Quiz 10: Liabilities
Business
Q 1Q 1
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.
Free
Essay
(1)
Calculate total cash payment for year 1:
Consider interest payment for 3 quarters.
Calculate total cash payment for year 2:
Consider interest payment for 1 quarter and principal amount.
Q 2Q 2
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.
Free
Essay
(a) Deposits: Interest bearing in the balance sheet of W.F. and Company represents the amounts on deposit of bank accounts. This liability arises from customers depositing money in these accounts and is discharged on maturity of deposit or premature withdrawal by customers. (b) Unexpired subscriptions in the balance sheet of the N.Y.T. Company represent advances from customers to receive newspaper for a particulars period. This liability is discharged by delivering newspapers to these customers for that particulars period. (c) Outstanding mutuel tickets in the balance sheet of The Hollywood Park Companies represent redeemable tickets arising from horses win races, and it is discharged by redeeming the winning tickets. (d) Sales return in the balance sheet of A Greetings represents the return of sales from customers. It is discharged by refunding the customers. (e) Current maturities of long term debt in the balance sheet of W. P. M. Company represent the current liability expected to be paid in a year's time. IT arose from long term debt representing current installment due. It will be discharged by paying of the installment. (f) Amounts received for future vacations in the balance sheet of C.M., Inc. represents the advances received from clients and is discharged by rendering services to the clients. (g) Accrued marketing and distribution in the balance sheet of A.C., Inc., represents the expenses that have not been paid. It is discharged as and when company makes payment. (h) Obligations for post retirement benefits in the balance sheet of G.M. represent represents post retirement benefits of employees and is discharged by paying off the benefits to the trust by the employer.
Q 3Q 3
Define liabilities. Identify several characteristics that distinguish liabilities from owners' equity.
Free
Essay
Liabilities: Liabilities maybe defined as debts or obligations arising from past transactions or events that require settlement at a future date. Characteristics that distinguish liabilities from owner's equity: 1) All liabilities eventually mature. Owner's equity does not mature. The date at which liabilities mature is called maturity date is called maturity date 2) The people to whom the business is liable to i.e, the creditors have financial claims against the business the owner's have right to control business operations. 3) The claims of creditors have legal priority over the claims of owner's.
Q 4Q 4
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.)
Free
Essay
Q 5Q 5
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.
Free
Essay
Q 6Q 6
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.
Free
Essay
Q 7Q 7
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?
Free
Essay
Q 8Q 8
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.
Free
Essay
Q 9Q 9
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.
Free
Essay
Q 10Q 10
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.
Free
Essay
Q 11Q 11
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.
Free
Essay
Q 12Q 12
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.
Free
Essay
Q 13Q 13
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.
Free
Essay
Q 14Q 14
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.
Free
Essay
Q 15Q 15
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?
Free
Essay
Q 16Q 16
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.
Free
Essay
Q 17Q 17
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.
Free
Essay
Q 18Q 18
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.
Free
Essay
Q 19Q 19
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.
Free
Essay
Q 20Q 20
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?
Free
Essay
Q 21Q 21
Explain why an employer's "total cost" of a payroll may exceed by a substantial amount the total wages and salaries earned by employees.
Free
Essay
Q 22Q 22
Employees-What Do They Really Cost?
Big Game, Inc., is a manufacturer of hunting supplies. The following is a summary of the company's annual payroll-related costs:
a. Compute Big Game's total payroll-related costs for the year.
b. Compute the net amount of cash actually paid to employees (their take-home pay).
c. Express total payroll-related costs as a percentage of (1) total wages and salaries expense, and (2) employees' take-home pay. (Round computations to the nearest 1 percent.)
Free
Essay
Q 23Q 23
Preparation and Use of an Amortization Tablek
On September 1, 2015, Speedy Lube signed a 30-year, $1,080,000 mortgage note payable to Jonstown Bank and Trust in conjunction with the purchase of a building and land. The mortgage note calls for interest at an annual rate of 12 percent (1 percent per month). The note is fully amortizing over a period of 360 months.
The bank sent Speedy Lube an amortization table showing the allocation of monthly payments between interest and principal over the life of the loan. A small part of this amortization table is illustrated below. (For convenience, amounts have been rounded to the nearest dollar.)
