Question

3. You are the independent accountant assigned to the audit of Katherine Company. The company’s accountant, a

fellow graduate of the accounting program you attended has prepared financial statements, which contained the

following items:

a)

The balance sheet reports land in total of $250,000. Included in this amount is a piece of property

purchased for a future warehouse site at a cost of $130,000 and a speculative land investment at a

cost of $50,000.

b)

Current liabilities include $950,000 for long term debt that comes due in three months. The

company has received a suitable firm commitment to refinance the debt for five years and intends

to do so.

c)

Investments in marketable securities include $520,000 in short-term high-grade commercial paper

which the company states is cash.

Discuss the appropriate classification of the above items and how they should be disclosed in a financial statement.

Answer 1

Disclosure of certain items in the Financial,

A) The total value of land reported in balance sheet is 250,000 which includes 130,000 which is piece of property and 50,000 of speculative land. This 50,000 may be included in the land value but it should be disclosed seperately in the balance sheet under fixed assets. On the other hand 130,000 should be treated as plant and machinery as it is no where with land. Land is a non depreciable asset l so other assets cannot be mistakenly taken into the value of land.

B) Current Liabilities include 950,000 due in three months. Tbe disclosure is correct and it is required that as the debt is due in 3 months it will be required to mentioned in the financial statements that the debt is due in 3 months. Refinance has no treatment in financial statements.

C) An amount of 520,000 is included in short term high grade commercial paper. But this is shown under cash. It may be highly liquid but it is not optimal to treat it under cash. It may be disclosed under ready for sale short term investment rather that under cash to show its high liquidity.