Financial and Managerial Accounting

Bonds Issued at a Premium Presley Company sells $1,000,000 general obligation bonds for 102. The interest rate on the bonds, paid quarterly, is 5 percent. Calculate ( a ) the amount that the company will actually receive from the sale of the bonds, and ( b ) the amount of both the quarterly and the total annual cash interest that the company will be required to pay.

You as a Student Assume that you will have a 10-year, $10,000 loan to repay when you graduate from college next month. The loan, plus 8 percent annual interest on the unpaid balance, is to be repaid in 10 annual installments of $1,490 each, beginning one year after you graduate. You have accepted a wellpaying job and are considering an early settlement of the entire unpaid balance in just three years (immediately after making the third annual payment of $1,490). Prepare an amortization schedule showing how much money you will need to save to pay the entire unpaid balance of your loan three years after your graduation. (Round amounts to the nearest dollar.)

Define liabilities. Identify several characteristics that distinguish liabilities from owners' equity.

The Nature of Liabilities Listed below are seven publicly owned corporations and a liability that regularly appears in each corporation's balance sheet: a. Wells Fargo Company (banking): Deposits: interest bearing b. The New York Times Company (news paper publisher): Unexpired subscriptions c. The Hollywood Park Companies (horse racing): Outstanding mutuel tickets d. American Greetings (greeting cards and gift wrap products manufacturer): Sales returns e. Wausau Paper Mills Company (paper manufacturer): Current maturities of long-term debt f. Club Med., Inc. (resorts): Amounts received for future vacations g. Apple Computer, Inc. (computer manufacturer): Accrued marketing and distribution h. General Motors Corporation (automobile manufacturer): obligation for postretirement benefits Instructions Briefly explain what you believe to be the nature of each of these liabilities, including how the liability arose and the manner in which it is likely to be discharged.

Effects of Transactions on the Accounting Equation Listed below are eight events or transactions of Lone Star Corporation. a. Made an adjusting entry to record interest on a short-term note payable. b. Made a monthly installment payment of a fully amortizing, six-month, interest-bearing instalment note payable. c. Recorded a regular biweekly payroll, including the amounts withheld from employees, the issuance of paychecks, and payroll taxes on the employer. d. Came within 12 months of the maturity date of a note payable originally issued for a period of 24 months. e. Deposited employee tax withholdings with proper tax authorities. f. Issued bonds payable at face value. g. Recognized semiannual interest expense on bonds payable described in part f and paid bondholders the full interest amount. h. Recorded the necessary adjusting entry on December 31, 2015, to accrue three months' interest on bonds payable that had been issued at a discount several years prior. The next semiannual interest payment will occur March 31, 2016. Indicate the effects of each of these transactions on the following financial statement categories. Organize your answer in tabular form, using the illustrated column headings. Use the following code letters to indicate the effects of each transaction on the accounting element listed in the column heading: I for increase, D for decrease, and NE for no effect.

Balance Sheet Presentation of Liabilities The following are selected items from the accounting records of Georgia Peach for the year ended December 31, 2015: Other Information 1. The note payable to Smithfield Bank is due in 60 days. Arrangements have been previously approved to renew this note for an additional 24 months. 2. The mortgage requires payments of $10,000 per month. An amortization table shows that its balance will be paid down to $733,000 by December 31, 2016. 3. Accrued interest on the mortgage note payable is paid monthly. The next payment is due near the end of the first week in January 2016. 4. Georgia Peach has been sued for $2,000,000 in a product liability case. It is not possible at this time, however, to make a reasonable estimate of the possible loss, if any, that the company may have sustained. Instructions a. Using the information provided, prepare the current and long-term liability sections of Georgia Peach's balance sheet dated December 31, 2015. (Within each classification, items may be listed in any order.) b. Explain briefly how the information in each of the four numbered paragraphs above influenced your presentation of the company's liabilities.

One of the advantages of borrowing is that interest is deductible for income tax purposes. a. If a company pays 8 percent interest to borrow $500,000. but is in an income tax bracket that requires it to pay 40 percent income tax. what is the actual net-of-tax interest cost that the company incurs? b. What is the effective interest rate that is paid by the company?

About Lab s has two bond issues outstanding with the following characteristics: Instructions Answer the following questions regarding these bond issues: a.? Which issue, A or B, has the higher effective rate of interest? How can you tell? b.? Assume that the bonds of both issues have face values of $ 1,000 each. How much total interest does each bond from issue A provide investors in 12 months ? How much total interest does each bond from issue B provide investors in 12 months? c.? Note that both issues are by the same company, have the same contract rate of interest, and have identical credit ratings. In view of these facts, explain the current price difference of each issue.

