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What disclosures are required relative to long-term debt and sinking fund requirements?
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Pierre Company has a 12% note payable with a carrying value of $20,000. Pierre applies the fair value option to this note. Given an increase in market interest rates, the fair value of the note is $22,600. Prepare the entry to record the fair value option for this note.
What is the fair value option? Briefly describe the controversy of applying the fair value option to financial liabilities.
Differentiate between a fixed-rate mortgage and a variablerate mortgage.
What are the considerations in imputing an appropriate interest rate?
When is the stated interest rate of a debt instrument presumed to be fair?
How is the present value of a non-interest-bearing note computed?
What is done to record properly a transaction involving the issuance of a non-interest-bearing long-term note in exchange for property?
How are gains and losses from extinguishment of a debt classified in the income statement? What disclosures are required of such transactions?
Why would a company wish to reduce its bond indebtedness before its bonds reach maturity? Indicate how this can be done and the correct accounting treatment for such a transaction.
What is the “call” feature of a bond issue? How does the call feature affect the amortization of bond premium or discount?
Will the amortization of Discount on Bonds Payable increase or decrease Bond Interest Expense? Explain.
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Briggs and Stratton reported unamortized debt issue costs of $5.1 million. How should the costs of issuing these bonds be accounted for and classified in the financial statements?
Zopf Company sells its bonds at a premium and applies the effective-interest method in amortizing the premium. Will the annual interest expense increase or decrease over the life of the bonds? Explain.
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What are the two methods of amortizing discount and premium on bonds payable? Explain each.
How should discount on bonds payable be reported on the financial statements? Premium on bonds payable?
Under what conditions of bond issuance does a discount on bonds payable arise? Under what conditions of bond issuance does a premium on bonds payable arise?
Distinguish between the following values relative to bonds payable:
\r\n(a) Maturity value. (c) Market (fair) value.
\r\n(b) Face value. (d) Par value.
Distinguish between the following interest rates for bonds payable:
\r\n(a) Yield rate. (d) Market rate.
\r\n(b) Nominal rate. (e) Effective rate.
\r\n(c) Stated rate.
Potlatch Corporation has issued various types of bonds such as term bonds, income bonds, and debentures. Differentiate between term bonds, mortgage bonds, debenture bonds, income bonds, callable bonds, registered bonds, bearer or coupon bonds, convertible bonds, commodity-backed bonds, and deep discount bonds.
(a) From what sources might a corporation obtain funds through long-term debt? (b) What is a bond indenture? What does it contain? (c) What is a mortgage?
As discussed in the chapter, an important consideration in evaluating current liabilities is a company’s operating cycle. The operating cycle is the average time required to go from cash to cash in generating revenue. To determine the length of the operating cycle, analysts use two measures: the average days to sell inventory (inventory days) and the average days to collect receivables (receivable days). The inventory-days computation measures the average number of days it takes to move an item from raw materials or purchase to final sale (from the day it comes in the company’s door to the point it is converted to cash or an account receivable). The receivable-days computation measures the average number of days it takes to collect an account.
\r\nMost businesses must then determine how to finance the period of time when the liquid assets are tied up in inventory and accounts receivable. To determine how much to finance, companies first determine accounts payable days—how long it takes to pay creditors. Accounts payable days measures the number of days it takes to pay a supplier invoice. Consider the following operating cycle worksheet for
\r\nBOP Clothing Co.
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These data indicate that BOP has reduced its overall operating cycle (to 261.5 days) as well as the number of days to be financed with sources of funds other than accounts payable (from 78 to 63 days). Most businesses cannot finance the operating cycle with accounts payable financing alone, so working capital financing, usually short-term interest-bearing loans, is needed to cover the shortfall. In this case, BOP would need to borrow less money to finance its operating cycle in 2014 than in 2013.
\r\nInstructions
\r\n(a) Use the BOP analysis to briefly discuss how the operating cycle data relate to the amount of working capital and the current and acid-test ratios.
\r\n(b) Select two other real companies that are in the same industry and complete the operating cycle worksheet, along with the working capital and ratio analysis. Briefly summarize and interpret the results.
\r\nTo simplify the analysis, you may use ending balances to compute turnover ratios.
\r\n[Adapted from Operating Cycle Worksheet at www.entrepreneur.com]
Presented below is the current liabilities section and related note of Mohican Company.
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Instructions
\r\nAnswer the following questions.
\r\n(a) What is the difference between the cash basis and the accrual basis of accounting for warranty costs?
\r\n(b) Under what circumstance, if any, would it be appropriate for Mohican Company to recognize deferred revenue on warranty contracts?
\r\n(c) If Mohican Company recognized deferred revenue on warranty contracts, how would it recognize this revenue in subsequent periods?
Despite being a publicly traded company only since 1987, Northland Cranberries of Wisconsin Rapids, Wisconsin, is one of the world’s largest cranberry growers. During its short life as a publicly traded corporation, it has engaged in an aggressive growth strategy. As a consequence, the company has taken on significant amounts of both short-term and long-term debt. The following information is taken from recent annual reports of the company.
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Instructions
\r\n(a) Evaluate the company’s liquidity by calculating and analyzing working capital and the current ratio.
\r\n(b) The discussion of the company’s liquidity, shown below, was provided by the company in the Management Discussion and Analysis section of the company’s annual report. Comment on whether you agree with management’s statements, and what might be done to remedy the situation.
The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://annualreport.marksandspencer.com/_assets/downloads/ Marks-and-Spencer-Annual-report-and-financial-statements-2012.pdf.
\r\nInstructions
\r\nRefer to M&S’s financial statements and the accompanying notes to answer the following questions.
\r\n(a) What was M&S’s 2012 short-term debt and related weighted-average interest rate on this debt?
\r\n(b) What was M&S’s 2012 working capital, acid-test ratio, and current ratio? Comment on M&S’s liquidity.
\r\n(c) What types of commitments and contingencies has M&S reported in its financial statements?
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