Advanced Accounting

Question 1

Which of the following statements correctly describes the differences between the Book
Value, Face Value, and Market Value of Debt?

Advanced Conceptual

Answer 1

a. Face Value is affected only by Debt Issuances, Principal Repayments, and Paid-inKind Interest, while Book Value is affected by all of those, plus Issuance Fees, Original Issue Discounts and Premiums, and the amortization of both items.
b. Face Value is the amount the company pays interest on, Book Value is the number that shows up on the Balance Sheet, and Market Value is what someone else would pay to buy the company’s Debt in the secondary market.
c. If the Market Value changes, it does not make a direct impact on the financial statements – but changes to the Face Value or Book Value do affect the statements.
Explanation: Everything above is true because these are the basic definitions of Book Value, Face Value, and Market Value. Compared with Face Value, Book Value reflects additional “accounting” line items, such as the deductions for the Original Issue Discount and Issuance Fees, and the amortization of both those items as the Debt approaches maturity. But the company always pays interest based on the Face Value, not the Book Value. Changes in the Market Value do not show up directly on the financial statements, but anything that affects the Face Value or Book Value must affect the statements as well – since items like Debt Issuances, Repayments, PIK Interest, and OID and Issuance Fee amortization all appear on the statements.

Question 2

If a company issues $100 of Debt with a 10-year maturity and an Original Issue Discount
(OID) of $10, what happens to the OID if the company repays the entire remaining Debt
balance at the end of Year 5?

Advanced Conceptual

Answer 2

The entire remaining OID balance will be written down and shown as a Loss on Debt Extinguishment; the exact amount depends on whether or not the company has previously repaid some of the principal.
Explanation: The second answer choice is correct. When Debt principal is repaid, the remaining OID is written down proportionally to the percentage repaid and shown as a Loss on Debt Extinguishment on the Income Statement. We don’t know how much in Debt remains at the end of Year 5, so we can’t assume that the remaining OID is exactly $5.
For example, if the company repaid $75 of the Debt Principal in Year 4, only $2.5 of the OID will be left at the start of Year 5. The third answer is wrong because this write-down should be shown as a separate Loss, and the last answer is wrong because the penalty fee doesn’t affect the treatment of the OID.

Question 3

For which of the following reasons would a company MOST LIKELY issue Debt with an
Original Issue Discount (OID)?

Advanced Conceptual

Answer 3

The company is offering a coupon rate on its Debt that is below yields on
comparable Debt issuances in the market.
Explanation: The third answer choice is correct. When the coupon rate
on Debt is below the yields on similar Debt issuances, the market value of
that Debt must drop so that investors can buy it for a lower price and end
up earning a similar yield on it. The first answer reverses this logic, which
is incorrect (this corresponds to an Original Issue Premium), and the
second answer is wrong because the Discount on a Convertible Bond is
not an “Original Issue Discount.” The last answer is wrong because
improved credit quality means that the Debt should be worth more, not
less, which corresponds to an Original Issue Premium.

Question 4

A company issues a Convertible Bond, split into Liability and Equity components, and
then its share price rises above the Conversion Price within 3 years of issuance. The
investors are debating whether to convert their bonds into shares now, in Year 3, or
wait until maturity in Year 7.
At a high level, how do the financial statements change if the investors convert their
bonds in Year 3 rather than Year 7?

Advanced Conceptual

Answer 4

Common Shareholders’ Equity increases by a smaller amount in Year 3 because
the Equity component is the same in Years 3 and 7, but the Liability component
is higher in Year 3.
Explanation: The last answer choice is correct for the reason stated. The
Equity component stays constant each year until conversion (or
maturity), but the Liability component keeps increasing due to the
Amortization of the Debt Discount and Issuance Fees. Therefore, the
Liability component is smaller in Year 3, and the total amount transferred
into Common Shareholders’ Equity is higher because the (Equity
component + Liability component) sum is higher.

Question 5

A company issues a Mezzanine Loan with 100% Paid-in-Kind (PIK) Interest. A year
passes. How do the Face Value and Book Value of the Mezzanine Loan change by the
end of the year?

Advanced Conceptual

Answer 5

Both Book Value and Face Value increase.
Explanation: The first answer choice is correct. When Interest is Paid-inKind, it accrues to the Debt principal (the Face Value) and results in higher Interest Expense in the future. It also increases the Debt figure
shown on the company’s Balance Sheet (the Book Value). These increases
also mean that the company will have to repay a higher amount of
principal when the Mezzanine matures.

