Question

2) 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.

Required. Describe the appropriate balance sheet presentation for the above items.

Answer 1

a)

Property held for speculation is reported under the section of Plant, Property and Equipment at $30,000 and remaining balance of $70,000 ($100,000 - $30,000) is reported as Land under the section of Total Assets in the Balance Sheet.

b)

Long-term debt of $50,000 that is due in three months suppose to be treated under the section of Current Liabilities because any liabilities that is due within 12 months are treated as Current Liabilities under the Balance Sheet. However, the company has received a commitment to refinance the debt for five years so the debt of $50,000 is treated as Long-term Debt under the Balance Sheet because any liability that should be paid more than 12 months should be treated as long-term liability.

c)

Short-term investments and cash equivalent are treated as Current Assets under the Total Assets so $20,000 is reported under Current Assets in the balance sheet.