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business
principles financial accounting

Questions and Answers of Principles Financial Accounting

Why is the effective interest rate method of computing periodic interest expense considered theoretically preferable to the straight-line method?
Why would an investor whose intent is to hold bonds to maturity pay more for the bonds than their face value?
Of what use is the times interest earned ratio?
On September 30, 1999, Domingo's Construction Company issued \(\$ 120,000\) face value of \(12 \%, 10\)-year bonds dated August 31, 1999, at 100, plus accrued interest. Interest is paid semiannually
On December 31, 1998, East Lansing Office Equipment Company issued \$1,600,000 face value of \(8 \%, 10\)-year bonds for cash of \(\$ 1,400,605\), a price to yield \(10 \%\). The bonds pay interest
Compute the annual interest expense on the bonds in Exercise 15-2, assuming the bond discount is amortized using the straight-line method.
After recording the payment of the interest coupon due on June 30, 1999, the accounts of Myrtle Beach Sailboat, Inc., showed Bonds Payable of \(\$ 300,000\) and Premium on Bonds Payable of \(\$
On June 30, 1999 (a semiannual interest payment date), Holiday Rollerblade Company redeemed all of its \(\$ 400,000\) face value of \(10 \%\) bonds outstanding by calling them at 106 . The bonds were
On August 31, 1998, as part of the provisions of its bond indenture, Caribbean Cruise Line, Inc., acquired \(\$ 480,000\) of its outstanding bonds on the open market at 96 plus accrued interest.
Cleveland Heating Systems, Inc., is required to make a deposit of \(\$ 18,000\) plus semiannual interest expense of \(\$ 540\) on October 31,1998 , to the trustee of its sinking fund so that the
After interest was paid on September 30, 1999, \(\$ 60,000\) face value of Miami Video Rentals, Inc., outstanding bonds were converted into 8,000 shares of the company's \(\$ 5\) par value common
A recent annual report of Wal-Mart Corporation showed the following amounts as of the dates indicated:Calculate the times interest earned ratio for each year and comment on the results. Earnings
What is the present value of a lump-sum payment of \(\$ 20,000\) due in five years if the market rate of interest is \(10 \%\) per year (compounded annually) and the present value of \(\$ 1\) due in
What is the present value of a series of semiannual payments of \(\$ 10,000\) due at the end of each six months for the next five years if the market rate of interest is \(10 \%\) per year and the
Joe Mordino bought a ticket in the Georgia lottery for \(\$ 1\), hoping to strike it rich. To his amazement, he won \(\$ 4,000,000\). Payment was to be received in equal amounts at the end of each of
After Joe Mordino won \(\$ 4,000,000\) in the Georgia lottery, he decided to purchase \(\$ 10,000\) of lottery tickets at the end of each year for the next 20 years. He was hoping to hit the lottery
On December 1, 1998, New Jersey Waste Management Company issued \(\$ 300,000\) of 10 -year, \(9 \%\) bonds dated July 1, 1998, at 100 . Interest on the bonds is payable semiannually on July 1 and
Safe Toy Company is seeking to issue \(\$ 800,000\) face value of \(10 \%, 20\)-year bonds. The bonds are dated June 30, 1998, call for semiannual interest payments, and mature on June 30,
On July 1, 1998, Tick-Tock Clock Company issued \(\$ 100,000\) face value of \(8 \%, 10\)-year bonds. These bonds call for semiannual interest payments and mature on July 1, 2008. The company
Creative Web Page issued \(\$ 600,000\) face value of \(15 \%, 20\)-year bonds on October 1, 1999 . The bonds are dated October 1, 1999, call for semiannual interest payments on April 1 and October
Goodhew Software Systems, Inc., issued \(\$ 100,000\) face value of \(10 \%, 20\)-year bonds on July 1, 1998. The bonds are dated July 1, 1998, call for semiannual interest payments on July 1 and
Western Solar Energy Company issued \(\$ 400,000\) of \(12 \%\) bonds on July 1, 1998, at face value. The bonds are dated July 1, 1998, call for semiannual payments on July 1 and January 1, and
On June 1, 1998, Economy Auto Parts, Inc., issued \$180,000 of 10-year, 16\% bonds dated April 1, 1998, at 100 . Interest on bonds is payable semiannually on presentation of the appropriate coupon.
