ASSUME YOUR WORK AS AN ACCOUNTANT FOR FEB REALITY CO., A SMALL LAND DEVELOPMENT COMPANY THAT DESPERATELY NEEDS ADDITIONAL FINANCING TO CONTINUE N BUSINESS .THE CEO OF YOUR CO. IS MEETING THE MANAGER OF UIC BANK AT THE END OF THIS MONTH TO TRY OBTAIN A LOAN. THE CEO HAS APPROACHED YOU WITH TWO IDEAS TO IMPROVE THE CO. REPORTED FINANCIAL POSITION. FIRST, HE CLAIMS THAT BECAUSE A BIG PART OF THE COMPANY VALUE COMES FROM ITS KNOWLEDGEABLE AND DEDICATED EMPLOYEES, YOU SHOULD REPORT THEIR INTELLECTUAL ABILITIES AS AN ASSET ON THE BALANCE SHEET. SECOND, HE CLAIMS THAT ALTHOUGH THE LOCAL ECONOMY IS DOING POORLY AND ALMOST NO ONE IS BUYING OUR LAND OR NEW HOUSES AND CONDOMANIUMS, HE IS OPTIMISTIC THAT EVENTUALLY THINGS WILL TURN AROUND. FOR THIS REASON, HE ASKS YOU TO CONTINUE REPORTING THE CO. LAND ON THA BALANCE SHEET AT ITS COST, RATHER THAN THE MUCH LOWER AMOUNT THAT REAL ESTATE APPRAISERS SAY THEY ARE REALLY WORTH.
1. WHY DO YOU THINK THE CEO IS SO CONCERNED WITH THE AMOUNT OFASSETS REPORTED ON THE BALANCE SHEET?(5 MARKS) The CEO is concerned with the amount of assets reported on the balance sheet due to following reasons. 1. The CEO needs to positive balance sheet in order to secure a loan from UIC bank. 2. The UIC bank will be concerned with their assets and liabilities which are mentioned in the balance sheet in order to calculate ROI,ROA and the calculate debt to equity to ratio . 3. Calculating the ratio bank will be able to determine the interest rate on the loan. 4. A positive amount reported on the balance sheet determines the goodwill of the company which allows the bank to process loan on good faith terms.
2. SHOULD THE INTELLECTUAL ABILITIES BE REPORTED AS AN ASSET?(4 MARKS) No .The Intellectual abilities is not an tangible asset which can be reported .There are no measurements that could value intellectual abilities of any employees or human capital of the company. 3. COMMENT ON THE CEO'S SUGGESTION TO CONTINUE REPORTING THE LAND AT COST?(5...
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