On January 1, 20X1, Chain Corporation issued $5 million of 7% coupon bonds at par. The bondsmature in 20 years and pay interest semiannually on June 30 and December 31 of each year. On December 31, 20Y1, the market interest rate for bonds of similar risk was 14%, and the marketvalue of Chain Corporation bonds (after the December 31 interest payment) was $3,146,052. Although the company’s books are not yet closed for the year, a preliminary estimate showsnet income to be $500,000. This amount is substantially below the $3 million management hadexpected the company to earn. The company has long-term debt totaling $7.5 million (includingthe $5 million bond issue) and shareholders’ equity of $12.5 million (including the $500,000 ofestimated net income). This means the company’s long-term debt-to-equity ratio is 60%. Unfortunately, a covenant in one of the company’s loan agreements requires a long-term debtto-equity ratio of 55% or less. Violating this covenant gives lenders the right to demand immediaterepayment of the loan principal. Worse yet, a “cross default” provision in the $5million bondmakes it immediately due and payable if the company violates any of its lending agreements. Because the company does not have the cash needed to repurchase the bonds, managementis considering a debt-for-debt exchange in which the outstanding 7% bonds would be replacedby new 14% bonds with a face amount of $3.2 million. The interest rate on the new bonds isequal to the market interest rate. Required: 1. Prepare a journal entry to record the swap on December 31, 20Y1. (Any gain or loss tothe company would be taxed at 21%, and the tax should be included in your entry.) 2. What would the company’s debt-to-equity ratio be after the swap? 3. What impact would the transaction have on net income for the year? 4. How else could management have avoided violation of the loan covenant? 5. IFRS guidance on the recognition of extinguishment gains in debt-for-debt swap transactions is more restrictive than U.S. GAAP. What additional factors must be considered indetermining if Chain Corporation should recognize the swap gain under IFRS?
> Metge Corporation’s worksheet for calculating taxable income for 20X1 follows: The enacted tax rate for 20X1 is 21%, but it is scheduled to increase to 25% in 20X2 and subsequent years. All temporary differences are originating differen
> Nelson Inc. purchased machinery at the beginning of 20X1 for $90,000. Management used thestraight-line method to depreciate the cost for financial reporting purposes and the sum-of the years’ digits method to depreciate the cost for tax purposes. The lif
> For financial statement reporting, Lexington Corporation recognizes royalty income accordingto GAAP. However, royalties are taxed when collected. At December 31, 20X0, deferred royaltyincome of $400,000 was included in Lexington’s balance sheet. All of t
> Early in 2017, Altuve Corporation forecasted that it would report a deferred tax liability of $70million at December 31, 2017, representing the additional tax that would be due to U.S. authorities if its un repatriated foreign earnings were to be repatri
> The following information pertains to Ramesh Company for 20X1: The company has one permanent difference and one temporary difference between book andtaxable income. Required: 1. Calculate the amount of temporary difference for 20X1 and indicate whether
> In early 2017, Quintana Corporation prepared the following forecast of its earnings for 2017and 2018: Quintana’s pre-tax income forecasts include $40 million of nontaxable income in 2017 and $30million of nontaxable income in 2018. Thes
> Current tax law limits the amount of interest expense that corporations may deduct to the sumof (a) taxable interest income and (b) 30% of taxable income (excluding taxable interestincome) before any deductions for interest, depreciation, amortization, o
> Bortles Corporation’s U.S. operations have been in “steady state” for several years, whereby itspre-tax income has been constant (at $400 million each year) and its originating temporarydifferences and reversing temporary differences exactly offset. At D
> Trevathan Corporation has only one source of temporary differences—warranties. At December 31,2016, 2017, and 2018, the amounts of cumulative temporary differences were as follows: Temporary differences related to warranties arise becau
> The disclosure rules for business combinations complicate financial analysis. Trend analysis becomes difficult because comparative financial statements are not retroactively adjusted to include data for the acquired company for periods prior to the acqui
