Chapter 9 - Chapter 9 Reporting and Analyzing Liabilities...

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©Cambridge Business Publishers, 2011 Solutions Manual, Chapter 9 9-1 Chapter 9 Reporting and Analyzing Liabilities Learning Objectives – coverage by question Mini- exercises Exercises Problems Cases LO1 Identify and account for current operating liabilities. 18, 22, 30 36, 37, 38, 49 61 LO2 – Describe and account for current nonoperating (financial) liabilities. 18 49 61 LO3 – Explain and illustrate the pricing of long-term nonoperating liabilities. 19, 28, 29, 31, 34, 35 40, 43, 44, 45, 46, 47, 48, 50 51, 52, 53, 54, 55, 56, 57, 58, 59, 60 62, 63 LO4 – Analyze and account for financial statement effects of long-term nonoperating liabilities. 17, 20, 21, 23, 24, 25, 26, 31, 33, 34 39, 42, 43, 44, 45, 47, 48, 49, 50 51, 52, 53, 54, 55, 56, 57, 58 61, 62, 63 LO5 – Explain how solvency ratios and debt ratings are determined and how they impact the cost of debt. 20, 27, 32 41 51 62, 63
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©Cambridge Business Publishers, 2011 Financial Accounting, 3rd Edition 9-2 QUESTIONS Q9-1. 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. Q9-2. 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. Q9-3. 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. Q9-4. Bonds sold at face (par) value earn an effective interest rate equal to the bonds’ coupon rate. Bonds are sold at a discount when the effective interest rate is higher than the coupon rate. Bonds are sold at a premium when the effective interest rate is lower than the coupon rate. Q9-5. 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.‖ If the bonds are refunded (that is, replaced with new bonds reflecting
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This note was uploaded on 08/16/2011 for the course ECON 300 taught by Professor Laren during the Spring '11 term at Missouri State University-Springfield.

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Chapter 9 - Chapter 9 Reporting and Analyzing Liabilities...

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