:

Q6. Coleman Corporation’s unadjusted trial balance at the end of 2007 reflected compensation expense of $90 million. The trial balance did not include the following:

  • Because of the holidays, no salary accrual was made for the last week of the year. Salaries for the last week totaled $3.5 million and were paid on January 4, 2008.

  • Employee bonuses for 2007 totaled $5 million. The bonuses were paid on January 31, 2008.

Ignoring payroll taxes, what is Coleman’s adjusted compensation expense for the year ended 2007 and what impact will the adjustment have on Coleman’s 2007 current ratio?

          Compensation expense           Current ratio

 

A) $98.5 million                                    Decrease

B) $94.5 million                                    Decrease

C) $98.5 million                                    No effect

Correct answer is A)

Because of the matching principle, compensation expense should be increased by the (accrued) salary expense for the last week of 2007 and the liability for the bonuses was incurred in 2007. Thus, total compensation expense for 2007 is $98.5 million ($90 million unadjusted compensation expense + $3.5 million salary accrual + $5 million bonus accrual). Since the salaries and bonuses were not paid in 2007, accrued liabilities would increase by $8.5 million. An increase in accrued liabilities, a current liability, would decrease the current ratio.

 

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