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Long Term Debt, Contingencies and Leases

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Discuss trends, financial position, ratios, etc. For example, it may be helpful to discuss inventory turnover when assessing inventory valuation risk.
Obtain the 2010 financial statements and notes (annual report or 10-K) for Monro Muffler Brake, Inc. (MNRO). Use Tenneco for a benchmark and comparison purposes. This means ratios must be completed for both companies (but a description of the company only needs to be done for Monro).

To assess a company's financial statements, think specifically about: (1) the types of underlying transactions and events that affect the company, (2) how well the financial accounting rules (i.e., GAAP) reflect those transactions and events, (3) the aggressiveness or conservatism of management's accounting choices, and (4) how the annual report helps you assess the company's risks, financial position, and profitability.

For each item below, provide an easy to read and understandable presentation of the facts for your company. There should be a brief description of the items (Monro) and computational analysis (ratios).

LONG-TERM DEBT, CONTINGENCIES AND LEASES:
? Description of long-term debt
? Major leasing activities (if any) and types of leases involved
? Business reasons for, and importance of leasing activities
? Other significant liabilities disclosed for contingencies, warranties or commitments and their importance

Things to consider: Description of debts, Debt Percentage, Operating leases vs Capital leases, Present Value of bonds and leases, etc.

Link for Munro 10K:
http://quote.morningstar.com/stock-filing/Annual-Report/2011/3/26/t.aspx?t=XNAS:MNRO&ft=10-K&d=494a5ad12f3cde1f4e477c4bd3c24f2b

Link for Tenneco 10K:
http://www.tenneco.com/media/annualreport/pdfs/Tenneco-2010-10-K.pdf.

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Introduction
Monro Muffler Brake, Inc operates in automotive repair industry and provides automotive undercar repair and tire services in US. Monro provides different products or services including tires and routine maintenance services. It provides a wide range of services on light trucks, vans for breaks, steering, passenger cars, etc. This paper discusses about the long-term debt, major leasing activities and importance of leasing activities for the business of Monro.
Long-term Debt
Long-term financing is related with financing with a maturity of more than five years. Primarily, long-term financing consists of bonds. Firms used long-term debt in order to finance long-lived assets such as construction projects, land and equipment (Shim and Siegel 2008). A firm's mix of all long-term funds is known as its capital structure. An ideal capital structure is which that maximizes the total value of company and at the same time minimizes its overall cost of capital.
Monro Company's long-term debt includes revolving credit facility of $10062, LIBOR based debt and mortgage note payable, non interest bearing, secured by warehouse and office land and also due in one installment in the year 2015 of $660 and obligations under capital leases at various interest rates, secured by certain equipment and store properties and due in installments through 2039 (Annual Report 2012).
Debt Percentage:
Monro has total long-term debt of $41990 in the year 2011 and $96,427 in the year 2010 (consolidated balance sheet). In the year 2011, total debt of company is approx 24% of the total liabilities and at the same time it was approx 46% of the total liabilities (Annual Report 2012). At the same time, Tenneco has total long-term debt of $1160 million and $1145 million in the year 2010 and 2009 respectively (Annual Report 2011). In the year 2010, company's total debt was 37% of total liabilities and at the same time, they were 41% of total liabilities in the fiscal year 2009. It shows that total long-term ...

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The solution discusses long-term debt, contingencies and leases.

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See Also This Related BrainMass Solution

Partial Balance Sheet, Ratios and 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

_________________________________________________________________________

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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