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Financial Accounting Information For Decisions 6th Edition Robert w Ingram, Thomas L Albright - Solutions

Katina Washington is currently employed as a computer programmer by Megatel Company. Her dream, however, is to start her own computer software firm. To provide cash to start her own business in six years she will invest $10,000 today. She thinks the investment will earn a 12% annual return.a. How
I. M. Cansado is about to retire. He has a retirement account that allows two payment options. Under Option 1, he can choose to receive $140,000 at the end of six years. Under Option 2, he can choose to receive $20,000 at the end of each year for six years. An interest rate of 10% is applicable to
Complete the tables and answer the questions.a.b. Summarize the effect of changing the compounding period on the future value of a single sum. Explain why this effect appears reasonable.c. What effect do you think that changing the compounding period of an annuity would have on its future value?
What is the present value of an investment that pays $80 at the end of each year for 10 years and pays an additional $1,000 at the end of the tenth year if the required rate of return is 7%? 8%? 9%?
Old Money Company borrowed $1 million from a bank on January 1, 2004. The loan is to be repaid in annual installments over a three-year period. The bank requires a 9% return.a. What is the amount of Old Money's required payment to the bank each year?b. How much interest expense will Old Money incur
Lily Pewshun negotiated a three-year, 9%, $46,000 loan from her bank. It called for three equal-sized year-end payments.a. Determine the amount of her payment each year (round to the nearest dollar).b. Show how the loan, and each of the three payments, would be entered into her accounting system
a. Calculate each of the following:i. The present value of $300 to be received at the end of three years if invested at 6%.ii. The present value of $300 to be received at the end of four years if invested at 6%.iii. The present value of $300 to be received at the end of four years if invested at
Use an Excel spreadsheet and the FV, PV, and PMT functions to determine the amount of each of the following. R = the annual interest rate and t = number of years. When there are multiple cash flows per year, the amount of the annuity shown below is the amount of each individual cash flow (not the
Arthur has just graduated from college and has his first job. His salary is that of an entry-level employee, so he has to budget his money carefully. However, he does understand the need to save money for the future.RequiredA. Assume that he deposits $500 at the end of each year for 10 years into
Stevie Gordon, age 40, is evaluating several supplemental retirement annuity plans offered by her employer. In general, all the plans call for Stevie to make annual contributions, some of which will be partially matched by the employer. The two plans drawing most of her attention are as follows.
Prudence and Margo are identical twins. Early on, it became clear that Prudence was a bit of a plodder whereas Margo was the fun-loving, carefree type. At age 15, both started working regularly after school. Prudence became a saver while Margo specialized in stimulating the economy with immediate
Starla has decided to retire in 12 years. She has $44,400 available today and wants to invest the money to supplement her pension plan.RequiredA. Assume Starla wants to accumulate $100,000 by her retirement date. Will she achieve her goal if she invests $44,400 today and earns 7%?B. If Starla
Tyrone Flower plans to choose one of three investments. Investment A pays $500 at the end of each year for four years. Investment B pays $2,250 at the end of four years. Investment C pays $300 at the end of each year for three years and pays $1,200 at the end of the fourth year. Tyrone requires a
Laura has decided to set up an IRA (Individual Retirement Account) in which she will make a deposit to her plan at the end of each year, beginning one year from today. She expects to earn 9% on her investment, over a period of 10 years.RequiredA. If she invests the maximum amount of $3,000 at the
Cellex Manufacturing is a family-owned company preparing its year-end 2007 financial statements. The firm will follow generally accepted accounting principles for the first time. Therefore, it is required to record, for the first time, a long-term liability for its employee pension plan. Employees
The Taylors are considering refinancing the loan on their home. Currently, they have a 30-year loan with an 8% annual interest rate. The original loan was for $250,000, but over three years the Taylors have reduced the loan balance to $243,200. A local bank has offered them a 15-year loan with a
Georgia Company borrowed $600,000 from a bank on May 1, 2004. The bank required a return of 12% on the loan. The loan is to be repaid over 12 months in equal installments. Georgia Company’s fiscal year ends on December 31.RequiredA. Prepare an amortization table for the loan for the 12-month
On January 1, 2004, Waldman Enterprises purchased machinery on credit by signing a note payable for the full purchase price. The note payable called for interest to be paid on the unpaid balance and required three equal end-of-year payments. Waldman's accounting staff prepared the following
Rebecca is the owner of Sunnybrook Farm. On January 1, 2004, the beginning of the company’s fiscal year, Rebecca borrowed $750,000 at 10% annual interest to purchase equipment. The loan is to be repaid over five years in equal annual installments.RequiredA. What is the amount of Rebecca’s loan
Turn Buckle Company financed new equipment costing $50,000 with a five-year loan from a local bank. The bank charged 11% interest on the note.RequiredA. What would Turn Buckle’s annual payments be to the bank each year, assuming that the note and interest are paid in equal annual installments?B.
