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 at $100,000. Included in this amount is a piece of property purchased for a future warehouse site at a cost of $30,000 and a speculative land investment at a cost of $50,000.   

b) Current liabilities include $50,000 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 $20,000 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

a) Land held for speculation should be reported under the noncurrent investments on asset side. So, land should be reported at $50,000 (100,000 - 50,000)

b) Since, the company refinanced its debts due in three months, they should be reported as long term liabilities and not current liabilities. So, current liabilities should be reduced by $50,000 and long term liabilities should be increased by $50,000.

c) Investment in short term high grade commercial paper should be reported with cash under the category cash and cash equivalents.