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Financial Accounting 7th Edition LibbyShort - Solutions
(Multiple choice)1. What is the present value factor for an annuity of five periods and an interest rate of 10 percent?a. 1.6105 b. 6.1051 c. 3.7908d. 7.72172. The university spirit organization needs to buy a car to travel to football games. A dealership in Lockhart has agreed to the following
Kieso Company borrowed $600,000 on a 90-day note at 11 percent interest. The money was borrowed for 30 days in 2011 and 60 days in 2012; the note and interest were to be paid upon maturity in 2012. How much interest expense, if any, would be reported in 2011 and in 2012?
Wygant Corporation borrowed $290,000 on October 1, 2011. The note carried a 10 percent interest rate with the principal and interest payable on May 1, 2012. Prepare the journal entry to record the note on October 1. Prepare the adjusting entry to record accrued interest on December 31.
For each of the following items, specify whether the information would be found in the balance sheet, the income statement, the statement of cash flows, the notes to the statements, or not at all.1. The amount of working capital.2. The total amount of current liabilities.3. Information concerning
The balance sheet for Stevenson Corporation reported the following: quick assets, $20,000; noncurrent assets, $240,000; total assets, $360,000; noncurrent liabilities, $176,000; total stockholders’ equity, $94,000. Compute Stevenson’s quick ratio and working capital.
Ospry, Inc., has a quick ratio of 0.50 and working capital in the amount of $1,240,000. For each of the following transactions, determine whether the quick ratio and working capital will increase, decrease, or remain the same.a. Paid accounts payable in the amount of $50,000.b. Recorded accrued
Buzz Coffee Shops is famous for its large servings of hot coffee. After a famous case involving McDonald’s, the lawyer for Buzz warned management (during 2011) that it could be sued if someone were to spill hot coffee and be burned: “With the temperature of your coffee, I can guarantee it’s
What is the present value of $500,000 to be paid in 10 years with an interest rate of 8 percent?
What is the present value of 10 equal payments of $15,000 with an interest rate of 10 percent?
As a result of a slowdown in operations, Global Stores is offering employees who have been terminated a severance package of $118,000 cash, another $129,000 to be paid in one year, and an annuity of $27,500 to be paid each year for six years beginning in one year. What is the present value of the
You plan to retire in 10 years. Would it be better for you to save $27,500 a year for the last five years before retirement or $16,250 for each of the 10 years? You are able to earn 9 percent interest on your investments.
You want a retirement fund of $125,000 when you retire in six years. You are able to earn 8 percent on your investments. How much should you deposit each year to build the retirement fund that you want?
Diane Corporation is preparing its 2012 balance sheet. The company records show the following selected amounts at the end of the accounting period, December 31, 2012:Total assets ............ $530,000Total noncurrent assets ....... 362,000Liabilities:Notes payable (8%, due in 5 years) ..
Paul Company completed the salary and wage payroll for March 2011. The payroll provided the following details:Salaries and wages earned ........ $200,000Employee income taxes withheld .... 40,000Insurance premiums withheld ...... 1,000FICA payroll taxes* .......... 15,000*$15,000 each for employer
Oaks Company has completed the payroll for January 2012, reflecting the following data:Salaries and wages earned ......... $86,000Employee income taxes withheld ...... 10,000FICA payroll taxes* ........... 6,000*Assessed on both employer and employee (i.e., $6,000 each).Required:1. What amount of
Many businesses borrow money during periods of increased business activity to finance inventory and accounts receivable. Neiman Marcus is one of America’s most prestigious retailers. Each Christmas season, Neiman Marcus builds up its inventory to meet the needs of Christmas shoppers. A large
Using the data from the previous exercise, complete the following requirements.Required:1. Determine the financial statement effects for each of the following:(a) Issuance of the note on November 1,(b) The impact of the adjusting entry at the end of the accounting period, and(c) Payment of the note
PepsiCo, Inc., manufactures a number of products that are part of our daily lives. Its businesses include Pepsi, Frito-Lay, Tropicana, Quaker, and Gatorade. The company’s annual revenues exceed $22 billion. A recent PepsiCo annual report contained the following information:At the end of the
Super Savers Department Store reported a quick ratio of 0.6. A review of its balance sheet revealed the following information:Quick assets ..... $120,000Current assets .... 750,000Noncurrent assets .... 450,000Noncurrent liabilities .. 300,000Determine the amount of current liabilities reported in
Vernon Company sells a wide range of goods through two retail stores operated in adjoining cities. Most purchases of goods for resale are on invoices. Occasionally, a short-term note payable is used to obtain cash for current use. The following transactions were selected from those occurring during
McDonald’s is one of the world’s most popular fast-food restaurants, offering good food and convenient locations. Effective management of its properties is a key to its success. As the following note in its current annual report indicates, McDonald’s both owns and leases property:The Company
As the new vice president for consumer products at Heffner Manufacturing, you are attending a meeting to discuss a serious problem associated with delivering merchandise to customers. Bob Smith, director of logistics, summarized the problem: “It’s easy to understand, we just don’t have enough
The annual report for American Airlines contained the following information:In addition to pension benefits, other postretirement benefits, including certain health care and life insurance benefits (which provide secondary coverage to Medicare), are provided to retired employees. The amount of
The following information pertains to the Lewis Corporation.Required:1. For each year, compute income tax expense (assume that no taxes have been paid).2. Explain why tax expense is not simply the amount of cash paid during theyear.
