answwer these problems

Problem 1 (20 Points)

1. Short-term obligations can be reported as long-term liabilities if:

A. The firm has a long-term line of credit

B. The firm has tentative plans to issue long-term bonds

C. The firm intends to and has the ability to refinance as long-term

D. The firm has the ability to refinance on a long-term basis

2. When Bonds are retired prior to their maturity date:

A. GAAP has been violated

B. The issuing company probably will report an ordinary gain or loss

C. The issuing company probably will report an extraordinary gain or loss

D. The issuing company will report a non-operating gain or loss

3. Which one of the following contingencies requires financial statement disclosure:

A. A lawsuit that the firm’s attorneys believe will be dropped

B. A lawsuit that the firm’s attorneys believe will probably be settled for $75,000

C. A reasonably possible loss on a lawsuit that the firm’s attorneys cannot estimate the loss

D. A reasonably possible loss on a lawsuit that the firm’s attorneys believe will be settled for $100,000

4. When the total expenses over the life of an operating lease are compared to the total expenses over the life of a capital lease, one will find that:

A. The expenses of a capital lease are greater than the expenses of the operating lease

B. The expenses of the capital lease and operating lease are equal

C. The expenses of an operating lease are greater that the expenses of a capital lease

D. No meaningful comparison can be made

5. What is the major reason that firms seek to classify leases as operating rather than capital?

A. Operating leases are less costly and improve the company’s profitability throughout the life of the lease

B. Operating leases improve the company’s balance sheet

C. Operating leases are easier to obtain

D. Capital leases hurt cash flow

6. The smoothing of pension expense is

A. Unethical and not allowed by GAAP

B. Allowed through amortization and deferral to prevent volatility in earnings

C. Not allowed by GAPP if the sole purpose is to prevent earnings volatility

D. Illegal and prohibited by the SEC

7. Analysts prefer the indirect method for the preparation of the cash flow statement because the size and direction of the items reconciling net income and net cash flow from operating activities provide a yardstick for measuring the

A. Current ratio

B. Return on assets

C. Quality of earnings

D. Rate of dividends

8. The denominator used in the calculation of basic earnings per share is the 

A. Number of common shares outstanding at the end of the year.

B. Number of preferred shares outstanding at the end of the year.

C. Weighted average number of common shares outstanding during the year.

D. Weighted average number of common shares and preferred shares outstanding during the year.

9. Affymetrix, Inc., reported a net gain of $79,000 on its foreign assets due to the weakening of the U.S. dollar in 2011. In the same year, the company disclosed unrealized gains of $2,271,000 on its available-for-sale securities and a $211,000 unrealized gain on its trading securities. The company also reported a $1,710,000 loss on the sale of some equipment.

Which of the following best describes the impact of these transactions on Affymetrix, Inc.’s accounts?

A. $ 851,000 increase to net income.

B. $2,350,000 increase to accumulated other comprehensive income.

C. $2,350,000 increase to net income.

D. $2,561,000 increase to accumulated other comprehensive income.

10. Daisy and Company announces a large stock dividend of 73% of the 2.4 million outstanding shares of common stock. The current price per share is $7.89. Par value of the stock is $0.01 per share. What effect does this dividend have on retained earnings?

A. $24,000 decrease

B. $17,520 decrease

C. $18,936,000 decrease

D. $13,823,280 decrease

Problem 2 (12 Points)

Merck & Co. included the following footnote in its 2011 annual report:

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 $25 million in 2011, $16 million in 2010 and $17 million in 2009, and are estimated at $93 million in the aggregate for the years 2012 through 2016. These amounts do not consider potential recoveries from other parties. The Company has taken an active role in identifying and providing for these costs and, in management’s opinion, the liabilities for all environmental matters, which are probable and reasonably estimable, have been accrued and totaled $171 million at December 31, 2011. Although it is not possible to predict with certainty the outcome of these environmental 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 $133 million in the aggregate. Management also does not believe that these expenditures should have 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, 2011, how much were these liabilities?

b. How does Merck account for environmental liabilities that are reasonably possible? At December 31, 2011, how much were these liabilities?

c. The footnote mentions $171 million and $93 million as estimated future expenditures. Explain what each of these amounts represents and why they differ.