Ecological Water Filtration, Inc., is going to issue \(\$ 400,000\) face value of \(10 \%, 15\)-year bonds. The bonds are dated June 30, 1998, call for semiannual interest payments, and mature on
On July 1, 1998, South Carolina Table Company issued \(\$ 600,000\) face value of \(10 \%, 10\)-year bonds. The bonds call for semiannual interest payments and mature on July 1, 2008. The company
Storall Company issued \(\$ 200,000\) face value of \(16 \%, 20\)-year junk bonds on July 1, 1999. The bonds are dated July 1, 1999, call for semiannual interest payments on July 1 and January 1, and
Kelly Furniture Company issued \(\$ 400,000\) face value of \(18 \%, 20\)-year junk bonds on October 1, 1998. The bonds are dated October 1, 1998, call for semiannual interest payments on April 1 and
Houston Clothing Company issued \(\$ 600,000\) of \(12 \%\) serial bonds on July 1, 1998, at face value. The bonds are dated July 1, 1998; call for semiannual interest payments on July 1 and January
A company is trying to decide whether to invest \(\$ 2\) million on plant expansion and \(\$ 1\) million to finance a related increase in inventories and accounts receivable. The \(\$ 3\) million
An annual report of a company contained the following paragraph in the notes to the financial statements:The \(97 / 8 \%\) Senior Subordinated Debentures are redeemable at the option of [the company]
The April 29, 1994, issue of The Wall Street Journal contained a table showing yield
Refer to the annual report booklet and determine the times interest earned ratios for 1996 for The Coca-Cola Company, Maytag Corporation, and The Limited, Inc. Use "operating income" to represent
A recent annual report of Emhart Corporation contained the following paragraph in its notes to the financial statements:The \(63 / 4 \%\) convertible subordinated debentures may be converted into
Refer to "An Ethical Perspective" on page 561. Write out the answers to the following questions:a. What motivates the brothers to pursue this new strategy?b. Are the brothers the only ones assuming
In groups of two or three students, write a two-page, double-spaced paper on one of the following topics:The Use of Junk Bonds in the 1980s Why Market Rates of Interest and Prices of Bonds Are
In a small group of students, locate Accounting Principles Board Opinion No. 21 (from a faculty member or from the library) relating to the amortization of premiums and discounts on bonds.
With one or two other students, locate the annual reports of three companies with bonds outstanding as part of their long-term debt. You should read the notes to the financial statements to determine
The requirement for a statement of cash flows was preceded by the requirement for the statement of changes in financial position
The statement of cash flows is one of the major financial statements.
Investing activities are transactions with creditors and owners.
The direct method of calculating cash flows from opercurrent assets and current liabilities. ations is encouraged by the FASB and is the predominant method used.
Issuance of capital stock and the subsequent reacquisition of some of those shares would both be financing activities.
Which of the following statements is true?a. The direct method of calculating cash flows from operations starts with net income and adjusts for noncash revenues and expenses and changes in current
Investing activities include all of the following except:a. Payment of debt.b. Collection of loans.c. Making of loans.d. Sale of available-for-sale and held-to-maturity securities.
If sales on an accrual basis are $500,000 and accounts receivable increased by $30,000, the cash received from customers would be:a. $500,000.b. $470,000.c. $530,000.d. Cannot be determined.
Assume cost of goods sold on an accrual basis is $300,000, accounts payable increased by $20,000, and inventory increased by $50,000. Cash paid for merchandise is:a. $370,000.b. $230,000.c.
Assume net income was $200,000, depreciation expense was $10,000, accounts receivable increased by $15,000, and accounts payable increased by $5,000. The amount of cash flows from operating
What are some of the uses of the statement of cash flows?
What information is contained in the statement of cash flows?
Which activities are generally included in operating activities?
Which activities are included in investing activities?
Which activities are included in financing activities?
Where should significant investing and financing activities that do not involve cash flows be reported?
Explain the difference between the direct and indirect methods for computing cash flows from operating activities.
What are noncash expenses? How are they treated in computing cash flows from operating activities?
Describe the treatment of a gain on the sale of equipment in preparing a statement of cash flows under the indirect method.
Depreciation is sometimes referred to as a source of cash. Is it a source of cash? Explain.
Why is it unlikely that cash flows from operating activities will be equal to net income for the same period?
If the net income for a given period is \(\$ 25,000\), does this mean there is an increase in cash of the same amount? Why or why not?
Why might a company have positive cash flows from operating activities even though operating at a net loss?
Indicate the type of activity each of the following transactions represents (operating, investing, or financing) and whether it is an inflow or an outflow.a. Sold goods.b. Purchased building.c.
Refer to "A Broader Perspective" on page 598.Answer the following questions:a. What was the major investing activity in 1996?b. Was there a net negative or positive cash flow from investing
Real World Question Refer to the annual report booklet. Of the four companies represented, which ones use the direct method of reporting cash flows from operating activities and which ones use the
Indicate how the following data should be reported in a statement of cash flows. A company paid \(\$ 500,000\) cash for land. A building was acquired for \(\$ 2,500,000\) by assuming a mortgage on
Cost of goods sold in the income statement for the year ended 1999 was \(\$ 260,000\). The balances in Merchandise Inventory and Accounts Payable were:Calculate the amount of cash paid for
Fill in the following chart, showing how increases and decreases in these accounts affect the conversion of accrual basis income to cash basis income: Accounts Receivable Merchandise Inventory
The income statement of a company shows net income of \(\$ 200,000\); merchandise inventory on January 1 was \(\$ 76,500\) and on December 31 was \(\$ 94,500\); accounts payable for merchandise
The operating expenses and taxes (including \(\$ 80,000\) of depreciation) of a company for a given year were \(\$ 600,000\). Net income was \(\$ 350,000\). Prepaid insurance decreased from \(\$
Dividends payable increased by \(\$ 20,000\) during a year in which total dividends declared were \(\$ 120,000\). What amount appears for dividends paid in the statement of cash flows?