The balance sheet for Nair Corporation provided the following summarized pretax data: Year 2011
The annual report for Starbucks contains the following information (in millions):Income TaxesThe provision for income taxes consisted of the following (in millions):Required:1. Determine whether tax expense is higher or lower than taxes payable for each year.2. Is the deferred tax liability
On January 1, 2011, Shannon Company completed the following transactions (assume a 10 percent annual interest rate):a. Bought a delivery truck and agreed to pay $50,000 at the end of three years.b. Rented an office building and was given the option of paying $10,000 at the end of each of the next
You have just won the state lottery and have two choices for collecting your winnings. You can collect $50,000 today or receive $10,100 per year for the next seven years. A financial analyst has told you that you can earn 10 percent on your investments. Which alternative should you select?
You are a financial adviser working with a client who wants to retire in eight years. The client has a savings account with a local bank that pays 9 percent and she wants to deposit an amount that will provide her with $900,000 when she retires. Currently, she has $200,000 in the account. How much
Judge Drago has decided to set up an educational fund for his favorite granddaughter, Emma, who will start college in one year. The judge plans to deposit an amount in a savings account that pays 9 percent interest. He wants to deposit an amount that is sufficient to permit Emma to withdraw $13,000
An investment will pay $11,000 at the end of the first year, $30,000 at the end of the second year, and $50,000 at the end of the third year. Determine the present value of this investment using a 10 percent interest rate.
An investment will pay $15,000 at the end of each year for eight years and a one-time payment of $120,000 at the end of the eighth year. Determine the present value of this investment using a 7 percent interest rate.
Smith Company has purchased a new office building. The company has agreed to pay the developer $55,000 annually for 9 years. Using present value techniques, determine the value that should be recorded for the building when it is purchased. Assume a 6 percent annual interest rate.
You have the chance to purchase the royalty interest in a gas well in the Barnett Shale. Your best estimate is that the net royalty income will average $25,000 per year for seven years. There will be no residual value at that time. Considering the uncertainty in your estimates, you expect to earn 9
On January 1, 2011, you deposited $6,000 in a savings account. The account will earn 10 percent annual compound interest, which will be added to the fund balance at the end of each year.Required (round to the nearest dollar):1. What will be the balance in the savings account at the end of 10
On January 1, 2011, Alan King decided to deposit $58,800 in a savings account that will provide funds four years later to send his son to college. The savings account will earn 8 percent, which will be added to the fund each year-end.Required (show computations and round to the nearest dollar):1.