Problem 3 (13 Points)

The Squash Company's shareholders' equity on January 1, 2012 was $3,125,500. During 2012, Squash Company reported the following: Net income of $575,325. Declared cash dividends totaling $125,000; the dividends had not been paid as of December 31, 2012. Issued 10,000 shares of $5 par value common stock at $9 per share. Purchased 5,000 shares of its common stock for $9.75 per share; the shares are being held as treasury shares. Sold 1,500 shares of treasury stock for $9.25 per share. Issued 2,000 shares of $5 par value common stock resulting from the declaration of a stock dividend during 2012; the market value of the common stock on the date of declaration was $10.25 per share.

What was shareholders' equity as of December 31, 2012? (Show all of your calculations)

Problem 4 (12 Points)

The following are excerpts from the 2011 annual report of Valero Energy. Use the information to answer the requirements.

Components of income tax expense (benefit) related to continuing operations were as follows (in millions):

The significant components of deferred tax assets and liabilities were as follows (in millions):

Required:

a. What income tax expense does Valero Energy report in its 2011 income statement? How much of this expense is currently payable?

b. Valero Energy reports deferred tax liabilities related to “Property, plant and equipment.” Describe how these liabilities arise. How likely is it that these liabilities will be paid? Specifically, describe a scenario that will (i) defer these taxes indefinitely, and (ii) will result in these liabilities requiring payment within the near future.

c. Valero Energy reports deferred tax assets from net loss carry forwards. Explain how these arise and how they will result in a future benefit.

Problem 5 (10 Points)

Hewlett Packard reports the following operating lease payments in its 2011 annual report.

a. What did HP report on its 2011 balance sheet related to these operating leases?

b. Calculate the lease-related liabilities that are potentially missing from HP’s 2011 balance sheet. Assume a discount rate of 6.3%. Further assume that payments made after 2015 are made in 1 equal installment.

Problem 6 (12 Points)

The following pension information was disclosed by PACCAR Inc in its 2011 annual report:

Required:

a. What is “service cost”? How does it affect PACCAR’s total pension expense for the year?

b. PACCAR reports an actuarial loss of $259.1 million for 2011. What is this loss and how does PACCAR account for it?

c. How much did PACCAR contribute to the pension plan during the year?

d. Explain the funded status of the pension plan in 2011 and compare it to the funded status in 2010. Are these amounts significant?

Problem 7 (12 Points)

A) Many companies buy back their outstanding stock on an annual basis. List several reasons a company might want to repurchase shares of its stock, as well as the financial statement effects of this action.

B) What is a stock split? Why do firms split their stock? How is the stockholders’ equity section impacted by a stock split?

Problem 8 (9 Points)

You are a pension fund manager looking for an investment that will provide a reliable stream of income over the next 10 years. You want to find the best yield possible while still conforming to the pension fund covenant of investing in investment grade bonds or better. Decide among the following investment options for your fund.

a. Terrific Cable Company: 10 years, 11% yield, EBIT Interest Coverage ratio = 4.2, EBITDA interest coverage ratio = 6.1, total debt of $100,000,000 (all of which is long term), total equity of $250,000,000, and a return on equity (ROE) of 8.3%.

b. Fairfield Nuclear Weapons: 10 years, 17% yield, EBIT Interest Coverage ratio = .78, EBITDA interest coverage ratio = 1.2, total debt of $55,000,000, total equity of $80,000,000, and a return on capital (ROE) of 8.2%.

c. HighTech Technology: 10 years, 5% yield, EBIT Interest Coverage ratio = 23.0, EBITDA interest coverage ratio = 31.0, total debt of $100,000,000 (all of which is long term), total equity of $2,500,000,000, and a return on equity (ROE) of 22.0%.

The table below shows the three-year median ratios for U.S. Industrials with long-term debt. Use the table to discuss the pros and cons of each investment option, described above. Determine the grade of each bond (as closely as you can). Which bond is appropriate for your pension fund?