You have decided to purchase a car. You have found a clean used car that will cost you $8,500. You can finance your purchase through the dealer at an annual rate of 12% for 24 months. The dealer requires a down payment of $2,000.RequiredA. What will be the amount of your monthly payments?B. How
Mezzelano Company was involved in a transaction in which a three-year note was exchanged. The note requires equal year-end payments. The accounting department prepared the following amortization table and sent you a copy. All amounts were rounded to the nearest dollar. Unfortunately, the copy
The Faithful Servants Church has started a building fund. Annual end-of-year deposits of $4,000 will begin at the end of the current calendar year. The accumulating balance will earn 6% compound interest per year. The $4,000 deposits are expected to be made for eight years and then increased to
Milo Moneybags is considering an investment that will pay him $1,050 at the end of each year for seven years and then will pay a lump sum of $15,000 at the end of that time.RequiredA. If Milo requires his investments to earn 9% interest, what is the maximum amount he should pay for the investment
1. For a given amount, interest rate, and number of years, which of the following will yield the highest number?a. Future value of a single sumb. Future value of an annuityc. Present value of a single sumd. Present value of an annuity2. You have purchased an investment at a price of $1,500. It
Homer has decided to purchase a house. The price of the house is $80,000 after a down payment of $20,000. The bank will finance the purchase for 25 years at 9%. Alternatively, it will finance the house for 15 years at 8%. Under either option, the bank wants Homer to retire the loan by making a
What are the fundamental accounting issues associated with financing activities?Financing activities for corporations involve issuing debt and stock. These activities provide financial resources for the corporation to grow. Debt has to be repaid along with interest. Stockholders expect dividends or
Why is it useful to report short-term liabilities separately from long-term liabilities when preparing the balance sheet?
What are the differences among debentures, serial bonds, and callable bonds?
Distinguish between the stated rate and the effective rate. Under what circumstances are these rates the same? Under what circumstances are these rates different?
While studying for an accounting exam, a friend observes that a capital lease is merely a means of financing the acquisition of assets. Do you agree? Explain the basis for your answer. If you agree, describe the ways in which a capital lease is similar to other financing activities. If you
What is a contingency, and how does it differ from a liability? Under what conditions should a contingency be reported as if it were a liability?
How is a commitment different from a contingency?
You and Bob are studying for an upcoming accounting exam. Bob says, “Contributed capital is basically the stockholders’ equity of the company. It includes things like common stock, paid-in capital in excess of par, preferred stock, and retained earnings.” Do you agree? Discuss.
A friend remarks that, as he understands it, most current liabilities appearing on the balance sheet arise from transactions involving operating activities. Do you agree? List three current liabilities that might appear on the balance sheet. For each one, explain the underlying transaction that
Jane has just purchased, from Beach Club Inc., 5,000 shares of Beach Club’s $10 par value common stock at a price of $40 per share. Explain how this event should be accounted for by Beach Club. Indicate which accounts will be involved and the amounts.
GAAP require that a firm disclose the details of changes to all stockholders’ equity accounts. What are the two primary techniques that companies use to meet this obligation?
The text states that “a company cannot earn profit from equity transactions.” Why might this be? If a company buys widgets at $10 and resells them at $13, there is a $3 profit. What’s the difference if a company buys back some of its own stock for $25 per share and resells it at $28 per
Clearly distinguish among the following terms: date of declaration, date of record, and date of payment. Construct a realistic example in which you use these terms.
