Exam 7: Current Liabilities and Long-Term Liabilities

Pinto Corp. sells $300,000 of bonds to private investors. The bonds have a 4% coupon rate and interest is paid semiannually. The bonds were sold to yield 5%. What periodic interest payment does Pinto make to its investors?

Butler, Inc. paid $75,000 to retire a note with a face value of $83,000. The note was issued with an 8% coupon rate paid semiannually. The note was three years from maturity and had a net book value of $68,200. What is the net gain or loss on the redemption of the note?

The principal and interest that will be paid on long-term debt within the next operating cycle are reported on the balance sheet as "current portion of long-term debt."

Which of the following corporate debt ratings are ordered in terms of decreasing market interest rate?

Contingent liabilities that are 'probable' and can be reasonably estimated are recorded on the balance sheet as a liability and as an expense in the income statement.

Define bond default. What are some potential ramifications if a company defaults on its debt?

Weiss Corporation's 2017 financial statements yield the following financial ratios. Using the partial listing of ratios utilized by Moody's Investors Services along with the median averages for the various ratings, estimate the credit rating that Moody's might assign to Weiss Corporation.

Sykora Corp. sells $450,000 of bonds to private investors. The bonds are due in 5 years, have a 6% coupon rate and interest is paid semiannually. Sykora received $490,222 for the bonds at issuance. The effective rate on these bonds is:

Hudson Corp. sells $300,000 of bonds to private investors. The bonds have a 7% coupon rate and interest is paid semiannually. The bonds were sold to yield 10%. What periodic interest payment does Hudson make to its investors?

EZ Wheels Corporation manufactures kick scooters. The company offers a one-year warranty on all scooters. During 2017, the company recorded net sales of $1,900 million. Historically, about 4% of all sales are returned under warranty and the cost of repairing and or replacing goods under warranty is about 30% of retail value. Assume that at the start of the year EZ Wheels' balance sheet included an accrued warranty liability of $16.3 million and at the end of the year, the accrued warranty liability balance was $12.4 million. What was EZ Wheels Corporation's warranty expense for 2017?

Reed Corp. sells $500,000 of bonds to private investors. The bonds are due in five years, have a 6% coupon rate, and interest is paid semiannually. The bonds were sold to yield 4%. What proceeds does Reed receive from the investors?

Which of the following business factors does not play a role in determining a company's credit rating?

Merck & Co. included the following footnote in its 2016 Form 10-K: Environmental Matters The Company believes that there are no compliance issues associated with applicable environmental laws and regulations that would have a material adverse effect on the Company. The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites. Expenditures for remediation and environmental liabilities were $11 million in 2016, and are estimated at $44 million in the aggregate for the years 2017 through 2021. These amounts do not consider potential recoveries from other parties. The Company has taken an active role in identifying and accruing for these costs and in management's opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled $83 million and $109 million at December 31, 2016 and 2015, respectively. These liabilities are undiscounted, do not consider potential recoveries from other parties and will be paid out over the periods of remediation for the applicable sites, which are expected to occur primarily over the next 15 years. Although it is not possible to predict with certainty the outcome of these matters, or the ultimate costs of remediation, management does not believe that any reasonably possible expenditures that may be incurred in excess of the liabilities accrued should exceed $64 million in the aggregate. Management also does not believe that these expenditures should result in a material adverse effect on the Company's financial position, results of operations, liquidity, or capital resources for any year. Required: a. How does Merck account for environmental liabilities that are probable and reasonably estimable? At December 31, 2016, how much were these liabilities? b. How does Merck account for environmental liabilities that are reasonably possible? At December 31, 2016, how much were these liabilities? c. The footnote mentions $83 million and $44 million as estimated future expenditures. Explain what each of these amounts represents and why they differ. d. Use the financial statement effects template below, to record Merck's 2016 remediation and environmental expenditures, assuming that the liability had already been accrued on Merck's books.

In general, how do credit analysts determine the risk-free rate?

For each item below, identify the amount (if any) that would be reported as a liability on Nike, Inc.'s fiscal year-end balance sheet at May 31, 2017. a. Nike, Inc. agreed to purchase materials for its new line of running shoes in June 2017. b. Nike, Inc. signed a 60-day 8% note for $105,000 on May 12, 2017 to finance its seasonal working capital needs. Principal and interest are due on July 11, 2017. c. Nike, Inc. owes $180,000 at year-end for inventory purchases. d. Nike, Inc. received a $250,000 deposit from Foot Locker for an order on the new line of running shoes that will be ready for shipment in September 2017.

Which one of the following would be considered a contingent liability?

Contingent Liabilities must have the following criteria - select all that apply.

The gain (or loss) on the repurchase of a bond carries no economic effects, as the gain (or loss) is exactly offset by the present value of the future cash flow implications of the repurchase.

Electronics Incorporated (EI) purchased 120 computers from its supplier on credit at a cost of $500 per computer. The computers were purchased to be held for sale to customers. By the end of the month, EI had sold all 120 computers for $800 each. The store received payment for these computers but waited until the end of the month to settle its account payable with the supplier. Use the financial statement effects template below to record these transactions.

EZ Wheels Corporation manufactures kick scooters. The company offers a one-year warranty on all scooters. During 2017, the company recorded net sales of $2,800 million. Historically, about 3% of all sales are returned under warranty and the cost of repairing and or replacing goods under warranty is about 30% of retail value. Assume that at the start of the year EZ Wheels' balance sheet included an accrued warranty liability of $15.4 million and at the end of the year, the accrued warranty liability balance was $11.5 million. a. How should EZ Wheels account for warranty claims? b. Calculate EZ Wheels' warranty expense for 2017. c. How much did EZ Wheels pay during the year to repair and or replace scooters under warranty?