ch10 - CHAPTER 10 INTRODUCTION TO LIABILITIES: ECONOMIC...

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Unformatted text preview: CHAPTER 10 INTRODUCTION TO LIABILITIES: ECONOMIC CONSEQUENCES, CURRENT LIABILITIES, AND CONTINGENCIES BRIEF EXERCISES BE101 a. Dividends declared during a year and the actual cash paid for dividends during the year may be different because dividends declared includes dividends that are accrued but not paid as of year end. The cash paid for dividends will include all payments that relate to dividends during the year, regardless of when those dividends were recognized in the financial statements. b. Dividend payable is a short term liability because it represents dividends that will have to be paid within the next 12 months as of the balance sheet date. c. Dividend payable 12/31/02 $ 808.4 million + Dividends declared 2003 3,264.7million Dividends paid during 2003 (3,250.4 ) million Dividend payable 12/31/03 $ 822.7 million BE102 a. Calculation of inventory purchases during 2003: Inventory @ 12/31/02 $ 4,760 million + Purchases - 2003 x Inventory @ 12/31/03 (5,343 ) million Cost of Goods Sold 2003 $ 31,790 million x = 32,373.................................................................................. Inventory (+A)........................................................................................ 32,373 Accounts Payable (+L).............................................................. 32,373 Record inventory purchases made during 2003. b. Calculation of payments made to suppliers during 2003: Accounts Payable @ 12/31/2002 $ 4,684 million + 2003 Inventory Purchases 32,373 million Accounts Payable @ 12/31/2003 (5,448 ) million Payments made to suppliers during 2003 $31,609 million Accounts Payable (-L)...................................................................... 31,609 Cash (-A)................................................................................... 31,609 Record cash paid to suppliers during 2003. BE103 a. Assets = Liabilities + Stockholders Equity 1 $0 = +$400 + $400 The accrual for litigation in 2003 increased the liabilities and reduced retained earnings. The retained earnings were reduced because net income was reduced by this expense. b. Monsanto is actually following a couple of accounting principles with this expense. By recording contingency losses, the company is following the conservatism principle and the matching principle (taking the expense in the time period in which related revenues were recorded). EXERCISES E101 a. A 12% annual discount rate is equivalent to a daily discount rate of .03288%. Present value = $40,000 [(1 + .0003288) -10 ] = $40,000 .99672 = $39,868.80 b. Although present value probably provides a better economic measure of a company's liabilities than is provided by the liabilities' face value, accounts payable are carried on the balance sheet at their face value. This is due to both materiality and cost/benefit considerations. Because payables are usually paid off relatively quickly, the difference between the present value of a payable and its face value will be quite small (in the problem, the difference is only $131.20). payable and its face value will be quite small (in the problem, the difference is only $131....
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This note was uploaded on 03/25/2009 for the course FIN FIN504 taught by Professor Byungjinkwak during the Spring '09 term at Korea Advanced Institute of Science and Technology.

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ch10 - CHAPTER 10 INTRODUCTION TO LIABILITIES: ECONOMIC...

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