pratt_8e_chapter_10_solns - CHAPTER 10 INTRODUCTION TO...

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CHAPTER 10 INTRODUCTION TO LIABILITIES: ECONOMIC CONSEQUENCES, CURRENT LIABILITIES, AND CONTINGENCIES BRIEF EXERCISES BE10–1 a. Dividends declared during a year and the actual cash paid for dividends during the year may be different because dividends declared includes dividends that are accrued but not paid as of year end. The cash paid for dividends will include all payments that relate to dividends during the year, regardless of when those dividends were recognized in the financial statements. b. Dividend payable is a short term liability because it represents dividends that will have to be paid within the next 12 months as of the balance sheet date. c. Dividend payable – 12/31/07 $ 831.1million + Dividends declared – 2008 3,250.4million Dividends paid during 2008 (3,278.5 ) million Dividend payable – 12/31/08 $ 803.0 million BE10–2 a. Calculation of inventory purchases during 2008: Inventory @ 12/31/07 $ 6,780 million + Purchases - 2008 x – Inventory @ 12/31/08 (6,705 ) million Cost of Goods Sold – 2008 $ 44,157 million x = $44,082 million .................................................................... Inventory (+A) ........................................................................................ 44,082 Accounts Payable (+L) .............................................................. 44,082 Record inventory purchases made during 2008. b. Calculation of payments made to suppliers during 2008: Accounts Payable @ 12/31/2007 $ 6,721 million + 2008 Inventory Purchases 44,082 million Accounts Payable @ 12/31/2008 (6,337 ) million Payments made to suppliers during 2008 $44,466 million Accounts Payable (-L) ..................................................................... 44,466 Cash (-A) ................................................................................... 44,466 Record cash paid to suppliers during 2008. 1
BE10–3 a. The accrual for litigation increased the liabilities and reduced stockholders’ equity (because of lowered profits due to the environmental expense). b. Monsanto is actually following a couple of accounting principles with this expense. By recording contingency losses, the company is following the conservatism principle and the matching principle (taking the expense in the time period in which related revenues were recorded). c. Environmental Liabilities | $ 272 25 | 15 | __ _|____ | $262 (Note: if $25 million was spent to reduce the liability in 2009, Monsanto would have accrued an additional $15 million in environmental remediation expenses in 2009 to show a decrease in the liability to the year-end value of $262 million.) BE10–4 a. The decrease in inventory indicates that Target sold more inventory than it purchased. Therefore, the inventory purchases were COGS – change in inventory ($44,157 – 77 = $44,080). If inventory purchases were made on account, then the $44,080 was credited to accounts payable during the year. If accounts payable decreased over the course of the year, Target must have paid more to suppliers than it purchased from them (reducing previous payables). Therefore, the cash paid to suppliers was Purchases + change in accounts payable ($44,080 + 389 = $44,469). b. The increase in Accounts Receivable and the decrease in Accounts Payable both represented “uses” of cash and therefore decreased Target’s cash flows. The decrease in Inventory was a “source” of cash and increased the company’s cash flows. EXERCISES E10–1 a. A 12% annual discount rate is equivalent to a daily discount rate of .03288%. Present value = $40,000 × [(1 + .0003288) -10 ] = $40,000 × .99672 = $39,868.80 b. Although present value probably provides a better economic measure of a company's

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