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Unformatted text preview: 9-1Odd-numbered SolutionsCHAPTER 9LIABILITIES: INTRODUCTIONQuestions, Short Exercises, Exercises, Problems, and Cases: Answers and Solutions9.1See the text or the glossary at the end of the book.9.3The expected value of the liability is $90,000 in both cases (.90X $100,000 =$90,000; .09X $1X 1,000,000 = $90,000). Accounting would probably reportthe liability from the lawsuit as $100,000 and the liability for the coupons as$90,000. This inconsistency seems curious since the two situations differonly with respect to the number of possible outcomes (that is, all or nothingwith respect to the lawsuit, whereas the coupon redemption rateconceivably ranges from one to one million).9.5The Parker School should accrue the salary in ten monthly installments of$360,000 each at the end of each month, September through June. It willhave paid $300,000 at the end of each of these months, so that by the end ofthe reporting year, it reports a current liability of $600,000 [= $3,600,000 (10X$300,000)].9.7It is cheaper (and, therefore, more profitable) to repair a few sets than tohave such stringent quality control that the manufacturing processproduces zero defectives. An allowance is justified when firms expect tohave warranty costs. Manufacturers of TV sets for use on space ships orheart pacemakers should strive for zero defects.9.9The coupon rate and par value of the bonds, the market rate of interest, andthe market's opinion of the firm as a borrower. If the coupon rate is 8percent, the market rate is 12 percent and the market views the firm as arelatively poor credit risk, the bonds will sell at a price to yield say, 15percent. This means that the firm will receive less than the par value of thebonds it issues. We are told that when bonds are brought to the market, theinvestment banker attempts to set the coupon rate so the bonds will sellclose to par.9.11Generally, accountants initially record assets at acquisition cost and thenallocate this amount to future periods as an expense. Changes in themarket value of most assets (except for use of the lower-of-cost-or-marketmethod for inventories; the market value method for marketable securitiesand investments in securities; and impairments) do not appear in theaccounting records. Similarly, using the market interest rate at the time ofOdd-numbered Solutions9-29.11 continued.issue to account for bonds results in an initial liability equal to the amount ofcash received and a subsequent liability that reflects amortization of thisinitial amount. Changes in the market value of bonds do not appear in theaccounting records.9.13Zero coupon bonds offer no cash payments to the investor until maturity.The issuer benefits by delaying cash payments. The issuer also gets a taxdeduction for interest expense (that is, amortization of bond discount) duringthe period the bonds are outstanding even though it has no immediate cashoutflow for interest. The investor locks in a yield at the time of purchase....
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This note was uploaded on 05/31/2008 for the course ORIE 310 taught by Professor Callister during the Fall '07 term at Cornell University (Engineering School).
- Fall '07