Instructions
a. Explain whether the amounts of interest expense and the reductions in the unpaid principal are likely to change in any predictable pattern from month to month.
b. Prepare journal entries to record the first two monthly payments on this mortgage.
c. Complete this amortization table for two more monthly installments-those due on December 1, 2015, and January 1, 2016. (Round amounts to the nearest dollar.)
d. Will any amounts relating to this 30-year mortgage be classified as current liabilities in Speedy Lube's December 31, 2015, balance sheet? Explain, but you need not compute any additional dollar amounts.
Free
Essay
Q 24Q 24
Preparation and Use of an Amortization Table
On October 1, 2015, Jenco signed a four-year, $100,000 note payable to Vicksburg State Bank in conjunction with the purchase of equipment. The note calls for interest at an annual rate of 12 percent (1 percent per month). The note is fully amortizing over a period of 48 months.
The bank sent Jenco an amortization table showing the allocation of monthly payments between interest and principal over the life of the loan. A small part of this amortization table is illustrated below. (For convenience, amounts have been rounded to the nearest dollar.)
Instructions
a. Explain whether the amounts of interest expense and the reductions in the unpaid principal are likely to change in any predictable pattern from month to month.
b. Prepare journal entries to record the first two monthly payments on this note.
c. Complete this amortization table for two more monthly installments.
d. Will any amounts relating to this four-year note be classified as current liabilities in Jenco's December 31, 2015, balance sheet? Explain, but you need not compute any additional dollar amounts.
Free
Essay
Q 25Q 25
Recording Bonds Issued at a Discount
Lewis Company sold $500,000 of bonds at 97 on an interest payment date. Assuming the bonds will be retired in 10 years and interest is paid annually, calculate the amount of cash that will be received and paid by Lewis in the first year, as well as the interest expense that will be recognized in that year. The bonds carry a stated interest rate of 5 percent.
Free
Essay
Q 26Q 26
Credit Ratings on Bonds
The Internet provides a wealth of information concerning long-term liabilities, bond ratings, and credit markets. Visit thehorne page of BondsOnline at the following Internet address:
www.BondsOnline.com
Instructions
a. Go to the "Chart Center" section of the Web site. Define in your own words the term "yield curve". Why is the yield curve relevant to you as a bond investor?
b.Return to the home page. On the left side of the screen, locate the heading that providescurrent market information. Summarize two things you learned about the current financial markets bystudying this information.
c. Again return to the home page. Select the option "Financial Career Center" and select the job classification that interests you the most. Browse the jobs listed under that classification andselect a specific job you would apply for were you currently qualified. Write a brief descriptionwhy this jobinterests you.
Free
Essay
Q 27Q 27
A friend of yours has just purchased a house and has taken out a $50,000. 11 percent mortgage, payable at $476.17 per month. After making the first monthly payment, he received a receipt from the bank stating that only $17.84 of the $476.17 had been applied to reducing the principal amount of the loan. Your friend computes that, at the rate of $17.84 per month, it w ill take over 233 years to pay off the $50,000 mortgage. Do you agree with your friend's analysis? Explain.
Free
Essay
Q 28Q 28
Accounting for Payroll Activities
Spirit Corporation reported the following payroll-related costs for the month of February:
Spirit's insurance premiums for workers' compensation and group health and life insurance were paid for in a prior period and recorded initially as prepaid insurance expense. Withholdings from employee wages in February were as follows:
a. Record Spirit's gross wages, employee withholdings, and employee take-home pay for February.
b. Record Spirit's payroll tax expense for February.
c. Record Spirit's employee benefit expenses for February.
d. Do the amounts withheld from spirit's employees represent taxes levied on spirit Corporation? Explain.
Free
Essay
Q 29Q 29
Bond Interest (Bonds Issued at Face Value)
Green Mountain Power Company obtained authorization to issue 20-year bonds with a face value of $10 million. The bonds are dated May 1, 2015, and have a contract rate of interest of 10 percent. They pay interest on November 1 and May 1. The bonds were issued on August 1, 2015, at 100 plus three months' accrued interest.
Instructions
Prepare the necessary journal entries in general journal form on:
a. August 1, 2015, to record the issuance of the bonds.
b. November 1, 2015, to record the first semiannual interest payment on the bond issue.
c. December 31, 2015, to record interest expense accrued through year-end. (Round to the nearest dollar.)
d. May 1, 2016, to record the second semiannual interest payment. (Round to the nearest dollar.)
e. What was the prevailing market rate of interest on the date that the bonds were issued? Explain.