Question 6

Parent Co. acquires a 40% stake in Sub Co. using 50% Cash and 50% Debt. Which of the
following changes does NOT take place on its Balance Sheet?

Advanced Conceptual

Answer 6

It creates a new Noncontrolling Interest on the L&E side to represent the 60%
of Sub Co. it does not own.
Explanation: The last answer choice is correct. When Parent Co. acquires
a minority stake in Sub Co., it creates an Equity Investment to represent
this stake, and it records the Cash, Debt, and Stock used to make the
acquisition. However, it does not create a Noncontrolling Interest (NCI)
because the NCI is used for majority-stake acquisitions when there’s a
minority percentage that Parent Co. does not own.

Question 7

Continuing with this scenario, Parent Co. now owns 40% of Sub Co. in Year 1. Which of
the following items flow into the Equity Investment line item each year?

Advanced Conceptual

Answer 7

a. 40% * Sub Co.’s Net Income (increase).
b. 40% * Sub Co.’s Dividends (decrease).
d. Realized Gains and Losses and Total Proceeds from Sales of this stake.
e. Additional purchases of Sub Co.’s shares that increase Parent Co.’s stake above
40%.
Explanation: Answer choices 1, 2, 4, and 5 (a, b, d, and e) are correct.
Ownership Percentage * Sub Co.’s Net Income increases the Equity
Investment line item, while Ownership Percentage * Sub Co.’s Dividends
reduces it. Realized Gains and Losses and Total Proceeds from Stake Sales
also flow in because the Equity Investment must be adjusted whenever
Parent Co.’s ownership in it changes; this logic applies to additional
purchases of Sub Co.’s shares as well. The third answer choice, Unrealized
Gains and Losses, is incorrect because these do not appear on the
financial statements when the equity method of accounting is used. They
only show up for “Trading Securities” that represent short-term, small
percentages of ownership in other companies’ shares (and bonds).

Question 8

Now, Parent Co. decides to increase its stake in Sub Co. from 40% to 80%, once again
using 50% Cash and 50% Debt. Which of the following changes does NOT take place on
its Balance Sheet?

Advanced Conceptual

Answer 8

Goodwill is created based on the Equity Purchase Price for 80% of Sub Co.
minus 80% of its Common Shareholders’ Equity.
Explanation: The first answer choice is correct, i.e., this change does NOT
take place when the Balance Sheets of Parent Co. and Sub Co. are
combined. New Goodwill is created, but it’s based on the Equity Purchase
Price for 100% of Sub Co. minus 100% of its Common Shareholders’
Equity, which is written off in >=50% acquisitions (plus/minus various
other adjustments). The Balance Sheet does not balance correctly if the
Goodwill is based on 80% rather than 100% of Sub Co. All the other
changes are correct: Assets and Liabilities are combined 100%, a new
Noncontrolling Interest for the 20% of Sub Co. that Parent Co. does not
own is created, and the Equity Investment line is removed because
Parent Co. now has a majority stake in the company.

Question 9

When Parent Co. now owns 80% of Sub Co., which of the following items flow into the
Noncontrolling Interest line item each year?

Advanced Conceptual

Answer 9

a. 20% * Sub Co.’s Net Income (increase).
b. 80% * Sub Co.’s Dividends (increase).
c. 100% * Sub Co.’s Dividends (decrease)
Explanation: The first three answer choices (a, b, and c) are correct. On
the Cash Flow Statement, Net Income Attributable to Noncontrolling
Interests, Dividends Received from Sub Co., and Total Dividends Paid by
Sub Co. all flow into the Noncontrolling Interest line on the Balance
Sheet. Net Income Attributable to Noncontrolling Interests is a deduction
on the Income Statement equal to (1 – Ownership Percentage) * Sub
Co.’s Net Income, and it’s reversed and added back on the CFS. Dividends
Received from Sub Co. are equal to Ownership Percentage * Sub Co.’s
Dividends, flipped to be positive. And then 100% of Sub Co.’s Dividends
are deducted as well. Effectively, the NCI increases by 20% * Sub Co.’s
Net Income and decreases by 20% * Sub Co.’s Dividends. It acts as a
“mini-Shareholders’ Equity” for the stake that Parent Co. does NOT own.
The last three answer choices are incorrect because Parent Co.’s
Dividends never flow in, the NCI doesn’t increase by Ownership
Percentage * Sub Co.’s Net Income, as that does not represent the
minority shareholders, and it also doesn’t increase by (1 – Ownership
Percentage) * Sub Co.’s Dividends. That last number represents the
Dividends that go to the minority shareholders, which should reduce the
NCI.

