Exam 9: Liabilities and Sources of Financing

The following is an excerpt from a 2002 press release by the US corporation, Pacific Gas and Electric (PG&E). Accounting for PG&E NEG Synthetic Leases The Corporation announced on Feb. 21 that it was initiating a thorough review of the accounting treatment of several synthetic leases used to finance power plant development at the PG&E NEG (National Energy Group). The review confirmed that payments to the independent equity owners during construction reduced the investor's equity below the minimum requirement to maintain these leases off balance sheet. As a result, the Corporation's statements now include these financings on balance sheet. The change in accounting treatment resulted in no restatement of prior year earnings, a less than $1 million impact on earnings for the fourth quarter 2001, an increase in total assets and liabilities of $118 million in 1999, $861 million in 2000, and $1.058 billion in 2001. Additional information Synthetic leases involve the use of a special purpose entity (SPE) who holds title to the asset(s) (in this instance, power plants) and raises the debt to finance the assets. The assets are then leased to a single lessee - here, PG&E. The accounting objective of synthetic leases is to finance the acquisition of an asset and at the same time keep the corresponding debt off the balance sheet of the acquiring company. The SPE typically leases the property to the lessee at rates below those of a traditional lease. Prior to 31 January 2003, the presumption in favour of consolidating an SPE could be avoided if the following two conditions were met: The independent equity owner in the case of PG&E was an independent third-party lessor. Required: Discuss the accounting and ethical issues involved in the case.

Which type of shares has a higher claim on dividends and assets than ordinary shares?

If taxable income is $220 000, accounting profit is $200 000, interest payable is $20 000, interest is recognised for tax when paid and the tax rate is 30%, then we know that tax payable is $66 000, tax expense is $60 000 and a deferred tax asset of $6000 will be recorded in the balance sheet.

Raffles Ltd began the financial year on 1 January with retained profits of $10 000 and by year end on 31 December retained profits had risen to $30 000. If a profit of $60 000 was earned during the year, then the amount declared and/or paid in dividends during the period would be:

Davis Computer Company has total liabilities of $50 000, total assets of $280 000 and paid-up capital of $120 000. What is the amount of retained earnings and/or reserves?

Which of the following provide resources to an organisation in exchange for future returns? Owners Liabilities creditors

A shareholder makes an investment in a company. The net effect of this contribution is an increase in:

Working capital is represented by current assets less current liabilities for short-term working capital, whereas long-term working capital is total assets less total liabilities.

Retained profits can best be described as:

A major discriminator between an operating lease and a finance lease is whether the risks and rewards of ownership have been substantially transferred to the lessee.

Working capital is:

The term 'working capital' is used to describe the:

The major accounting difference between a finance lease and an operating lease is that finance leases:

A company's taxable income is the amount of profit determined by the tax commissioner on which the current income tax liability is determined.

When a firm leases a resource for most of its useful life and controls the resource as though it had been purchased, the lease is treated as:

The following amounts of capital were obtained to start operations of Yuppie Manufacturing at the beginning of the financial year: What is the amount of equity financing for this firm?

The sole source of equity finance for a company is contributed equity.

Tax expense is the amount an entity remits to the tax department, and is determined by adjusting the tax-payable figure for increases/decreases in deferred tax payable.

Financing through trade credit requires less security than financing through factoring.

Which of the following statements is incorrect?