Accounting ACCT 2610 Lecture Notes - Lecture 16: Government Debt, Finance Lease, Operating Lease

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28 Apr 2017

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Accrued payroll taxes, accrued rent, current portion of notes payable: accrued taxes payable, expense recorded in period the revenue is earned, dr. income tax expense, cr. Income tax payable: then pay off the taxes at subsequent date, dr. income tax payable, cr. Cash: accrued compensation, at end of period where revenue earned, record compensation expenses, dr. compensation expense, cr. Wages payable (and accrued vacation liability if applicable: settle the liability at a later date, dr. wages payable, cr. Cash: accrued payroll taxes, net paycheck is much lower than the gross paycheck, federal, state, medicare, social security taxes, federal insurance contribution act (fica) taxes = social security taxes + Medicare taxes: social security tax rate is 6. 2% on the first ,500 (2016 earnings, medicare tax rate is 1. 45% on all income, the employee pays 7. 65% and the employer pays 7. 65% for a total contribution of 15. 3%

Related Questions

Silver ComputerCorporation

Use the financial statementsbelow to complete a financial ratio analysis.

The ratios should becalculated on the ratio worksheet. Make sure to reference

amounts from the statementsonto your ratios. Be sure that your answer

uses the correct format forthat ratio: times, percentage, days, dollar amount.

RatioFormat:

Show with your answer whetherthe ratio is times, perentage, or dollar amount.

For example:

Current ratio is times, so it would be shown as anumber compared to one.

(ie. 2.08 to 1 or 2.08:1 )

Working capital is a dollar amount, so it would beshown as currency.

(ie. $11, 190 )

Net margin is a percentage, so it would be shownwith a % sign.

(ie. 12.7% )

Take a look at the ratiodescriptions in the textbook to determine if the ratio is

times, percentage, or dollaramount.

Decimal Places onRatios

The following are typicallyaccepted rules for decimal places on ratios:

Ratios: two decimal places

Dollars: two decimal places (the book showed threedecimal places for

earnings per share but we don't need to do that forthis class)

Days: one decimal place

Percentages: one decimal place (the textbook showedpercentages to two

decimal places but I think that is overkill)

Price-Earnings ratio: two decimal places

Times: two decimal places

Silver ComputerCorporation

IncomeStatement

For the Year EndedDecember 31, 2016

Other revenue and expense

Income before incometaxes

Silver ComputerCorporation

Comparative BalanceSheets

As of December 31,2016 and 2015

Assets

Marketable securities

Merchandise inventory

Total plant and equipment

Liabilities

Total current liabilities

Long-term liabilities

Long-term notes payable

Stockholder's Equity

Total stockholder'sequity

Total liabilities &equity

Notes for preparationof financial ratios:

All of Silver Corporations sales were onaccount.

1,692 shares of common stock were outstanding atthe end of 2016.

$2.50 of dividends per share were paid in2016.

The market price per share of Silver stock was$34.00 for all of 2016.

Answer this question

SilverComputer Corporation
Liquidity and SolvencyFinancial Ratios

LiquidityRatios
Note - Working Capitalshown as an example to follow on the remainingratios.

Working Capital	16,540
	10,350	1.6:1

Current ratio


Quick ratio
* Quick assets are cash,marketable securities, and accounts receivable

Accounts receivableturnover


Average days to collectreceivables


Inventory turnover


Average days to sellinventory


Operating cycle


Solvency Ratios(Long-term credit risk)

Debt ratio


Interest coverage ratio

coppergnu114

Analyzing and Interpreting Footnote on Operating and Capital Leases

Assume Verizon Communications, Inc., provides the following footnote relating to its leasing activities in its 10-K report. The aggregate minimum rental commitments under noncancelable leases for the periods shown at December 31, 2010, are as follows:

Years (dollars in millions)	Capital Leases	Operating Leases
2011	$ 83	$ 1,449
2012	71	1,316
2013	67	1,056
2014	63	806
2015	46	527
Thereafter	161	1,937
Total minimum rental commitments	491	$ 7,091
Less interest and executory costs	(89)
Present value of minimum lease payments	402
Less current installments	(46)
Long-term obligation at December 31, 2010	$ 356

(a) Confirm that the implicit discount rate for Verizon's capital leases is 5.01%.

N	0	1	2	3	4	5	6	7	8	9
Amount	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
IRR	Answer %

(b) What effect does the failure to capitalize operating leases have on Verizon's balance sheet? Over the life of its leases, what effect does this lease classification have on net income?

There is no effect on the balance sheet and income statement as a result of the classification of leases.

Total assets and total liabilities are higher than if the operating lease had been classified as a capital lease. Over the lease term, total rent expense under operating leases will be equal to the interest and depreciation expense that the company would record under capital leases.

