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stock, bonds, payroll tax, current portion, liabilities

1. Is a current liability a debt that can be expected to be paid in one year. Is this correct? Explain.

2. Identify three taxes commonly withheld by the employer from an employee's gross pay.

3. Identify three taxes commonly paid by employers on employees' salaries and wages.
(b) Where in the financial statements does the employer report taxes withheld from employees' pay?

4. What are long-term liabilities? Give two examples. What is a bond?

5. Contrast these types of bonds:
(a) Secured and unsecured.
(b) Convertible and callable.

6. Assume that Mimi Inc. sold bonds with a face value of $100,000 for $104,000. Was the market interest rate equal to, less than, or greater than the bonds' contractual interest rate? Explain.

7. Is liquidity and solvency are the same thing. If not, how do they differ?

BE10-1 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.

BE10-5 Domino Inc. is considering these two alternatives to finance its construction of a new $2 million plant:
(a) Issuance of 200,000 shares of common stock at the market price of $10 per share.
(b) Issuance of $2 million, 6% bonds at face value.
Complete the table and indicate which alternative is preferable.
Issue Stock Issue Bond
Income before interest and taxes $1,000,000 $1,000,000
Interest expense from bonds ________ ________
Income before income taxes _________ ________
Income tax expense (30%) _________ __________
Net income $ _________ $ ________
Outstanding shares _________ 700,000
Earnings per share $_________ $_________

BE10-9 Presented here are liability items for Warner Inc. at December 31, 2007. Prepare the liabilities section of Warner's balance sheet.
Accounts payable $135,000 Employee benefits payable $ 7,800
Bank note payable
(due May 1, 2008) 20,000 Interest payable 40,000
Bonds payable, due 2011 900,000 Notes payable, due 2009 80,000
Current portion of
long-term debt 240,000 Property tax payable 3,500
Discount on bonds payable 45,000 Sales taxes payable 1,400

FINANCIAL REPORTING PROBLEM: Tootsie Roll Industries
BYP10-1 Refer to the financial statements of Tootsie Roll Industries and the Notes to
Consolidated Financial Statements in Appendix A.

Instructions
Answer the following questions.
(a) What were Tootsie Roll's total current liabilities at December 31, 2004? What was the
increase/decrease in Tootsie Roll's total current liabilities from the prior year?
(b) How much were the accounts payable at December 31, 2004?
(c) What were the components of total current liabilities on December 31, 2004 (otherthan accounts payable already discussed above)?
6. What are the two principal components of stockholders'
equity?
7. The corporate charter of Clio Corporation allows the
issuance of a maximum of 100,000 shares of common
stock. During its first 2 years of operation, Clio sold
60,000 shares to shareholders and reacquired 4,000
of these shares. After these transactions, how many
shares are authorized, issued, and outstanding?
12. Identify the events that result in credits and debits
to retained earnings.

Jeni Phelps is planning to start a business. Identify for Jeni the advantages
and disadvantages of the corporate form of business organization.
On June 1 Harmon Inc. issues 2,000 shares of no-par common stock at a cash
price of $6 per share. Journalize the issuance of the shares.

E11-5 Yanik Corporation recently hired a new accountant with extensive experience in
accounting for partnerships. Because of the pressure of the new job, the accountant was
unable to review what he had learned earlier about corporation accounting. During the
first month, he made the following entries for the corporation's capital stock.
May 2 Cash 120,000
Capital Stock 120,000
(Issued 10,000 shares of $5 par value
common stock at $12 per share)
10 Cash 530,000
Capital Stock 530,000
(Issued 10,000 shares of $50 par value
preferred stock at $53 per share)
15 Capital Stock 7,200
Cash 7,200
(Purchased 600 shares of common
stock for the treasury at $12 per share)

Instructions
On the basis of the explanation for each entry, prepare the entries that should have been
made for the capital stock transactions.

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?

Solution Preview

1. Is a current liability a debt that can be expected to be paid in one year? Is this correct? Explain.

Yes normally a currently liability is a debt that can be expected to be paid in one year. However, it could be paid either from existing current assets or by creating other current liabilities. And this is to be done either within one year or within the operating cycle, whichever is longer.

2. Identify three taxes commonly withheld by the employer from an employee's gross pay.
1. Federal income tax
2. State income tax
3. Social security tax.

3. Identify three taxes commonly paid by employers on employees' salaries and wages.
1. Federal unemployment tax
2. State unemployment tax
3. Social security tax

4. Where in the financial statements does the employer report taxes withheld from employees' pay?
These are reported as current liability in the balance sheet

5. What are long-term liabilities? Give two examples. What is a bond?
Long-term liabilities: Obligations which are payable after one year (in contrast to current liabilities which are paid with one year)
Examples: Bonds, Long term notes
Bonds: Bonds are a form of debt financing used by the corporations & government agencies which has a form of interest-bearing notes payable.

6. Contrast these types of bonds:
(a) Secured and unsecured.
Secured bonds are safer for the investors as they are backed by collateral i.e. the issuer pledges specific assets for these bonds. Unsecured bonds are not backed by the collateral and the investors have to bear the risk of default.

(b) Convertible and callable.
Convertible bonds give the option to the investor to be converted into common stock at the predetermined rate at the pre-determined time. Whereas in case of callable bonds, the issuer has the option to call and retire the bonds at a pre-determined rate at any time prior to the maturity.

7. Assume that Mimi Inc. sold bonds with a face value of $100,000 for $104,000. Was the market interest rate equal to, less than, or greater than the bonds' contractual interest rate? Explain.
Since the market price of bond is greater than the face value, the contractual interest rate is less than the market interest rate.

8. Is liquidity and solvency are the same thing. If not, how do they differ?
No they are different. While liquidity takes short term view, solvency takes long term view. Liquidity is the ability of the firm to meet its maturing obligations in short-term and meets the unexpected cash requirements. Solvency is ability of the company to survive in long run.

BE10-1 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.
Answer:
(a) No and ...

Solution Summary

Answer several questions on stock, bonds, payroll tax, current portion, liabilities, etc. i.e. different accounting and corporate finance concepts. It can be used as a good practice for exams.

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