Notes Payable: Accruing Interest During the fiscal year ended December 31, Swanlee Corporation engaged in the following transactions involving notes payable: Instructions a. Prepare journal entries (in general journal form) to record the above transactions. Use a 360-day year in making the interest calculations. b. Prepare the adjusting entry needed at December 31, prior to closing the accounts. Use one entry for all three notes (round to the nearest dollar). c. Provide a possible explanation why the new 60-day note payable to Moontime Equipment pays 16 percent interest instead of the 10 percent rate charged on the September 16 note.

Cash Effects of Borrowing Jansen Company borrowed $12,000 on a one-year, 8 percent note payable from the local bank on April 1. Interest was paid quarterly, and the note was repaid one year from the time the money was borrowed. Calculate the amount of cash payments Jansen was required to make in each of the two calendar years that were affected by the note payable.

Effects of Transactions on Financial Statements Fifteen transactions or events affecting Technology Specialists, Inc., are as follows: a. Made a year-end adjusting entry to accrue interest on a note payable. b. A liability classified for several years as long-term becomes due within the next 12 months. c. Recorded the regular biweekly payroll, including payroll taxes, amounts withheld from employees, and the issuance of paychecks. d. Earned an amount previously recorded as unearned revenue. e. Made arrangements to extend a bank loan due in 60 days for another 18 months. f. Made a monthly payment on a fully amortizing installment note payable. (Assume this note is classified as a current liability.) g. Called bonds payable due in seven years at a price above the carrying value of the liability in the accounting records. h. Issued bonds payable at 97 on May 1, 2015. The bonds pay interest May 1 and November 1. i. Recorded November 1, 2015, interest expense and made semiannual interest payment on bonds referred to in part h. j. Recorded necessary adjusting entry on December 31, 2015, for bonds referred to in part h. k. Issued bonds payable at 102 on July 31, 2015. The bonds pay interest July 31 and January 31. l. Recorded necessary adjusting entry on December 31, 2015, for bonds referred to in part k. m. Recorded an estimated liability for warranty claims. n. Entered into a two-year commitment to buy all hard drives from a particular supplier at a price 10 percent below market. o. Received notice that a lawsuit has been filed against the company for $7 million. The amount of the company's liability, if any, cannot be reasonably estimated at this time. Instructions Indicate the effects of each of these transactions upon the following elements of the Technology Specialists, Inc.'s financial statements. Organize your answer in tabular form, using the column headings shown below. Use the following code letters to indicate the effects of each transaction on the accounting element listed in the column headings: I for increase, D for decrease, and NE for no effect.

Define current liabilities and long-term liabilities. Under what circumstances might a 10-year bond issue be classified as a current liability? Under what circumstances might a note payable maturing 30 days after the balance sheet date be classified as a long-term liability?

Loss Contingencies Discuss each of the following situations, indicating whether the situation is a loss contingency that should be recorded or disclosed in the financial statements of Freedom Airlines. If the situation is not a loss contingency, explain how (if at all) it should be reported in the company's financial statements. (Assume that all dollar amounts are material.) Instructions a. 1. Freedom estimates that $700,000 of its accounts receivable will prove to be uncollectible. 2. The company's president is in poor health and has previously suffered two heart attacks. 3. As with any airline, Freedom faces the risk that a future airplane crash could cause considerable loss. 4. Freedom is being sued for $2 million for failing to adequately provide alternative service for passengers whose reservations were canceled as a result of the airline's overbooking certain flights. This suit will not be resolved for a year or more. b. Make a general statement that summarizes management's ethical responsibility regarding reporting loss contingencies in its financial statements.

Effects of Transactions on Various Financial Measurements Six events relating to liabilities follow: a. Paid the liability for interest payable accrued at the end of the last accounting period. b. Made the current monthly payment on a 12-month installment note payable, including interest and a partial repayment of principal. c. Issued bonds payable at 98 on March 1, 2015. The bonds pay interest March 1 and September 1. d. Recorded September 1, 2015, interest expense and made semiannual interest payment on bonds referred to in part c. e. Recorded necessary adjusting entry on December 31, 2015, for bonds referred to in part c. f. Recorded estimated six-month warranty expense on December 31, 2015. Indicate the effects of each transaction or adjusting entry on the financial measurements in the five column headings listed below. Use the code letters I for increase, D for decrease, and NE for no effect.

Bonds Issued at a Discount Crosby, Inc., sells $1,000,000 general obligation bonds for 98. The interest rate on the bonds, paid quarterly, is 6 percent. Calculate ( a ) the amount that the company will actually receive from the sale of the bonds, and ( b ) the amount of both the quarterly and the total annual cash interest that the company will be required to pay.