Total assets and total liabilities are lower than if the operating lease had been classified as a capital lease. Over the lease term, total rent expense under operating leases will be equal to the interest and depreciation expense that the company would record under capital leases.

Total assets and total liabilities are lower than if the operating lease had been classified as a capital lease. Over the lease term, total rent expense under operating leases will be greater than the interest and depreciation expense that the company would record under capital leases.

1.00 points out of 1.00

(c) Compute the present value of Verizon's operating leases, assuming an 5.01% discount rate and rounding the remaining lease term to 3 decimal places. (Use a financial calculator or Excel to compute. Do not round until your final answers. Round each answer to the nearest whole number.)

($ millions)	Present Value
Year 1	Answer
Year 2	Answer
Year 3	Answer
Year 4	Answer
Year 5	Answer
After 5	Answer
Total*	Answer

* (Use subsequent rounded answers for calculation.)

Which of the following statements best describes how we might use this additional information in our analysis of the company?

To assess the company's financial condition and performance, we might add the present value of its operating leases to both operating assets and nonoperating liabilities. No adjustment is necessary for the income statement.

To assess the company's financial condition and performance, we might add the sum of the contractual payments under the operating leases to both assets and nonoperating liabilities, and we can replace rent expense with the depreciation of the lease assets and the interest on the lease liability.

To assess the company's financial condition and performance, we might add the present value of its operating leases to both operating assets and nonoperating liabilities, and we can replace rent expense with the depreciation of the lease assets and the interest on the lease liability.

Verizon's balance sheet and income statement are prepared in accordance with GAAP. No adjustments are necessary to evaluate the financial condition of the company.

1.00 points out of 1.00

Tying the Ratios Together

The DuPont equation shows the relationships among asset management, debt management, and

-Select-liquiditymarketprofitabilityCorrect 1 of Item 1 ratios. Management can use the DuPont equation to analyze ways of improving the firm's performance. Its equation is:

Ratio analysis is important to understand and interpret financial statements; however, sound financial analysis involves more than just calculating and interpreting numbers. -Select-QuantitativeQualitativeForeignCorrect 2 of Item 1 factors also need to be considered.

Quantitative Problem: Rosnan Industries' 2014 and 2013 balance sheets and income statements are shown below.

Balance Sheets:
	2014	2013
Cash and equivalents	$60	$45
Accounts receivable	275	300
Inventories	375	350
Total current assets	$710	$695
Net plant and equipment	2,000	1,490
Total assets	$2,710	$2,185

Accounts payable	$150	$85
Accruals	75	50
Notes payable	110	135
Total current liabilities	$335	$270
Long-term debt	450	290
Common stock	1,225	1,225
Retained earnings	700	400
Total liabilities and equity	$2,710	$2,185

Income Statements:
	2014	2013
Sales	$2,000	$1,500
Operating costs excluding depreciation	1,250	1,000
EBITDA	$750	$500
Depreciation and amortization	100	75
EBIT	$650	$425
Interest	62	45
EBT	$588	$380
Taxes (40%)	235	152
Net income	$353	$228

Dividends paid	$53	$48
Addition to retained earnings	$300	$180

Shares outstanding	100	100
Price	$25.00	$22.50
WACC	10.00%

What is the firmâs 2014 current ratio? Round your answer to two decimal places.

The 2014 current ratio indicates that Rosnan has -Select-insufficientsufficientCorrect 1 of Item 3 current assets to meet its current obligations as they come due.

What is the firmâs 2014 total assets turnover ratio? Round your answer to four decimal places.

Given the 2014 current and total assets turnover ratios calculated above, if Rosnanâs 2014 quick ratio is 1.0 then an analyst might conclude that Rosnanâs fixed assets are managed -Select-efficientlyinefficientlyCorrect 1 of Item 4.

What is the firmâs 2014 debt-to-capital ratio? Round your answer to two decimal places.
%

If the industry average debt-to-capital ratio is 30%, then Rosnanâs creditors have a -Select-smallerbiggerCorrect 1 of Item 5 cushion than indicated by the industry average.

What is the firmâs 2014 profit margin? Round your answer to two decimal places.
%

If the industry average profit margin is 12%, then Rosnanâs lower than average debt-to-capital ratio might be one reason for its high profit margin.
-Select-TrueFalseCorrect 1 of Item 6

What is the firmâs 2014 price/earnings ratio? Round your answer to two decimal places.

Using the DuPont equation, what is the firmâs 2014 ROE? Round your answer to two decimal places.
%

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Accounting ACCT 2610 Lecture Notes - Lecture 16: Government Debt, Finance Lease, Operating Lease

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