You are the independent accountant assigned to the audit of Brandi Company. The

Question

You are the independent accountant assigned to the audit of Brandi 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.  

Explanation / Answer

Property purchased for a future warehouse site at a cost of $ 30000 should come under Property or Buildings under fixed asset rather than be included as land. Also speculative land investment at a cost of $ 50000 should come under short term investment ( which is generally meant for selling in a span of 1 year)

Long term debt of $ 50000 should be taken away from Short term liabilities and should be brought under long term liabilites.

Amount of $ 20000 should be shown as cash equivalent in the balance sheet.

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