SolutionsModule8 - Module 7 Reporting and Analyzing...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Module 7 Reporting and Analyzing Nonowner Financing QUESTIONS Q7-1. Current liabilities are obligations that require payment within the coming year or operating cycle, whichever is longer. Generally, current liabilities are normally settled with use of existing current assets or operating cash flows. Q7-2. An accrual is the recognition of an event in the financial statements even though no actual transaction has occurred. Accruals can involve both liabilities (and expenses) and assets (and revenues). Accruals are vital to the fair presentation of the financial condition of a company as they impact both the recognition of revenue and the matching of expense. Q7-3. The coupon rate is the rate specified on the face of the bond. It is used to compute the amount of cash interest paid to the bond holder. The market rate is the rate of return expected by investors that purchase the bonds. The market rate determines the market price of the bond. It incorporates expectations about the relative riskiness of the borrower and the rate of inflation. In general, there is an inverse relation between the bond’s market rate and the bond’s market price. Q7-4. Bonds sold at face (par) value earn an effective interest rate equal to the bonds’ coupon rate. Bonds sold at a discount causes the effective interest rate to be higher than the coupon rate. Bonds sold at a premium causes the effective interest rate to be lower than the coupon rate. ©Cambridge Business Publishers, 2006 Solutions Manual, Module 7 7-1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Q7-5. Bonds are reported at historical cost, that is, the face amount plus (minus) unamortized premium (discount). The market price of the bonds varies inversely with the level of interest rates and fluctuates continuously. Differences between the market price of a bond and its carrying amount represent unrealized gains and losses. These unrealized gains (losses) are not reflected in the financial statements (although they are disclosed in the footnotes). They must be recognized upon repurchase of the bonds, the point at which they become “realized.” The recognition of the gain (loss) on the redemption results from the use of historical costing for bonds. The gain (loss) that is reported upon redemption will be offset by correspondingly lower (higher) interest payments in the future. The present value of these future interest payments, as well as the present value of the difference between the current face amount of the bond and the former face amount, are not recognized. These present values exactly offset the reported gain (loss), and no “real” gain (loss) has been realized. Q7-6. Debt ratings reflect the relative riskiness of the borrowing company. This riskiness relates to the probability of default (e.g., not repaying the principal and interest when due). Higher (greater quality) debt ratings result in higher market prices for the bonds and a correspondingly lower effective interest rate for the issuer. Lower (lesser quality) debt ratings result in lower market prices for the bonds and a
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 25

SolutionsModule8 - Module 7 Reporting and Analyzing...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online