Q1. If any asset is sold at profit in a given year, lets say any machinery is sold at profit of rs 200000, in F/Y 2011-12 then how does it affect financial statements, B/S, P/L and CF.
According to my understanding, if any asset is sold at profit, then its profit i.e. recoverable amount less carrying value of asset will be recorded in P/L in 2011-12 and in 2011-12 B/S, that asset will be removed as it is sold and Cash flow from investing will increase by recoverable amount.
Query: Whether my understanding of sale of asset and its reporting in all Financial statements are correct or incorrect? And the reporting of sale of asset at profit or loss is similar under both IFRS and US GAAP
Q2. If the firm has DTL that results from accelerated depreciation for tax purposes and the firm is expected to grow in the foreseeable future, why does the analysts treat liability as equity at its full value? Why analysts does not treat it as liability at its full value? What exactly we mean from above statement and the difference between both treatments?
Q3. A capital lease requires annual lease payments of $2,000 at the start of each year.
Fair value of the leased equipment at inception of the lease is $10,000 and the implicit interest rate is 12 percent. If the present value of the lease payments equals the fair value of the equipment at the inception of the lease, the interest expense (in $) recorded by the lessee in the second year of the lease is closest to:
Query: why the answer is A and not B. Plz see my below calculation
Year starting balance interest expense @12% lease payment ending balance
1 10,000 1200 2,000 9200
2 9200 1104
Q4. During the past year, a company’s production facility was operating at 75% of capacity. The firm’s costs were as follows:
Fixed production overhead costs 3
Raw materials costs 6
Labor costs 4
Freight-in costs for raw materials 1
Warehousing costs for finished goods 2
The firm ended the year with no remaining work-in-process inventory. The total capitalized inventory cost (in $ millions) for the year is closest to:
Query: answer is A and given below the calculation, but could not understand why 75% utilization capacity is taken for fixed production costs and not for Raw materials and Labor cost because if there is underutilization of capacity, raw material and Labor used will also be used in same utilized capacity, but fixed production costs should not be as they are fixed and must be taken in full.
Fixed Production Costs: 75% of capacity: 75% x $3 2.25
Raw materials 6.00
Labor Costs 4.00
Freight In 1.00
Total Capitalized Inventory Cost 13.25
Q5. Which of the following transactions will most likely result in a decrease in a
company’s current ratio? The:
A. recording of a warranty expense.
B. recording of revenue before cash is received.
C. payment of a property insurance policy for the following year.
Query: why the most accurate answer in above is A and not B as both leads to Current ratio to decrease. Warranty expense creates a warranty liability so increase in current liabilities, hence Current ratio to decrease. Recording of revenue before cash is received is Unearned revenue which is also current liability, hence Current ratio to decrease.
Q6. An analyst makes the appropriate adjustments to the financial statements of retail companies that are lessees using a substantial number of operating leases. Compared to ratios computed from the unadjusted statements, the ones computed from the adjusted statements would most likely be higher for:
A. the debt-equity ratio but not the interest coverage ratio.
B. the interest coverage ratio but not the debt-equity ratio.
C. both the debt-equity ratio and the interest coverage ratio.
Query: Here the adjustments are done to convert operating leases to capital lease.
Why Finance lease has higher Debt/ Equity ratio as compared to Operating lease because equal amounts of asset and liabilities are added to finance lease.
Q7. This is regarding Revaluation Model under IFRS. Please see whether below calculation of Revaluation model under IFRS is derived from written statements and given under :
Suppose Revalued fair value of asset is 280000 in F/Y 2011-12and historical cost of asset is 250000, then 30000 is the gain in F/Y 2011-12, but if previous loss is 24000, then in F/Y 2011-12, 24000 will be reported in P/L ( max gain reporting will be previously written loss) and balance 6000 will be shown in B/S as Revaluation Surplus.
Now suppose Fair value becomes 240000, then it means 40000 decline (280000-240000) which will reduce the Revaluation surplus by 6000 (previously reported) and balance 34000 will not be reported as loss in P/L, only 10000 will be reported as loss in P/L because loss will be reported to the extent of fair value<historical cost (240000-250000)
Query: Is the calculation part correct or incorrect? And give calculation if incorrect?