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financial reporting and analysis
Questions and Answers of
Financial Reporting and Analysis
Tara Corporation uses the equity method of accounting for its 40% investment in Flax’s common stock. During 2008, Flax reported earnings of \($750,000\) and paid dividends of \($250,000\). Assume
Town, a calendar-year corporation that was incorporated in January 2007, experienced a \($600,000\) net operating loss (NOL) in 2009. For the years 2007 and 2008, Town reported taxable income in each
Dix Company reported operating income/loss before income tax in its first three years of operations as follows:Dix had no permanent or temporary differences between book income and taxable income in
For the year ended December 31, 2008, Colt Corporation had a loss carryforward of$ 180,000 available to offset future taxable income. At December 31, 2008, the company believes that realization of
Operating income in Mobe’s first three years of operations was as follows:Mobe had no other deferred income taxes in any year, and its income tax rate is 30%. In 2008, Mobe elected to carry back
In Figland Company’s first year of operations (2008), the company had pre-tax book income of \($500,000\) and taxable income of \($800,000\) at the December year-end. Figland expected to maintain
Taft Corporation uses the equity method to account for its 25% investment in Flame, Inc. During 2008, Taft received dividends of \($30,000\) from Flame and recorded \($180,000\) as its equity in
The following information is provided for Lally Corporation for 2008 and 2009:• Income before income taxes in 2008 included accrued rent revenue of $80,000 that was not subject to income taxes
Millie Co. completed its first year of operations on December 31, 2008 with pre-tax financial income of \($400,000\). Millie accrued a contingent liability of \($900,000\) for financial reporting
Collins Company incurs a \($1,000\) book expense that it deducts on its tax return. The tax law is unclear whether this expense is deductible, so the deduction leads to an uncertain tax
Bunker Company negotiated a lease with Gilbreth Company that begins on January 1, 2008. The lease term is three years, and the asset's economic life is four years. The annual lease payments are
1. Repeat requirement 2 of P12-3. Assume that the lease payments are due at the beginningrather than at the end of the year. In this case, the first $277,409.44 payment would bemade on January 1,
On January 1, 2008, Seven Wonders Inc. signed a five-year noncancelable lease with Moss Company.The lease calls for five payments of \($277,409.44\) to be made at the end of each year. The leased
On January 1, 2008, Task Co. signs an agreement to lease office equipment from Coleman, Inc. forthree years with payments of \($193,357\) beginning December 31, 2008. The equipment’ fair valueis
1. Repeat requirement 2 of P12-3. Assume that the lease payments are due at the beginning rather than at the end of the year. In this case, the first $277,409.44 payment would be made on January 1,
On December 31, 2008, Thomas Henley, financial vice president of Kingston Corporation,signed a noncancelable three-year lease for an item of manufacturing equipment. The leasecalled for annual
On January 1, 2008, Bare Trees Company signed a three-year noncancelable lease with Dreams Inc. The lease calls for three payments of \($62,258.09\) to be made at each year-end. The lease payments
On January 1, 2008, Railcar Leasing Inc. (the lessor) purchased 10 used boxcars from RailroadEquipment Consolidators at a price of \($8,345,640.\) Railcar leased the boxcars to the ReadingRailroad
On January 1, 2008, Task Co. signs an agreement to lease office equipment from Coleman, Inc. for three years with payments of \($193,357\) beginning December 31, 2008. The equipment’ fair value is
On January 1, 2008, ABC Builders Inc. (the lessor) entered into a lease with Winged FootCompany (the lessee) for an asset that ABC had manufactured at a cost of \($15,000,000.\) The asset’sfair
Using the data in P12-6, prepare the journal entries required by Coleman, Inc. on January 1, 2008 assuming that (a) Task does not guarantee the residual value and (b) Task does guarantee it. Coleman
