Various Accounting Problems: Bonds, Liabilites, and Dividends
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1. Georgia Lazenby believes a current liability is a debt that can be expected to be paid in one year. Is Georgia correct? Explain.
2. (a) What are long-term Liabilities? Give two examples.
(b) What is a bond?
3. Contrast these types of bonds: (a) Secured and unsecured. (b) Convertible and callable.
4. Valentin Zukovsky says that liquidity and solvency are the same thing. Is he correct? If not, how do they differ?
5. Kananga Company has these obligations at Dec. 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.
6. 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?
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1. True. A current liability is another name for a short term liability. A 'short term' in accounting lingo is defined as one full accounting cycle or less (one year or less).
2.a) Long term liabilities are debts that are not expected to be repaid in the short term. Any debt that will take more than one accounting full cycle (one year) is a long term liability. Two examples include a mortgage or a lease obligation.
b) A bond is a type of long term liability that a company uses to raise capital to finance projects, etc. A bond is a "guarantee" of repayment of a face value (usually $1,000) from the company to an investor.
3.a) A secured bond is one backed by collateral (other assets that must be surrender in the event of the inability of the issuing company to repay the bond). An unsecured bond is just the opposite. It is one that is inherently more risky because there is no collateral attached to it.
b) A convertible bond is one that can be converted into stock of the issuing company at the behest of the investor. They typically afford a lower return than non convertible bonds because it is expected that the underlying stock price will rise giving the investor an opportunity to convert the bonds into a predetermined amount ...
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