Free
Essay
Q 30Q 30
Bond Interest (Bonds Issued at Face Value)
Stevens Manufacturing Company obtained authorization to issue 10-year bonds with a face value of $5 million. The bonds are dated June 1, 2015, and have a contract rate of interest of 6 percent. They pay interest on December 1 and June 1. The bonds are issued on September 1, 2015, at 100 plus three months' accrued interest.
Instructions
Prepare the necessary journal entries in general journal form on:
a. September 1, 2015, to record the issuance of the bonds.
b. December 1, 2015, to record the first semiannual interest payment on the bond issue.
c. December 31, 2015, to record interest expense accrued through year-end.
d. June 1, 2016, to record the second semiannual interest payment.
e. What was the prevailing market rate of interest on the date that the bonds were issued? Explain.
Free
Essay
Q 31Q 31
Recording Bonds Issued at a Premium
Purple Orange, Inc., sold $800,000 of bonds on an interest payment date at 102. Assuming the bonds will be retired in 10 years and interest is paid annually, calculate the amount of cash that will be received and paid by Purple Orange in the first full year, as well as the amount of interest expense that will be recognized in that year. The bonds carry a stated interest rate of 6.5 percent.
Free
Essay
Q 32Q 32
Briefly explain the income tax advantage of raising capital by issuing bonds rather than by selling capital stock.
Free
Essay
Q 33Q 33
Use of an Amortization Table
Glen Pool Club, Inc., has a $150,000 mortgage liability. The mortgage is payable in monthly installments of $1,543, which include interest computed at an annual rate of 12 percent (1 percent monthly).
a. Prepare a partial amortization table showing ( 1 ) the original balance of this loan, and ( 2 ) the allocation of the first two monthly payments between interest expense and the reduction in the mortgage's unpaid balance. (Round to the nearest dollar.)
b. Prepare the journal entry to record the second monthly payment.
c. Will monthly interest increase, decrease, or stay the same over the life of the loan? Explain your answer, including why in this case the amount of principal included in the first two payments is the same.
Free
Essay
Q 34Q 34
Amortization of a Bond Discount and Premium
On September 1, 2015, Evansville Lumber Company issued $80 million in 20-year, 10 percent bonds payable. Interest is payable semiannually on March 1 and September 1. Bond discounts and premiums are amortized at each interest payment date and at year-end. The company's fiscal year ends at December 31.
Instructions
a. Make the necessary adjusting entries at December 31, 2015, and the journal entry to record the payment of bond interest on March 1, 2016, under each of the following assumptions:
1. The bonds were issued at 98. (Round to the nearest dollar.)
2. The bonds were issued at 101. (Round to the nearest dollar.)
b. Compute the net bond liability at December 31, 2016, under assumptions 1 and 2 above. (Round to the nearest dollar.)
c. Under which of the above assumptions, 1 or 2, would the investor's effective rate of interest be higher? Explain.
Free
Essay
Q 35Q 35
Amortization of a Bond Discount and Premium
On September 1, 2011, Rodriguez Plumbing Company issued $5 million in 10-year, 12 percent bonds payable. Interest is payable semiannually on March 1 and September 1. Bond discounts and premiums are amortized at each interest payment date and at year-end. The company's fiscal year ends at December 31.
Instructions
a. Make the necessary adjusting entries at December 31, 2015, and the journal entry to record the payment of bond interest on March 1, 2016, under each of the following assumptions:
1. The bonds were issued at 98. (Round to the nearest dollar.)
2. The bonds were issued at 104. (Round to the nearest dollar.)
b. Compute the net bond liability at December 31, 2016, under assumptions 1 and 2 above. (Round to the nearest dollar.)
c. Under which of the above assumptions, 1 or 2, would the investor's effective rate of interest be higher? Explain.
Free
Essay
Q 36Q 36
Debt Ratio
Wolfe Company has debt totaling $2,000,000 and total stockholders' equity of $4,200,000. Tiger Company has debt totaling $3,100,000 and stockholders' equity of $5,000,000.
a. Calculate the debt ratio for each company. (Hint: You will find an explanation of the debt ratio and how it is computed in Exhibit 10-8.)
b. Briefly explain the meaning of the debt ratio.
