Reference no: EM132976713

Problem 1: Assume NO taxes. A company borrows $1,000 at the beginning of Y3 at an interest rate of 10% per year. The interest is paid in cash at the end of each year. Instead of treating the entire loan as being for general corporate purposes, it misclassifies 30% of the loan as being used to finance the construction of a manufacturing facility. The manufacturing facility is still under construction at the end of Y3. What effect will this misclassification have on the REPORTED financial statements?

a. Increase net income by $30, increase construction in progress [asset] by $30, no effect on operating cash flows, and increase capital expenditures by $30.

b. Increase net income by $30, increase construction in progress [asset] by $30, no effect on operating cash flows, and no effect on capital expenditures.

c. Increase net income by $30, no effect on construction in progress [asset], no effect on operating cash flows, and no effect on capital expenditures.

d. Increase net income by $30, increase construction in progress [asset] by $30, increase operating cash flows by $30, and increase capital expenditures by $30.