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12
Financial Accounting_10_Q.10
Financial Accounting_10_Q.8
Financial Accounting_10_Q.6
Explain how the net borrowing cost decreases when the interest rate increases
The high the rate of tax is, the lower the net cost of borrowing money because the paid
interest on borrowed money is reducible on the return of income taxof the borrower. The
higher the income tax rate the less the net cost of interest for the borrower
This can be better explained with the help of an example:
For instance, a business with an average rate of tax of 40% and debt with 10% interest
per annum incurs a net rate of interest of 10% x 50% = 5% In contrast, the same
corporation with a 20% average tax rate incurs a net interest rate of 10% x 80% = 8%
Thus from the example it can be seen that the rise in the interest rate lessens the net
borrowing cost.
Financial Accounting_10_Q.4
Convertible bondsbonds that may be transformed to other different securities of the issuer
(usually common stock) after a particular future time at the choice of the holder of the bond.
Issuing convertible securities is restricted for an organization to minimize negative financial
specialist translation of its corporate activities.
For instance, if an effectively open organization decides to issue STOCK, the business sector
typically deciphers this as a sign that the organization's offer cost is to a degree exaggerated. To
maintain a strategic distance from this negative impression, the organization may decide to issue
convertible securities, which bondholders will probably change over to value in any case ought to
the organization keep on doing admirably.
Financial Accounting_10_Q.2
Financial Accounting_10_P.14
Requirement 1
Compute the price of the issue
Extracted information
Amount of bond $5, 000, 000
Maturity 5 years
Interest rate when stated 8%
Interest rate at the time of selling 8%
Step-1
Compute the Interest as:
$40, 000
2
$20, 000
$500, 000 8%
Step-2
Compute the Present value
$500, 018
The precise present value is $500,000. The $18 distinction is because of the rounding of
the present valuefactor at the place of four digits.
Requirement 2
Calculate the interest expense
Interest expense
June 30
2014
$20, 000
Dec 31
2015
$20, 000
June 30
2014
$20, 000
Dec 31
2015
$20, 000
Requirement 3
Compute the cash paid on 31 Dec 2013, and 2015
Cash Paid
Requirement 4
Calculate the amount of bonds payable at 31 Dec 2014 and 2015
2014
$500, 000
Bonds payable
2015
$500, 000
Financial Accounting_10_ME.12
Cash paid to retired bonds: Cash paid to retired bond is a cash payment made to longterm creditors (with the exception of interest expenses). Cash paid to retired bonds are
reported as outflows from financing activities.
Cash paid for interest: Cash paid for interest is a cash payment involving short-term
creditors affecting working capital and are consequently shown in the Operating activities
segment of the cash flow statement.
Financial Accounting_10_ME.10
Explain the effect on financial statements of the debt retirement in some situations
In some cases, a company may elect to retire debt early by purchasing it on the open
market, just as an investor would this approach is necessary when the bonds do not have
a call feature. It might also be an attractive approach if the cost of the bonds fell after the
issue date. The most ordinary cause for fall in cost of bonds is rise interest rates. As per
the present value concepts, bond prices move in the opposite direction of interest rates. If
interest rates go up, bond prices fall, and if interest rates fall, bond price will rise.
When interest rates fell, a company that wants to retire a bond before maturity may find
buying the bond on the open market is more expensive due to increase in the bond price
and is going report a loss on debt retirement.
The financial statement affects are described as follows:
Journal entry for recording the retirement of
bond at loss:
Bonds payable (_L)
Loss on retirement of bonds (+Loss, -SE)
Cash (-A
)
xxx
xxx
xxx
Assets
Liabilities
Stockholders ' Equity
The loss on the bond retirement is the amount over par that is paid in the open market
purchase. This loss on the bond retirement will be shown on the statement of income.
Financial Accounting_10_ME.6
$910,000.00
$60,000.00
$850,000.00
$63,700.00
$43,000.00
$68,000.00
Financial Accounting_10_ME.6
Principal
$500,000 0.4564
$228, 200
Interest
$25000 13.5903
339758
Issue price
$567,958
$940,000.00
$60,000.00
$1,000,000.00
$51,700.00
$1,700.00
$50,000.00
Financial Accounting_10_ME.2
$600000 0.4564
$273,840
Interest
$24000 13.5903
326,167
Issue price
$600007
The issue price should be exactly $600000 . The $7 dissimilarity is the consequence of
rounding of the PV factor.