Preferred stock generally does not have voting rights and its holders, therefore, do not have a formal voice in company affairs. Why, then, is it said that preferred stock is a less risky investment than common stock?
If preferred stock generally has a dividend preference over common stock anyway, what is gained by holding preferred stock that is cumulative?
Preferred stock generally pays a larger return to investors than do bonds but a lesser return than earned by common stockholders. Why?
Clarify the differences among the following terms: contributed capital, common stock, capital stock, preferred stock, and treasury stock.
For each of the following independent situations, determine: (a) Whether the bonds sold at face (maturity) value, at a premium (more than face value), or at a discount (less than face value), and (b) Whether interest expense recognized each year for the bonds was less than, equal to, or Greater
Today is the fiscal year end for the Benson Boat Company. The regular year-end interest payment on its 9% bonds payable was made earlier today. All necessary entries were recorded. Bonds Payable now has a balance of $186,400. The chief financial officer (CFO) has proposed buying back this debt in
The Calvert Corporation plans to expand its operations. To obtain the necessary cash, $5 million of 6%, five-year bonds were issued on January 1, 2005. The bonds pay interest annually.a. Assume Calvert Corporation issued the bonds to yield an effective rate of 7%. Calculate the selling price of the
The Medical Lake Clinic acquired diagnostic equipment via a five-year capital lease. Medical Lake Clinic promised to make five end-of-year lease payments of $5,200. Each payment is to include 9% interest. Using the format presented in this chapter, record:a. The entry necessary at the beginning of
For each of the situations that follow, determine whether a liability should be reported on the balance sheet. If a liability should be reported, suggest an account name and indicate whether it should be reported as a current liability or as a long-term liability. If no liability should be
Below are listed key word clues and descriptions. The key word clues relate to different features or aspects of debt. Match the letter of each clue to the most relevant description provided. Use each clue only once.a. bond b. callable c. capital d. commitment e. contingencyf. currentg. debentureh.
Bohannan Company’s charter allows it to sell 400,000 shares of $4 par value common stock. So far, the firm has sold 80,000 shares for a total of $780,000. Just yesterday, the company reacquired 1,000 shares from a disgruntled shareholder at a price of $10 per share.a. What is a charter and by
The charter of Pelenova, Inc. states that it may issue up to one million shares of common stock. Over the life of the company, 255,000 shares have been sold to investors. Total profits over the life of the company have been $876,000, and exactly one-half of that amount has been paid out in
The Quick Chips Company, a fast-food manufacturer, began operations in January 2004. It issued 500,000 shares of $0.25 par value common stock. The stock sold for $20 per share. There are 600,000 shares authorized. In 2006, the company repurchased 15,000 shares of stock at a cost of $26 per share.
Harbor Company reported net income of $1.7 million for the year ending December 31, 2004. On January 27, 2005, the board of directors met and decided that each of the firm’s 400,000 outstanding common shares should receive a dividend of $0.65. The board voted to distribute the dividend on March
Fast Start Corporation manufactures automobile ignitions. Selected portions of the company€™s recent financial statements are given below.a. What was Fast Start€™s total contributed capital at year end?b. How many shares of common stock were outstanding at year end?c. What
Study the partial statement of stockholders€™ equity below. The left-most column, which usually contains the explanations of events affecting stockholders€™ equity, is missing. You may assume that the first number in a column is the beginning balance and the last number is the
San Diego Company has 4,000 shares of $100 par value, 7% cumulative preferred stock outstanding. In addition, the company has 10,000 shares of common stock outstanding. The company began operations and issued both classes of stock on January 1, 2004. The total amount of cash dividends declared and
Below are listed key word clues and descriptions. The key word clues relate to different features or aspects of equity. Match the letter of each key word clue to the most relevant description provided. Use each clue only once.a. authorized b. charter c. common d. contributed e. cumulative f.
