QUESTION: 1873

A firm has entered into a long-term purchase obligation. This will allow the firm to obtain raw materials for operations at a known price over the next 6 years. This obligation must be reflected on the balance sheet as:

a current liability until the first purchase occurs.
a footnote disclosure.
none of these answers.
a long-term liability.

Answer(s): B

Explanation:

It is important to recognize that liabilities arise and are recognized on the balance-sheet only if the firm has consumed at least a part of the services or goods under the contract. Until then, a liability is not admitted since there is no corresponding asset or equity that has been generated (a similar principle holds for the recognition of assets). However, due to the bonding nature of the contract, it must be disclosed in footnotes along with the relevant details so that analysts can figure in the impact of all such agreements while evaluating the future health of the firm.

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QUESTION: 1874

Sparten, Inc., a plumbing contractor, received a check for $3,000 on June 29 for services to be performed in the following fiscal month. During the July accounting period, Sparten completed all but $500 of the job. What adjusting entry needs to be made at the end of July?

increase Unearned revenue and decrease cash for $500
debit Unearned Revenue and credit Revenue for $2,500
increase cash and revenue for $3,000
decrease accounts receivable and increase revenue for $2,500

Answer(s): B

Explanation:

When the check for was received on June 30, a liability was established for $3,000 because revenue could not be recognized until it was earned. During July, $2,500 of revenue was earned and should be recognized, along with a reduction (debit) to the Unearned Revenue account.

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QUESTION: 1875

The following data are taken from the AlphaBeta Company's financial statements ending Dec 31, 1990:

Increase in salaries payable 120
Decrease in accounts payable 45
Provision for bad debt 15
Depreciation 90
Interest paid 35
Proceeds from new bonds issued 225

Net Income 350
Tax rate 35%

What was AlphaBeta's operating cash flow in 1990?

Answer(s): D

Explanation:

In this case, OCF = 350 + 120 - 45 + 15 + 90 = 530. Proceeds from bond issue are part of financing cash flow, not of OCF. Note that tax rate is not relevant in the indirect method since it has already been factored into in the net income figure. Also, only non-cash items need to be adjusted.

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QUESTION: 1876

New Gestalt, Inc., a software firm had a net income of 1.7 million last year. It has 200,000 common shares and 300,000 convertible bonds with face value of 100 outstanding. The convertible bonds carry a coupon of 4% and can be converted one-for-one. The average stock price last year was 39 and the maximum price was 57. The effective interest rate on the convertible debt is 8%. New Gestalt issued 100,000 preferred shares with face value 100 and a coupon of 5% on March 31st of last year. Assume the convertible bonds are dilutive and that New Gestalt faces a 30% tax rate. Given the above, New Gestalt's Diluted EPS equals ________.

7.45
2.65
6.01
7.51

Answer(s): C

Explanation:

Diluted EPS = (Net Income - Preferred dividends + interest on convertibles net of taxes)/(weighted # of common shares assuming convertible conversion) In this case, numerator = 1.7 million - 375,000 + 300,000*8%*100*(1-30%) = 3,005,000. The denominator equals 200,000 + 300,000 = 500,000. Therefore, Diluted EPS = 6.01. Note that the interest expense on the convertible bond is calculated using the effective interest rate, not the coupon rate.

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QUESTION: 1873

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QUESTION: 1874

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QUESTION: 1876

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