Q32. International Motors (IM) currently shows a pension asset of $1.2 billion on its balance sheet. Upon further inspection it is

     discovered that IM’s pension is actually under funded by $1.3 billion. What adjustments would an analyst make to modify the

     balance sheet of IM to include this discrepancy?

A)   Eliminate the pension asset, increase long-term liabilities by $2.5 billion, and reduce equity by $2.5 billion.

B)   Increase long-term liabilities by $1.3 billion, and reduce equity by $1.3 billion.

C)   Eliminate the pension asset, increase long-term liabilities by $1.3 billion, and reduce equity by $2.5 billion.

Q33. The UNI Company Balance Sheet

    As of December 31, 2002

(in millions)

The UNI Company Income Statement

For year ended December 31, 2002

(in millions)

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 balance in inventory at the end of 2002 using first in, first out (FIFO) inventory valuation is:

A)   $190 million.

B)   $180 million.

C)   $200 million.

Q32. International Motors (IM) currently shows a pension asset of $1.2 billion on its balance sheet. Upon further inspection it is fficeffice" />

     discovered that IM’s pension is actually under funded by $1.3 billion. What adjustments would an analyst make to modify the

     balance sheet of IM to include this discrepancy?

A)   Eliminate the pension asset, increase long-term liabilities by $2.5 billion, and reduce equity by $2.5 billion.

B)   Increase long-term liabilities by $1.3 billion, and reduce equity by $1.3 billion.

C)   Eliminate the pension asset, increase long-term liabilities by $1.3 billion, and reduce equity by $2.5 billion.

Correct answer is C)

The reduction in equity is calculated as the net result of a reduction in assets (-$1.2 billion) and an increase in liabilities (-$1.3 billion).

Q33. 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

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 balance in inventory at the end of 2002 using first in, first out (FIFO) inventory valuation is:

A)   $190 million.

B)   $180 million.

C)   $200 million.

Correct answer is C)        

FIFO inventory = LIFO inventory + LIFO reserve
FIFO inventory = $180 + 20 = $200