# A FSA question from Q-bank

Inventories are listed on the balance sheet at \$600,000, retained earnings are \$1.9 Million. In the notes to financial statements, you find a LIFO reserve of \$125,000. Also, the probability of a LIFO liquidation is high. Assuming a tax rate of 36 percent, what will be the adjusted value of retained earnings? A) \$1,980,000. B) \$1,820,000. C) \$1,855,000. D) \$1,945,000. Intuitively, shouldn’t the adjustment to LIFO liquidation increase COGS, and therefore reduce retained earning? Please help!

Coastal Drilling Corp (CDC) reported the following year-end data: Net income \$23 million Total liabilities \$50 million Total shareholder’s equity \$50 million Effective tax rate 40 percent CDC also reported that it had changed the expected return on plan assets assumption which resulted in an increased return on plan assets of \$5 million. This change resulted in an increase in the market-related value of plan assets with no long-term effect on the income statement. What is the impact on the debt/equity ratio? A) The new debt/equity ratio is 86.2%. B) The new debt/equity ratio is 90.9%. C) The new debt/equity ratio is 94.3%. D) The debt/equity ratio is still 100%. Isn’t it true that change in expected return of pension ONLY affect the pension expense on income statement? Maybe retained earning? Answer clearly is NOT 94.3%, which is what I got from 50/53. Please help!!!

Q1. A \$1,980,000 You want to adjust the BS to reflect current mkt values so you want to value inv using FIFO. So the adj inv is 600+125=725, on the E side you increase SE by the after tax gain of 125*(1-0.36) = 80, and then I think on the L side you increase DTL by 125*0.36 = 45. I didn’t finish my coffee yet so…

agree w/ slouis on the 1st one

that makes sense. slouiscar, thanks a lot.

I always felt a bit unclear about all the DTL adjustment. It is explained poorly in CFAI book as well. Can anyone work out the math on this? I understant A=L + E, that is how I remember this as well. But DTL should be caused by difference of tax reporting and income statement reporting. From this point of view. How do we explain increase of DTL?