Minnesota Satellite partial balance sheet, ratios; Aztec Airlines loss contingency
See attached file for Problem 10.7.
The following items were taken from accounting records of Minnesota Satellite telephone corporation (MinnSat) for the year ended December 31, 2009 (dollar amounts are in thousands):
MINNESOTA SATELLITE TELEPHONE CORPORATION
Accounts payable $65,600
Accrued expenses payable (other than interest) 11,347
6 3/4% Bonds payable, due February 1, 2010 100,000
8 1/2% Bonds payable, due June 1, 2010 250,000
Discount on bonds payable (8 1/2% bonds of 2010) 260
11% Bonds payable, due June 1, 2019 300,000
Premium on bonds payable (11% bonds of 2017) 1,700
Accrued interest payable 7,333
Bond interest payable 61,000
Other interest payable 17,000
Notes payable (short-term) 110,000
Lease payment obligations-capital leases 23,600
Pension obligation 410,000
Unfunded obligation-postretirement benefits 72,000
other than pensions
Deferred income taxes 130,000
Income taxes expense 66,900
Income taxes payable 17,300
Operating income 280,800
Net income 134,700
Total assets 2,093,500
Additional information:
1. Refinance of 6 3/4% bonds accomplished through issuance of
9% 20 year general debentures $150,000
2. Bonds due 6/1/08 will be repaid from bond sinking fund
3. Total lease payments due in 2010 14,400
Portion applicable to operating leases 7,479
Portion applicable to capital leases 6,921
Interest expense portion of capital lease payments 2,300
Capital lease payment reduction portion of 4,621
capital lease payments
4. Pension plan is fully funded with independent trustee
5. Portion of retired worker health insurance obligation 18,000
to be funded during 2010
6. 2009 income taxes payable must be paid 3/15/10 17,300
Other information
1. The 6¾% percent bonds due in February 2010 will be refinanced in January 2010 through the issuance of $150,000 in 9 percent, 20-year bonds payable.
2. The 8½% percent bonds due June 1, 2010, will be repaid entirely from a bond sinking fund.
3. MinnSat is committed to total lease payments of $14,000 in 2010. Of this amount, $7,479 is applicable to operating leases, and $6,921 to capital lease. Payments on capital leases will be applied as follows: $2,300 to interest expense and $4,621 to reduction in the capitalized lease payment obligation.
4. MinnSat's pension plan is fully funded with an independent trustee.
5. The obligation for the postretirement benefits other than pensions consists of a commitment to maintain health insurance for retired workers. During 2010, MinnSat will fund $18,000 of this obligation.
6. The $17,300 in income tax payable relates to income taxes levied in 2009 and must be paid on or before March 15, 2010. No portion of the deferred tax liability is regarded as a current liability.
Instructions:
a. Using this information, prepare the current liabilities and long term liabilities sections of a classified balance sheet as of December 31, 2009. (Within each classification, items may be listed in any order.)
b. Explain briefly how the information in each of the six numbered paragraphs affected your presentation of the company's liabilities.
c. Compute as of December 31, 2009, the company's (1) debt ratio and (2) interest coverage ratio.
d. Solely on the basis of information state in this problem, indicate whether this company appears to be an outstanding, medium, or poor long term credit risk. State specific reasons for your conclusion.
Total liabilities (part a) = $1,088,620
10.7 Excel File attachment below
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Case 10.3
Discuss each of the following situations, indicating whether the situation is a loss contingency that should be recorded or disclosed in the financial statements of Aztec Airlines. If the situation is not a loss contingency, explain how (if at all) it should be reported in the company's financial statements (Assume that all dollar amounts are material.)
a. 1. Aztec estimates that $700,000 of its accounts receivables will prove to be uncollectable.
2. The company's president is in poor health and has previously suffered two heart attacks.
3. As with any airline, Aztec faces the risk that a future airplane crash could cause considerable loss.
4. Aztec is being sued for $10 million for failing to adequately provide for passengers whose reservations were canceled as a result of the airline overbooking certain flights. This suit will not be resolved for a year or more.
B. Make a general statement that summarizes management's ethical responsibility regarding reporting loss contingencies in financial statements.
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Student Name:
Class:
Problem 10-04
a. Explain whether the amounts of interest expense and the reductions in unpaid
principal are likely to change in any predictable pattern from month to month.
QUICK LUBE
General Journal
2009 Account Titles Debit Credit
Oct 1 Interest expense
Mortgage note payable
Cash
Nov 1 Interest expense
Mortgage note payable
Cash
QUICK LUBE
Amortization Table
(12%, 30-Year Mortgage Note Payable for $1,080,000;
Payable in 360 Monthly Installments of $11,110)
Interest Payment Monthly Interest Principal Unpaid
Period Date Payment Expense Reduction Balance
Issue date Sept. 1, 2009 $1,080,000
1 Oct. 1 $11,110 $ 10,800 $ 310 1,079,690
2 Nov. 1 11,110 10,797 313 1,079,377
3 Dec. 1
4 Jan. 1, 2010
d. Will any amounts relating to this 30-year mortgage be classified as current
liabilities in the December 31, 2007 balance sheet? Explain, but you need not
compute additional dollar amounts.
