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P 9-10 Contingent Liabilities P 10-5 Impact of a Lease

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Problem 9-10 Contingent Liabilities
Several items are listed for which the outcome of events is unknown at year-end.
a. A company offers a two-year warranty on sales of new computers. It believes that 4% of the computers will require repairs.
b. The company is involved in a trademark infringement suit. The company's legal experts believe that an award of $500,000 in the company's favor will be made.
c. A company is involved in an environmental cleanup lawsuit. The company's legal counsel believes that the outcome may be unfavorable but has not been able to estimate the costs of the possible loss.
d. A soap manufacturer has included a coupon offer in the Sunday newspaper supplements. The manufacturer estimates that 25% of the 50-cent coupons will be redeemed.
e. A company has been sued by the federal government for price fixing. The company's legal counsel believes that there will be an unfavorable verdict and has made an estimate of the probable loss.
Required
1. Identify which of the items (a) through (e) should be recorded at year-end.
2. Identify which of the items (a) through (e) should not be recorded but should be disclosed in the year-end financial statements.

Problem 10-5 Financial statement Impact of a Lease
On January 1, 2008, Muske Trucking Company leased a semi-tractor and trailer for five years. Annual payments of $28,300 are to be made every December 31 beginning December 31, 2008. Interest expense is based on a rate of 8%. The present value of the minimum lease payments is $113,000 and has been determined to be greater than 90% of the fair market value of the asset on January 1, 2008. Muske uses straight-line depreciation on all assets.
Required
1. Prepare a table similar to Exhibit 10-7 to show the five-year amortization of the lease obligation.
2. Identify and analyze the effect of the lease signing on January 1, 2008.
3. Identify and analyze the effect of all transactions on December 31, 2009 (the second year of the lease).
4. Prepare the balance sheet presentation as of December 31, 2009, for the leased asset and the lease obligation.
Problem 11-13 Effects of Stockholders Equity Transactions on Balance Sheet
The following transactions occurred at Horton INc. during its first year of operation:
a. Issued 100,000 shares of common stock at $5 each; 1,000,000 shares are authorized at $1 par value.
b. Issued 10,000shares of common stock for a building and land. The building was appraised for $20,000, but the value of the land is undeterminable. The stock is selling for $10 on the open market.
c. Purchased 1,000 shares of its own common stock on the open market for $16 per share.
d. Declared a 2-for-1 stock split. The market value of the stock was $37 before the stock split.
e. Reported $180,000 of income for the year.
Required
1. Identify and analyze the effect of each transaction.
2. Prepare the Stockholders Equity section of the balance sheet.
3. Write a paragraph that explains the number of shares of stock issued and outstanding at the end of the year.

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Several items are listed for which the outcome of events is unknown at year-end.

a. A company offers a two-year warranty on sales of new computers. It believes that 4% of the computers will require repairs.

The liability is probable, and an estimate is available. Record at year end.

b. The company is involved in a trademark infringement suit. The company's legal experts believe that an award of $500,000 in the ...

Solution Summary

Your tutorial gives you the reason for recording or not recording the liabilities and provides schedules to help you organize the data and respond to the requirements. Instructional notes are added to the spreadsheets to guide you.

$2.19
See Also This Related BrainMass Solution

I require assistance and help with these valuations, to allow me to write up a report on the company and to learn from the method used:

Company Valuation project - as part of a project, I am required to provide a financial Valuation of a Company using the valuation methods below. This is an Australian Company "Hills Industries" full details can be found at http://www.hills.com.au

I require assistance and help with these valuations, to allow me to write up a report on the company and to learn from the method used:

I need help with the following:

? The working out for each valuation method below and answers with calculations behind each valuation method. (if possible in a excel file so that I can review the method used) Plus a brief explanation of each method and results (so that I can them review the method and understand then and to expand and write a full report)

The only information given is the excel file attached hills.xls and suggested viewing of the annual reports for 2004 and/or 2003... also attached.

Any questions can be asked to me, via email at russ01@bigpond.net.au

Company Valuation - methods

Using fundamental analytical techniques

1. Dividend Discount Model + justifications (approx 1 page Double spaced)

a. Constant Growth model + explanation (300 words approx)

b. Differential Growth model + explanation (300 words approx)

Note a: How to apply Constant Growth Dividend Discount Model?

Step 1: Compute the beta of the stock
a) using regression
b) using spread sheet (Excel) - see illustration spreadsheet

Step 2: Look for a risk-free rate. Go to the website of Monetary Authority, such as RBA, to look for the yield of Treasury Bills (3-month) or Government Bonds

Step 3: Calculate the return of local stock market - by computing the average return of the Stock Index, such as AOI or ASX200 over a 48 or 60-month period

Step 4: Apply the CAPM formula to compute the r (Discount rate)
r = risk free rate + beta (return of AOI - risk free rate)

Step 5: Estimate the growth rate
a) using historical growth rate of Earnings per share
b) using the self sustainable growth rate = Retention ratio x ROE
c) using the industry growth rate
d) using the competitor's growth rate

Step 6: Apply the Constant growth DDM, where
Price = Current dividend (1 + growth rate) / (discount rate - growth rate)

Step 7: compare this estimated price with the current stock price. If the estimated price is higher than the current stock price, the stock is considered 'undervalue', you should make a 'buy' recommendation.

Note b: to apply a two-stage growth Dividend Discount Model?

The key points here are:

You have to estimate how long the high growth period will last.
Hint: You may simply assume 3 years or 4 years

You have to estimate a constant growth rate after the high growth period.
Hint: You may use the same constant growth rate mentioned earlier

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