Free
Essay
Q 37Q 37
Seattle Boat Company pays federal income taxes at a rate of 35 percent on taxable income. Compute the company's annual after-tax cost of borrowing on an 8 percent, $5 million bond issue. Express this after-tax cost as a percentage of the borrowed $5 million.
Free
Essay
Q 38Q 38
After-Tax Cost of Borrowing
DuPont reports in a recent balance sheet $1,383 million of 6.00 percent notes payable due in 2018. The company's income tax rate is approximately 20 percent.
a. Compute the company's after-tax cost of borrowing on this bond issue stated as a total dollar amount.
b. Compute the company's after-tax cost of borrowing on this bond issue stated as a percentage of the amount borrowed.
c. Describe briefly the advantage of raising funds by issuing bonds as opposed to stocks.
Free
Essay
Q 39Q 39
Reporting Liabilities in a Balance Sheet
The following items were taken from the accounting records of Murfreesboro Telephone Corporation (MTC) for the year ended December 31, 2015 (dollar amounts are in thousands):
Other Information
1. The 6¾ percent bonds due in February 2016 will be refinanced in January 2016 through the issuance of $150,000 in 9 percent, 20-year bonds payable.
2. The 8½ percent bonds due June 1, 2016, will be repaid entirely from a bond sinking fund.
3. MTC is committed to total lease payments of $14,400 in 2016. Of this amount, $7,479 is applicable to operating leases, and $6,921 to capital leases. Payments on capital leases will be applied as follows: $2,300 to interest expense and $4,621 to reduction in the capitalized lease payment obligation.
4. MTC's pension plan is fully funded with an independent trustee.
5. The obligation for postretirement benefits other than pensions consists of a commitment to maintain health insurance for retired workers. During 2016, MTC will fund $18,000 of this obligation.
6. The $17,300 in income tax payable relates to income taxes levied in 2015 and must be paid on or before March 15, 2016. No portion of the deferred tax liability is regarded as a current liability.
Instructions
a. Using this information, prepare the current liabilities and long-term liabilities sections of MTC's classified balance sheet as of December 31, 2015. (Within each classification, items may be listed in any order.)
b. Explain briefly how the information in each of the six numbered paragraphs affected your presentation of the company's liabilities.
c. Compute as of December 31, 2015, MTC's (1) debt ratio and (2) interest coverage ratio.
d. Solely on the basis of information stated in this problem, indicate whether this company appears to be an outstanding, medium, or poor long-term credit risk. State specific reasons for your conclusion.
Free
Essay
Q 40Q 40
Reporting Liabilities in a Balance Sheet
The following items were taken from the accounting records of Nevada Utility Company for the year ended December 31, 2015 (dollar amounts are in thousands):
Other Information
1. The 10 percent bonds due in April 2016 will be refinanced in March 2016 through the issuance of $125,000 in 9 percent, 20-year bonds payable.
2. The 8 percent bonds due October 1, 2016, will be repaid entirely from a bond sinking fund.
3. Nevada Utility is committed to total lease payments of $11,000 in 2016. Of this amount, $6,000 is applicable to operating leases, and $5,000 to capital leases. Payments on capital leases will be applied as follows: $2,000 to interest expense and $3,000 to reduction in the capitalized lease payment obligation.
4. Nevada Utility's pension plan is fully funded with an independent trustee.
5. The obligation for postretirement benefits other than pensions consists of a commitment to maintain health insurance for retired workers. During 2016, Nevada Utility will fund $16,000 of this obligation.
6. The $8,000 in income taxes payable relates to income taxes levied in 2015 and must be paid on or before March 15, 2016. No portion of the deferred tax liability is regarded as a current liability.
Instructions
a. Using this information, prepare the current liabilities and long-term liabilities sections of Nevada Utility Company's classified balance sheet as of December 31, 2015. (Within each classification, items may be listed in any order.)
b. Explain briefly how the information in each of the six numbered paragraphs affected your presentation of the company's liabilities.
c. Compute as of December 31, 2015, the company's ( 1 ) debt ratio and ( 2 ) interest coverage ratio.
d. Solely on the basis of information stated in this problem, indicate whether this company
appears to be an outstanding, medium, or poor long-term credit risk. State specific reasons for your conclusion.