On January 1, 2008, Overseas Leasing Inc. (the lessor) purchased five used oil tankers from SevenSeas Shipping Company at a price of \($99,817,750.\) Overseas immediately leased the oil tankers
On December 31, 2008, Thomas Henley, financial vice president of Kingston Corporation, signed a noncancelable three-year lease for an item of manufacturing equipment. The lease called for annual
On January 1, 2008, Merchant Co. sold a tractor to Swanson, Inc. and simultaneously leased itback for five years. The tractor’s fair value is \($250,000,\) but its carrying value on Merchant'sbooks
On December 31, 2008, Rankin Corporation, a lessor of office machines, purchased a new machine for \($725,000\). It was delivered the same day (by prior arrangement) to Liska Company, the lessee. The
AMR Corporation is the parent of American Airlines, one of the largest airline companies in the world. Excerpts from its 2006 annual report follow.The accompanying notes are an integral part of these
Wal-Mart Stores, Inc. operates retail stores in various retailing formats in all 50 states in the UnitedStates. The company’s mass merchandising operations serve its customers primarily through
The following information is based on an actual annual report. In a recent lending agreement (dated March 3, 2008), Guaraldi Bank, Inc., included the following definitions for terms used in its loan
The following information is drawn from recent annual reports of three firms in the retail industry: JC Penney Company, Inc., Dillard Department Stores, Inc., and Macy's Inc. A. JC Penney is a major
The 2006 annual report of Tupperware Brands Inc. contained the following note:During 2006, the Company renegotiated a line of credit with a financial institution in Australia... . The Credit
Asa senior partner at one of the nation’s largest public accounting firms, you serve as chairperson of the firm’s financial reporting policy committee. You are also the firm's chief spokesperson
Groupe Casino is a French multinational company that operates more than 9,000 multiformat retail stores—hypermarkets, supermarkets, discount stores, convenience stores, and restaurants—throughout
The following information is from Coca-Cola Company’s 2006 annual report:The principal amount of our long-term debt that had fixed and variable interest rates, respectively, was \($1,346\) million
The following article raises questions about Cardinal Health's accounting for an expected legal settlement. Management responded to the accusations by sending a letter to all shareholders and to
Fox Company, a dealer in machinery and equipment, leased equipment to Tiger, Inc. on July 1, 2008. The lease is appropriately accounted for as a sale by Fox and as a purchase by Tiger. The lease is
On January 2, 2008, Lafayette Machine Shops, Inc. signed a 10-year noncancelable lease for a heavy-duty drill press, stipulating annual payments of \($15,000\) starting at the end of the first year,
East Company leased a new machine from North Company on May 1, 2008 under a lease with the following information:East has the option to purchase the machine on May 1, 2018 by paying $50,000, which
Grady Company purchased a machine on January 1, 2008 for \($720,000\). The machine is expected to have a 10-year life, no residual value, and will be depreciated by the straight-line method. On
On December 31, 2008, Ball Company leased a machine from Cook for a 10-year period, expiring December 30, 2018. Annual payments of \($100,000\) are due on December 31. The first payment was made on
Benedict Company leased equipment to Mark Inc. on January 1, 2008. The lease is for an eight-year period, expiring December 31, 2015. The first of eight equal annual payments of \($600,000\) was made
Glade Company leases computer equipment to customers under direct financing leases. The equipment has no residual value at the end of the lease term, and the leases do not contain bargain purchase
Peg Company leased equipment from Howe Corporation on July 1, 2008 for an eight-year period expiring June 30, 2016. Equal payments under the lease are \($600,000\) and are due on July 1 of each year.
On December 31, 2008, Day Company leased a new machine from Parr with the following pertinent information:The lease is not renewable, and the machine reverts to Parr at the termination of the lease.