> Devers Corporation began operations in 20X1 and had the following partial income statements, which are complete only down to pre-tax income. Devers had no book-tax differences except for the effects of its net operating loss carryforward. The corporate t
> Cishek Corporation sold $100 million of gift cards in 20X1. The gift cards may be used to purchase goods from Cishek in the future. The gift cards never expire, and Cishek expects that none of the gift cards will go unused. Cishek projects the gift cards
> Goff Corporation has only one temporary difference, which is related to the use of accelerateddepreciation for income tax purposes and straight-line depreciation for financial reporting. Goff had the following amounts of cumulative temporary difference a
> Boers Corporation and Bernstein, Inc. both project pre-tax income of $100 million in 20X1. Both also expect there to be no change in their cumulative temporary differences during the year. However, the two companies are in very different deferred tax pos
> Flower Company started doing business on January 1, 20X0. For the year ended December 31, 20X1, it reported $450,000 pre-tax book income on its income statement. Flower is subject toa 21% corporate tax rate for this year and the foreseeable future. Addit
> In 20X1, MB Inc. is subject to a 21% tax rate. For book purposes, it expenses $1,500,000 ofexpenditures. MB intends to deduct these expenditures on its 20X1 tax return despite tax lawprecedent that makes it less than 50% probable that the deduction will
> Moss Inc. follows GAAP for financial reporting purposes and appropriately uses the installment method of accounting for income tax purposes. It reported $250,000 of pre-tax incomeunder GAAP, but it will report the corresponding taxable income in the foll
> On July 1, 20X1, Burgundy Studios leases camera equipment from Corning stone Corporation. Corning stone had to make significant changes to the equipment to meet Burgundy’s needs, andit would be significantly costly to modify the equipment for alternative
> On December 31, 20X1, Thomas Henley, financial vice president of Kingston Corporation, signed a no cancelable three-year lease for an excavator. The lease calls for annual payments of $41,635 per year due at the end of each of the next three years. The l
> Using the data in P13–6, prepare the journal entries required by Coleman Inc. on January 1, 20X1, assuming that (a) Trask does not guarantee the residual value and (b) Trask doesguarantee it. Coleman paid $325,000 to acquire the office equipment several
> The following information is based on a real company whose name has been disguised. Opus One operates in a single business segment, the retailing and servicing of home audio, car audio, and video equipment. Its operations are conducted in Texas through 2
> On January 1, 20X1, Trask Co.signs an agreement to lease office equipment from Coleman Inc. forthree years with payments of $193,357 beginning December 31, 20X1. The equipment’s fair value is$500,000 with an expected useful life of four years. At the end
> On January 1, 20X1, Bare Trees Company signed a three-year non cancelable lease with Dreams Inc. The lease calls for three payments of $62,258.09 to be made at each year-end. The leasepayments include $3,000 of executory costs related to service. The lea
> On January 1, 20X1, Bill Inc. leases manufacturing equipment from Beatrix Corporation. The lease covers seven years and requires annual lease payments of $51,000, beginning on January 1, 20X1. The unguaranteed residual value at the end of seven years is
> On January 1, 20X1, Seven Wonders Inc. signed a five-year non cancelable lease with Moss Company. The lease calls for five payments of $277,409.44 to be made at the end of each year. The leased asset has a fair value of $1,200,000 on January 1, 20X1. Sev
> Mason Company has a machine with a cost and fair value of $100,000. On January 1, 20X1, itleases the machine for a 10-year period to Drake Company. The machine has a 12-year expectedeconomic life. Payments are received at the beginning of each year. The
> On January 1, 20X1, Bonduris Company leases warehouse space in Oakland, CA. The lease isfor six years with payments to be made at the beginning of each year. The lease calls for Bonduris to pay $15,000 on January 1, 20X1. The lease calls for subsequent l
> On January 1, 20X1, Dwyer Company leases space for a donut shop. The lease is for five yearswith payments to be made at the beginning of each year. The lease calls for Dwyer to pay $10,000 on January 1, 20X1; $11,000 on January 1, 20X2; $12,500 on Januar
> On October 1, 20X1, Brady Consulting leases unmodified equipment from Damon Corporation. The lease covers four years and requires lease payments of $73,046, beginning on September 30, 20X2. The unguaranteed residual value is $200,000. On October 1, 20X1,
