Question

You are the independent accountant assigned to the audit of Neophyte Company. The company's accountant, a graduate of Rival State University, has prepared financial statements that contained the following questionable items: a. The balance sheet reports land at $100,000. Included in this amount is a property held for speculation at a cost of $30,000. b. Current liabilities include $50,000 for long-term debt that is 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 include $20,000 in short-term, high-grade commercial paper, which is a cash equivalent. Describe the appropriate balance sheet presentation for the above items.

Answer 1

a) Land held for speculation is not a regular long lived asset. Since management has intention of selling the land it should be shown separately as Land available for sale. It cannot be clubbed with Land which is for regular use .They are part of current assets if they can be sold within a year or part of long term assets if they can be sold beyond a year.

b) Current liabilities are the liabilities which are due within a period of 12 months from the date of Balance sheet. Hence it contains all liabilities which are due within in next 12 months from Balance sheet date. The short term portion of long-term debt is due in next 3 months. Hence it is part of Current liabilities and show in Current liabilities as “Current Portion of Long-term Debt”. The refinance plan does not affect the presentation of debt due within 3 months as Current liability.

c) The Cash equivalents are short-term in nature and have a maturity of less than 90 days. It should be separately shown as Cash equivalent in Current assets under the Cash. It is not part of Long term investment.