Chapter 11 Solutions
1 - 4, 9, 11, 12, 15, 16, 21, 22
5, 7, 8, 10, 13, 14, 17, 18, 20, 23, 24
6, 19, 25
Interest expense = 12% x $10,000 (beginning balance of
lease obligation) = $1,200.
(ii) The lease obligation will be reduced by $100 ($1,300 -
$1,200) leaving an obligation of $9,900.
Cash from Operations will be reduced by the
interest payment of $1,200. Cash from investing
activities will not be affected. (However, the firm
will report the capital lease as a “noncash investment
and financing activity.” Cash from financing will be
reduced by the amount of the principal payment of
(iv) Under an operating lease there is no lease obligation
on the balance sheet. The only effect on income is
Rent Expense of $1,300. Similarly, CFO is reduced by
$1,300. (CFI and CFF are not affected).
In a take-or-pay arrangement, a company contracts to
buy or pay for a certain amount of a supplier’s
commodity at a predetermined price over a stated time
period. The company, by entering the contract, incurs
an economic liability. However, since it is only a
contract, no accounting liability is recorded on the
balance sheet – it is off balance sheet.
(ii) In a sale of receivable, a company “sells” its
receivables to a third-party, usually a financial
institution. Typically, the sale is made at a
discounted price from the face value and the seller
may retain some or all of the default risk. The sale,
in substance, is a financing arrangement with the
receivables being used as collateral. However, under
GAAP, the transaction is treated as a sale and the
debt does not appear on the balance sheet.
(iii)A joint venture represents an investment of 50% or
less by one company (the “investor”) in another
company. Under GAAP, since ownership is not over 50%,
the assets and liabilities of the joint venture need