Explain the relative priority of the claims of owners and of creditors to the assets of a business. Do all creditors have equal priority? Explain.

During the fiscal year ended December 31, Swanson Corporation engaged in the following transactions involving notes payable: Instructions a. ?Prepare journal entries (in general journal form) to record the above transactions. Use a 360-day year in making the interest calculations. b. ?Prepare the adjusting entry needed at December 31. prior to closing the accounts. Use one entry for all three notes (round to the nearest dollar). c. ?Provide a possible explanation why the new 30-day note payable to Seawald Equipment pays 16 percent interest instead of the 10 percent rate charged on the September 16 note.

Off-Balance Sheet Financing Airlines AMR (American Airlines) leases most of itscommercial aircraft and is currently committedtopayover $11 billion in future lease obligations. However, the company's 2009 financialstatement reported only $689 million of these commitments as long-term capital lease obligationsinthe liability sectionof its balance sheet. The remaining commitments are structured asoperatingleases. Obligations to pay future operating lease obligations are not reported in the balance sheetas liabilities. Instead, cash outlays for operating leases appear only in the income statement asexpenses as the obligations corne due.American's recent balance sheet reports assets totaling $25.5 billion. The company's long-termdebt, including its capital lease obligations, total approximately $10.5 billion, and the stockholders'equity section of itsbalance sheet reveals a deficit (negative) balance in retained earnings. Instructions a. If American Airlines had structured its aircraft commitments as capital leases instead of operating leases, how would the appearance and potential interpretation of its balance sheethave changed? b. Isit ethical for American Airlines to structure less than $1billion of its aircraft commitments as capital leases and theremaining as off-balance sheet financing? Defend your answer. c. With regard to American Airlines 's lease obligations, why is it important for investors and creditors toread and understand the footnotes accompanying the airline's financial statements?

Effects of Transactions on Financial Statements Fifteen transactions or events affecting Philmar, Inc., are as follows: a. Made a year-end adjusting entry to accrue interest on a note payable that has the interest rate stated separately from the principal amount. b. A liability classified for several years as long-term becomes due within the next 12 months. c. Recorded the regular weekly payroll, including payroll taxes, amounts withheld from employees, and the issuance of paychecks. d. Earned an amount previously recorded as unearned revenue. e. Made arrangements to extend a bank loan due in 60 days for another 36 months. f. Made a monthly payment on a fully amortizing installment note payable. (Assume this note is classified as a current liability.) g. Called bonds payable due in 10 years at a price below the carrying value of the liability in the accounting records. h. Issued bonds payable at 101 on January 31, 2015. The bonds pay interest on January 31 and July 31. i. Recorded July 31, 2015, interest expense and made semiannual interest payment on bonds referred to in part h. j. Recorded necessary adjusting entry on December 31, 2015, for bonds referred to in part h. k. Issued bonds payable at 98 on August 31, 2015. The bonds pay interest August 31 and February 28. l. Recorded the necessary adjusting entry on December 31, 2015, for bonds referred to in part k. m. Recorded an estimated liability for warranty claims. n. Entered into a five-year commitment to buy all supplies from a particular supplier at a price 20 percent below market. o. Received notice that a lawsuit has been filed against the company for $8 million. The amount of the company's liability, if any, cannot be reasonably estimated at this time. Instructions Indicate the effects of each of these transactions upon the following elements of the company's financial statements. Organize your answer in tabular form, using the column headings shown below. Use the following code letters to indicate the effects of each transaction on the accounting elements listed in the column headings: I for increase, D for decrease, and NE for no effect.

Balance Sheet Presentation of Liabilities The following are selected items from the accounting records of Denver Chocolates for the year ended December 31, 2015: Other Information 1. The note payable to Northwest Bank is due in 60 days. Arrangements have been made to renew this note for an additional 12 months. 2. The mortgage requires payments of $6,000 per month. An amortization table shows that its balance will be paid down to $739,000 by December 31, 2016. 3. Accrued interest on the mortgage note payable is paid monthly. The next payment is due near the end of the first week in January 2016. 4. Denver Chocolates has been sued for $160,000 in a contract dispute. It is not possible at this time, however, to make a reasonable estimate of the possible loss, if any, that the company may have sustained. Instructions a. Using the information provided, prepare the current and long-term liability sections of the Denver Chocolates balance sheet dated December 31, 2015. (Within each classification, items may be listed in any order.) b. Explain briefly how the information in each of the four numbered paragraphs above influenced your presentation of the company's liabilities.