> On January 1, 20X1, Merchant Co. sold a tractor to Swanson Inc. and simultaneously leased itback for five years. The tractor’s fair value is $300,000, but its carrying value on Merchant’sbooks prior to the transaction was $200,000. The tractor has a seve
> On January 1, 20X1, Overseas Leasing Inc. (the lessor) purchased five used oil tankers from Seven Seas Shipping Company at a price of $99,817,750. Overseas immediately leased the oiltankers to Pacific Ocean Oil Company (the lessee) on the same date. The
> The income statement for the year ended December 31, 20X1, as well as the balance sheets asof December 31, 20X1, and December 31, 20X0, for Lucky Lady Inc. follow. This informationis taken from the financial statements of a real company whose name has be
> Assume that on January 1, 20X1, Trans Global Airlines leases two used Boeing 737s from Aircraft Lessors Inc. The eight-year lease calls for payments of $10,000,000 at each year-end. On January 1, 20X1, the Boeing 737s have a total fair value of $60,000,0
> Moore Company sells and leases its computers. Moore’s cost and sales price per machine are $1,200 and $3,000, respectively. At the end of three years, the expected residual value is $400,which is guaranteed by the lessee. Moore leases 20 of these machine
> Refer to the information in P13–10. Assume that at the commencement of the lease, collectability of the payments is not probable and the lessor uses the straight-line depreciation method. Required: 1. Prepare the necessary journal entries for Railcar fo
> On January 1, 20X1, Railcar Leasing Inc. (the lessor) purchased 10 used boxcars from Railroad Equipment Consolidators at a price of $8,749,520. Railcar leased the boxcars to the Reading Railroad Company (the lessee) on the same date. The lease is for eig
> Bunker Company negotiated a lease with Gilbreth Company that begins on January 1, 20X1. The lease term is three years, and the asset’s economic life is five years. The equipment wascustomized, and it would be of little use to the lessor at the end of the
> Clovis Company recently issued $500,000 (face value) bonds to finance a new constructionproject. The company’s chief accountant prepared the following bond amortization schedule: Required: 1. Compute the discount or premium on the sale
> You have the following information for Brophy, Inc. Required: 1. How much interest expense did the company record during Year 2 on the 7% debentures? How much of the original issue discount was amortized during Year 2? 2. How much interest expense did th
> The following information appeared in the 20X4 annual report of Rumours, Inc.: Rumours, Inc. issued $10 million, 10% coupon bonds on January 1, 20X1, due on December 31,20X5. The prevailing market interest rate on January 1, 20X1, was 12%, and the bonds
> In 20X5, Kahn Financial Group used the fair value option for some of its own debt. During thefirst quarter of 20X5, the fair value of its debt declined by $2.7 billion. Its reported net incomefor the quarter was $1.6 billion. Required: 1. Suppose Kahn F
> On January 1, 20X1, Tango-In-The-Night, Inc., issued $75 million of bonds with an 8% couponinterest rate. The bonds mature in 10 years and pay interest semiannually on June 30 and December 31 of each year. The market rate of interest on January 1, 20X1,
> Mattel, Inc., develops and manufacturers toys that it sells globally. Presented below are excerptsfrom its Form 10-K for the year ended December 31, 2018. NOTE 10—DERIVATIVE INSTRUMENTS Mattel seeks to mitigate its exposure to foreign c
> Avenet Inc., a U.S. company, is a global provider of electronic parts, enterprise computing and storage products, and supply chain and logistics services for the electronic components industry. The company’s 2009 annual report contained the following not
> On January 1, 20X1, Mason Manufacturing borrows $500,000 and uses the money to purchasecorporate bonds for investment purposes. Interest rates were quite volatile that year and sowere the fair values of Mason’s bond investment (an asset
> On January 1, 20X1, Newell Manufacturing purchased a new drill press that had a cash purchase price of $6,340. Newell decided instead to pay on an installment basis. The installmentcontract calls for four annual payments of $2,000 each beginning in one y
> On January 1, 20X1, Fleetwood Inc. issued bonds with a face amount of $25 million and astated interest rate of 8%. The bonds mature in 10 years and pay interest semiannually on June 30 and December 31 of each year. The market rate of interest on January
> On July 1, 20X1, Heflin Corporation (a fictional company) issued $20 million of 12%, 20-yearbonds. Interest on the bonds is paid semiannually on December 31 and June 30 of each year,and the bonds were issued at a market interest rate of 8%. Required: 1.