Financial Accounting_10_E.6
Step-1
Compute the Interest as
$336,500.00
$245,271.00
$581,771.00
$500.000x 0.5537
15000x 14.8775
Issue price (market rate less than stated rate)
$276,850.00
$223,163.00
$500,013.00
$500.000xO.4350
$217,500
S15.000x 132944
199.416
Financial Accounting_10_E.2
Compute the price paid when the bonds are bought and the decline in the cost of the
bond if it is originally sold at par.
The AT&T securities have a coupon investment rate of 65%. In the event that securities
Mth a $10000 face quality were bought, the issue value would be $8950 and they would
give a money yield of 7 .3%. A decrease in worth after issuance would have no effect on
AT&T money related explanations
Financial Accounting_10_CP.4
Requirement 1
Reason for the investor buying bond with zero interest
An investor buyszero coupon bondsbecause, a bond with a zero coupon interest rate is
simply a deeply discounted bond that will sell for substantially less than its maturity
value.
Requirement 2
Compute the money received when the bonds were issued
Given information:
Number of Years
Effective interest rate
Face (maturity) value
8 Years
15%
$400(Million)
Bond valuation
Here the present value of bonds is to be calculated as follows:
The investor would earn 15 percent on similar investments; JC Penny would receive the
amount with a face value of $400M .
PV 400M PVF8.15 % 400M
From the Present Value Tables
PVF8.15 % 0.327
$400 Million 0.327
$130.8 Million
Value of JC Penny's Receipt $130.8
Thus the money which would be received when the bonds would be issued is $130.8
million.
Financial Accounting_10_CP.2
Requirement 1
Reason for not including the interest paid in the books of accounts
Organizations are not needed to report unimportant sums. No doubt, the measure of
money premium paid by Urban Outfitters was Immaterial. This question is related to the
next one.
Requirement 2
Reason why the organization does not report the payable bonds in the statement of
balance sheet
Bonds should be reported except the corporation has not issued any. Therefore, the
company must not have issued bonds.
Requirement3
The notes disclose that the corporation has established an unsecured credit line.
Financial Accounting_10_AP.4
Requirement 1
Compute the issue price
Amount of bond $2, 000, 000
Maturity 5 years
Interest rate when stated 6%
Interest rate at the time of selling 7%
Interest expense
2015
$135, 260**
Thus in year 2014 the interest expense should be $134,262 and in 2015 should be
$135,260.
Requirement 3
Compute the cash paid on 31 Dec 2013, and 2015
2014
$120, 000
Cash Paid
2015
$120, 000
The amount of cash paid would be same as the interest calculated which would be same
for both the years.
Requirement 4
Compute the bonds book value
2014
$1,932, 286*
Bonds payable
2015
$1,947,546**
Thus the bonds value on 31st Dec 2014 is $1,932,286 and in 2015 is $1,947,546.
Financial Accounting_9_Q.16
Interest
Cos t cashpayment
Pr esent value factor for 6 years at 12% int erest rate
$15, 000
4.9173
$3, 050
Elucidate the distinction between the present value and the future value
Future value-Thefuture worth of a figure of dollars is the quantity that it will boost to in
the future at i interest rate for n periods. The future value is the principal plus
accumulated interest compounded each period.
Present value- The present worth of an amount of dollars; to be received at some
specified date in the future is that amount discounted to the present at i interest rate for n
periods. It is the converse of future value. In compound discounting, the interest is
subtracted rather than added as in compounding.
Financial Accounting_9_Q.10
9
$360
12
Give the meaning for accrued responsibility and the entry which shows the accrued
accountability
Accrued Liability: An accrued liability isa cost that was causedbefore the end of the
current periodhoweverhas not been paid or recorded. Therefore, an accrued liability is
recognized when such a transaction is recorded.