Sweetwater Company reports the following stockholders’ equity section of the balance sheet.Preferred stock, $50 par value, 8% cumulative ........ $ 2,500,000Common stock, $2 par value ............... 800,000Paid-in capital in excess of par value, common stock ..... 11,000,000Retained earnings
On January 1, 2004, Holstein Enterprises issued bonds. Its accounting department prepared the amortization table below.RequiredA. What was the total face value of the bonds issued?B. At what price were the bonds sold?C. What is the stated rate, or nominal rate, of interest for these bonds?D. What
Pattison Associates issued 4-year bonds with a face value of $300,000 to yield an effective rate of 6%. The bonds pay interest annually and were sold at a price of $310,394.RequiredA. What was the stated rate for these bonds?B. Show what information would be entered into the accounting system
Sky King Company sold $9 million off our-year, 8% debentures on July 1, 2007. The bonds sold to yield a real rate of 7%. Interest is paid annually on June 30. RequiredA. Determine the price of the bonds.B. Prepare an amortization schedule for the bonds.C. Using the format presented in this
Ethan Jones is an investment broker. Recently he contacted potential investors and offered to sell them bonds that were paying an 8% annual rate of interest. He noted that the bonds were paying a much higher return than other investments and that similar bonds were selling at a real rate of 6%
The management of Poliwog Financial plans to borrow $50,000 to carry out current operations. Two repayment options are available. The appropriate interest rate is 8%.Option 1: The Company may repay the amount borrowed by making four equal annual payments, the first one due in one year.Option 2:
Jessica Johnson Logging Company is considering the acquisition of a new bulldozer. Big Dig, Inc. has offered to lease the equipment to Johnson Company for all 12 years of its useful life at annual year-end lease payments of $24,500. Each payment will include 9% interest. At the end of 12 years of
Garcia Orchards & Processing Company has been taking bids for three new tractors. Goldbaum Equipment has made an offer to sell a qualifying model for $41,000 each. In addition, Goldbaum has offered to finance the transaction through a capital lease over the expected 15-year life of the tractors
FencePost.com needs additional equipment to expand production capacity. A vendor has suggested a lease plan in which FencePost would make end-of-the-month payments for five years of $3,250. At that point the equipment would be worthless and discarded. The vendor expects to earn a return on this
Rampaging Technology, Inc. is growing rapidly and is expanding its production capacity. An equipment supplier has suggested a lease plan based on a selling price of $350,000. Rampaging would make five equal-size end-of-the-year payments and then own the machine. The supplier expects to earn a
Below is shown the stockholders' equity section of Tulip Company's balance sheet at December 31, 2007. Common stock, $2 par value, 5,400,000 shares authorized, 2,200,000 shares issued and outstanding ...... $ 4,400,000 Paid-in capital in excess of par value 30,800,000 Retained earnings ..
Olafson Electronics reported the following statement of stockholders€™ equity at the end of its 10th year in business.RequiredFor each of the five lettered items in the statement on the next page, indicate where that same information will be found on one or more other financial
Saigon Building Supply was organized and began operations on January 1, 2004. At December 31, 2005, it reported the following stockholdersâ€™ equity section on its comparative balance sheet.The company reported net income of $75,000 for calendar year 2004 and $125,000 for 2005. The
Determine if a liability should be recorded in each of the following cases involving the Soft-Wear Manufacturing Company. If there is no liability, explain how the item should be recorded.A. The company guarantees to repair or replace any of its products that are defective.B. The company estimates
1. Which of the following are attributes of a liability?2. Which of the following should be reported on a year-end balance sheet under the heading of short-term debt?3. A contingency is reported on the balance sheet as a liability ifa. it arises from a potential claim regarding damage to the
Suppose that you are an employee of the loan department of Metropolitan Bank, and one of your primary tasks is analyzing information provided by organizations applying for commercial loans. Most applicants are small businesses seeking additional capital to acquire long-term assets. Other applicants
How do we finance our business?Financial decisions are critical for a company. It is important for a company to create value for its owners by earning a high return and by controlling its risk. Higher financial leverage can result in both high returns and high risk. Consequently, managers must
What is capital structure? Why do the capital structures of companies vary?
Why is return on equity such a valuable measure to investors?
Company X and Company Y are both managed successfully by teams of highly respected executives. The firms operate in different industries. After careful analysis, you observe that Company X employs a very high level of financial leverage while Company Y employs almost none. How can both sets of
Why would stockholders tend to believe that return on equity is a more important measure of a company’s performance than is return on assets?
Why does the use of financial leverage cause the current ratio to be lower than if no financial leverage was used?