On each December 31, you plan to deposit $2,000 in a savings account. The account will earn 9 percent annual interest, which will be added to the fund balance at year-end. The first deposit will be made December 31, 2011 (end of period).Required (show computations and round to the nearest
On January 1, 2011, you plan to take a trip around the world upon graduation four years from now. Your grandmother wants to deposit sufficient funds for this trip in a savings account for you. On the basis of a budget, you estimate that the trip currently would cost $15,000. To be generous, your
Vigeland Company completed the following transactions during 2011. The annual accounting period ends December 31, 2011.Jan. 15 Purchased and paid for merchandise for resale at an invoice cost of $14,200; periodic inventory system.Apr. 1 Borrowed $700,000 from Summit Bank for general use; executed
Rogers Company completed the following transactions during 2011. The annual accounting period ends December 31, 2011. Jan. 8 Purchased merchandise for resale on account at an invoice cost of $14,860; assume a periodic inventory system.17 Paid January 8 invoice.Apr. 1 Borrowed $35,000 from
Using data from the previous problem, complete the following requirements.Required:1. For each transaction (including adjusting entries) listed in the previous problem, indicate the effects (e.g., cash + or − ), using the following schedule:Date Assets Liabilities Stockholders’ Equity2. For
During 2012, Walnut Company completed the following two transactions. The annual accounting period ends December 31.a. Paid and recorded wages of $130,000 during 2012; however, at the end of December 2012, three days’ wages are unpaid and unrecorded because the weekly payroll will not be paid
Using the data from the previous exercise, complete the following requirements.Required:1. Determine the financial statement effects for each of the following:(a) The adjusting entry for accrued wages required on December 31, 2012,(b) The January 6, 2013, journal entry for payment of any unpaid
Dell Computers is a leader in the industry with over $56 billion in sales each year. A recent annual report for Dell contained the following note:WarrantyWe record warranty liabilities at the time of sale for the estimated costs that may be incurred under its limited warranty. Factors that affect
For each of the following situations, determine whether the company should (a) Report a liability on the balance sheet, (b) Disclose a contingent liability, or (c) Not report the situation. Justify and explain your conclusions.1. An automobile company introduces a new car. Past experience
For each of the following transactions, determine whether cash flows from operating activities will increase, decrease, or remain the same:a. Purchased merchandise on credit.b. Paid an account payable in cash.c. Accrued payroll for the month but did not pay it.d. Borrowed money from the bank. The
PepsiCo, Inc., is a $25 billion company in the beverage, snack food, and restaurant businesses. PepsiCo’s annual report included the following note:At year-end, $3.5 billion of short-term borrowings were reclassified as long-term, reflecting PepsiCo’s intent and ability to refinance these
Mansfield Corporation purchased a new warehouse at the beginning of 2011 for $1,000,000. The expected life of the asset is 20 years with no residual value. The company uses straight-line depreciation for financial reporting purposes and accelerated depreciation for tax purposes (assume 10 percent
On January 1, 2011, Boston Company completed the following transactions (use a 7 percent annual interest rate for all transactions):a. Borrowed $115,000 for seven years. Will pay $8,050 interest at the end of each year and repay the $115,000 at the end of the 7th year.b. Established a plant
After hearing a knock at your front door, you are surprised to see the Prize Patrol from a large, well known magazine subscription company. It has arrived with the good news that you are the big winner, having won $12.5 million. You discover that you have three options:(1) You can receive $1.25
On December 31, 2011, Mercury Company created a fund that will be used to pay the principal amount of a $120,000 debt due on December 31, 2014. The company will make four equal annual deposits on each December 31 in 2011, 2012, 2013, and 2014. The fund will earn 7 percent annual interest, which
On January 1, 2011, Spearfish Company completed the following transactions (use an 8 percent annual interest rate for all transactions):a. Deposited $50,000 in a debt retirement fund. Interest will be computed at six-month intervals and added to the fund at those times (i.e., semiannual
Sturgis Company completed the following transactions during 2012. The annual accounting period ends December 31, 2012.Jan. 15 Recorded tax expense for the year in the amount of $125,000. Current taxes payable were $93,000.31 Paid accrued interest expense in the amount of $52,000.Apr. 30 Borrowed
Using data from problem AP9-1, complete the following requirements.Required:1. For each transaction (including adjusting entries) listed in the previous problem, indicate the effects (e.g., cash + or − ) using the following schedule:Date Assets Liabilities Stockholders’ Equity2. For each
Ford Motor Company is one of the world’s largest companies with annual sales of cars and trucks in excess of $170 billion. A recent annual report for Ford contained the following note:WarrantiesEstimated warranty costs are accrued for at the time the vehicle is sold to a dealer. Estimates for
For each of the following transactions, determine whether cash flows from operating activities will increase, decrease, or remain the same:a. Purchased merchandise for cash.b. Paid salaries and wages for the last month of the previous accounting period.c. Paid taxes to the federal government.d.
