The balance sheet shows real estate owned at $192,000. An analyst estimates the value of the property to be $4 Million and adjusts the balance sheet accordingly. What liability account(s) will you adjust and by how much, if you assume the effective tax rate is 36%? A) Increase retained earnings by $3,808,000. B) Increase retained earnings by $2,437,120. C) Increase retained earnings by $2,437,120 and increase deferred taxes by $1,370,880. D) Increase retained earnings by $1,370,880 and increase deferred taxes by $2,437,120
C? The Asset will get written up by $3,808,000 Add 3,808,000(.36) = $1,370,880 to deferred tax liability Add 3,808,000(1-.36) = $2,437,120 to retained earnings My only thought is it should be adjusted this way if they real estate is expected to be sold soon. Otherwise A?
C. Seems too easy.
I’ll risk A
bannisja Wrote: ------------------------------------------------------- > The balance sheet shows real estate owned at > $192,000. An analyst estimates the value of the > property to be $4 Million and adjusts the balance > sheet accordingly. What liability account(s) will > you adjust and by how much, if you assume the > effective tax rate is 36%? > As I reread this there doesn’t appear to be a right answer as they are asking only about the liability account and every answer has and equity account in it???
A - nothing is flowing through the income statement. They haven’t sold the property, so why realize the gain (tax it)?
I will also go with A
markgrace Wrote: ------------------------------------------------------- > A - nothing is flowing through the income > statement. They haven’t sold the property, so why > realize the gain (tax it)? Good point. If anything I guess you would back out the projected capital gains taxes, but that would be reaching.
Well, I got tricked as many did (maybe it’s just a crappily worded question)… ha ha schweser very cute that it’s a property that hasn’t been sold yet. I’m tired and my FSA SS7 adjustments scores right now on qbank are awful. I think I’m going to quit soon for the night- my focus isn’t on point right now and i think sleep might do me good. Your answer: C was incorrect. The correct answer was A) Increase retained earnings by $3,808,000. Since the property has not been sold, there is not a tax effect. The entire market value adjustment is included in retained earnings.
Still not a liability account. *walks away with head down*
i messed up on a similar question a few weeks ago and have learned my lesson 
At least I wrote down the right answer somewhere in my post.
What happens if you bubble in both A and C on test day?
CFAI sends my materials for June 09 L2 exam with a pile of dog #^*@ stuffed between all 3000+ pages. They are very good when it comes to details.