Some companies, such as Microsoft, have never paid a dividend and are unlikely to do so anytime soon. If an investment is never going to yield a dividend, why would anyone buy stock in such a company?
You are reviewing the balance sheets of Alpha Company and Beta Company. You observe that Alpha has $800,000 of long-term debt and that Beta has $4,000,000. Which company is more highly leveraged? If you need additional information to answer this question, identify what information you could use.
Beaumont Company has no current liabilities. Its only long-term debt is $20 million of bonds payable. The company’s debt-to-assets ratio is 0.20 and its assets-to-equity ratio is 1.25. What is the company’s debt-to-equity ratio?
Does the use of financial leverage always have a favorable impact on the firm and its owners? If not, explain the circumstances under which it would not be desirable to employ financial leverage.
How does the use of financial leverage affect the risk and return of a company?
When a company issues long-term debt, creditors often require the company to agree to certain restrictions on future activities. For example, a restriction may limit a company’s debt to assets ratio and its dividend payout ratio. What is the purpose of these restrictions? How do they benefit
Evaluate the following statement: Companies that issue a lot of new debt and equity to create cash are usually in a bad financial condition.
Ernesto wants some advice. He heard that some companies pay out a large portion of their earnings as dividends to stockholders. Other companies pay few or no dividends. A friend told him that dividends affect the value of stock and that he should invest in stocks that pay high dividend rates. What
Applause Company has a market to book ratio of 0.75 to 1. Bravo Company has a market to book-value ratio of 3.4 to 1. What information does the market-to-book-value ratio capture and what does this ratio tell you about the companies mentioned?
What relationship would you expect between financial leverage and the market-to-book value ratio? Does a high value in one lead to a high value in the other? Or a low value in the other? Or do you think there is not necessarily a relationship? Explain your reasoning.
Describe how each of the following transactions affects the capital structure of a company. Is there an effect on the short-term liability portion, the long-term liability portion, the equity portion, or is there no effect at all?a. The issuance of common stockb. The sale of bondsc. The purchase
Given below is the most recent balance sheet of Carousel Company.a. Describe the firm€™s capital structure.b. How would the capital structure be different if the company had raised the needed capital by issuing additional stock instead of the bonds that are due in 2008?
Why is return on equity commonly used along with net income to evaluate a company’s performance? Assume that a company issued long-term bonds during a fiscal period, increasing its interest expense. The bonds were used to finance new plant assets. What effect would the financing and asset
The following summary information is available regarding Robinson Sports Gear. The income statements are for the respective fiscal years, and the balance sheets are as of the end of each fiscal year.a. What does this income statement information suggest to you about this firm and its attractiveness
A friend is studying for an accounting exam and exclaims, “I’m really confused by all this leverage stuff. What is leverage, anyway? How does it affect a company? And what has it got to do with the debt-to-equity ratio or debt-to-assets ratio? The professor keeps saying that a company with a
At year-end 2004, Istanbul Company had stockholders’ equity of $18 million. Stockholders’ equity at year end 2004 consisted of one million shares of common stock. For 2004, the company reported net income of $4 million. The company paid common dividends of $2 per share in 2004. Compute
Boswell Company expects net income of $5 million for 2005. Pretax earnings are projected to be $7 million. The company’s average total assets during 2005 were $25 million. It had no liabilities or preferred stock. It had 1 million shares of common stock outstanding. Boswell is considering issuing
Linfield Company has assets of $200 million and long-term debt of $110 million. The debt consists primarily of callable debentures having interest rates ranging from 10% to 12%. (Callable debentures are bonds that a company can recall and pay off at any time it chooses.) Over the last couple of
For each of the events or transactions below, indicate the effect on each ratio listed. Use I to indicate increase, D to indicate decrease, and NE to indicate noeffect.
Given below are selected data for Wal-Mart for the years ended January 31, 2002 and 2001:Study the information above and discuss what the changes from 2001 to 2002 mean. What conclusion can you make about Wal-Mart€™s financingactivities?
Given below is the most recent set of financial statements for BeanSprout Farms.a. Calculate return on assets and return on equity.b. Assume the company had $18,000 less of contributed capital and $18,000 more of long-term debt. Recalculate return on assets and return on equity.c. Assume the

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