Question 10

A company issues $60 in Stock-Based Compensation to employees in Year 1. Its value
then increases to $80 in Year 2 and $100 in Year 3. In Year 3, employees exercise their
options and receive shares. What is the MAIN difference between the U.S. GAAP and
IFRS treatments of this scenario?

Advanced Conceptual

Answer 10

Under IFRS, the Deferred Tax Asset created by the initial $60 of SBC increases
as the SBC’s value rises and then returns to $0 in Year 3; under U.S. GAAP, the
DTA stays the same and returns to $0 in Year 3, and the Excess Tax Benefits in
Year 3 appear directly on the Income Statement.
Explanation: The last answer choice is correct. Under both accounting
systems, Stock-Based Compensation is not Cash-Tax Deductible when
initially issued, so in both cases, it creates a Deferred Tax Asset. As the
value of the SBC increases, it does not create an immediate Cash-Tax
benefit in either system. But under IFRS, the Deferred Tax Asset keeps
increasing as this happens. Then, when employees finally receive their
shares, the SBC becomes deductible, and the DTA drops to $0 in both
systems. The difference is that under IFRS, that’s all that happens, i.e., it
is just a simple positive Deferred Tax adjustment on the CFS. But under
U.S. GAAP, the ($100 – $60) * Tax Rate shows up as Excess Tax Benefits
on the Income Statement and reduces the Income Taxes there.

Question 11

Which of the following statements CORRECTLY describes the treatment of Unrealized
Gains and Losses for different security types?

Advanced Conceptual

Answer 11

Unrealized Gains and Losses on all Equity Securities are reported directly on
the Income Statement but do not affect Cash Taxes.
Explanation: The second answer choice is correct. The three main
classifications for securities include Trading or FVPL, Available-for-Sale
(AFS) or FVOCI, and Held-to-Maturity (HTM) or Amortized Cost. All Equity
Securities (i.e., ones representing small ownership stakes in other
companies) are now classified as Trading Securities, so Unrealized Gains
and Losses on them always appear on the Income Statement. However,
the company does not pay Cash Taxes on these Gains or Losses until they
become realized, so the Deferred Tax Asset initially changes and then
reverses once the company sells the Securities. The first choice is wrong
because Unrealized Gains and Losses are not recorded for majority stakes
in other companies, the third answer is wrong because it describes the
AFS treatment, not the HTM treatment, and the last answer is wrong
because it describes the Trading Securities treatment, not the AFS one.

Question 12

True or False: If a company switches from FIFO to LIFO, its Net Income will decrease, and
its Cash Flow from Operations will increase.

Advanced Conceptual

Answer 12

Need more information to answer the question.
Explanation: The third answer choice is correct because you need to
know if Inventory Costs have been increasing or decreasing to answer
this question. If Inventory Costs have increased over the period shown on
the company’s financial statements, then Net Income will be lower, and
CFO will be higher under LIFO. The company records the more recent,
more expensive Inventory purchases for COGS, reducing its Net Income,
but it records less of an Inventory Increase on the Cash Flow Statement,
which boosts its CFO.
However, if Inventory Costs have decreased, the opposite happens:
COGS is lower, which increases Net Income, and the Inventory Increase is
higher, which reduces Cash Flow from Operations.

Question 13

What is the MAIN difference between the Interest Cost and Service Cost for a definedbenefit pension plan?

Advanced Conceptual

Answer 13

The Interest Cost represents the Present Value of future pension benefit
payments increasing, while the Service Cost represents employees accruing
additional benefit payments due to salary increases or more time working.
Explanation: The third answer choice is correct because these are the
basic definitions of the Interest Cost and Service Cost. Both are non-cash
expenses on the Income Statement, so the first and second answer
choices are incorrect. The last answer choice is wrong because both the
Interest Cost and the Service Cost affect the Pension Liability on the
Balance Sheet, increasing it. Neither one affects the Pension Asset.

Question 14

A company with an underfunded, defined-benefit pension plan contributes $500 million
per year to the plan and makes $400 million in benefit payments to employees each
year. Will the company’s pension remain underfunded if this pattern continues?