Robbins, Inc. leased a machine from Ready Leasing Company. The lease qualifies as a capital lease and requires 10 annual payments of \($10,000\) beginning immediately. The lease specifies an interest
On January 1, 2008, Babson, Inc. leased two automobiles for executive use. The lease requires Babson to make five annual payments of \($13,000\), beginning January 1, 2008. At the end oft he lease
On December 31, 2008, Roe Company leased a machine from Colt for a five-year period.Equal annual payments under the lease are \($105,000\) (including \($5,000\) annual executory costs)and are due on
On December 31, 2008, Lane, Inc. sold equipment to Noll and simultaneously leased it back for 12 years. Pertinent information at this date is as follows:Required:1. At December 31, 2008, should Lane
Coates Corporation is planning to enter into a three-year lease with annual payments of $30,000 due at the beginning of each year. If the lease qualified as a capital lease, the breakdown of the
Sandra Company and Nova Inc. each signed lease agreements on January 1, 2008. Nova's lease qualified for capital lease treatment, but Sandra's lease did not. All other information for both companies
On July 1, 2008, McVay Corporation issued $15 million of 10-year bonds with an 8% coupon interest rate. The bonds pay interest semiannually on June 30 and December 31 of each year.The market rate of
On January 1, 2008, Fleetwood Inc. issued bonds with a face amount of $25 million and a coupon interest rate of 8%. The bonds mature in 10 years and pay interest semiannually on June 30 and December
On January 1, 2008, Newell Manufacturing purchased a new drill press that had a cash purchase price of \($6,340.\) Newell decided instead to pay on an installment basis. The installment contract
Cory Company needs to raise about \($500,000\) to finance the expansion of its office building. It is considering three alternative loan arrangements:• Alternative A: Issue a \($500,000,\) 20-year
On January 1, 2008, Mason Manufacturing borrows $500,000 and uses the money to purchase corporate bonds for investment purposes. Interest rates were quite volatile that year and so were the fair
On July 1, 2008, Stan Getz, Inc. bought call option contracts for 500 shares of Selmer Manufacturing common stock. The contracts cost \($200,\) expire on September 15, and have an exercise price of
On January 1, 2008, Tango-In-The-Night, Inc. issued $75 million of bonds with a 9% coupon interest rate. The bonds mature in 10 years and pay interest semiannually on June 30 and December 31 of each
On July 1, 2009, Mirage Company issued $250 million of bonds with an 8.5% coupon interest rate. The bonds mature in 10 years and pay interest semiannually on June 30 and December 31 of each year. The
Exhibit 11.12 describes Chalk Hill’s use of an interest rate swap to hedge its cash flow exposure to interest rate risk from variable rate debt. The journal entries in the exhibit illustrate how
Information taken from a Sears, Roebuck and Company annual report follows.Required: .1. How much interest expense did the company record during Year 2 on the 7% debentures?How much of the original
The following excerpts were taken from a recent annual report of Quaker Oats Company:[Several years ago] the Company swapped \($15.0\) million of long-term debt for 27.9 million in deutsche mark (DM)
Shares of Checkpoint Systems, which makes electronic anti-theft tags used by retailers, have dropped from 18 in April to 12.50 lately, in part because of an unseasonably warm winter, which dampened
On January 1, 2008, Merrill Corporation issued $2 million of par value 10-year bonds. The bonds pay interest semiannually on January | and July 1 at an annual rate of 10% and are callable at 102% of
Clovis Company recently issued $500,000 (face value) bonds to finance a new construction project. The company’s chief accountant prepared the following bond amortization cahedule:Required:1.
On January 1, 2008, MyKoo Corporation issued \($1\) million in five-year, 5% serial bonds to be repaid in the amount of \($200,000\) on January 1 of 2009, 2010, 2011, 2012, and 2013. Interest on the
The following information appeared in the 2008 annual report of Rumours, Inc.:Long-Term Debt _ [Rumours, Inc. issued] \($10\) million, 10% coupon bonds on January 1, 2005 due on December 31, 2009.The
The following information appeared in the annual reports of Apparel America, Borden, Inc., and Exxon Corporation.Apparel America, Inc. - .In December 1994 the Company entered into an agreement to pay
On January 1, 2008, Nicks Corporation issued $250 million of floating-rate debt. The debt carries a contractual interest rate of “LIBOR plus 5.5%, which is reset annually on January 1 of each year.
The following information appeared in the 2002 annual report of Lyondell Petrochemical Company, a manufacturer of petrochemicals and refined petroleum products such as gasoline, heating oil, jet
On January 1, 1998, Chain Corporation issued \($5\) million of 7% coupon bonds at par. The bonds mature in 20 years and pay interest semiannually on June 30 and December 31 of each year. On December
The following information was taken from the financial statements of ALZA Corporation.Note 6: Borrowings oe ce On July 28, 2000, ALZA completed a private offering of the 3% Zero Coupon Convertible
On July 1, 2008, LekTech Corporation issued $20 million of 12%, 20-year bonds. Interest on the bonds is paid semiannually on December 31 and June 30 of each year, and the bonds were issued at a
