Coleman Corporation’s unadjusted trial balance at the end of 2007 reflected compensation expense of $90 million. The trial balance did not include the following: Because of the holidays, no salary accrual was made for the last week of the year. Salaries for the last week totaled $3.5 million and were paid on January 4, 2008. Employee bonuses for 2007 totaled $5 million. The bonuses were paid on January 31, 2008. Ignoring payroll taxes, what is Coleman’s adjusted compensation expense for the year ended 2007 and what impact will the adjustment have on Coleman’s 2007 current ratio? Compensation expense Current ratio A) $98.5 million Decrease B) $98.5 million No effect C) $94.5 million Decrease D) $94.5 million No effect Though I got it right but wasn’t very comfortable with the answer I chose.
I would say A.
why will current ratio decrease as a result of this adjustment ? As a result of payment of $8.5MM ----> current liabilities or accrued expense will decrease. Also the same amount cash outflow will decrease your current assets. Now any increase/decrease in current ratio will depend on the initial magnitude of current assets and current liabilities (relative to each other). Given the options I will select decrease too (as increase is not given) Any thoughts dreary ??
The balance sheet is at a point in time, 12/31/07, thus you will have a accrual of payroll expense at that moment in time. So you are correct that in the future when you payoff the expenses, cash will go down and so will curent liabilties and we do not know the impact of that on the current ratio. However, at 12/31/07, when you add the accrued expense to the CL’s, the current ratio would decrease.
Current liabilities go up due to salaries payable, which weren’t accounted for at end of year. No payment was made at year end, so you only have a liability.
i will go for A as well. as of year end 2007, current liabilities will increase by $8.5 but payment will only be made after year end in 2008 so current assets will still be intact at yr end 2007. therefore the increased CL will decrease the current ratio.