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understanding financial accounting

Questions and Answers of Understanding Financial Accounting

Incurred expenses: $125,000 for wages, $35,000 for supplies, $80,000 for depreciation, and $75,000 for miscellaneous expenses.
Purchased fixed assets for $250,000 cash.
Declared, but did not pay, cash dividends of $10,000.
Purchased fixed assets in exchange for a long-term note valued at $85,000. Chapter 13 The Complete Income Statement 675 REQUIRED:a. Classify each transaction as either an operating transaction or a
Excerpts from Crozier Industries’ financial records as of December 31, 1997, follow: Sales Sales Returns Costs of Goods Sold Dividends Rent Expense Wages Payable Loss on Sale of Food Services
In its 1997 financial report Meeks Company reported $850,000 under the line item “Extraordinary losses” on the income statement. The company’s tax rate is 35 percent. The footnote pertaining to
Define long-term notes payable, bonds payable, and leasehold obligations, and explain to what extent companies use such instruments to finance operations. What kinds of projects are long-term
Explain how a debt covenant can have an important economic consequence on a com¬ pany’s financial condition.
Why might management wish to avoid reporting debt on the balance sheet?
Identify circumstances in which management might wish to accelerate the recognition of debt and related losses on the financial statement.
List and define the three forms of contractual obligations discussed in this chapter.
Briefly explain how the effective interest rate on an obligation is computed. Why is it more difficult to compute the effective interest rate for an interest-bearing note than for a
Why are long-term liabilities carried on the balance sheet at an estimate of present value, while long-lived assets are not?
What is the stated interest rate, and how does it differ from the effective interest rate?
State the basic rule of the effective interest method. Give several examples using the effec¬ tive interest method to value balance sheet liabilities, and explain why it is used to account for
Why might a company decide to borrow money by issuing a note with a stated interest rate of zero?
Explain the process used to amortize a discount on a long-term note or bond payable.
Why is issuing bonds such a popular way to raise large amounts of capital?
List and briefly explain the important features of a bond contract.
What is a debenture? Why might DuPont be able to issue debentures frequently, while Jones Airlines, Inc., a less dependable business, might not?
Why might the issuing company allow a debt covenant to be written into a bond contract? How would adding such a provision tend to affect the issue price of the bonds?
When a bond is issued at a discount, what is the relationship between the stated interest rate and the effective interest rate?
Does the effective interest method ensure that bond liability is carried on the balance sheet at present value throughout its life? Upon what assumption does the answer to this ques¬ tion depend?
Explain how a user could adjust reported earnings in view of the difference between the balance sheet value of outstanding long-term debt and its market value.
Why would a company choose to redeem its outstanding bonds prior to maturity, some¬ times even at a premium price?
Describe several examples of financing risks that may not be reflected on the balance sheet, and briefly explain how users can assess such risks.
Why is leasing such a popular form of financing for many companies? Distinguish a cap¬ ital lease from an operating lease.
Explain the methods used to account for capital leases. How is the lease obligation amor¬ tized over the life of the lease?
What is off-balance-sheet financing? Why might a company structure a lease so that it is considered an operating lease instead of a capital lease?
Describe how a user can use footnote disclosures to make more comparable firms that have different policies concerning the accounting for operating and capital leases.
Relative to the United States, how important is debt financing in other countries? How has this affected the financial reporting systems in those countries?
(Appendix 11A) Explain how the effective interest rate on a note receivable or bond invest¬ ment is determined. What method is used to account for both?
(Appendix 11A) When accounting for a bond investment, how is interest revenue com¬ puted each period?
(Appendix 11A) To account for a bond investment, the effective interest rate, determined at purchase, is used throughout the life of the bond investment to compute periodic interest revenue even
(Appendix 11B) Describe the three steps involved when deciding whether to purchase a bond.
(Appendix 11B) Explain how a reduction in a company’s credit rating would affect the prices at which the company could issue bonds. Would it affect the risk-free rate or the risk premium?
(Appendix 1 IB) If you were holding a portfolio of bonds, would you want future interest rates to increase or decrease? Why?
What role does the benefit received in exchange for the long-term obligation play in the determination of the effective interest rate?
If you were a manager deciding to borrow money, explain how both the stated rate and the effective rate would affect your decision.
When a bond is issued at a premium, what is the rela¬ tionship between the stated rate and the effective rate?
Under what conditions will the interest revenue be constant from period to period? Under what conditions will it increase? Under what conditions will it decrease?
Why is a gain or loss usually recognized when a company redeems outstanding bonds prior to maturity?
Define the effective rate of return, the required rate of return, the risk-free rate, and the risk premium, and explain how they are related.