Silverado Inc. buys titanium from a supplier that requires a six-month firm commitment on all purchases. On January 1, 2008, Silverado signs a contract with the supplier to purchase 10,000 pounds of
Newton Grains plans to sell 100,000 bushels of corn from its current inventory in March 2009. The company paid \($1\) million for the corn during the fall 2008 harvest season. On October 1, 2008,
Basie Business Forms borrowed \($5\) million on July 1, 2008 from First Kansas City Bank. The loan required annual interest payments at the LIBOR rate, reset annually each June 30. The loan principal
On January 1, 2008, Four Brothers Manufacturing borrowed \($10\) million from Guiffrie Bank by signing a three-year, 8.0% fixed-rate note. The note calls for interest to be paid annually on December
Recall the Rombaurer Metals example in the chapter: On October 5, 2008, Rombaurer has 10 million pounds of copper inventory on hand at an average cost of \($0.65\) a pound. The spot price for copper
On January 2, 2007, Half, Inc. purchased a manufacturing machine for \($864,000\). The machine has an eight-year estimated life and a \($144,000\) estimated salvage value. Half expects to manufacture
On June 30, 2008, Macrosoft Company acquired a 10-acre tract of land. On the tract was a warehouse that Macrosoft intended to use as a distribution center. At the time of purchase, the land had an
On April 23, 2008, Starlight Department Stores Inc. acquired a 75-acre tract of land by paying \($25,000,000\) in cash and by issuing a six-month note payable for \($5,000,000\) and 1,000,000 shares
Formidable Express provides overnight delivery of letters and small parcels to numerous locations throughout the United States. As part of its operations, the company maintains a sizable fleet of
Fly-by-Night is an international airline company. Its fleet includes Boeing 757s, 747s, 727s, Lockheed L-1011s, and McDonnell Douglas MD-83s, MD-80s, and DC-9s. Assume that Fly-by-Night made the
On July 23, 2008, Consolidated Parcel Service (CPS) acquired a new de-icing machine for use at its facility at Chicago’s O'Hare airport. The machine is used to de-ice the wings of the firm's
Norway Co. manufactures and sells television receivers. Due to recent innovations (plasma screens), Norway suspects that some of its equipment may be impaired. The equipment’s historical cost is
National Sweetener Company owns the patent to the artificial sweetener known as Supersweet.Assume that National Sweetener acquired the patent on January 1, 2002 at a cost of \($300\) million dollars,
To meet the increasing demand for its microprocessors, Intelligent Micro Devices began construction of a new manufacturing facility on January 1, 2008. Construction costs were incurred uniformly
Consider the following two scenarios;Scenario I: Over the 2005-2008 period, Micro Systems, Inc. spends \($10,000,000\) a year to develop patents on new computer hardware manufacturing technology.
The 2007 income statement and other information for Mallard Corporation, which is about to purchase a new machine at a cost of \($500\) and a new computer system at a cost of \($300,\)
Gardenia Co. and Lantana Co. both operate in the same industry. Gardenia began its operations in 2008 with a \($20\) million initial investment in plant and equipment with an expected life of 10
Prescott Co. management has committed to a plan to dispose of a group of assets associated with the manufacture of railroad cars. This group of assets qualifies as a component of an entity for
Target Corporation is a general merchandise retailer. Its Target and Super target stores are part of the upscale discount chain. Wal-Mart Stores, Inc. operates retail stores in various retailing
Granite Construction is one of the largest heavy civil construction contractors in the United States.Granite operates nationwide, serving both public and private sector clients. Within the public
Microsoft Corporation develops, manufactures, licenses, and supports a wide range of software products for many computing devices. The company’s software products include operating systems for
Dallas Inc. began operations on January 1, 2008 when it purchased some long-lived assets at a cost of \($120,000\). The assets have a 12-year useful life and no salvage value; Dallas intends to use
On the following page is information pertaining to the Property, plant, and equipment accounts of Intel Corporation. This information was taken from Intel’s Year 2 10-K report. A 10-K is an annual
National Coal Corporation mines, processes, and sells high-quality bituminous steam coal from mines located in Tennessee and southeastern Kentucky. The company owns the coal mineral rights to
Exhibit 11.13 is taken from the 2002 Shareholder Report of Snap-On Inc., a manufacturer and marketer of high-quality professional automotive and industrial tools. The exhibit typifies the required
Akers Company sold bonds on July 1, 2008 with a face value of $100,000. These bonds are due in 10 years. The stated annual interest rate is 6% per year, payable semiannually on June 30 and December
By July 1, 2009, the market yield on the Akers Company bonds described in E11-1 had risen to 10%.Required:What was the bonds’ market price on July 1, 2009?
On January 1, 2008 when the market interest rate was 14%, Luba Corporation issued bonds in the face amount of $500,000 with interest at 12% payable semiannually. The bonds mature on December 31,
On January 2, 2008, West Company issued 9% bonds in the amount of \($500,000\) that mature on December 31, 2017. The bonds were issued for \($469,500\) to yield 10%. Interest is payable annually on
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