Unformatted text preview: ACCT1511 2011s2 WEEK 11 TUTORIAL HOMEWORK QUESTION FINAL EXAM SEMESTER 1, 2008 QUESTION 4 (a) The financial statements do not reflect assets and liabilities held offbalance sheet (2 marks) If loss of $233.6 billion is mentioned, bonus 1 mark. (b) Before: After: 2,187.63/113.6 = 19.25 (1 mark) (2,187.63+86.4)/(113.6233.6) = 18.95 Not Meaningful because of negative equity OR 2,187.63/(113.6233.6) = 18.23 Not Meaningful (1 mark) If no calculation is given but answer says not meaningful to calculate because of negative equity denominator, give 1 mark. Decimal point is not critical (c) These Level 3 assets represent risk that they have no value and that management has the incentive to put a figure to inflate/misrepresent the true value of these assets to hid possible losses. (2 marks) As the quantum of these assets exceed shareholders equity, the risk is that these assets could wipe out shareholders equity and bankrupt Citigroup. (1 mark) The effectiveness of the hedges may attenuate the possible loss. (bonus 1 mark) Problem 15.16 *Note: For Problem 15.16, calculate net profit and net assets (instead of total assets). 3 a. Net Profit: The increased 2008 receivables would produce a reduction in 2009 profit because revenue formerly recognised in 2009 would now be pushed back to 2008. The increased 2009 receivables would produce an increase in 2009 profit because revenue formerly recognised in 2010 would be brought back to 2009 Income tax of 30% would reduce the 2009 profit effect, so the effect on 2009 net profit would be 70% of the gross effect. Net change in 2009 profit = ( $12 000 + $23 000)(1 .30) = $11 000 (.70) = $7700 increase Net assets: The increased 2008 receivables ($12000) would produce a reduction in 2009 receivables because receivables formerly recognised in 2009 would now be pushed back to 2008. The increased 2009 receivables ($23000) would produce an increase in 2009 receivables. There were increases in income tax expenses (see above) and, in turn, there would be increases in income tax payables* by the same amount ($11000 X .30). Change in 2009 net assets = $12 000 + $23 000 ($11000 X .30) = $7700 increase * I have assumed that the income tax effect would increase income tax liability rather than decreasing an income tax receivable (as this is unlikely). b Net Profit: The increased 2008 inventories would produce a reduction in 2009 profit because expenses formerly included in 2008 COGS would now be held on the 2008 balance sheet and so form part of the calculation of 2009 COGS (part of the `beginning inventory' amount in the calculation COGS = beginning inventory + purchases ending inventory). The increased 2009 inventories would produce an increase in 2009 profit because expenses formerly included in 2009 COGS would now be held on the 2009 balance sheet and so form part of the calculation of 2010 COGS. Income tax of 30% would again reduce the 2009 profit effect. Net change in 2009 profit = ( $4000 + $1000)(1 .30) = $3000 (.70) = $2100 decrease Net assets: The increased 2008 inventories ($4000) would produce a reduction in 2009 inventories because inventories formerly recognised in 2009 would now be pushed back to 2008. The increased 2009 inventories ($1000) would produce an increase in 2009 inventories. There was a decrease in income tax expenses (see above) and, in turn, there would be decreases in income tax payables by the same amount ($3000 X .30). Change in 2009 net assets = $4000 + $1000 + ($3000 X .30) = $2100 decrease d In order to answer this, an assumption is needed about whether the capitalised expenses are also amortised in the year they are capitalised. The calculations below assume that they are (if not, the amortisation figures would be lower but the general direction of the effects would be similar). Net Profit: This policy would have the following specific effects: 2008 development expenses reduced by $4000; 2008 amortisation expenses increased by $800 (amortising the $4000 straightline over five years); 2008 yearend assets increased by $3200 ($4000 capitalised less $800 amortised); 2009 development expenses reduced by $6000; 2009 amortisation expenses increased by $2000 ($800 amortisation of the 2008 capitalisation, $1200 amortisation of the 2009 capitalisation); 2009 yearend assets increased by $7200 ($4000 capitalised in 2008 less two years' amortisation of $800 each, plus $6000 capitalised in 2009 less one year's amortisation of $1200). The gross effect on 2009 profit would therefore be an increase of $6000 due to expenses capitalised, minus $2000 amortisation expenses, or $4000. After 30% income tax, this would result in an increase in 2009 net profit of $2800. Net assets: $6000 was capitalised in 2009 and, therefore, there was increases in assets by that amount. As noted above, there was an increase in amortisation expenses by $2000, and, therefore, there was also increase in accumulated amortisation by the same amount. Also, there was an increase in income tax by $1200 (i.e. $4000X.30). This indicates that there was an increase in income tax payables by the same amount. Change in 2009 net assets = $6000 $2000 $1200 = $2800 (increase) ...
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