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Using Financial Accounting Information The Alternative to Debits and Credits 7th Edition Gary A. Porter, Curtis L. Norton - Solutions

Effect of Transactions on Working Capital, Current Ratio, and Quick Ratio (Note: Consider completing Problem 13-2 after this problem to ensure that you obtain a clear understanding of the effect of various transactions on these measures of liquidity.) The following account balances are taken from
(Note: Consider completing this problem after Problem 13-1 to ensure that you obtain a clear understanding of the effect of various transactions on these measures of liquidity.)The following account balances are taken from the records of Veriform Inc.:Cash ................ $ 70,000Short-term
The president of Blue Skies Corp. is reviewing with his vice presidents the operating results of the year just completed. Sales increased by 15% from the previous year to $60,000,000. Average total assets for the year were $40,000,000. Net income, after adding back interest expense, net of tax, was
Sunrise Corp. is a major regional retailer. The chief executive officer (CEO) is concerned with the slow growth both of sales and of net income and the subsequent effect on the trading price of the common stock. Selected financial data for the past three years follow.The CEO believes that the price
The accounting staff of CCB Enterprises has completed the financial statements for the 2010 calendar year. The statement of income for the current year and the comparative statements of financial position for 2010 and 2009 follow.Required1. Calculate the following financial ratios for 2010 for
Tablon Inc. is a wholly owned subsidiary of Marbel Co. The philosophy of Marbel's management is to allow the subsidiaries to operate as independent units. Corporate control is exercised through the establishment of minimum objectives for each subsidiary, accompanied by substantial rewards for
Heartland Inc. is a medium-size company that has been in business for 20 years. The industry has become very competitive in the last few years, and Heartland has decided that it must grow if it is going to survive. It has approached the bank for a sizable five-year loan, and the bank has requested
The following account balances are taken from the records of Monet€™s Garden Inc.:Current liabilities ........... $150,000Long-term liabilities ......... 375,000Stockholders€™ equity ......... 400,000Required1. Use the information provided to compute Monet€™s
The following account balances are taken from the records of Degas Inc.:Current liabilities ........... $ 25,000Long-term liabilities .......... 125,000Stockholders€™ equity .......... 400,000Required1. Use the information provided to compute Degas€™s debt-to-equity ratio
The president of Blue Moon Corp. is reviewing with her department managers the operating results of the year just completed. Sales increased by 12% from the previous year to $750,000. Average total assets for the year were $400,000. Net income, after adding back interest expense, net of tax, was
Sunset Corp. is a major regional retailer. The chief executive officer (CEO) is concerned with the slow growth both of sales and of net income and the subsequent effect on the trading price of the common stock. Selected financial data for the past three years follow.The CEO believes that the price
The accounting staff of SST Enterprises has completed the financial statements for the 2010 calendar year. The statement of income for the current year and the comparative statements of financial position for 2010 and 2009 follow.SST EnterprisesStatement of IncomeYear Ended December 31,
Grout Inc. is a wholly owned subsidiary of Slait Co. The philosophy of Slait's management is to allow the subsidiaries to operate as independent units. Corporate control is exercised through the establishment of minimum objectives for each subsidiary, accompanied by substantial rewards for success
Midwest Inc. is a medium-size company that has been in business for 20 years. The industry has become very competitive in the last few years, and Midwest has decided that it must grow if it is going to survive. It has approached the bank for a sizable five-year loan, and the bank has requested
Horizontal Analysis for Kellogg€™s Refer to the financial statement information of Kellogg€™s reprinted at the back of the book.Required1. Prepare a work sheet with the following headings:2. Complete the work sheet using each of the account titles on Kellogg€™s income
Refer to the financial statement information of Kellogg’s reprinted at the back of the book. Required1. Using the format in Example 13-5, prepare common-size comparative income statements for 2008 and 2007. Use as the base “Net sales.” Round all percentages to the nearest one-tenth of a
This case should be completed after responding to the requirements in Decision Case 13-2. Refer to the financial statement information of Kellogg’s and General Mills reprinted at the back of the book.Required:1. Using the format in Example 13-5, prepare common-size comparative income statements
Refer to the financial statement information of General Mills reprinted at the back of the book.Required1. Compute the following ratios and other amounts for each of the two years, ending May 31, 2009, and May 25, 2008. Because only two years of data are given on the balance sheets, to be
Diversified Industries is a large conglomerate that is continually in the market for new acquisitions. The company has grown rapidly over the last ten years through buyouts of medium-size companies. Diversified does not limit itself to companies in any one industry, but looks for firms with a sound
BPO€™s management believes the company has been successful at increasing sales because it has not increased the selling price of its products even though its competition has increased prices and costs have increased. Price and cost relationships in Year 1 were established because they
As controller of Midwest Construction Company, you are reviewing with your assistant, Dave Jackson, the financial statements for the year just ended. During the review, Jackson reminds you of an existing loan agreement with Southern National Bank. Midwest has agreed to the following
Garden Fresh Inc. is a wholesaler of fresh fruits and vegetables. Each year, it submits a set of financial ratios to a trade association. Even though the association doesn€™t publish the individual ratios for each company, the president of Garden Fresh thinks it is important for public
Presented here are a statement of income and retained earnings and comparative balance sheets for Gallagher, Inc., which operates a national chain of sporting goods stores.Gallagher, Inc.Statement of Income and Retained EarningsFor the Year Ended December 31, 2010(all amounts in thousands of
What is the definition of current liabilities? Why is it important to distinguish between current and long-term liabilities?