Advanced Conceptual

Answer 14

We can’t say because we don’t know the Actual Return on Plan Assets, Service
Cost, and Interest Cost.
Explanation: The last answer is correct. The Pension Asset changes based
on the Actual Return, Employer Contributions, and Benefit Payments,
while the Pension Liability changes based on the Service Cost, Interest
Cost, Benefit Payments, and Other/Actuarial Adjustments. Since we only
know the Employer Contributions and Benefit Payments here, we can’t
tell whether or not the Pension Liability will continue to exceed the
Pension Asset in the future. The first two answer choices are wrong
because they assume too much, and the third answer choice is not
complete because we need the individual components of the pension
expense and the other items that affect Pension Assets and Liabilities,
such as the Actual Return on Plan Assets.

Question 15

A company issues a $200 bond with a 5-year maturity, 4% coupon rate, Issuance Fees of
$10, and an Original Issue Discount of $10. There are no required principal repayments,
and early repayments are not allowed.
Walk through the financial statements in Year 1 and explain how Cash changes,
factoring in the straight-line amortization of Issuance Fees and OID, and the interest
expense. Ignore the cash inflow from the initial issuance and assume no differences
between Book and Cash Taxes.

Advanced Accounting Scenarios

Answer 15

Cash is down by $5.
Explanation: In Year 1, the company records 4% * $200 = $8 in Interest
Expense, Issuance Fee Amortization of $10 / 5 = $2, and OID Amortization
of $10 / 5 = $2, for a total of $12 in “Interest Expense.” Pre-Tax Income
falls by $12, and Net Income falls by $9 at a 25% tax rate.
On the Cash Flow Statement, Net Income is down by $9, but the company
adds back the Amortization line items for a total of $4, so Cash is down by
$5.
On the Balance Sheet, Cash is down by $5, so Total Assets are down by
$5. On the L&E side, Debt is up by $4 because of the two Amortization
line items, and Common Shareholders’ Equity is down by $9 due to the
reduced Net Income, so both sides are down by $5 and balance.
Intuition: The company’s Net Income is down by $9, but $4 of the
reduction comes from non-cash expenses, so its Cash balance is down by
$5 rather than $9.

Question 16

Now, the company decides to repay this entire $200 bond at the end of Year 3. What
does the company record for the Interest Expense and Losses on Debt Extinguishment
on its Income Statement?

Advanced Accounting Scenarios

Answer 16

Interest Expense = $12; Losses on Debt Extinguishment = $8.
Explanation: The Cash Interest Expense here is still $200 * 4% = $8. The
company also still has $10 / 5 = $2 for the Issuance Fee Amortization and
$10 / 5 = $2 for the OID Amortization. All of those are included in Interest
Expense on the Income Statement for a total of $12.
The Losses on Debt Extinguishment are used to accelerate the
amortization of the remaining, unamortized Issuance Fees and OID. At
the end of Year 3, $4 of OID and $4 in Issuance Fees remain, so the
company writes down a total of $8 and lists that for the Losses on Debt
Extinguishment.

Question 17

A company has $100 of Mezzanine Debt with 8% PIK Interest, 4% Cash Interest, and no
principal repayments. How does its Cash balance change after the first year? For
simplicity, ignore the Issuance Fees.

Advanced Accounting Scenarios

Answer 17

Cash is down by $1.
Explanation: The company records $100 * (8% + 4%) = $12 for its Interest
Expense, so its Pre-Tax Income falls by $12, and its Net Income falls by $9
at a 25% tax rate.
On the Cash Flow Statement, Net Income is down by $9, but the company
adds back the $8 in PIK Interest, so Cash at the bottom is down by $1. On
the Balance Sheet, Cash is down by $1, so the Assets side is down by $1.
On the L&E side, Debt is up by $8 from the PIK Interest, and Common
Shareholders’ Equity is down by $9 due to the reduced Net Income, so
both sides are down by $1 and balance.
Intuition: Normally, the company’s Cash would decrease by $9 because
of this Net Income reduction, but $8 of this reduction is non-cash, so it
only falls by $1.

Question 18

Company A owns 20% of Company B, which it acquired when Company B’s Market Cap
was $100. In the current year, Company B’s Market Cap increases to $120, and it
records Net Income of $20 and Dividends of $10. How does Company A’s Cash balance
change?

