You Are Reviewing The Dec 31, 2011 Financial Statement Of AB

You Are Reviewing The Dec 31 2011 Financial Statement Of Abc Anti

(2) You are reviewing the December 31, 2011, financial statement of ABC Antique that is considering an initial offering of their shares. The following items come to your attention: (a) Include in long-term investments are 10-year US treasury bonds that mature on March 31, 2012. The bonds were purchased on November 20, 2011. (b) The property, plant, and equipment account is stated at cost, except that it includes a parcel of land purchased for investment purposes at a cost of $40,000. Because of rising land prices, the value of the land has been written up to $60,000. The company has an independent appraisal that attests to this amount. (c) The accounts receivable account includes $20,000 due in 3 years from officers and employees and a two-year, 8% note for $25,000 due from a customer. The loan enabled the customer to buy equipment needed to process materials purchased from ABC Antique. Please discuss how the above items should be classified and accounted for.

Paper For Above instruction

The financial statements of a company serve as crucial tools for investors, creditors, and management to assess the company's financial health and make informed decisions. Accurate classification and accounting of assets and receivables are essential to reflect the true financial position. The items in question from ABC Antique's December 31, 2011, financial statement highlight important considerations regarding investments, property, plant, and equipment, and receivables. Proper analysis ensures compliance with accounting standards such as Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

Classification and Accounting of Short-term Investments

The first item pertains to the US Treasury bonds purchased on November 20, 2011, which mature on March 31, 2012. Since these bonds have a remaining maturity of less than one year as of the balance sheet date, they should be classified as short-term investments under both GAAP and IFRS. Despite being designated as long-term investments initially, the approaching maturity date, which falls within the next fiscal year, indicates that these bonds qualify as "short-term" or "current" investments (FASB, 2017).

From an accounting perspective, these bonds should be recorded at amortized cost unless the company intends to sell them before maturity. Given the maturity date shortly after the balance sheet date, it is probable the company will hold them to maturity; therefore, they should be carried at amortized cost on the balance sheet, with any unrealized gains or losses recognized in earnings (FASB, 2017). This classification aligns with the objective of providing relevant and reliable financial information about assets expected to be liquidated within a year.

Property, Plant, and Equipment (PP&E) and Land Revaluation

The second item involves the property, plant, and equipment (PP&E) account, which includes land purchased for investment purposes at a cost of $40,000. The land's value has been revalued upward to $60,000 based on an independent appraisal. Under GAAP, land and other PP&E are generally recorded at historical cost. Revaluation of land is permissible under IFRS but not under GAAP, where assets are typically carried at cost less accumulated depreciation.

Since the company has an independent appraisal verifying the land's increased value, IFRS permits revaluation of land to fair value. This revaluation would be recognized as an increase in asset value on the balance sheet, with a corresponding revaluation surplus in other comprehensive income (IAS 16). However, under GAAP, the land should remain at historical cost of $40,000 unless the company elects not to revalue assets. It should be disclosed in the notes that the land is carried at historical cost and not adjusted for market value unless revaluation is performed under IFRS standards.

Importantly, because the land was purchased for investment purposes, its revaluation to fair value could impact the company's reported asset base. Proper classification as investment property under IFRS may necessitate separate presentation from operational property. Companies must disclose the basis of valuation, methods used, and any effects on financial statements.

Receivables and Their Classification

The third item relates to receivables recorded in the accounts: $20,000 due in three years from officers and employees, and a two-year, 8% note for $25,000 due from a customer. The $20,000 receivable due in three years constitutes a non-current asset because the maturity is beyond one year or the operating cycle, whichever is longer. Conversely, the $25,000 note is a current receivable because it is due within two years, which is within the operating cycle if it exceeds one year.

It is noteworthy that the receivable from officers and employees relates to amounts owed over a lengthy period, possibly representing a loan or deferred compensation. These should be classified as non-current receivables on the balance sheet, disclosed separately from current receivables (FASB, 2017). The $25,000 note, bearing 8% interest, should be classified as a current asset and recorded at amortized cost, with accrued interest recognized as interest income over the note's life.

The fact that the loan enabled the customer to purchase equipment suggests that it may be considered a financing arrangement rather than a simple trade receivable. Under GAAP, such a financing arrangement can be analyzed for proper classification based on evidence of intent and terms; if it functions as a loan, it should be accounted for accordingly, including interest recognition. Additionally, the company should assess whether the receivable qualifies as impaired based on collectability.

Conclusion

In summary, the classification and accounting treatment of these items hinge on their respective maturities, purpose, and relevant accounting standards. The US Treasury bonds should be classified as short-term investments and carried at amortized cost given the imminent maturity. The land purchased for investment purposes should be evaluated under IFRS for revaluation, with GAAP requiring it to stay at historical cost unless revaluation is explicitly conducted. The receivable due in three years from officers and employees belongs to non-current assets, while the $25,000 note from the customer due in two years is a current asset, with interest income recognized over its life. Accurate classification ensures the financial statements accurately portray the company's financial position, aiding investors and management in decision-making.

References

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