Most firms attempt to pay their accounts payable within the discount period to take advantage of the discount. Why is that normally a sound financial move?
Assume that your local bank gives you a $1,000 loan at 10% per year but deducts the interest in advance. Is 10% the “real” rate of interest that you will pay? How can the true interest rate be calculated?
Is the account Discount on Notes Payable an income statement or a balance sheet account?
A firm’s year ends on December 31. Its tax is computed and submitted to the U.S. Treasury on March 15 of the following year. When should the taxes be reported as a liability?
What is a contingent liability? Why are contingent liabilities accounted for differently than contingent assets?
Many firms believe that it is very difficult to estimate the amount of a possible future contingency. Should a contingent liability be reported even when the dollar amount of the loss is not known? Should it be disclosed in the notes to financial statements?
Assume that a lawsuit has been filed against your firm. Your legal counsel has assured you that a loss is not probable. How should the lawsuit be disclosed on the financial statements?
What is the difference between simple interest and compound interest? Is the amount of interest higher or lower when the interest is simple rather than compound?
What is the effect when interest is compounded quarterly versus annually?
What is the meaning of the terms present value and future value? How can you determine whether to calculate the present value or the future value of an amount?
What is the meaning of the word annuity? Can the present value of an annuity be calculated as a series of single amounts? If so, how?
Assume that you know the total dollar amount of a loan and the amount of the monthly payments. How can you determine the interest rate as a percentage of the loan?
The present value and future value concepts are applied to measure the amount of several accounts common in accounting. What are some accounts that are valued in this manner?
Beta Company has current assets of $80,000 and current liabilities of $60,000. How much of its short-term notes payable could it pay in cash and achieve its minimum desired current ratio of 2 to 1?
You receive an invoice from a supplier for $5,000 on January 1 with terms 3/15, n/30. If you pay between January 1 and January 16, how much must you pay? If you pay after January 16, how much must you pay?
Current Liabilities and Cash Flows In the statement of cash flows, how should the following appear? A decrease in a current liability account An increase in a current liability account Should changes in current liability accounts always appear in the Operating Activities category? Give an example
Contingent Liabilities Omega Company is involved in two unrelated lawsuits, one as the plaintiff and one as the defendant. As a result of these two lawsuits, the company has a contingent asset and a contingent liability. How should Omega record these on its balance sheet?
Simple and Compound Interest You invest $1,000 for five years at 5% simple interest at Bank 1. You invest $1,000 for five years at Bank 2 where interest at 5% is compounded annually. Compute the amounts that will be accumulated.
Present Value and Future Value You are required to pay $5,000 for college fees for each of the next four years, and a generous uncle has offered to give you enough money now to cover these future payments. How much must he give you now if you can invest at 10% per year compounded annually?
Solving for an Interest Rate You are required to pay $5,000 for college fees for each of the next four years, and a not-quite-as-generous uncle offers to give you $14,275 toward your college fees. What annual interest rate do you need to earn to allow you to invest the money and meet the four
The following items are accounts on Smith’s balance sheet of December 31, 2010: Taxes Payable Accounts Receivable Notes Payable, 9%, due in 90 days Investment in Bonds Capital Stock Accounts Payable Estimated Warranty Payable in 2011 Retained Earnings Trademark Mortgage Payable ($10,000 due
Current Liabilities The following items represent liabilities on a firm’s balance sheet:a. An amount of money owed to a supplier based on the terms 2/20, n/40, for which no note was executed.b. An amount of money owed to a creditor on a note due April 30, 2011.c. An amount of money owed to a
Current Liabilities Section Jackie Company had the following accounts and balances on December 31, 2010:RequiredPrepare the Current Liabilities section of Jackie Company's balance sheet as of December 31,2010.