> On January 1, 20X0, Korman, Inc., issued $1.0 billion of 3% zero coupon subordinated debentures, which were issued at a price of $553.68 per $1,000 principal amount at maturity. Thebonds were priced to yield 3% per annum, computed on an annual basis. The
> On January 1, 20X1, Nicks Corporation issued $250 million of floating-rate debt. The debtcarries a contractual interest rate of “LIBOR plus 5.5%,” which is reset annually on January 1of each year. The LIBOR rates on January 1, 20X1, 20X2, and 20X3, were
> On July 1, 20X1, McVay Corporation issued $15 million of 10-year bonds with an 8% statedinterest rate. The bonds pay interest semiannually on June 30 and December 31 of each year. The market rate of interest on July 1, 20X1, for bonds of this type was 10
> National Sweetener Company owns the patent to the artificial sweetener known as Supersweet. Assume that National Sweetener acquired the patent on January 1, 20X1, at a cost of $300 million;expected the patent to have an economic useful life of 12 years;
> Refer to the facts in Problem 11-8. Repeat requirements 2 through 5 using the cost model (asopposed to the revaluation model) under IFRS.
> In 20X0, the cereal division of Bloom Company (a fictional company) decided to test marketin 20X1 an organic corn-based cereal to be called Healthcrisp. The business plan calls for production to begin in late May 20X1, with retail store delivery starting
> Yachting in Paradise, Inc., was founded late in 20X0 by retired Admiral Andy Willits to provideexecutive retreats aboard a luxury yacht with ports of call scattered around the South Pacific. Yachting in Paradise is a U.S. firm and follows U.S. GAAP. On J
> Fly-by-Night is an international airline company. Its fleet includes Boeing 757s, 747s, and 737sand McDonnell Douglas MD-83s and MD-80s. Assume that Fly-by-Night made the followingexpenditures related to these aircraft in 20X1: a. New jet engines were in
> On April 23, 20X1, Starlight Department Stores, Inc., acquired a 75-acre tract of land by paying $25,000,000 in cash and by issuing a six-month note payable for $5,000,000 and 1,000,000shares of its common stock. On April 23, 20X1, Starlight’s common sto
> Crews Cable Company provides phone, internet, television, and security services to its customers. Crews offers a promotion where current customers can add phone and security services foran additional $60 per month if they sign a two-year contract. Custom
> Hopkins Co. often partners with other companies to deliver technology solutions to its clients. Because of these working relationships, Hopkins offers a sales incentive program to these companies for work that is brought to Hopkins. Hopkins agrees to pay
> On June 30, 20X1, Macrosoft Company acquired a 10-acre tract of land. On the tract was a warehouse that Macrosoft intended to use as a distribution center. At the time of purchase, theland had an assessed tax value of $6,300,000, and the building had an
> IceCap Hotels operates a series of northern European hotels and reports under IFRS. On June 30, 20X0, IceCap purchased a hotel for €2,100,000. IceCap reports hotel values on the balancesheet under Property, plant, and equipment. The esti
> White Ski Resorts operates a series of ski resorts in northern Europe and reports under IFRS. On June 30, 20X0, White purchased land for €3,000,000. White reports land values on thebalance sheet under Property, plant, and equipment. The
> 1. Contrast the economic sacrifice and expected benefit approaches to long-lived assetvaluation. 2. GAAP requires firms to use historical cost (in most cases) to report the value of long-livedassets. As a statement reader, do you think that firms should
> Prescott Co. management has committed to a plan to dispose of a group of assets associatedwith the manufacture of railroad cars. This group of assets qualifies as a component of anentity for financial reporting purposes. As of December 31, 20X1, manageme
> Refer to The Kroger Co. information in Case 15-3. Required: Explain how net benefit cost and OCI would change if The Kroger Co. were using IAS 19.
