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    Partial Balance Sheet, Ratios and Loss Contingency

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    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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    Attachments

    Solution Preview

    Please see the attachment.

    10.3
    a. 1. Aztec estimates that $700,000 of its accounts receivables will prove to be uncollectable.

    This is a loss contingency since some of the sales would not be collected. This loss contingency can be reasonably estimated and so would be recorded in the financial statements. The entry made is
    Bad debt expense Dr 700,000
    Allowance for doubtful debts Cr 700,000

    2. The company's president is in poor health and has previously suffered two heart attacks.

    This is not a loss ...

    Solution Summary

    Partial balance sheet, ratios and loss contingency is examined.

    $2.19