Transaction Analysis Polly’s Cards & Gifts Shop had the following transactions during the year:a. Polly’s purchased inventory on account from a supplier for $8,000. Assume that Polly’s uses a periodic inventory system.b. On May 1, land was purchased for $44,500. A 20% down payment was
Current Liabilities and Ratios Several accounts that appeared on Kruse€™s 2010 balance sheet are as follows:Required1. Prepare the Current Liabilities section of Kruse€™s 2010 balance sheet.2. Compute Kruse€™s working capital.3. Compute Kruse€™s current
Each of the following situations involves the use of discounts: 1. How much discount may Seals Inc. take in each of the following transactions? What was the annualized interest rate?a. Seals purchases inventory costing $450, terms 2/10, n/40.b. Seals purchases new office furniture costing $1,500,
Notes Payable and Interest On July 1, 2010, Jo’s Flower Shop borrowed $25,000 from the bank. Jo signed a ten month, 8% promissory note for the entire amount. Jo’s uses a calendar year-end.Required1. Identify and analyze the effect of the issuance of the promissory note.2. Identify and analyze
Non-Interest-Bearing Notes Payable On October 1, 2010, RatkowskiInc. borrowed $18,000 from Second National Bank by issuing a 12-month note. The bank discounted the note at 9%.Required1. Identify and analyze the effect of the issuance of the note.2. Identify and analyze the effect of the accrual of
Impact of Transactions Involving Current Liabilities on Statement of Cash Flows From the following list, identify whether the change in the account balance during the year would be reported as an operating (O), an investing (I), or a financing (F) activity or not separately reported on the
Impact of Transactions Involving Contingent Liabilities on Statement of Cash Flows From the following list, identify whether the change in the account balance during the year would be reported as an operating (O), an investing (I), or a financing (F) activity or not separately reported on the
Clean Corporation manufactures and sells dishwashers. Clean provides all customers with a two-year warranty guaranteeing to repair, free of charge, any defects reported during this time period. During the year, it sold 100,000 dishwashers for $325 each. Analysis of past warranty records indicates
Simple versus Compound Interest For each of the following notes, calculate the simple interest due at the end of the term.Now assume that the interest on the notes is compounded annually. Calculate the amount of interest due at the end of the term for each note. Finally, assume that the interest
Present Value and Future Value Brian Inc. estimates that it will need $150,000 in ten years to expand its manufacturing facilities. A bank has agreed to pay Brian 5% interest compounded annually if the company deposits the entire amount now needed to accumulate $150,000 in ten years. How much
Effect of Compounding Period Kern Company deposited $1,000 in the bank on January 1, 2010, earning 8% interest. Kern Company withdraws the deposit plus accumulated interest on January 1, 2012. Compute the amount of money Kern withdraws from the bank assuming that interest is compounded(a)
Present Value and Future Value The following situations involve time value of money calculations: 1. A deposit of $7,000 is made on January 1, 2010. The deposit will earn interest at a rate of 8%. How much will be accumulated on January 1, 2015, assuming that interest is compounded (a) Annually,
Present Value and Future Value The following situations require the application of the time value of money: 1. On January 1, 2010, $16,000 is deposited. Assuming an 8% interest rate, calculate the amount accumulated on January 1, 2015, if interest is compounded (a) Annually, (b) Semiannually, and
Annuity Steve Jones has decided to start saving for his son’s college education by depositing $2,000 at the end of every year for 15 years. A bank has agreed to pay interest at the rate of 4% compounded annually. How much will Steve have in the bank immediately after his 15th deposit?
