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1 Running Head: Assignments from the Readings Assignments from the Readings <Name> ACC/400 – Week Three Instructor’s Name: <Name> <Date> 2 Chapter 10 1) Georgia Lazenby believes a current liability is a debt that can be expected to be paid in one year. Is Georgia correct? Explain. Answer Georgia is absolutely right, because current liabilities are defined as the obligations due to be paid or settled by the company in one year or the current operating cycle, whichever time period is the greater. For example, the bank loan installment to be paid in one year will come under current liabilities. Other common examples are employee’s salary and commercial papers. 7) (a) What are longterm liabilities? Give two examples. (b) What is a bond? Answer a) Liabilities of a company, which are to be pain in more than one year or current operating cycle, are termed as longterm liabilities. For example, mortgage payments, longterm notes, lease obligations and tax payments. b) A bond can be defined as a debt instrument and an IOU contract, which obligates the issuer to pay the buyer the principle amount with interest and redeem the bond. It is mainly used by government and private corporations to raise money for meeting operational expenses or invest in business growth. 8) Contrast these types of bonds: (a) Secured and unsecured. (b) Convertible and callable. Answer a) Secured bonds vs. unsecured bonds 3 A secured bond is backed by collateral, in form of money or physical assets, given by the bond issuer to the buyer in case of payment defaults. These bonds are considered safe or highgraded because they provide a clear claim on company’s assets. For example, mortgage payments are secured bonds because they are backed by equipments or real estate property. Unsecured bonds or debentures are not backed by money, equipments or real estate property. Instead the issuer promises to make the payment on time. Companies’ issuing unsecured bonds does not have any property to collateralize. The transaction takes place on the basis of “full faith and credit”. These bonds are more risky than secured bonds, but they provide higher rate of interest. For example, U.S. government treasury bonds are unsecured because are issued under full faith and credit. b) Convertible bonds vs. callable bonds A convertible bond allows the buyer to convert the debt instrument into a specified number of common shares issued by the company. A callable bond can be defined as a debt obligation, which can be redeemed by the issuer after paying premium to the bond holder. This is used by the companies in case of declining interest rates, wherein the company can call its bonds and reissue them at a lower interest rate. 19) Valentin Zukovsky says that liquidity and solvency are the same thing. Is he correct? If not, how do they differ? AnswerI believe that Valentin Zukovsky is incorrect by saying that liquidity is same as solvency. Solvency can be defined as the company’s ability to repay its debts on time. If the company is able to pay its debts then it is considered to be solvent or else insolvent. A completely insolvent company can enter bankruptcy. On the other hand, liquidity is defined as a 4 company’s ability to pay its debts in cash or using assets which can be quickly converted into cash. If a company is insolvent, it is also illiquid because of its inability to access cash to make the payments. But a company can be illiquid but solvent by paying using noncash resources. Brief Exercise BE101 BE101 Kananga Company has these obligations at December 31: (a) a note payable for $100,000 due in 2 years, (b) a 10year mortgage payable of $200,000 payable in ten $20,000 annual payments, (c) interest payable of $15,000 on the mortgage, and (d) accounts payable of $60,000. For each obligation, indicate whether it should be classified as a current liability. Answers a) No b) 20,000 yes c) Yes d) Yes BYP101: FINANCIAL REPORTING PROBLEM: Tootsie Roll Industries BYP101 Refer to the financial statements of Tootsie Roll Industries and the Notes to Consolidated Financial Statements in Appendix A. Instructions Answer the following questions. (a) What were Tootsie Roll’s total current liabilities at December 31, 2004? What was the increase/decrease in Tootsie Roll’s total current liabilities from the prior year? 5 (b) How much were the accounts payable at December 31, 2004? (c) What were the components of total current liabilities on December 31, 2004 (other than accounts payable already discussed above)? Answers a) Tootsie Roll’s Total current liabilities at December 31, 2004, were $82,317,000. The total current liabilities increased by $82,317,000 – $62,887,000 = $19,430,000 over the prior year. b) Tootsie Roll’s accounts payable at December 31, 2004, is $19,315,000. c) The other components of current liabilities are: Bank loan $6,333,000 Dividends payable $3,659,000 Accrued liabilities $44,722,000 Income taxes payable $8,288,000 Chapter – 11 BYP1110 Greenwood Corporation has paid 60 consecutive quarterly cash dividends (15 years). The last 6 months have been a real cash drain on the company, however, as profit margins have been greatly narrowed by increasing competition. With a cash balance sufficient to meet only daytoday operating needs, the president, Gil Mailor, has decided that a stock dividend instead of a cash dividend should be declared. He tells Greenwood’s financial vicepresident, Vicki Lemke, to issue a press release stating that the company is extending its consecutive dividend record with the issuance of a 5% stock dividend. “Write the press release convincing the stockholders that the stock dividend is just as good as a 6 cash dividend,” he orders. “Just watch our stock rise when we announce the stock dividend; it must be a good thing if that happens.” Instructions (a) Who are the stakeholders in this situation? (b) Is there anything unethical about President Mailor’s intentions or actions? (c) What is the effect of a stock dividend on a corporation’s stockholders’ equity accounts? Which would you rather receive as a stockholder—a cash dividend or a stock dividend? Why? Answers a) The stakeholders in this situation are Mr. Gil Mailor, Ms. Vicki Lemke and the shareholders of Greenwood Corporation. b) Mr Mailor’s intentions were unethical in writing the press release convincing the stockholders that the stock dividend is just as good as a cash dividend. It is evident that Stock dividend is not as good as cash dividend; thereby Mr. Mailor’s action may mislead investors. c) The stock dividends will have no effect on a corporation’s stockholders’ equity accounts. It will just decrease the retained earnings and increase paid in capital of the same amount. If I am a stockholder, I would prefer stock dividend, assuming that the company’s performance is good, because this is a form of reinvestment and thus, I will expect higher return in the future. INTERNET 11.1 Stockholders’ Equity Items 7 LO4 LO5 LO7 LO9 Visit the home page of Staples, Inc., at the following Internet address: www.staples.com Locate the company’s most current balance sheet by selecting Corporate Information. Instructions Answer the following questions: a. Does the company report preferred stock in its balance sheet? If so, how many shares are currently outstanding? b. How much common stock does the company report in its most recent balance sheet? What is the par value of each? c. Does the company report any treasury stock? Has this amount changed since the previous year? Based on 2007 Annual Report Located at http://thomson.mobular.net/thomson/7/2967/4245/ Answers a) The company authorized 5,000,000 shares of Preferred Stocks, at $0.01 par value, but none is issued. b) The company authorized 2,100,000,000 shares of Common Stocks, at $0.0006 par value, out of which 896,655,170 shares are issued at January 30, 2010. c) Yes; there is treasury stock. The treasury stocked increased from $166,427,240 in 2009 to $167,990,178 in 2010. 8 9 References Jan R. Williams, Susan F. Haka, and Mark S. Bettner (2003), “Financial and Managerial Accounting: The Basis for Business Decisions,” Irwin/McGrawHill; 13th edition. Referenced on 19 June, 2010 from UoP Library. Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2007). “Financial accounting: Tools for business decision making,” (4th ed.). Hoboken, NJ: John Wiley & Sons. Referenced on 19 June, 2010 from UoP Library.
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