The balance sheet as of December 31, 1996, for Melrose Enterprises follows. (Disclosing debt and debt covenants) Assets Liabilities and Stockholders’ Equity Current assets $200,000 Current
Hathaway Manufacturing issued long-term debt on January 1, 1996. The debt has a face value of $300,000 and an annual stated interest rate of 10 percent. The debt matures on January 1, 2001.
The stated and effective interest rates for several notes and bonds follow. Indicate whether each note/bond would be issued at a discount, par value, or a premium. Note/Bond Stated Effective Interest
Compute the proceeds from the following notes payable. Interest payments are made annually. Proceeds Stated Interest Rate Effective Interest Rate Face Value Life 9 • 0% 8% $ 1,000 4 years 9 • 0 6
Tradewell Rentals purchased a piece of equipment with a FMV ol $11,348 in exchange lor a five-year, non-interest-bearing note with a face value ol $20,000. REQUIRED:a. Compute the effective interest
Candleton signed a two-year, interest-bearing note payable with a face value of $8,000 and an effective interest rate of 8 percent. Interest payments on the note are made annually. REQUIRED: Provide
On January 1, 1997, Wilmes Floral Supplies borrowed $2,413 from Bower Financial Services. Wilmes Floral Supplies gave Bower a $2,500 note with a maturity date of December 31, 1998. The note specified
Morrow Enterprises purchased a building on January 1, 1997, in exchange for a three-year, non-interest-bearing note with a face value of $693,000. Independent appraisers valued the building at
The following information was extracted from the financial records of Leong Cosmetics. 1998 1997 Balance Sheet Notes payable $200,000 $200,000 Less: Discount on notes payable 12,000 14,400 Income
Three different bond issuances are listed here with interest payments made Semiannually. Bond Issuance Face Value Stated% A B C 100,000 400,000 600,000 Interest Rate 6% 8 6 Effective Interest Rate 6%
On January 1, 1996, Collins Copy Machine Company issued thirty $1,000 face-value bonds with a stated annual rate of 10 percent that mature in ten years. Interest is paid semiannually on June 30 and
Tingham Village issued 500 five-year bonds on July 1, 1997. The interest payments are due semiannually (January 1 and July 1) at an annual rate of 6 percent. The effective interest rate on the bonds
Treadway Company issued bonds with a face value of $20,000 on January 1, 1996. The bonds were due to mature in five years and had a stated annual interest rate of 8 percent. The bonds were issued at
On September 10, 1994, Mooney Plastic Products issued bonds with a face value of $500,000 for a price of 96. During 1997 Mooney exercised a call provision and redeemed the bonds for 101. At the time
Marker Musical Products issued bonds with a face value of $100,000 and an annual stated interest rate of 8 percent on January 1, 1994. The effective interest rate on the bonds was 10 percent.
The information below was taken from the balance sheet of Beasley Brothers as of December 31, 1996. Bond payable $100,000 Less: Unamortized discount 5,350 $94,650 Footnotes: The bonds have a stated
The information below was taken from the balance sheet of Cohort Enterprises as of December 31, 1997. Bond payable $200,000 Less: Unamortized discount 6,941 $193,059 Footnotes: The bonds have a
Tradeall, Inc., leases automobiles for its salesforce. On January 1, 1996, the company leased 100 automobiles and agreed to make lease payments of $10,000 per automobile each year. The lease
Watts Motors plans to acquire a building and can either borrow cash from a bank to finance the purchase or lease the building from the current owner. The sales price of the building is $149,388. If
Compute the effective rate of interest on the following long-term debts. Interest payments on the notes are made annually and interest payments on the bonds are made semiannually. Debt Fair Market
On January 1, 1996, Bondinger Financial Services lent $9,652 to Weyton Industries. In exchange, Bondinger received a note with a maturity date of December 31, 1997, a face value of $10,000, and a
On January 1, 1996, Christie Sohn Company purchased ten bonds ($1,000 face value) with a stated annual interest rate of 10 percent. The bonds mature in five years, and over that time interest is paid
Dylander bonds are selling on the open market at 89.16. The bonds have a stated interest rate of 8 percent and mature in 8 years. Interest payments are made semiannually. REQUIRED:a. Assume that your
Haiti Enterprises issued ten $1,000 bonds on September 30, 1996, with a stated annual inter¬ est rate of 8 percent. These bonds will mature on October 1, 2006, and have an effective rate of 10
The balance sheet as of December 31, 1996, for Manheim Corporation follows. Assets Liabilities and Stockholders’ Equity Current assets Noncurrent assets Total assets $ 85,000 Current liabilities $
Patnon Plastics needs some cash to finance expansion. Patnon issued the following debt to acquire the cash. 1. A five-year note with a stated interest rate of zero, a face value of $20,000, and an
The balance sheet as of December 31, 1997, for Boyton Sons follows. Assets Liabilities and Stockholders’ Equity Current assets $ 40,000 Current liabilities $ 30,000 Noncurrent assets 80,000
Earl Rix, president of Rix Driving Range and Health Club, has provided you with the follow¬ ing information: 1998 1997 Balance Sheet Notes payable $800,000 $800,000 Less: Discount on notes payable
Hartney Enterprises issued twenty $1,000 bonds on June 30, 1997, with a stated annual inter¬ est rate of 6 percent that mature in six years. Interest is paid semiannually on December 31 and June 30.
