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

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.