> Gardenia Co. and Lantana Co. both operate in the same industry. Gardenia began its operations in 20X1 with a $20 million initial investment in plant and equipment with an expectedlife of 10 years. Lantana’s net asset base is also $20 million, but its ass
> The 20X0 income statement and other information for Mallard Corporation, which is about to purchase a new machine at a cost of $500 and a new computer system at a cost of $300, follow. Additional Information: • The two new assets are ex
> Assume that Major Motors Corporation, a large automobile manufacturer, reported in a recentannual report to shareholders that its buildings had an original cost of $4,694,000,000. a. Major Motors uses the straight-line depreciation method to depreciate t
> Consider the following two scenarios: Scenario I: Over the 20X1–20X5 period, Micro Systems, Inc., spends $10 million a year todevelop patents on new computer hardware manufacturing technology. While some of itsprojects failed, the firm did develop severa
> To meet the increasing demand for its microprocessors, Intelligent Micro Devices began construction of a new manufacturing facility on January 1, 20X1. Construction costs were incurreduniformly throughout 20X1 and were recorded in the firm’s Construction
> On January 2, 20X0, Half, Inc., purchased a manufacturing machine for $864,000. The machinehas an eight-year estimated life and a $144,000 estimated salvage value. Half expects to manufacture 1,800,000 units over the machine’s life. During 20X1, Half man
> Parque Corporation (a fictional company) applied to Fairview Bank (another fictional company) early in 20X2 for a $400,000 five-year loan to finance plant modernization. The company proposes that the loan be unsecured and repaid from future operating cas
> During your audit of Patti Company’s ending inventory at December 31, 20X1, you find the following inventory accounting errors: a. Goods in Patti’s warehouse on consignment from Valley, Inc., were included in Patti’s ending inventory. b. On December 31,
> Packard, Inc., adopted the dollar-value LIFO inventory method on June 30, 20X1, the end of its fiscal year. Packard’s inventory records provide the following information: Required: Calculate the ending inventory for Packard, Inc., for
> Princess Retail Stores started doing business on January 1, 20X1. The following data reflect its inventory purchases and sales during the year: Required: 1. Compute gross margin and cost of ending inventory using the periodic FIFO cost flow assumption.
> The Kroger Co. operates numerous grocery store chains. Excerpts from Kroger’s Note 15 arepresented below. The 2017 amounts are for the fiscal year ended February 3, 2018. All amountsare in millions of U.S. dollars. At February 3, 2018,
> Diana Gomez Corporation, a manufacturer of cowboy boots, provided the following information from its accounting records for the year ended December 31, 20X1. Additional information is as follows: a. Work-in-process inventory costing $30,000 was sent to a
> Mastrolia Manufacturing produces pacifiers. The company uses absorption costing for external reporting, but management prefers variable costing for evaluating the profitability of each model. Bonuses, which make up a significant portion of each manager&a
> Bravo Wholesalers, Inc., began its business on January 1, 20X1. Information on its inventory purchases and sales during 20X1 follows: Assume a tax rate of 21%. Required: 1. Compute the cost of ending inventory and cost of goods sold under each of the fo
> The following information pertains to Yuji Corporation: Required: Sales revenue during 20X1 was $300,000. The income tax rate is 21%. Compute the following: 1. Cost of raw materials used. 2. Cost of goods manufactured/completed. 3. Cost of goods sold. 4
> 1. Refer to the facts in Problem 10-16. Repeat the requirements assuming that Jake uses the FIFO cost flow assumption. 2. Explain how the financial statements are affected when a company decides that NRV should be used for the inventory value. 3. Repeat
> Ramps by Jake, Inc., manufactures skateboard ramps. The company uses independent sales representatives to market its products and pays a commission of 8% on each sale. Data regarding the five styles of ramps in the company’s inventory a
