At the beginning of 2021, Saola was informed that a new city ordinance would require them to restore the woods behind their main factory if they intend to keep using it. The estimated cost of the restoration will be approximately $690,000 and must be done within the next 5 years or the factory will be shut down. When the notice was received, Saolas board decided to wait until the beginning of 2025 to start the restoration.

Although the notice was received and the boards decision made at the beginning of the year, no journal entries have yet been made for this obligation. The factory was built 3 years ago when Saola was still a privately held company and is being depreciated using SL depreciation using the original estimate of a 15 year useful life. The depreciation for the building has already been recorded for 2021. The restoration will not change the factorys salvage value.

Saolas management would like to know the effect of your adjustment on the following ratios: Current Ratio and ROA.

1. Make the appropriate journal entries, if any, to account for the new liability (including any necessary changes to income tax expense). In making your entries, assume that Saolas Internal Rate of Return is 6%.

2. Make any necessary changes to the financial statements. (I will attach pictures of the financial statements below.)

3. Calculate each of the required ratios using the original values (before any changes) and the updated values (after your changes).

4. In past years legal requirements were the primary reasons for companies to recognize an ARO like this one. However, there has been a recent push by companies to improve their social responsibility without waiting for government intervention. How do you think investors would have reacted to this adjustment if Saola had made the decision to clean up the environment around their facility on their own? Do you think the drop in net income would have been considered less negative if the decision had been Saola's? Defend your answer.

5. Saolas CEO argued that they should wait until they had to actually satisfy the obligation to record it, after all they werent going to have to actually pay anything until then. What are the possible consequences of this decision and who is likely to be affected?

I iahilities and Storkhnlders' Frulitv Saola Co. Multi-Step Income Statement For Year Ended December 31, 2021 \begin{tabular}{l} \hlineSalesRevenueSalesRevenue \\ Less: Sales Discounts \\ Sales Returns \\ Net Sales Revenue \\ CostofGoodsSoldCostofGoodsSold \\ Gross Profit \end{tabular} \begin{tabular}{ll} $2,420,204 & \\ & \\ & \\ $3,234,102 & $5,654,306 \\ \hline & $4,528,051 \end{tabular} \begin{tabular}{l} Operating Activities \\ \hline Selling Expenses \\ Advertising Expense \\ Bad Debt Expense \\ Miscellaneous Selling Exp \\ Sales Force Salaries Expens \\ Selling Commissions Expens \\ Shipping Expense \\ Total Selling Expenses \\ Administrative Expenses \\ Consulting and Legal Fees \\ Executive Salaries Expense \\ Depreciation \& Amortization \\ Insurance Expense \\ Miscellaneous Admin. Expens \\ Office Supplies Expense \\ Utilities Expense \\ Total Administrative Expenses \\ Income from Operations \end{tabular} Income from Operations Other Gains and Losses \begin{tabular}{lrr} \hline Rent Revenue & $80,938 & \\ Income from Investment in ZHT, Inc. & $264,656 & \\ Interest Expense & ($165,113) & $180,481 \\ Income from Continuing Operations before Taxes & & $4,708,532 \\ Income Tax Expense & & ($1,421,495) \\ \hline Net Income & $3,287,037 \\ \hline \end{tabular} EPS $1.10 2 Saola Co. Statement of Cash Flows \begin{tabular}{lcr} \multicolumn{3}{c}{ For Year Ended December 31, 2021} \\ \hline Cash Flow from Operations & & $3,287,037 \\ Net Income & & \\ Adjustments: & ($641,802) & \\ Change in A/R & $518,000 & \\ Change in Inventory & $44,250 \\ Change in Prepaid Insurance & ($64,750) \\ Change in Prepaid Utilities & $1,554,000 \\ Depreciation & ($188,606) \\ Equity Method Investments & ($1,171,792) & \\ Change in A/P & $261,163 & \\ Change in Income Tax Payable & $259,000 & \\ Change in Interest Accrued & ($12,950) & $556,513 \\ Change in Uneamed Revenue & & $3,843,550 \end{tabular} \begin{tabular}{lr} Net Increase (Decrease) in Cash & ($475,246) \\ Cash, January 1, 2021 & $1,295,000 \\ \hline Cash, December 31, 2021 & $819,754 \\ \hline \hline \end{tabular} 4 Ratio Analysis