ACCTG311 Chapter Notes - Chapter 4: Accounting Period, Income Statement
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7. A company receiving a donated asset will record:
a. an increase in revenue
b. an increase in liabilities
c. a decrease in liabilities
d. an increase in revenue and a decrease in liabilities
8. Alamos Co. exchanged equipment and $17,500 cash for similar equipment. The book value and the fair value of the old equipment were $81,800 and $90,300, respectively.
Assuming that the exchange has commercial substance, Alamos would record a gain/(loss) of:
a.$0
b. $8,500
c. $26,000
d. $(8,500)
9. On January 1, 2018, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2019. Expenditures on the project were as follows:
| January 1, 2018 | $ | 200,000 | |
| September 1, 2018 | $ | 300,000 | |
| December 31, 2018 | $ | 300,000 | |
| March 31, 2019 | $ | 300,000 | |
| September 30, 2019 | $ | 200,000 | |
Kendall borrowed $750,000 on a construction loan at 12% interest on January 1, 2018. This loan was outstanding throughout the construction period. The company had $4,500,000 in 9% bonds payable outstanding in 2018 and 2019.
Average accumulated expenditures for 2018 was:
a. $300,000
b. $350,000
c. $500,000
d. $400,000
10. On January 1, 2018, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on September 30, 2019. Expenditures on the project were as follows:
| January 1, 2018 | $ | 323,000 | |
| September 1, 2018 | $ | 483,000 | |
| December 31, 2018 | $ | 483,000 | |
| March 31, 2019 | $ | 483,000 | |
| September 30, 2019 | $ | 323,000 | |
Dreamworld had $6,100,000 in 15% bonds outstanding through both years.
Dreamworld's capitalized interest in 2018 was:
a. $84,712
b. $48,450
c. $72,600
d. $96,900
11. Software development costs are capitalized if they are incurred:
a. Prior to the point at which technological feasibility has been established.
b. after commercial production has begun
c.After technological feasibility has been established but prior to the product availability date.
d. none of these answers
12.Cebrex Software began a new development project in 2017. The project reached technological feasibility on June 30, 2018, and was available for release to customers at the beginning of 2019. Development costs incurred prior to June 30, 2018, were $3,200,000 and costs incurred from June 30 to the product release date were $1,400,000. The economic life of the software is estimated at four years. For what amount will software be capitalized in 2018?
a. $0
b. $5,600,000
c. $1,400,000
d. $3,200,000
Excerpt from the multipage Note 7â¦
The Company is required to provide standby letters of creditto support certain obligations that arise in the ordinary course ofbusiness. Although the letters of credit are an off-balance sheetitem, the majority of obligations to which they relate arereflected as liabilities in the Consolidated Balance Sheet.Outstanding letters of credit totaled $211 million at December 31,2007.
The net book value of the assets pledged as collateral forthe Companyâs secured borrowings, primarily aircraft and engines,was $660 million at December 31, 2007.
As of December 31, 2007, aggregate annual principalmaturities of debt and capital leases (not including amountsassociated with interest rate swap agreements and interest oncapital leases) for the five-year period ending December 31, 2012,were $40 million in 2008, $42 million in 2009, $50 million in 2010,$44 million in 2011, $418 million in 2012, and $1.5 billionthereafter.
included Excerpted from Southwest Airlines, Inc. 10-K for yearended 12/31/2007
2007 2006 inmillions
7 7/8 % Notes due2007 $- -
French Credit Agreements due2012 32 37
6 ½ % Notes due2012 386 369
5 ¼ % Notes due2014 352 336
5 ¾ % Notes due2016 300 300
5 1/8 % Notes due2017 311 300
French Credit Agreements2017 94 100
Pass ThroughCertificates 480 --
7 3/8 % Debentures due2027 103 100
Capital Leases (note8) 52 63
2110 1705
Less Currentmaturities 41 16
Less debt discount and issuancecosts 19 16
$ 2050 1567
Here is a copy of the credit report by Fitch Ratings, Ltd. atSouthwestâs $385 million, 6.5% note issuance, duein 2012:
Ratings | |||||||
Maturity Date | Currency | Total Amount | Coupon Rate | Long-term | Short-term | CUSIP | ISIN |
01-MAR-2012 | USD | $385,000,000 | 6.5% | A | -- | 844741AV0 | US844741AV08 |
Here is a price quote on those same Southwest notes atthe date of issuance:
Ratings | Ticker | Description | Coupon | Maturity | YTC/YTM | Price |
Baa/A | LUV | Southwest Airls Co | 6.500 | 03-01-2012 | 7.450 | 97.29 |
1-4. What is the value of these notes at the 2007 balance sheetdate? Read the excerpt from
Note 10.
Prior to 2007, the Company had entered into interest rate swapagreements relating to its $385 million 6.5% senior unsecured notesdue 2012 and⦠Under each of these interest rate swapagreements, the Company pays the London InterBank Offered Rate(LIBOR) plus a margin every six months on the notional amount ofthe debt [what amounts to the market price of thedebt], and receives payments based on the fixedstated rate of the notes every six months until the date the notesbecome due [this is why it is called aswap]. Under the agreement related to its$385 million 6.5% senior unsecured notes due 2012, the averagefloating rate paid during 2007 is estimated to be 7.31 percentbased on actual and forward rates at December 31, 2007.
The primary objective for the Companyâs use of interest ratehedges is to reduce the volatility of net interest income by bettermatching the repricing of its assets and liabilities. The Companyâsinterest rate swap agreements qualify as fair value hedges, asdefined by SFAS 133. The fair values of the interest rate swapagreements, which are adjusted regularly, are recorded in theConsolidated Balance Sheet, as necessary, with a correspondingadjustment to the carrying value of the long-term debt. The fairvalue of the interest rate swap agreements, excluding accruedinterest, at December 31, 2007, was an asset of approximately $16million and is recorded in âOther deferred liabilitiesâ in theConsolidated Balance Sheet. In accordance with fair value hedging,the offsetting entry is an adjustment to increase the carryingvalue of long-term debt. See Note 7. [we will discuss theaccounting for fair value hedges (and cash flow hedges) inInternational Accounting]
1-5. So what has happened to the general trend of interest ratesbetween the date of issuance and the end of 2007? How can you tell?What was the market rate at issuance for notes of equivalentrisk?
1-6. Why might Southwest pay off these notes back beforematurity? What effect would a repurchase at the 12/31/07 marketrate (ignoring the interest rate swap) have on Southwestâs majorfinancial statements?