Given Data P10-04:
QUICK LUBE
Date of mortgage note September 1, 2009
Amount of mortgage note $ 1,080,000
Annual interest 12%
Period for full amortization (months) 360
Amortization Table
(12%, 30-Year Mortgage Note Payable for $1,080,000;
Payable in 360 Monthly Installments of $11,110)
Interest Payment Monthly Interest Principal Unpaid
Period Date Payment Expense Reduction Balance
Issue date Sept. 1, 2009 $1,080,000
1 Oct. 1 $11,110 $10,800 $310 1,079,690
2 Nov. 1 11,110 10,797 313 1,079,377
Student Name:
Class:
Problem 10-06
PARK RAPIDS LUMBER COMPANY
General Journal
Date Account Titles Debit Credit
a. (1) Bonds issued at 98:
2009
Dec. 31 Bond interest expense
Discount on bonds payable
Bond interest payable
2010
Mar. 1 Bond interest payable
Bond interest expense
Discount on bonds payable
Cash
a. (2) Bonds issued at 101:
2009
Dec. 31 Bond interest expense
Premium on bonds payable
Bond interest payable
2010
Mar. 1 Bond interest payable
Bond interest expense
Premium on bonds payable
Cash
PARK RAPIDS LUMBER COMPANY
Net Bond Liability at Dec. 31, 2010
Bonds Bonds
Issued Issued
at 98 at 101
Bonds payable
Less: Discount on bonds payable
Add: Premium on bonds payable
Net bond liability
c. Under which of the above assumptions, 1 or 2, would the investor's
effective rate of interest be higher? Explain.
Given Data P10-06:
PARK RAPIDS LUMBER COMPANY
Bonds issued September 1, 2009 $ 80,000,000
Term of bond (years) 20
Bond contract interest rate 10%
Semiannual interest payment dates:
March 1
September 1
Assumptions:
(1) Bonds issued at 98
(2) Bonds issued at 101
Student Name:
Class:
Problem 10-07
MINNESOTA SATELLITE TELEPHONE CORPORATION
Partial Balance Sheet
December 31, 2009
(in thousands)
Liabilities:
Current liabilities:
Accounts payable
Accrued expenses payable (other than interest)
Accrued interest payable
Notes payable (short-term)
Capital lease obligation (current portion)
Unfunded obligation for postretirement
benefits other than pensions (current portion)
Income taxes payable
Total current liabilities
Long-term liabilities:
6 3/4% Bonds payable, due February 1, 2010
8 1/2% Bonds payable, due June 1, 2010
Less: Unamortized bond discount
11% Bonds payable, due June 1, 2019
Add: Premium on bonds payable
Capital lease obligation (less current portion)
Unfunded obligation for postretirement benefits other
than pensions (less current portion)
Deferred income taxes
Total long-term liabilities
Total liabilities
b. Explain briefly how the information in each of the six numbered
paragraphs affected your presentation of the company's liabilities.
1
2
3
Student Name:
Class:
Problem 10-07
4
5
6
MINNESOTA SATELLITE TELEPHONE CORPORATION
Ratio Computations
c. (1) Computation of debt ratio:
Total liabilities
Total assets
Debt ratio
c. (2) Computation of interest coverage ratio:
Operating income
Annual interest expense
Interest coverage ratio times
d. Based solely on information stated in this problem, indicate whether
this company appears to be an outstanding, medium, or poor long-term
risk. State specific reasons for your conclusion.
Given Data P10-07:
MINNESOTA SATELLITE TELEPHONE CORPORATION
Accounts payable $65,600
Accrued expenses payable (other than interest) 11,347
6 3/4% Bonds payable, due February 1, 2010 100,000
8 1/2% Bonds payable, due June 1, 2010 250,000
Discount on bonds payable (8 1/2% bonds of 2010) 260
11% Bonds payable, due June 1, 2019 300,000
Premium on bonds payable (11% bonds of 2017) 1,700
Accrued interest payable 7,333
Bond interest payable 61,000
Other interest payable 17,000
Notes payable (short-term) 110,000
Lease payment obligations-capital leases 23,600
Pension obligation 410,000
Unfunded obligation-postretirement benefits 72,000
other than pensions
Deferred income taxes 130,000
Income taxes expense 66,900
Income taxes payable 17,300
Operating income 280,800
Net income 134,700
Total assets 2,093,500
Additional information:
1. Refinance of 6 3/4% bonds accomplished through issuance of
9% 20 year general debentures $ 150,000
2. Bonds due 6/1/08 will be repaid from bond sinking fund
3. Total lease payments due in 2010 14,400
Portion applicable to operating leases 7,479
Portion applicable to capital leases 6,921
Interest expense portion of capital lease payments 2,300
Capital lease payment reduction portion of 4,621
capital lease payments
4. Pension plan is fully funded with independent trustee
5. Portion of retired worker health insurance obligation 18,000
to be funded during 2010
6. 2009 income taxes payable must be paid 3/15/10 17,300