General Mills is a multibillion-dollar company that makes and sells products used in the kitchens of most American homes. The Company’s annual report included the following note:We have a revolving credit agreement expiring in two years that provides for a credit line (which permits us to borrow
On January 1, 2011, Ellsworth Company completed the following transactions (use an 8 percent annual interest rate for all transactions):a. Borrowed $2,000,000 to be repaid in five years. Agreed to pay $150,000 interest each year for the five years.b. Established a plant addition fund of $1,000,000
After completing a long and successful career as senior vice president for a large bank, you are preparing for retirement. Visiting the human resources office, you find that you have several retirement options:(1) You can receive an immediate cash payment of $750,000,(2) You can receive $60,000 per
On January 1, 2011, Austin Auto Company decided to accumulate a fund to build an addition to its plant. The company will deposit $320,000 in the fund at each year-end, starting on December 31, 2011. The fund will earn 9 percent interest, which will be added to the balance at each year-end. The
Finding Financial Information Refer to the financial statements of American Eagle given in Appendix B at the end of this book.Required:1. What is the amount of accrued compensation and payroll taxes at the end of the most recent reporting year?2. By what amount did accounts payable change over
Finding Financial Information Refer to the financial statements of Urban Outfitters given in Appendix C at the end of this book.Required:1. What is the amount of accrued compensation at the end of the most recent reporting year?2. By what amount did accounts payable change over the most recent
Comparing Companies within an Industry Refer to the financial statements of American Eagle (Appendix B) and Urban Outfitters (Appendix C) and the Industry Ratio Report (Appendix D) at the end of this book.Required:1. Compute the quick ratio for each company for the current year.2. Compare the most
Many advertisements contain offers that seem too good to be true. A few years ago, an actual newspaper ad offered “a $150,000 house with a zero interest rate mortgage” for sale. If the purchaser made monthly payments of $3,125 for four years ($150,000 ÷ 48 months), no interest would be
In some cases, a manager can engage in transactions that improve the appearance of financial reports without affecting the underlying economic reality. In this chapter, we discussed the importance of liquidity as measured by the quick ratio and working capital. For each of the following
The president of a regional wholesale distribution company planned to borrow a significant amount of money from a local bank at the beginning of the next fiscal year. He knew that the bank placed a heavy emphasis on the liquidity of potential borrowers. To improve the company’s quick ratio, the
The New York State Lottery Commission ran the following advertisement in a number of New York newspapers:The Lotto jackpot for Wednesday, August 25, 1999, will be $3 million including interest earned over a 20-year payment period. Constant payments will be made each year.Explain the meaning of this
What are the primary characteristics of a bond? For what purposes are bonds usually issued?
What is the difference between a bond indenture and a bond certificate?
Differentiate secured bonds from unsecured bonds.
Differentiate between callable and convertible bonds.
From the perspective of the issuer, what are some advantages of issuing bonds instead of capital stock?
As the tax rate increases, the net cost of borrowing money decreases. Explain.
At the date of issuance, bonds are recorded at their current cash equivalent amount. Explain.
Explain the nature of the discount and premium on bonds payable.
What is the difference between the stated interest rate and the effective-interest rate on a bond?
Differentiate among the stated and effective rates of interest on a bond (a) Sold at par, (b) Sold at a discount, and (c) Sold at a premium.
What is the book value of a bond payable?
Explain the basic difference between the straight-line and the effective-interest methods of amortizing a bond discount or premium. Explain when each method should or may be used.
(Multiple Choice)1. Annual interest expense for a single bond issue continues to increase over the life of the bonds. Which of the following explains this?a. The market rate of interest has increased since the bonds were sold.b. The coupon rate of interest has increased since the bonds were sold.c.
For each of the following items, specify whether the information would be found in the balance sheet, the income statement, the statement of cash flows, the notes to the statements, or not at all.1. The amount of a bond liability.2. Interest expense for the period.3. Cash interest paid for the
Willams Company plans to issue $600,000, 10-year bonds that pay 8 percent payable semiannually on June 30 and December 31. All of the bonds will be sold on January 1, 2011. Determine the issuance price of the bonds assuming a market yield of 8 percent.