Advanced Accounting Scenarios

Answer 18

Cash is up by $2.
Explanation: At the bottom of Company A’s Income Statement, it records
20% * Company B’s Net Income = 20% * $20 = $4. On the Cash Flow
Statement, Net Income to Parent is up by $4. But Company A reverses
the $4 in Equity Investment Earnings and records a positive for the
Dividends received from Company B, equal to 20% * $10 = $2. Therefore,
at the bottom of the Cash Flow Statement, Cash is up by $2.
On the Assets side of the Balance Sheet, Cash is up by $2, and Equity
Investments are up by $4 – $2 = $2, so Total Assets are up by $4. On the
L&E side, Common Shareholders’ Equity is up by $4 due to the increased
Net Income to Parent, so both sides are up by $4 and balance.
Intuition: Cash is up by $2 because Company A only receives Company
B’s Dividends in Cash ($10 * 20% = $2). It does not control Company B, so
it cannot “claim” its Net Income for itself. Also, Unrealized Gains and
Losses on Equity Investments are not shown on the financial statements.

Question 19

At the end of the next year, Company B’s Market Cap increases to $140, and Company A
still owns 20% of it, purchased when Company B’s Market Cap was $100. Company A
now decides to sell its entire stake in Company B. What Gain or Loss does it record for
this transaction?

Advanced Accounting Scenarios

Answer 19

Cannot determine because we don’t know the cost basis of the Equity
Investment just before the sale takes place
Explanation: The Gain or Loss here is based on Company B Market Cap at
Time of Sale * Ownership % Before Sale – Cost Basis Just Before Sale. If
Company A were not selling its entire stake, we would also adjust this
Gain or Loss for the percentage it sells.
The problem here is that we don’t know the Cost Basis Just Before Sale –
it’s not $100 or $120 because those do not include the cumulative Equity
Investment Earnings and Dividends from Company B. This Cost Basis
equals the Equity Investment on the Balance Sheet in the previous year
plus Equity Investment Earnings this year minus Equity Investment
Dividends this year, and we do not have that information.

Question 20

Company C owns 70% of Company D. It initially records a Noncontrolling Interest of
$300 to represent the 30% of Company D it does not own. Over the first year, Company
C earns $1,000 in Net Income and issues $200 in Dividends, and Company D earns $100
in Net Income and issues $50 in Dividends. What is the Noncontrolling Interest at the
end of the year?

Advanced Accounting Scenarios

Answer 20

. $315.
Explanation: On the Income Statement, Net Income is up by $1,000 +
$100 = $1,100, to represent the combined Net Income from both
companies (since the statements are fully consolidated). But then
Company C deducts 30% * Company’s D’s Net Income for the portion it
does not own, so Net Income to Parent = $1,100 – 30% * $100 = $1,070.
On the Cash Flow Statement, Net Income to Parent is up by $1,070, and
the company reverses the Net Income Attributable to NCI deduction for
$30, so cash flow is up by $1,100 so far.
But then it adds 70% * Company D’s Dividends of $50 = $35, and it
deducts 100% of the Dividends from both Company C and Company D for
a total of $250. So, Cash at the bottom is up by $885.
On the Balance Sheet, Cash is up by $885, so the Assets side is up by
$885. On the L&E side, Common Shareholders’ Equity increases by $1,070
from the increased Net Income to Parent and decreases by Company C’s
Dividends of $200. Within Equity, the NCI increases by Net Income
Attributable to NCI and Dividends Received from Company D and
decreases by Company D’s Dividends, so it changes by $30 + $35 – $50 =
$15. Therefore, the L&E side is up by $1,070 – $200 + $15 = $885, and
both sides balance.
Intuition: The easiest explanation is that the Noncontrolling Interest
increases by 30% * Company D’s Net Income and decreases by 30% *
Company D’s Dividends, so the change equals 30% * $100 – $30 * $50 =
$15. Therefore, the NCI increases from $300 to $315.

Question 21

At the end of another year, Company C sells its entire stake in Company D and deconsolidates the financial statements. Which of the following answer choices does NOT represent a correct change on the Balance Sheet when this happens?

Advanced Accounting Scenarios

Answer 21

Company C records the After-Tax Gain or Loss in Cash on the Assets side, and in
Common Shareholders’ Equity on the Liabilities & Equity side.
Explanation: The last answer choice is correct, i.e., this is the only change
that does NOT happen. The problem is that Company C records the total
cash proceeds received in Cash on the Assets side, not just the After-Tax
Gain or Loss. So, Cash changes by the Cost Basis Recovered + After-Tax
Gain or Loss. On the L&E side, only the After-Tax Gain or Loss appears in
Common Shareholders’ Equity.
Everything else above is correct: Company D’s Assets and Liabilities are
removed, and the Goodwill and Noncontrolling Interest are removed as
well.