Free
Essay
Q 41Q 41
Early Retirement of Bonds
Joseph Max, Inc., sold 10-year, 7 percent bonds for $1,000,000 at 98. On the interest payment date at the end of the 5th year the bonds were outstanding, 50 percent of the bonds were retired by Max at 102 under an early retirement option that was included in the bond agreement. Determine the gain or loss that Max will incur as a result of retiring the bonds.
Free
Essay
Free
Essay
Q 43Q 43
Bond Interest on Bonds Issued at Face Value
On March 31, 2015, Gardner Corporation received authorization to issue $50,000 of 9 percent, 30-year bonds payable. The bonds pay interest on March 31 and September 30. The entire issue was dated March 31, 2015, but the bonds were not issued until April 30, 2015. They were issued at face value.
a. Prepare the journal entry at April 30, 2015, to record the sale of the bonds.
b. Prepare the journal entry at September 30, 2015, to record the semiannual bond interest payment.
c. Prepare the adjusting entry at December 31, 2015, to record bond interest expense accrued since September 30, 2015. (Assume that no monthly adjusting entries to accrue interest expense had been made prior to December 31, 2015.)
d. Explain why the issuing corporation charged its bond investors for interest accrued in April 2015, prior to the issuance date (see part b above).
Free
Essay
Q 44Q 44
Financial Statement Presentation of Liabilities
As of December 31 of the current year, Petersen Corporation has prepared the following information regarding its liabilities and other obligations:
Instructions
a. Prepare a listing of the Petersen Corporation's current and long-term liabilities as they should be presented in the company's December 31 balance sheet.
b. Briefly explain why you have excluded any of the listed items in your listing of current and long-term liabilities.
Free
Essay
Q 45Q 45
Financial Statement Presentation of Liabilities
As of December 31 of the current year, Alexander Company has prepared the following information regarding its liabilities and other obligations:
Instructions
a. Prepare a listing of Alexander's current and long-term liabilities as they should be presented in the company's December 31 balance sheet.
b. Briefly explain why you have excluded any of the listed items in your listing of current and long-term liabilities.
Free
Essay
Q 46Q 46
Deferred Income Taxes
Alberto Company determines its annual income tax expense to be $459,000. Of that amount, $300,000 has already been paid during the year (on a quarterly basis) and charged to the Income Taxes Expense account. The company has determined that, of the amount that has not yet been paid or recorded, $75,000 will be deferred into future years under certain favorable income tax provisions available to the company. Prepare the end-of-year general journal entry to recognize income taxes accrued.
Free
Essay
Q 47Q 47
Some bonds now being bought and sold by investors on organized securities exchanges were issued when interest rates were much higher than they are today. Would you expect these bonds to be trading at prices above or below their face values? Explain.
Free
Essay
Q 48Q 48
Accounting for Bonds Issued at a Premium: Issuance, Interest Payments, and Retirement
Xonic Corporation issued $8 million of 20-year, 8 percent bonds on April 1, 2015, at 102. Interest is due on March 31 and September 30 of each year, and all of the bonds in the issue mature on March 31, 2035. Xonic's fiscal year ends on December 31. Prepare the following journal entries:
a. April 1, 2015, to record the issuance of the bonds.
b. September 30, 2015, to pay interest and to amortize the bond premium.
c. March 31, 2035, to pay interest, amortize the bond premium, and retire the bonds at maturity (make two separate entries).
d. Briefly explain the effect of amortizing the bond premium on (1) annual net income and (2) annual net cash flow from operating activities. (Ignore possible income tax effects.)
Free
Essay
Q 49Q 49
Pension and Other Postretirement Benefit Costs
Grammar, Inc., offers its full-time employees pension and other postretirement benefits, primarily health insurance. During the current year, pension benefits for the employees totaled $250,000. Other postretirement benefits totaled $140,000. The pension benefits are fully funded by the company by transferring cash to a trustee that administers the plan. The other postretirement benefits are similarly funded, but only at the 50 percent level. Prepare journal entries to record the two expenses, and determine the total amount that Grammar will need to transfer to its trustee for both benefit plans during the current year
Free
Essay
Q 50Q 50
There is an old business saying that "You shouldn't he in business if your company doesn't earn higher than bank rates." This means that if a company is to succeed, its return on assets should be significantly higher than its cost of borrowing. Why is this so important?
