Accounting Chapter 10 Homework Base Amount 4220 Total Tax 11558 1082

BYP 10-6 REAL-WORLD FOCUS

(a) An ‘A’ rating means that the company has a strong capacity to meet

financial commitments, but is somewhat susceptible to adverse

economic conditions and changes in circumstances. A ‘C’ rating means

that a company is currently highly vulnerable due to obligations and

other defined circumstances.

BYP 10-7 DECISION MAKING ACROSS THE ORGANIZATION

(a) 1. Bonds Payable ……………………………………. 3,000,000

Cash ……………………………………………. 2,500,000

Discount on Bonds Payable ………….. 54,000*

2. Cash …………………………………………………… 2,500,000

Bonds Payable …………………………….. 2,500,000

(b) Dear President Garner:

The early redemption of the 8%, 5-year bonds results in recognizing a

gain of $446,000 that increases current year net income by the after-tax

effect of the gain. The amount of the liabilities on the balance sheet will

be lowered by the issuance of the new bonds and redemption of the

5-year bonds.

1. The cash flow of the company as it relates to bonds payable will be

adversely affected as follows:

BYP 10-7 (Continued)

2. The amount of interest expense shown on the income statement

will be higher as a result of the decision to issue new bonds:

Annual interest expense on new bonds ………. $300,000

Annual interest expense on 8% bonds:

BYP 10-8 COMMUNICATION ACTIVITY

To: Harry Jackman

From: I. M. Student

Subject: Bond Financing

The types of bonds that may be issued are:

1. Secured or unsecured bonds. Secured bonds have specific assets of

the issuer pledged as collateral while unsecured bonds do not.

BYP 10-9 ETHICS CASE

(a) The stakeholders in this situation include:

Stockholders

(b) The possible courses of action and their consequences include:

1. The CEO could inform the auditors. The auditors would then re-

quire that this information be disclosed in the annual report. When

2. The CEO could conceal the information from the auditors. If the

company is not ultimately found at fault, then the company will not

(c) Answer will vary according to student.

(d) If the CEO conceals the information, and the company is subsequently

found to be at fault, a number of stakeholders will suffer. First, the com-

pany’s creditors will lose money because it is likely the company won’t

BYP 10-10 ETHICS CASE

(a) The stakeholders include:

1. Enron management

(b) Yes. Although the primary responsibility for proper accounting rests

with company management, other knowledgable parties have secon-

(c) The auditor may have been unable to detect the inappropriate account-

(d) A company may wish to conceal financing arrangements in order to

appear more solvent to investors and creditors. GAAP requires full

(e) The Citigroup deal was more harmful than other off-balance-sheet trans-

actions because it was not fully explained in the financial statement

BYP 10-11 ALL ABOUT YOU ACTIVITY

The answer to these questions depends on the state in which the student

resides. It also will be depend on the year chosen, although we expect that

the results will be much the same whether they pick any rates between

2012 and 2014. We provide a solution for this problem using the state of

Wisconsin as an example. It should be pointed out that certain taxes can

be deducted for computing federal income tax but are ignored in our

computation.

(a) Wisconsin state income tax for a single person with a taxable income of

$60,000 is $3,710.80. The tax rate between $17,680 and $132,580 is

$950.30 plus 6.5 percent over $17,680. Therefore the computation is as

follows:

(c) The state gasoline tax in Wisconsin is 32.9 cents per gallon and the federal

gasoline tax is 18.4 cents per gallon. Your total taxes on gasoline are

computed as follows:

(d) In Wisconsin the state sales tax rate is 5% and excludes food and

prescription drug purchases. Therefore the sales tax is $200 ($4,000 X 5%).

BYP 10-11 (Continued)

The total taxes paid therefore are computed as follows, based on a $60,000

income amount:

State income tax …………………………………………………………. $ 3,701

Property tax on home ………………………………………………….. 4,200

BYP 10-12 ALL ABOUT YOU

A company’s insurance premiums would be substantially lower if its

employees did not smoke and if they were in better shape. Some argue that

employees with unhealthy habits increase the share of insurance

BYP 10-13 FASB CODIFICATION ACTIVITY

(a) Current liabilities is used principally to designate obligations whose

liquidation is reasonably expected to require the use of existing re–

(b) Long-term obligations are those scheduled to mature beyond one year

(or the operating cycle, if applicable) from the date of an entity’s balance

sheet.

(c) The Codification provides the following guidance for disclosure of long-

term obligations:

Bonds, mortgages and other long-term debt, including capitalized

leases.

(1) State separately, in the balance sheet or in a note thereto, each

issue or type of obligation and such information as will indicate

(see §210.4–06):

(2) The amount and terms (including commitment fees and the condi-

tions under which commitments may be withdrawn) of unused

BYP 10-14 CONSIDERING PEOPLE, PLANET AND PROFIT

(a) The monthly rates paid by borrowers on loans from these microfinance

organizations is 5% to 10%. This would convert to roughly 60% (5% × 12)

to 120% (10% × 12) per year.

(c) The organizations are structured as savings and loans. (Savings and

loans used to be quite common in the U.S. until a financial crisis in the

1980s caused many of them to go bankrupt.) The organizations in the

IFRS CONCEPTS AND APPLICATION

IFRS 10-1

Under IFRS a provision is defined as a liability of uncertain timing or amount.

Examples include warranties, employee vacation pay, and anticipated losses.

IFRS 10-2

Under IFRS a contingent liability is defined as a possible obligation that is not

recognized in the financial statements but may be disclosed if certain criteria

are met. Under IAS 37 contingent liabilities are defined as being:

• A possible obligation that arises from past events whose existence

will be confirmed only by the occurrence or nonoccurrence of one

or more uncertain future events not wholly within the control of the

entity; or

IFRS 10-3

The similarities between GAAP and IFRS include: (1) the basic definition of

a liability, (2) liabilities are normally reported in the order of their liquidity,

and (3) preferred stock that is required to be redeemed at a specific point in

time in the future must be reported as debt.

IFRS 10-4

(a) Jan. 1 Cash (€2,000,000 X .97) ……………………. 1,940,000

Bonds Payable …………………………. 1,940,000

IFRS 10-5

(a) In the 1870s, a securities system was introduced in Japan and public

bond negotiation began. This resulted in the request for a public

(b) In March of 1943, the “Japan Securities Exchange Law” was enacted to

reorganize the Stock Exchange as a wartime-controlled institution. With

(c) The following are major items with respect to decisions by the com-

pany that need to be disclosed to the public:

• Issuance of stocks, convertible bonds, and bonds with warrants

• Reduction of capital

IFRS 10-5 (Continued)

(d) The following are major items with respect to “occurrence of material

fact” that need to be disclosed to the public:

• Damage incurred by natural disaster or business operations

• Change in major shareholders

IFRS10-6 INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a) Trade payables represent amounts payable for goods and services

received. It took Zetar an average of 48 days to pay its trade payables.

(b) Provisions relate to amounts potentially payable to the vendors of

companies and businesses acquired by Zetar. The estimates are based