Brands, Inc.—like all other businesses—adjusts accounts prior to year end to get correct amounts for the financial statements. Examine YUM’s balance sheet in Appendix A, and pay particular attention to (a) Prepaid Expenses and Other Current Assets and (b) Income Taxes Payable.

Required

1. Why aren’t Prepaid Expenses “true” expenses? Why does a company have income taxes payable at year end?

2. Open T-accounts for the two accounts listed above. Insert YUM’s balances (in millions) at December 31, 2005.

3. Journalize the following transactions for the year ended December 30, 2006. Key entries by letter, and show amounts in millions. Explanations are not required.

a. Recorded General Expense for expiration of the beginning balance of Prepaid Expenses.

b. Paid off the beginning balance of Income Taxes Payable.

c. Paid the ending balance of Prepaid Expenses.

d. Recorded Income Tax Expense of $284 million, paying $247 million in cash and accruing the remainder.

4. Post these entries to the 2 accounts and show that the ending balances of Prepaid Expenses and Other Current Assets and of Income Taxes Payable agree with the corresponding amounts reported in YUM’s December 30, 2006, balance sheet.

5. Compute the current ratios and debt ratios for YUM! Brands at December 31, 2005, and at December 30, 2006. Did the ratio values improve, deteriorate, or hold steady during 2006? Do YUM’s ratio values indicate financial strength or weakness?