Question 22

A U.S.-based company following U.S. GAAP issues $200 in Stock-Based Compensation to
employees in Year 1. In Year 3, the value of this Stock-Based Compensation increases to
$300, and employees exercise their options and receive their shares.
How do Income Taxes on the Income Statement change in Year 3? Assume that the
company has positive Pre-Tax Income in Year 3, with Income Taxes shown as a negative.

Advanced Accounting Scenarios

Answer 22

They become less negative by $25.
Explanation: In Year 3, the original $200 of SBC becomes Cash-Tax
Deductible, and the $50 Deferred Tax Asset created in Year 1 reverses
and goes back to $0. HOWEVER, all of that happens only on the Cash
Flow Statement and Balance Sheet under U.S. GAAP.
On the Income Statement, the company records a line item for “Excess
Tax Benefits” as a direct offset to Book Income Taxes. It’s equal to (SBC
Value in Year 3 – SBC Value in Year 1) * Tax Rate, so it’s ($300 – $200) *
25% = $25 here, and Income Taxes become less negative by $25, which
increases Net Income.

Question 23

Company A owns a small number of shares in Company B, and it classifies these shares
as Equity Securities since they represent ~0.5% ownership in Company B. Company A
purchased these Equity Securities for $100 last year.
This year, the market value of these Equity Securities increases to $120 because
Company B’s share price goes up. Company A holds the shares and does not sell
anything. How does Company A’s Deferred Tax Asset change?

Advanced Accounting Scenarios

Answer 23

It’s down by $5
Explanation: This change is recorded as a $20 Unrealized Gain on the
Income Statement, so Pre-Tax Income is up by $20, and Net Income is up
by $15 at a 25% tax rate.
On the Cash Flow Statement, Net Income is up by $15, but this
Unrealized Gain is non-cash, so it’s reversed for negative $20, and cash
flow is down by $5 so far. However, you also record a positive entry of $5
for Deferred Taxes because the company does not pay Cash Taxes on this
Unrealized Gain. Cash at the bottom is unchanged.
On the Balance Sheet, Cash is unchanged, the Equity Securities are up by
$20, and the DTA is down by $5 because of the $5 of Deferred Taxes on
the CFS, so the Assets side is up by $15. On the other side, CSE is up by
$15 due to the increased Net Income, so both sides are up by $15 and
balance.
Intuition: The company doesn’t have to pay the $5 in Cash Taxes on this
Unrealized Gain right now, but it will have to do so in the future. Its
Deferred Tax Asset decreases by $5 to reflect that.

Question 24

A company with a defined-benefit pension plan makes an Employer Contribution of $80,
records a Service Cost of $10, and records an Interest Cost of $10. Assume that
Employer Contributions are Cash-Tax Deductible, but that the Pension Expense on the
Income Statement is not.
Walk through the financial statements and explain how the company’s Cash changes.

Answer 24

It’s down by $60.
Explanation: On the Income Statement, Pre-Tax Income is down by $20
due to the Service Cost + Interest Cost, so Net Income is down by $15 at a
25% tax rate.
On the Cash Flow Statement, Net Income is down by $15, but the Pension
Expense on the IS did not create true Cash-Tax savings. Only the $80
Employer Contribution does that. So, Cash Taxes decrease by ($80 – $20)
* 25% = $15, which shows up as a positive adjustment of $15 in Deferred
Taxes on the CFS.
The company also adds back the $20 Pension Expense from the IS, since
it’s non-cash, and subtracts the $80 of Employer Contributions, so Cash
changes by ($15) + $15 + $20 – $80 = ($60).
On the Balance Sheet, Cash is down by $60, the DTA is down by $15
because of the Deferred Taxes on the CFS, and the Pension Asset is up by
$80 because of the Employer Contributions, so Total Assets are up by $5.
On the other side, the Pension Liability is up by $20 from the Pension
Expense reversal on the CFS, and CSE is down by $15 due to the reduced
Net Income. The L&E side is down by $5, and both sides balance.
Intuition: The Pension Expense on the IS makes no impact because it’s a
non-cash expense that is also not Cash-Tax Deductible. The $80 of
Employer Contributions reduce the company’s Cash by $80, but they also
save the company $80 * 25% = $20 in Cash Taxes, so its Cash balance falls
by $60 rather than $80.