ACC 151 Lecture Notes - Lecture 9: Current Asset, Current Liability, Book Value

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19 Jan 2016

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Document Summary

Acc 151 - lecture - short-term investments and receivables. To be classified as a current asset, an investment must meet both of the following criteria: Must be liquid (easily convertible to cash) Convert to cash within one year or. Current operating cycle, whichever is longer or use it to pay a current liability. Otherwise, the interest is classified as a long-term asset. Debt (bonds, notes, etc. ) or equity stock. Expected to be sold within the near term through active trading. Generate income or losses on a day-to-day basis through changes in their prices. Held with intent of selling some time in the future. Not classified as either trading or held-to-maturity. Debt securities bonds, notes, or other instruments with established maturity dates. Investor has intent and ability to hold until they mature. Trading securities are reported on the balance sheet at current fair (market) value. Occurs only when the investor sells an investment.

Related Questions

Kroshka Holdings Corporation has several investments in debt and equity securities of other companies:

1. 10-year BCE bonds, intended to be held for the duration of the bonds

2. 10-year GE bonds, intended to be sold if interest rates go down

3. 5-year Government of Canada bonds, intended to be sold if cash is needed

4. A 180-day treasury bill

5. Bank of Montreal preferred shares, purchased for the dividend income

6. TMX common shares, purchased to sell in the near term at a profit. These shares are part of an investment portfolio that is actively traded.

Instructions:

a) Indicate whether each of the above investments is a passive or strategic investment

b) Indicate whether each of the above investments would be classified as a short-term (current assest) of long-term investment on Kroshka Holdings' balance sheet.

c) For each investment that you classified as passive in (a), indicate whether it is a held-for-trading, available-for-sale, or held-to-maturity security.

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1. All of the following are characteristics of currentliabilities except:

a. they may involve estimated amounts. b. they are due withinone year or within the operating cycle, whichever is longer. c.they may be replaced with a new short-term liability rather thanbeing paid in cash. d. all three of the above are characteristic ofcurrent liabilities.

2. Which of the following is an example of a contingentliability?

a. A corporate long-term employment contract with the chiefexecutive officer. b. A lawsuit pending against a restaurant chainfor improper preparation of food. c. A liability for notes payablewith interest included in the face amount. d. The liability forfuture warranty repairs on computers sold during the currentperiod

. 3. A company will have to pay a $50,000 liability in 4 years.How much must be deposited now into a bank account earning 8%compounded semiannually to fully fund the future payment? HINT: PVof $1 The solution to this problem requires time value of moneycalculations. Reference to Tables 9-1 through 9-4 in the text isnecessary to complete the calculations.

a. $35,500 b. $36,535 c. $36,665 d. $34,000

4. On October 1, Lawrence Company borrowed $60,000 from FourthNational Bank on a 1-year, 7% note. If the company's fiscal yearends as of December 31, Lawrence should make an entry toincrease

a. interest payable, $1,050. b. prepaid interest, $3,150. c.notes payable, $1,050. d. interest expense, $4,200.

5. Warranty expenses are the result of the selling companyâsestimate of the number of units sold during the current year thatmay become defective and need repair or replacement during thewarranty period.

a. True b. False

6. Estimated liability for product warranties to be paid in thefuture is a long term liability.

a. True b. False

7. The future value of equal semi-annual payments of $500 at 8%compounded semiannually for 4 years is HINT: FV of Annuity of $1The solution to this problem requires time value of moneycalculations. Reference to Tables 9-1 through 9-4 in the text isnecessary to complete the calculations.

a. $ 868 b. $9,320 c. $2,000 d. $4,607

8. What is the correct classification of the account: Discounton Notes Payable?

a. a revenue b. a contra liability c. an asset d. an expense

9. If the annual interest is 12%, but the compounding is donequarterly, then the interest rate is 3% per period.

a. True b. False

10. A convertible bond is one where a. the issuer can convertfrom

a fixed interest rate to a floating one. b. the issuer canconvert it from long-term to short-term. c. the issuer can retirethe bond before its specified due date. d. the holder can convertthe bond into common stock at a future time.

11. Which of the following statements regarding serial bonds istrue?

a.They are likely to be issued by food companies.

b. They have shorter lives than term bonds.

c.They are strongly backed by the issuer's collateral.

d. The bonds do not all mature on the same date.

12. Bonds are a popular source of financing because

a.bond interest expense is deductible for tax purposes, whiledividends paid on stock are not.

b. financial analysts tend to downgrade a company that hasraised large amounts of cash by frequent issues of stock.

c. a company having cash flow problems can postpone payment ofinterest to bondholders.

d. the bondholders can always convert their bonds into stock ifthey choose.

13. When determining the amount of interest to be paid on abond, which of the following information is not necessary?

a.The face amount of the bonds

b. The selling price of the bonds

c.The face rate of interest on the bonds

d. The length of the interest period, annually or semiannually14. Which of the following statements is correct?

a.Bonds are issued at a price that reflects the stated rate ofinterest on the day the bond is purchased.

b. If the face rate of interest on a bond is not equal to themarket rate of interest, then the company desiring to issue thebonds must reprint its bond certificates.

c.The actual issue price of a bond represents the present valueof all future cash flows related to the bond.

d. The market rate of interest has no bearing on the sellingprice of the bonds.

15. Endeavor Company issued 20-year bonds with a coupon rate of6% when the market rate of interest was 9%. This means that thebonds were issued

a.at a premium. b. at a discount. c.at the face value. d. withan additional 3 years of interest.

16. Which of the following statements regarding leases isfalse?

a. Lease agreements are a popular form of financing the purchaseof assets because leases do not require a large initial outlay ofcash.

b. Accounting recognizes two types of leases--operating andcapital leases.

c. If a lessor classifies a lease as a capital lease, then thelessee records a lease liability on its balance sheet.

d. If a lease is classified as an operating lease, the lesseerecords a lease liability on its balance sheet.

17. Which of the following accounts would not appear on thebalance sheet of a lessee company recording a capital lease?

a. Accumulated depreciation on the leased asset

b. Lease obligation in the current liability section

c. Lease obligation in the long-term liability section

d. Rent expense on the income statement

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