Calculation of Years Kelly Seaver has decided to start saving for her daughter’s college education. Kelly wants to accumulate $41,000. The bank will pay interest at the rate of 4% compounded annually. If Kelly plans to make payments of $1,600 at the end of each year, how long will it take her to
Value of Payments Upon graduation from college, Susana Lopez signed an agreement to buy a used car. Her annual payments, which are due at the end of each year for two years, are $1,480. The car dealer used a 12% rate compounded annually to determine the amount of the payments.Required1. What should
Comparison of Alternatives Jane Bauer has won the lottery and has the following four options for receiving her winnings: 1. Receive $100,000 at the beginning of the current year2. Receive $108,000 at the end of the year3. Receive $20,000 at the end of each year for eight years4. Receive $10,000 at
Two Situations The following situations involve the application of the time value of money concepts: 1. Sampson Company just purchased a piece of equipment with a value of $53,300. Sampson financed this purchase with a loan from the bank and must make annual loan payments of $13,000 at the end of
Notes and Interest Glencoe Inc. operates with a June 30 year-end. During 2010, the following transactions occurred:a. January 1: Signed a one-year, 10% loan for $25,000. Interest and principal are to be paid at maturity.b. January 10: Signed a line of credit with Little Local Bank to establish a
Effects of Burger King€™s Current Liabilities on Its Statement of Cash Flows The following items are classified as current liabilities on Burger King Holdings, Inc.€™s balance sheets as of June 30, 2008, and June 30, 2007:Required1. Burger King uses the indirect method to
Effects of Brinker International€™s Current Liabilities on Its Statement of Cash Flows Brinker International operates Chili€™s, MacaroniGrill, and other restaurant chains. The following items are classified as current liabilities on Brinker International€™s balance
Clearview Company manufactures and sells high-quality television sets. The most popular line sells for $1,000 each and is accompanied by a three-year warranty to repair, free of charge, any defective unit. Average costs to repair each defective unit will be $90 for replacement parts and $60 for
Warranties Bombeck Company sells a product for $1,500. When the customer buys it, Bombeck provides a one-year warranty. Bombeck sold 120 products during 2010. Based on analysis of past warranty records, Bombeck estimates that repairs will average 3% of total sales.Required1. Identify and analyze
Comparison of Simple and Compound Interest On June 30, 2010, Rolf Inc. borrowed $25,000 from its bank, signing an 8%, two-year note.Required1. Assuming that the bank charges simple interest on the note, prepare the journal entry Rolf will record on each of the following dates:December 31,
Investment with Varying Interest Rate Shari Thompson invested $1,000 in a financial institution on January 1, 2010. She leaves her investment in the institution until December 31, 2014. How much money does Shari accumulate if she earns interest, compounded annually, at the following rates? 2010
Comparison of Alternatives On January 1, 2010, Chen Yu’s Office Supply Store plans to remodel the store and install new display cases. Chen has the following options of payment. Chen’s interest rate is 8%.a. Pay $180,000 on January 1, 2010.b. Pay $196,200 on January 1, 2011.c. Pay $220,500 on
Interest in Advance versus Interest Paid When Loan Is Due On July 1, 2010, Leach Company needs exactly $103,200 in cash to pay an existing obligation. Leach has decided to borrow from State Bank, which charges 14% interest on loans. The loan will be due in one year. Leach is unsure, however,
Contingent Liabilities Several independent items are listed for which the outcome of events is unknown at year-end.a. A company offers a two-year warranty on sales of new computers. It believes that 4% of the computers will require repairs.b. A company is involved in a trademark infringement suit.
Time Value of Money Concept The following situations involve the application of the time value of money concept: 1. Janelle Carter deposited $9,750 in the bank on January 1, 1993, at an interest rate of 11% compounded annually. How much has accumulated in the account by January 1, 2010?2. Mike
Comparison of Alternatives Brian Imhoff’s grandparents want to give him some money when he graduates from high school. They have offered Brian three choices as follows:a. Receive $15,000 immediately. Assume that interest is compounded annually.b. Receive $2,250 at the end of each six months for
McLaughlin Inc. operates with a June 30 year-end. During 2010, the following transactions occurred:a. January 1: Signed a one-year, 10% loan for $35,000. Interest and principal are to be paid at maturity.b. January 10: Signed a line of credit with Little Local Bank to establish a $560,000 line of
Effects of McDonald€™s Current Liabilities on Its Statement of Cash Flows The following items are classified as current liabilities on McDonald€™s consolidated statements of financial condition (or balance sheet) at December 31 (in millions):Required1. McDonald€™s uses
Effects of Darden Restaurants€™ Changes in Current Assets and Liabilities on Its Statement of Cash Flows The following items, listed in alphabetical order, are included in the Current Liabilities category on the consolidated balance sheet of Darden Restaurants at May 25, 2008, and May
