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Financial Accounting: Liabilities, Debt and Equity Financing and Stock vs. Cash Dividends

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Chapter 10: Questions 1, 7, 8, and 19

1. 1. Georgia Lazenby believes a current liability is a debt that can be expected to be paid in one year. Is Georgia
correct? Explain.

2. 7. (a) What are long-term liabilities? Give two examples.
(b) What is a bond?

3. 8. Contrast these types of bonds:
(a) Secured and unsecured.
(b) Convertible and callable.

5. 19. Valentin Zukovsky says that liquidity and solvency are the same thing. Is he correct? If not, how
do they differ?

Chapter 10: BE 10-1

6. BE 10-1. Kananga Company has these obligations at December 31: (a) a note payable
for $100,000 due in 2 years, (b) a 10-year mortgage payable of $200,000 payable in ten $20,000 annual payments, (c) interest payable of $15,000 on the mortgage, and (d) accounts payable of $60,000. For each obligation, indicate whether it should be classified as a current liability.

Chapter 11: BYP11-10

7. BYP11-10. Greenwood Corporation has paid 60 consecutive quarterly cash dividends (15 years). The last 6 months have been a real cash drain on the company, however, as profit margins have been greatly narrowed by increasing competition. With a cash balance sufficient to meet only day-to-day operating needs, the president, Gil Mailor, has decided that a stock dividend instead of a cash dividend should be declared. He tells Greenwood's financial vice-president, Vicki Lemke, to issue a press release stating that the company is extending its consecutive dividend record with the issuance of a 5% stock dividend. "Write the press release convincing the stockholders that the stock dividend is just as good as a cash dividend," he orders. "Just watch our stock rise when we announce the stock dividend; it must be a good thing if that happens."

Instructions

(a) Who are the stakeholders in this situation?
(b) Is there anything unethical about president Mailor's intentions or actions?
(c) What is the effect of a stock dividend on a corporation's stockholders' equity accounts?

Which would you rather receive as a stockholder: a cash dividend or a stock dividend? Why?

Chapter 11: Assignment 11-1

8. PROBLEM 11.1
Early in 2002, Robbinsville Press was organized with authorization to issue 100,000 shares of $100 par value preferred stock and 500,000 shares of $1 par value common stock. Ten thousand shares of the preferred stock were issued at par, and 170,000 shares of common stock were sold for $15 per share. The preferred stock pays an 8 percent cumulative dividend.

During the first four years of operations (2002 through 2005), the corporation earned a total of $1,085,000 and paid dividends of 75 cents per share in each year on its outstanding common stock.

Instructions

a. Prepare the stockholders' equity section of the balance sheet at December 31, 2005. Include a supporting schedule showing your computation of the amount of retained earnings reported. (Hint: Income increases retained earnings, whereas dividends decrease retained earnings.)

b. Are there any dividends in arrears on the company's preferred stock at December 31, 2005?
Explain your answer.

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Chapter 10: Questions 1, 7, 8, and 19
1. 1. Georgia Lazenby believes a current liability is a debt that can be expected to be paid in one year. Is Georgia
correct? Explain.

Yes, Georgia Lazenby is correct in her belief. A current liability is a debt or an obligation that is expected to be paid within one year or within the normal operating cycle of a business, whichever is longer. Generally, the operating cycle of a company is less than 1 year and hence current liabilities are associated with obligations that are expected to be paid within 1 year.

Current liabilities include accounts payable, accrued liabilities, short term debt and other obligations that are due for payment within 1 year.

2. 7. (a) What are long-term liabilities? Give two examples.

Long-term liabilities are debts or obligations that are expected to be paid after more than 1 year. Bonds, Debentures, bank loans (due after more than 1 year) are examples of long-term liabilities.

(b) What is a bond?

Bond is a type of debt security in which an investor lends money to the issuer that borrows money for defined period of time and at a fixed interest rate. The issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest.

3. 8. Contrast these types of bonds:
(a) Secured and unsecured.

- Secured bonds are backed up by pledge of specific assets as collateral in case the issuer fails to honor the commitment. Unsecured bonds are not backed or secured by any asset or collateral.
- In case of default in payment of principal and/or interest by the issuer, the secured bond holders have the option to seize the assets of the company and proceed to the court in case of default. This option is not available to the investors in case of unsecured bonds.
- Secured bonds are comparatively far less risky than unsecured bonds.
- Secured bonds carry preferential payment status as compared to unsecured bonds in case of liquidation/bankruptcy of the issuer.

(b) Convertible and callable.

- Convertible bonds are bonds that are convertible to equity shares of the issuer after a certain specified period of time. Callable bonds are bonds that can be called back by the issuer after a certain period of time at a specified price. ...

Solution Summary

Liabilities, debt and equity financing and stock versus cash dividends are examined. Different types of bonds are contrasts.

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