chapter 11 solution

chapter 11 solution - Chapter 11 Solutions Overview:...

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Unformatted text preview: Chapter 11 Solutions Overview: Problem Length Problem #s {S} 1 - 4, 9, 11, 12, 15, 16, 21, 22 {M} 5, 7, 8, 10, 13, 14, 17, 18, 20, 23, 24 {L} 6, 19, 25 1.{S}(i) 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. (iii) 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 $100. (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). 2.{S}(i) In a take-or-pay arrangement, a company contracts to buy or pay for a certain amount of a suppliers 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 11-1 not be consolidated with the parents assets and liabilities. Hence, any debt taken on by the joint venture remains off balance sheet even when the investor is liable for the debt. 11-2 3.{S} Effect of choice of interest rate on lessee: 9% versus 10% First Year Lease Term (i) Interest expense: Lower interest rate reduces interest expense. Lower Lower (ii) Amortization expense: Lower interest rate increases present value of minimum lease payments, creating higher asset amount to be amortized over lease term. Higher Higher (iii) Total lease expense: The net effect for the first year depends on the lease amounts; over the lease term, however, total expense equals total lease payments regardless of the choice of interest rate. Indeter minate Equal (iv) Cash from operations: Lower interest rate shifts expense from interest to amortization (see i and ii); as cash from operations is decreased only by interest expense, a decrease in interest expense increases CFO, both in the first year and over the leas term....
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chapter 11 solution - Chapter 11 Solutions Overview:...

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