Following are balance sheet data for Quality Merchandise, Inc.:Assume that the depreciation recorded in 2000 was \(\$ 15,000\). Compute the cash spent to purchase plant assets, assuming no assets
Use the data in Exercise 16-7. Assume the net income for 2000 was \(\$ 24,000\), depreciation was \(\$ 15,000\), and dividends declared and paid were \(\$ 6,000\). The company paid interest of \(\$
The following data are from a company's Automobile and the Accumulated DepreciationAutomobile accounts:The old auto was traded for a new one, with the difference in values paid in cash. The income
The following income statement and other data are for Kennesaw Auto Glass Specialists, Inc.:Changes in current assets (other than cash) and current liabilities during the year were:Depreciation was
The following information relates to Dunwoody Nursery \& Garden Center, Inc. The company leases a building adjacent to its land.1. Net income was \(\$ 97,500\) for the year.2. Fully depreciated
PMT Services, Inc., is an independent service organization that markets and services electronic credit card authorization and payment systems to small retail, wholesale, and professional businesses
\) million in fiscal year 1996. The increase in cash flow from operating activities resulted from increases in net income for each period which have been achieved principally through purchases of
\) million for the purchase of merchant portfolios in fiscal years 1994, 1995 and 1996, respectively. The Company purchased five merchant portfolios in fiscal 1994, nine merchant portfolios in fiscal
The income statement and other data of Dunbar Carpet Outlet, Inc., follow:Changes in current assets (other than cash) and current liabilities during the year were:Depreciation was the only noncash
The following comparative balance sheets and other data are for Cellular Telephone\section*{Problem 16-2A}Sales, Inc.:1. Land was bought for \(\$ 37,500\) cash. The company intends to build a
Computer Associates International, Inc., is the world's largest business software company. The company offers more applications on more kinds of platforms to more kinds of corporations than any other
million shares. An additional 13 million shares is authorized for repurchase. The Company had previously completed a 22.5 million share repurchase program, for a total of 47 million shares. All
\) million included \(\$ 9.8\) million for building costs of which \(\$ 3.4\) was for the purchase of an engineering building, \(\$
The cost of land includes its purchase price and other related costs, including the cost of removing an old unusable building that is on the land.
Depreciation is the process of valuation of an asset to arrive at its market value.
The purpose of depreciation accounting is to provide the cash required to replace plant assets.
Expenditures made on plant assets that increase the quality of services are debited to the accumulated depreciation account.
Plant asset subsidiary ledgers are used to increase control over plant assets.
On January 1, 1999, Jackson Company purchased equipment for \(\$ 400,000\), and installation and testing costs totaled \(\$ 40,000\). The equipment has an estimated useful life of 10 years and an
In Question 1, if the equipment were purchased on July 1, 1999, and Jackson used the double-declining-balance method, the depreciation expense for 1999 would be:a. \(\$ 88,000\).b. \(\$ 72,000\).c.
In Question 1, if Jackson acquired the asset on January 1, 1999, and uses the sum-of-the-years'-digits method, the depreciation expense for 1999 is:a. \(\$ 72,727\).b. \(\$ 80,000\).c. \(\$
Hatfield Company purchased a computer on January 2, 1997, for \(\$ 10,000\). The computer had an estimated salvage value of \(\$ 3,000\) and an estimated useful life of five years. At the beginning
The result of recording a capital expenditure as a revenue expenditure is an:a. Overstatement of current year's expense.b. Understatement of current year's expense.c. Understatement of subsequent
What is the main distinction between inventory and a plant asset?
Which of the following items are properly classifiable as plant assets on the balance sheet?a. Advertising that will appear in the future to inform the public about new energy-saving programs at a
In general terms, what does the cost of a plant asset include?
In what way does the purchase of a plant asset resemble the prepayment of an expense?
Brown Company purchased an old farm with a vacant building as a factory site for \(\$ 1,040,000\). Brown decided to use the building in its operations. How should Brown allocate the purchase price
Describe how a company may determine the cost of a self-constructed asset.
In any exchange of noncash assets, the accountant's task is to find the most appropriate valuation for the asset received. What is the general rule for determining the most appropriate valuation in
Why should periodic depreciation be recorded on all plant assets except land?

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