Ross Running Shoes issued ten $1,000 bonds with a stated annual rate of 10 percent on June 30, 1997. These bonds mature on June 30, 2000. The bonds have an effective interest rate of 8 percent, and
Consider the three notes payable listed here. Each was issued on January 1, 1997, and matures on December 31, 1999. Interest payments are made annually on December 31. Note Face Value Stated
Ginny & Rick Eateries reported the following account balances in the December 31, 1996, financial report. Bonds payable $500,000 Premium on bonds payable 12,600 The bonds have a stated annual
Ficus Tree Farm issued five $1,000 bonds with a stated annual interest rate of 12 percent on January 1, 1997, that mature on January 1, 2002. Interest is paid semiannually on June 30 and December 31.
Taylor Corporation is contemplating issuing bonds to raise cash to finance an expansion. Before issuing the debt, the controller of the company wants to prepare an analysis of the cash flows and the
Mackey Company acquired equipment on January 1, 1996, through a leasing agreement that required an annual payment of $30,000. Assume that the lease has a term of five years and that the life of the
The balance sheet as of December 31, 1996, for Thompkins Laundry follows. Assets Liabilities and Stockholders’ Equity Current assets $10,000 Current liabilities $10,000 Noncurrent assets 60,000
Memminger Corporation purchased equipment on January 1, 1997. The terms of the purchase required that the company pay $1,000 in interest at the end of each year for five years and $20,000 at the end
An excerpt from the financial statement of Lombardy Services follows. The information refers to a single note receivable. 1997 1996 Balance Sheet Note receivable $20,000 $20,000 Less: Discount on
On July 1, 1997, Lawton Corporation purchased bonds as a long-term investment with a total face value of $400,000. The bonds have an annual stated interest rate of 10 percent, and they pay interest
Sun Company, an oil-refining concern, purchased all of its outstanding 8 1/2 percent (stated rate) debentures due November 15, 2000, as part of a restructuring plan. The balance sheet value of each
Several years ago, J.C. Penney Company issued bonds with a face value of $200 million and a stated interest rate of zero, which matured eight years later, for 33.24. That same year Martin Marietta,
Assume that United Airlines is planning to purchase a jet passenger plane, with a price of $45,636,480, from the Boeing Company. United is considering structuring the transaction in one of two ways.
‘“Out on a limb, over his head’—that’s the typical reaction every time Rupert Murdock adds another debt-financed chunk to his global media colossus, News Corp. In the past five years, its
A recent article in The Wall Street Journal (October 2, 1990) noted that as the country slid deeper into a recession in the early 1990s, companies with high amounts of cash relative to their debt are
Albertson’s and Safeway are leading retail food chains in the United States. As of the end of 1994, Albertson’s reported $3.6 billion in total assets and $1.9 billion in total liabilities, while
The Wall Street Journal (June 5, 1995) recently reported: Alan Greenspan may not see a recession on the horizon, but it sure looks as if a few people in the bond market do. After a fierce month-long
Refer to the 1994 annual report of MCI and answer the following questions.a. Compute MCI’s long-term debt-to-equity ratio over the last five years. In general, is it increasing or decreasing, and
Define a liability, and identify the three characteristics all balance sheet liabilities have in common.
Why is it important to disclose and value all liabilities appropriately on the balance sheet? Why is it important to stockholders, investors, creditors, management, and auditors?
How can management benefit from understating liabilities? Why is such a practice often not effective?
In what situations might a manager wish to overstate liabilities?
When a manager manipulates liabilities, what important financial statement numbers are affected?
What is the definition of a current liability? Why are current liabilities defined in terms of current assets?
Explain why financial statement ratios like the current ratio are found in debt covenants.
Define and differentiate determinable, conditional, and contingent liabilities. Provide several examples of each.
Define accounts payable. Why does the auditor pay special attention to the inventory purchases occurring near the end of an accounting period?
Under what conditions should the current installment payment on a long-term debt be disclosed as a current liability on the balance sheet?

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