Chapter 3 solutions part 2

Chapter 3 solutions part 2 - Brett Basnight 5 The...

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Brett Basnight 5 The accounting for convertibility and warrants impacts income and equity as follows: a. The convertible feature is attractive to investors. As a result, the debt will be issued at a slightly lower interest rate and the resulting interest expense is less (and conversely, equity is increased). Also, diluted earnings per share is reduced by the assumed conversion. At conversion, a gain or loss on conversion may result when equity instruments are issued. b. Similarly, warrants attached to bonds allow the bonds to pay a lower interest rate. As a result, interest expense is reduced (and conversely, equity is increased). Also, diluted earnings per share is affected because the warrants are assumed converted. 18. Property, plant, and equipment can be financed by having an outside party acquire the facilities while the company agrees to do enough business with the facility to provide funds sufficient to service the debt. Examples of these kinds of arrangements are through-put agreements, in which the company agrees to run a specified amount of goods through a processing facility or "take or pay" arrangements in which the company guarantees to pay for a specified quantity of goods whether needed or not. A variation of the above arrangements involves the creation of separate entities for ownership and the financing of the facilities (such as joint ventures or limited partnerships) which are not consolidated with the company's financial statements and are, thus, excluded from its liabilities. Companies have attempted to finance inventory without reporting on their balance sheets the inventory or the related liability. These are generally product financing arrangements in which an enterprise sells and agrees to repurchase inventory with the repurchase price equal to the original sales price plus carrying and financing costs or other similar transactions such as a guarantee of resale prices to third parties.
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Lucas Garber 19. In a defined contribution plan, the employer promises to currently contribute a fixed sum of money to the employee’s retirement fund, so it is the contribution that is defined. In a defined benefit plan, the employer promises to pay a periodic pension benefit to the employee after retirement (typically until death), so it is the benefit that is defined. The risk (or reward) of the investment performance in the former case is borne by the employee and in the latter by the employer. Accounting for defined contribution plans is simple: whenever a contribution is made it is recorded as an expense. Defined benefit plans’ accounting is complex and involves currently recording a liability based on future expected benefit payments and an asset to the extent the plan is funded. Pension expense in this case depends on the changes in pension obligation and the return on plan assets. 20.
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This note was uploaded on 07/02/2011 for the course FINA 470 taught by Professor Austin during the Spring '11 term at South Carolina.

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Chapter 3 solutions part 2 - Brett Basnight 5 The...

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