Example
A typical example is wages incurred during the last few days of the accounting period but
not recorded because no payroll was prepared and paid that included these wages.
Presuming wages of $2000 were incurred, the adjusting entry to record the accrued
liability and the wage expense would be as follows:
31-Dec
Wage expense
Wages payable
$2,000.00
$2,000.00
Financial Accounting_9_Q.4
Liability: An organizations lawful obligations or commitments that emerge amid the
course of business operations. Liabilities are settled about whether through the exchange
of monetary profits including money, administrations or merchandise.
Explanation
Most obligations detail a positive sum that is expected at a defined date later on. On the
other hand, there are circumstances where it is realized that a commitment or obligation
exists despite the fact that the definite sum is obscure.Liabilities that are known to
existyet the precise sumis not yet known must be recorded in therecordsand reported in
thebudgetary explanations at an expected sum.
Examples of a known obligation of an estimated amount are estimated income tax at the
yearend property taxes at the finish of the year, and responsibility under warranty
agreement for products sold.
Financial Accounting_9_Q.2
Liabilities: An organizations lawful obligations or commitments that emerge amid the
course of business operations. Liabilities are settled about whether through the exchange
of monetary profits including money, administrations or merchandise.
Explanation
External parties have difficulty determining the amountof liabilities of a businessin the
absence of a balance sheet. Therefore, about the only sources available to external parties
for determining the number, type, and amounts of liabilities of a business are the
published financial statements These statement have more trustworthiness when they
have been audited by an autonomous CPA.
Financial Accounting_9_P.10
Requirement 1
Deferred income tax amount: It is the amountwhich is specified on the balance sheet
which outcomes from the money already earned by the organization and recognized for
the accounting, and not the purposes of tax. These differences could also mention as the
deferred income tax.
The following steps can be incorporated to calculate the deferred tax liability:
Step-1
1,000,000
20
years
=
$50,000
1,000 000 x 10% = $100,000
GAAP depreciation
Tax depreciation
Step-2
Book Value:
2014
GAAP
Cost
Accumulated depreciation
Book value
Deferred tax liability-2014
Tax
$1,000,000.00
$50,000.00
$950,000.00
2015
GAAP
Tax
$1,000,000.00
$1,000,000.00
$1,000,000.00
$100,000.00
$100,000.00
$200,000.00
$900,000.00
$900,000.00
$800,000.00
($950,000-$900,000)x34% = $17,000
($900,000 $800,000) x34% =
$34,000
The distinction in the liability on the grounds that extra wage charges must be paid later
on .This is an aftereffect of lower deterioration derivations in the expense form for the
future; that is, lower charge findings implies more salary assessment later on other
assessable sums .
Requirement 2
Calculate the income tax expense
Income tax expense 2014:
Taxes payable
Deferred taxes
Income tax expense
$400,000
$17,000.00
$417,000.00
Taxes payable
Deferred taxes
Income tax expense
$625,000
$17,000.00
$642,000.00
Financial Accounting_9_ME.6
On 1 October
Cash (+A)
$290,000.00
Note payable (+L)
$290,000.00
On 31 December:
Interest Expense(+E, .SE)($940,000 11%x 112)
Interest payable (+L)
$7,250.00
$7,250.00
Financial Accounting_9_E.20
Calculate the present value of principal amount, then the present value of interest , the
present value can be calculated by adding both the values:
$1, 000, 000 0.5584
$558, 400
Present Value
Requirement 1
Income tax: It is the amount which is to be paid by the individual, organizations etc for
the income which they have earned in a specified period.
Income tax payablecan be calculated in the followingmanner:
Tax expense
Less: Deferred taxes
Income tax payable
$580,000
$108,000.00
$472,000.00
Long term borrowings- In bookkeeping, an area of the accounting report that rundowns
commitments of the organization that get to be expected more than one year into what's
to come. Long haul liabilities incorporate things like debentures, advances, conceded
duty liabilities and benefits commitments. The segments of long haul liabilities that will
come due inside the following 12 months are recorded under present liabilities, for
example, the current part of long haul debt.