Trew Company plans to issue $900,000, 10-year, 6 percent bonds. Interest is payable semiannually on June 30 and December 31. All of the bonds will be sold on January 1, 2011. Determine the issuance price of the bonds assuming a market yield of 8.5 percent.
Coffman Company issued $1,000,000, 10-year, 10 percent bonds on January 1, 2011. The bonds sold for $940,000. Interest is payable semiannually each June 30 and December 31. Record the sale of the bonds on January 1, 2011, and the payment of interest on June 30, 2011, using effective-interest
Wefald Company issued $600,000, 10-year, 10 percent bonds on January 1, 2011. The bonds sold for $580,000. Interest is payable semiannually each June 30 and December 31. Record the sale of the bonds on January 1, 2011, and the payment of interest on June 30, 2011, using straight-line amortization.
Waterhouse Company plans to issue $500,000, 10-year, 10 percent bonds. Interest is paid semiannually on June 30 and December 31. All of the bonds will be sold on January 1, 2011. Determine the issuance price of the bonds, assuming a market yield of 8 percent.
Ernst Company issued $600,000, 10-year, 9 percent bonds on January 1, 2011. The bonds sold for $620,000. Interest is payable annually each December 31. Record the sale of the bonds on January 1, 2011, and the payment of interest on December 31, 2011, using straight-line amortization.
RKO Company issued $850,000, 10-year, 8 percent bonds on January 1, 2011. The bonds sold for $910,000. Interest is payable annually each December 31. Record the sale of the bonds on January 1, 2011, and the payment of interest on December 31, 2011, using the effective-interest method of
The debt-to-equity and times interest earned ratios were discussed in this chapter. Which is a better indicator of a company’s ability to meet its required interest payment? Explain.
If interest rates fell after the issuance of a bond and the company decided to retire the debt, would you expect the company to report a gain or loss on debt retirement? Describe the financial statement effects of a debt retirement under these circumstances.
If a company issues a bond at a discount, will interest expense each period be more or less than the cash payment for interest? If another company issues a bond at a premium, will interest expense be more or less than the cash payment for interest? Is your answer to either question affected by the
In what section of the statement of cash flows would you find cash paid to retire bonds? In what section would you find cash paid for interest?
Bond Terminology: Fill in the Missing Blanks1. The ___________ is the amount (a) payable at the maturity of the bond and (b) on which the periodic cash interest payments are computed.2. ___________ is another name for bond principal, or the maturity amount of a bond.3. ___________ is another name
As this book was being written, the business press reported the following information concerning bonds issued by AT&T:Bonds Yield CloseAT&T 6.5 7.3
Wynn Resorts owns a variety of popular gaming resorts. Its annual report contained the following information:Debenture ConversionsOur convertible debentures are currently convertible at each holder’s option into shares of the Company’s common stock at a conversion price of $23.00 per share
LaTanya Corporation is planning to issue $100,000, seven-year, 8 percent bonds. Interest is payable each December 31. All of the bonds will be sold on January 1, 2011.Required:Compute the issue (sale) price on January 1, 2011, for each of the following independent cases (show computations):a. Case
James Corporation is planning to issue $500,000 worth of bonds that mature in 10 years and pay 6 percent interest each June 30 and December 31. All of the bonds will be sold on January 1, 2011.Required:Compute the issue (sale) price on January 1, 2011, for each of the following independent cases
You have just started your first job as a financial analyst for a large stock brokerage company. Your boss, a senior analyst, has finished a detailed report evaluating bonds issued by two different companies. She stopped by your desk and asked for help: “I have compared two ratios for the
GMAC Corporation issued a $100,000 bond that matures in five years. The bond has a stated interest rate of 6 percent. On January 1, 2011, when the bond was issued, the market rate was 8 percent. The bond pays interest twice per year, on June 30 and December 31. At what price was the bond issued?
On January 1, 2011, Clearwater Corporation sold a $750,000, 8 percent bond issue (9 percent market rate). The bonds were dated January 1, 2011, pay interest each December 31, and mature in 10 years.Required:1. Give the journal entry to record the issuance of the bonds.2. Give the journal entry to
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