Free
Essay
Q 51Q 51
Accounting for Bonds Issued at a Discount: Issuance, Interest Payments, and Retirement
Mellilo Corporation issued $5 million of 20-year, 9.5 percent bonds on July 1, 2015, at 98. Interest is due on June 30 and December 31 of each year, and all of the bonds in the issue mature on June 30, 2035. Mellilo's fiscal year ends on December 31. Prepare the following journal entries:
a. July 1, 2015, to record the issuance of the bonds.
b. December 31, 2015, to pay interest and amortize the bond discount.
c. June 30, 2035, to pay interest, amortize the bond discount, and retire the bonds at maturity (make two separate entries).
d. Briefly explain the effect of amortizing the bond discount upon (1) annual net income and (2) annual net cash flow from operating activities. (Ignore possible income tax effects.)
Free
Essay
Q 52Q 52
Identify two characteristics of estimated liabilities. Provide at least two examples of estimated liabilities.
Free
Essay
Q 53Q 53
Safety of Creditors' Claims
Shown below are data from recent reports of two toy makers. Dollar amounts are stated in thousands.
a. Compute for each company (1) the debt ratio and (2) the interest coverage ratio. (Round the debt ratio to the nearest percent and the interest coverage ratio to two decimal places.)
b. In your opinion, which of these companies would a long-term creditor probably view as the safer investment? Explain.
Free
Essay
Q 54Q 54
What-is the meaning of the term loss, contingency ? Give several examples. How are loss contingencies presented in financial statements? Explain.
Free
Essay
Q 55Q 55
On July 1. Pine Region Dairy leased equipment from Farm America for a period of three years. The lease calls for monthly payments of $2,500 payable in advance on the first day of each month, beginning July 1.
Prepare the journal entry needed to record this lease in the accounting records of Pine Region Dairy on July 1 under each of the following independent assumptions:
a. ?The lease represents a simple rental arrangement.
b. ?At the end of three years, title to this equipment will be transferred to Pine Region Dairy at no additional cost. The present value of the 36 monthly lease payments is $76,021, of which $2,500 is paid in cash on July 1. None of the initial $2,500 is allocated to interest expense.
c. ? Why is situation a. the operating lease, sometimes called off-balance sheet financing?
d. ?Would it be acceptable for a company to account for a capital lease as an operating lease to report rent expense rather lhan a long-term liability?
Free
Essay
Q 56Q 56
Explain how the lessee accounts for an operating lease and a capital lease. Why is an operating lease sometimes called off-balance sheet financing?
Free
Essay
Q 57Q 57
Pension Plans
At the end of the current year, Eastern Electric received the following information from its actuarial firm:
The pension plan is fully funded. Eastern Electric has funded only 40% of the nonpension postretirement benefits this year.
a. Prepare the journal entry to summarize pension expense for the entire year.
b. Prepare the journal entry to summarize the nonpension postretirement benefits expense for the entire year.
c. If the company becomes illiquid in future years, what prospects, if any, do today's employees have of receiving the pension benefits that they have earned to date?
d. Does the company have an ethical responsibility to fully fund its nonpension postretirement benefits?
Free
Essay
Q 58Q 58
When are the costs of postretirement benefits recognized as an expense? When are the related cash payments made?
Free
Essay
Q 59Q 59
Deferred Income Taxes
The following journal entry summarizes for the current year the income tax expense of Sophie's Software Warehouse:
Of the deferred income taxes, only $30,000 is classified as a current liability.
a. Define the term deferred income tax.
b. What is the amount of income tax that the company has paid or expects to pay in conjunction with its income tax return for the current year?
c. Illustrate the allocation of the liabilities shown in the above journal entry between the classifications of current liabilities and long-term liabilities.
Free
Essay
Q 60Q 60
What are deferred income tax liabilities ? How are these items presented in financial statements?
Free
Essay
Q 61Q 61
Examining Home Depot's Capital Structure
To answer the following questions use the financial statements for Home Depot , Inc , inAppendixA at the end of the textbook
a. Compute the company's current ratio and quick ratio for the most recent year reported. Do these ratios provide support that Home Depot is able to repay its current liabilities asthey , come due? Explain.
b. Compute the company's debt ratio. Does Home Depot appear to have excessive debt? Explain.
c. Examine the company's statement ofcash flows. Does Home Depot's cash flow from operating activities appear adequate tocover itscurrent liabilities as they come due? Explain.
Free
Essay