Warranties Sound Company manufactures and sells high-quality stereos. The most popular line sells for $2,000 each and is accompanied by a three-year warranty to repair, free of charge, any defective unit. Average costs to repair each defective unit will be $180 for replacement parts and $120 for
Beck Company sells a product for $3,200. When the customer buys it, Beck provides a one-year warranty. Beck sold 120 products during 2010. Based on analysis of past warranty records, Beck estimates that repairs will average 4% of total sales.Required1. Identify and analyze the effect of recording
Comparison of Simple and Compound Interest On June 30, 2010, Rolloff Inc. borrowed $25,000 from its bank, signing a 6% note. Principal and interest are due at the end of two years. Required1. Assuming that the note earns simple interest for the bank, calculate the amount of interest accrued on
Investment with Varying Interest Rate Trena Thompson invested $2,000 in a financial institution on January 1, 2010. She leaves her investment in the institution until December 31, 2014. How much money does Trena accumulate if she earns interest, compounded annually, at the following rates? 2010
Comparison of Alternatives On January 1, 2010, Chen Yu’s Office Supply Store plans to remodel the store and install new display cases. Chen has the following options of payment. Chen’s interest rate is 8%.a. Pay $270,000 on January 1, 2010.b. Pay $294,300 on January 1, 2011.c. Pay $334,750 on
Interest in Advance versus Interest Paid When Loan Is Due On July 1, 2010, Moton Company needs exactly $206,400 in cash to pay an existing obligation. Moton has decided to borrow from State Bank, which charges 14% interest on loans. The loan will be due in one year. Moton is unsure, however,
Contingent Liabilities Several independent items are listed for which the outcome of events is unknown at year-end.a. A company has been sued by the federal government for price fixing. The company’s legal counsel believes that there will be an unfavorable verdict and has made an estimate of the
Time Value of Money Concept The following situations involve the application of the time value of money concept:1. Jan Cain deposited $19,500 in the bank on January 1, 1993, at an interest rate of 11% compounded annually. How much has accumulated in the account by January 1, 2010?2. Mark Schultz
Comparison of Alternatives Darlene Page’s grandparents want to give her some money when she graduates from high school. They have offered Darlene the following three choices:a. Receive $16,000 immediately. Assume that interest is compounded annually.b. Receive $2,400 at the end of each six months
General Mills’s and Kellogg’s Current Liabilities Refer to General Mills’s and Kellogg’s annual reports reprinted at the back of the book. Using the companies’ balance sheets and accompanying notes, write a response to the following questions: Required1. Determine General Mills’s
Caribou Coffee€™s Cash Flow Statement Following is the current asset and current liability portion of the balance sheet for Caribou Coffee as of December 30, 2007, and December 31, 2006:Required1. Determine the company€™s current ratio for each fiscal year. What do the ratios
Darden Restaurants’ Contingent Liabilities The following excerpts are from the footnotes of Darden Restaurants’ financial statements of May 25, 2008: Like other restaurant companies and retail employers, in a few states we have been faced with allegations of purported class-wide wage and hour
Hewlett-Packard’s Contingent Liability Following is an excerpt from Hewlett-Packard’s notes that accompanied its financial statements for the year ended October 31, 2008: Schorsch v. HP is a consumer class action ﬁ led against HP on October 28, 2003 in Illinois state court alleging that HP
Current Ratio Loan Provision Assume that you are the controller of a small, growing sporting goods company. The prospects for your firm in the future are quite good, but like many other firms, it has been experiencing some cash flow difficulties because all available funds have been used to
Alternative Payment Options Kathy Clark owns a small company that makes ice machines for restaurants and food-service facilities. Kathy knows a great deal about producing ice machines but is less familiar with the best terms to extend to her customers. One customer is opening a new business and has
Warranty Cost Estimate John Walton is an accountant for ABC Auto Dealers, a large auto dealership in a metropolitan area. ABC sells both new and used cars. New cars are sold with a five-year warranty, the cost of which is carried by the manufacturer. For several years, however, ABC has offered a
Retainer Fees as Sales Bunch o’ Balloons markets balloon arrangements to companies that want to thank clients and employees. Bunch o’ Balloons has a unique style that has put it in high demand. Consequently, Bunch o’ Balloons has asked clients to establish an account. Clients are asked to pay
Which interest rate, the face rate or the market rate, should be used when calculating the issue price of a bond? Why?
What is the tax advantage that companies experience when bonds are issued instead of stock?
Does the issuance of bonds at a premium indicate that the face rate is higher or lower than the market rate of interest?

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