ch14solutions - Chapter 14 Financing with Debt QUESTIONS 1....

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Chapter 14 Financing with Debt QUESTIONS 1. In order to recognize a liability, a company need not know the actual recipient of the assets that are to be transferred or for whom the services are to be performed. For example, a company that provides warranties doesn’t know the particular customers that will request warranties in the future, but a liability still needs to be recorded. 2. Current liabilities are obligations expected to be satisfied within one year of the balance sheet date. Long-term liabilities are obligations that will be satisfied in a period longer than one year from the balance sheet date. The distinction between current and long-term liabilities is important because of the impact on a company’s current ratio. The current ratio is a measure of a company’s ability to meet current obligations. 3. Warranties exist but the exact amount is not measurable. The amount of the liability must be estimated. Environmental cleanup liabilities exist but sometimes cannot even be reliably estimated. 4. Some companies include short-term borrowing as a permanent aspect of their overall financing mix. In such a case, the company often intends and has ability to renew, or roll over, its short-term loans as they become due. As a result, a short-term loan can take on the nature of a long-term debt since, with the refinancing, the cash payment to satisfy the loan is deferred into the future. As of a balance sheet date, if a company has a firm agreement with a lender and intends to refinance a short-term loan, the loan is classified in the balance sheet as a long-term liability. 5. A line of credit is a negotiated arrangement with a lender in which the terms are agreed to prior to the need for borrowing. When a company finds itself in need of money, an established line of credit allows the company access to funds immediately without having to go through the credit approval process. 6. In reporting long-term debt obligations, the emphasis is on reporting what the real economic value of the obligation is today, not what the total debt payments will be in the future. The sum of the future cash payments to be made on a long-term debt is not a good measure of the actual economic obligation. Because the cash outflows associated with a long-term liability extend far into the future, present value concepts must be used to properly value the liability. 7. Because of the relatively short time period (less than one year), current liabilities do not need to be present-valued because the sum of future cash payments approximates the real economic value today. 8. An annuity is a series of cash flows of equal amounts at equal time intervals. These cash flows can either be paid or received. 9.
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This note was uploaded on 09/14/2008 for the course ACCT 410x taught by Professor Bonner during the Spring '06 term at USC.

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ch14solutions - Chapter 14 Financing with Debt QUESTIONS 1....

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