Explanation to the statement
Analysts need to assess the shorter commitments of a business with a specific end goal to
survey liquidity or the capacity to fulfill an obligation that must be paid within a brief
span of time. In the event that PepsiCo needed to pay the $3 6 billion instantly, the
examiners would need to know the wellspring of the required money. Since PepsiCo
arrangements to refinance the obligation, it won't need to pay it promptly. Hence, an
expert would be less worried about this kind of obligation.
The key condition that must be satisfied for a short-term borrowing to be classified as
long duration is the declaration that the liability can be refinanced. A desire or a plan is
not sufficient. There must be evidence that the company has the capability to do so.
Financial Accounting_9_E.2
Requirement 1
31 March
$200,000
$40,000.00
$1,000.00
$15,000.00
$144,000.00
$15,000
$15,000.00
Requirement 2
Liability for taxes on income taxes withdrawn workers (-L)
Liability for insurance premiums withheld-employees (-L)
FICA taxes payable-employees (-1)
FICA taxes payable-employer (-L)
Cash (-A)
Remittanceof payroll taxesand deductions for March payroll
40,000
1,000
15,000
15,000
71,000
Financial Accounting_9_CP.4
$37.9740
Step-2
Present value of $3,125 for 48 periods A Present Value Factor
=$3,125 37.9740
The true price of the building $ 118, 668.75
The accrual amount is being paid for the house was $150,000 though it had present value
of $118, 668 , the difference can be called as an interest $31,332.
Financial Accounting_9_CP.2
Requirement 1
Accrued compensation: Income that is earned in a FUND or by organization by giving
an administration or offering an item however has yet to be gotten. Shared stores or other
pooled stakes that amass salary over a time of time however just pay it out to
shareholders once a year are, by definition, collecting their pay. Singular organizations
can likewise accumulate pay without really getting it, which is the premise of the
accumulation bookkeeping framework.
The amount of accrued compensation is $15,630,000 .
Requirement 2
Accounts payable: A bookkeeping entry that shows that an element's commitment to pay
off a fleeting obligation to its lenders. The accounts payable section is found on an asset
report under the heading current liabilities.
Accounts payable improved by $21,310, 000 (as reported on the SCF). This change
increased operating cash flows.
Requirement 3
Long term liabilities: In bookkeeping, an area of the accounting report that rundowns
commitments of the organization that get to be expected more than one year into what's
to come. Long haul liabilities incorporate things like debentures, advances, conceded
duty liabilities and benefits commitments. The segments of long haul liabilities that will
come due inside the following 12 months are recorded under present liabilities, for
example, the current part of long haul debt.
Long-term liabilities are $183,974, 000 .
Financial Accounting_9_AP.2
Determine the effects of schedule on transaction and discuss its effects on cash flow:
Cash flow statement: In the financial accounting, a statement of cash flow is the
statement which shows how the alteration in the balance sheet affects the cash and its
equivalents like marketable securities and distributes the analysis to operating activity,
investing activity and financing activity.
a) Determine the effects of schedule on transaction:
Date
Assets
Stockholders
equity
Liablities
Deferred
Tax liability +
Taxes payable
15-Jan No effect
+
Expense -
31-Jan
Cash-
No effect
30-Apr
3-Jun
Inventory
+
5-Jul
31-Aug
Interest Payable-
No effect
Cash -
Accounts
Payable +
Accounts
Payable -
No effect
Cash+
Deferred
Revenue+
Revenue+
No effect
Interest Payable
31-Dec No effect
+
Interest Expense -
Long-term
Liability Current Liability
31-Dec No effect
+
31-Dec No effect
Wages Payable
+
No effect
Wage Expense -
Operating activity: These are the organization's average day by day forms that create
income. Working exercises relate to an organization's center business exercises, for
example, assembling, appropriating, marketing and offering an item or administration.
These exercises ought to give the larger part of an organization's money stream and will
to a great extent figure out if an organization is beneficial.
b) Effects on Cash flow from activities of Operation
15-Jan
No effect
31-Jan
Decreased
30-Apr
3-Jun
5-Jul
31-Aug
All December 31
No effect
No effect
Decreased
Increased
No effect