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    Financial Data Reported by Mac Company

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    AE10-7
    The following financial data were reported by Mac Company for 2007 and 2008 ($ in millions).

    MAC COMPANY
    Balance Sheets (partial)
    2008 2007
    Current assets
    Cash and cash equivalents $2,406 $1,799
    Accounts receivable, net 3,824 3,349
    Inventories 3,127 2,387
    Other current assets 612 1,009
    Total current assets $9,969 $8,544
    Current liabilities $7,170 $5,521

    Calculate the current ratio and working capital for Mac for 2007 and 2008. (Round current ratio to 2 decimal places, e.g. 10.50. Round other answer to 0 decimal places, e.g. 125.)
    2007 2008
    Current ratio

    Working capital $ million
    $ million

    Suppose that at the end of 2008 Mac management used $348 million cash to pay off $348 million of accounts payable. How would its current ratio and working capital have changed? (Round current ratio to 2 decimal places, e.g. 10.50. Round other answers to 0 decimal places, e.g. 125.)
    Current ratio

    Working capital $ million

    *AE10-9
    Northeast Airlines is considering two alternatives for the financing of a purchase of a fleet of airplanes. These two alternatives are:
    1. Issue 66,000 shares of common stock at $49 per share. (Cash dividends have not been paid nor is the payment of any contemplated).
    2. Issue 10%, 10-year bonds at par for $3,234,000.
    It is estimated that the company will earn $877,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 86,900 shares of common stock outstanding prior to the new financing.
    Determine the effect on net income and earnings per share for these two methods of financing. (If answer is zero, please enter 0. Do not leave any fields blank. Round earnings per share to 2 decimal places, e.g. 10.50. Enter all amounts as positive amounts and subtract where necessary.)
    Plan One
    Issue Stock Plan Two
    Issue Bonds
    Income before interest and taxes $
    $

    Interest

    Income before income taxes

    Income tax expense

    Net income $
    $

    Outstanding shares

    Earnings per share $
    $

    AE10-10
    On January 1, Neuer Company issued $560,000, 12%, 10-year bonds at par. Interest is payable semiannually on July 1 and January 1.
    Prepare journal entries to record the following.
    The issuance of the bonds.
    Date Account/Description Debit Credit
    Jan. 1

    The payment of interest on July 1, assuming that interest was not accrued on June 30.
    Date Account/Description Debit Credit
    July 1

    The accrual of interest on December 31.
    Date Account/Description Debit Credit
    Dec. 31

    AE10-12
    Deng Company issued $513,000 of 5-year, 8% bonds at 99 on January 1, 2011. The bonds pay interest twice a year.
    1. Prepare the journal entry to record the issuance of the bonds. (For multiple debit/credit entries, list amounts from largest to smallest e.g. 10, 5, 3, 2.)
    Account/Description Debit Credit

    2. Compute the total cost of borrowing for these bonds.
    $

    1. Prepare the journal entry to record the issuance of the bonds, assuming the bonds were issued at 105. (For multiple debit/credit entries, list amounts from largest to smallest e.g. 10, 5, 3, 2.)
    Account/Description Debit Credit

    2. Compute the total cost of borrowing for these bonds.
    $

    AE10-13
    The following section is taken from Budke Corp.'s balance sheet at December 31, 2010.

    Current liabilities
    Bond interest payable $ 57,820
    Long-term liabilities
    Bonds payable, 7%, due January 1, 2015 1,652,000
    Interest is payable semiannually on January 1 and July 1. The bonds are callable on any interest date.
    Journalize the payment of the bond interest on January 1, 2011.
    Date Account/Description Debit Credit
    Jan. 1

    Assume that on January 1, 2011, after paying interest, Budke calls bonds having a face value of $522,000. The call price is 103. Record the redemption of the bonds. (For multiple debit/credit entries, list amounts from largest to smallest e.g. 10, 5, 3, 2.)
    Date Account/Description Debit Credit
    Jan. 1

    Prepare the entry to record the payment of interest on July 1, 2011, assuming no previous accrual of interest on the remaining bonds.
    Date Account/Description Debit Credit
    July 1

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    The solution discusses the financial data reported by Mac Company.

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