> Caldwell Corporation (a fictional company) operates an ice cream processing plant and uses the FIFO inventory cost flow assumption. A partial income statement for the year ended December 31, 20X2, follows: Caldwell’s physical inventory
> Sirotka Retail Company began doing business in 20X1. The following information pertains to its first three years of operation: Assume the following: • The income tax rate is 21%. • Purchase and sale prices change only
> Bourne Company (a fictional company) has the following inventory note in its 20X3 annual report. LIFO revaluations decreased $140 million in 20X3, compared with decreases of $169 million in 20X2 and $82 million in 20X1. Included in these changes were dec
> JKW Corporation (a fictional company) has been selling plumbing supplies since 1981. In 2003, the company adopted the LIFO method of valuing its inventory. The company has grown steadily over the years and a layer has been added to its LIFO inventory in
> AT&T reported pre-tax income of $24,873 million, $15,139 million, and $12,976 millionfor the years ended December 31, 2018, 2017, and 2016, respectively. At December 31, 2018, it had 7,281.6 million common shares outstanding and a common share price
> The following is an excerpt from the financial statements of Talbot Industries (a fictional company): During 20X2, Chaney Technologies (a fictional company) changed its inventory cost flow assumption from LIFO to the average cost method. The following is
> Keefer, Inc., began business on January 1, 20X1. Information on its inventory purchases and sales during 20X1 and 20X2 follow: Required: 1. Calculate ending inventory, cost of goods sold, and gross margin for 20X1 and 20X2 under the periodic FIFO invent
> On January 1, 20X1, Hillock Brewing Company sold 50,000 bottles of beer to various customers for $45,000 using credit terms of 3/10, n/30. These credit terms mean that customers receive a cash discount of 3% of invoice price for payments made within 10 d
> On January 2, 20X1, Criswell Acres purchased from Mifflinburg Farm Supply a new tractor that had a cash selling price of $109,837. As payment, Criswell gave Mifflinburg Farm Supply $25,000 in cash and a $100,000, five-year note that provided for annual i
> On December 31, 20X1, Roker, Inc., reported notes receivable of $63,930,000. This amount represents the present value of future cash flows (both principal and interest) discounted at a rate of 11.12% per annum. The schedule of collections of the receivab
> The following information pertains to the financial statements of Buffalo Supply Company, a provider of plumbing fixtures to contractors in central Pennsylvania. Required: Reconstruct all journal entries pertaining to Gross accounts receivable and Allow
> On December 1, 20X1, Eva Corporation, a mortgage bank, has the following amounts on its balance sheet (in millions): Also on December 1, 20X1, Eva transfers mortgage receivables with a book value of $20,000,000 to a securitization entity (SE). The averag
> At December 31, 20X0, Oettinger Corporation, a premium kitchen cabinetmaker for the home remodeling industry, reported the following accounts receivable information on its year-end balance sheet: During 20X1, the company had credit sales of $8,200,000, o
> Avillion Corporation had a $45,000 debit balance in Accounts receivable and a $3,500 credit balance in Allowance for credit losses on December 31, 20X1. The company prepared the following aging schedule to record the adjusting entry for bad debts on Dece
> Baer Enterprises’s balance sheet at October 31, 20X1 (fiscal year-end), includes the following: Transactions for fiscal year 20X2 include the following: a. Due to a product defect, previously sold merchandise totaling $10,500 was return
> Refer to the 2017 General Electric Retiree Health and Life Benefits disclosure appearing in Exhibit 15.9. Required: 1. Reconstruct the journal entries that GE would have made in 2017 to record the effects ofits retiree health and life benefits plans. Th
> The following notes for three fictional companies represent what analysts may see in practice. Required: How do the three companies record the transfer of their receivables—that is, as a sale or borrowing? Is their accounting treatment
> Mikeska Companies purchased equipment for $108,000 from Power-line Manufacturing on January 1, 20X0. Mikeska paid $18,000 in cash and signed a five-year, 5% installment note for the remaining $90,000 of the purchase price. The note calls for annual payme
