CFA Practice Question

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CFA Practice Question

ABC Company reported the following on its December 31, 2011 Balance Sheet:
Total Assets: $100,000
Total Liabilities: $50,000.

Prior to computing ABC's leverage (Liabilities / Assets), you determine that the company included a liability of 10,000 from its pension plan in its Total Liabilities. The plan is in fact in a net asset position of +20,000. What is ABC's Liabilities-to-Assets ratio after the adjustment required to reflect the true economic status of the pension plan?
A. 0.33
B. 0.4
C. 0.42
Explanation: Liabilities must be reduced by 10,000, and assets must be increased by 20,000.

40,000/120,000 = 0.33.

User Contributed Comments 5

User Comment
richmondo Didnt understsnd the question
Cesarnew you should adjust liabilities and assets.
1) it is said that liabilities are overstated by 10 000, so adjusted liabilities are 50 000- 10000 = 40 000.
2) also you know that assets are understated by 20 000. so 100 000+20 000 = 120000.

40000/120000 = 0.33
somk if the plan is "net of asset +20,000" while the liability is 10,000; then asset is 30,000 (30K - 10 K = net of 20K). SO, if the accountant has done the mistake by not recording "net of asset", is he that dumb to record the 10K libility without recording the 30K asset?
brissio agreed with Somk; given that only the net funding status is reported on the balance sheet (in this case 10.000, a liability), why should I adjust also the assets?
sunday128 Agree with somk as well.
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