...Quiz: * Case can go up by 200 Bp or down by 100 Bp * Treasury Bill matures at FV of $100 * 2 cents per bond commission on every transaction * T-Bill = rf * In cases no interest risk, default risk or liquidity risk. * T-Bill valuation Fair Value = 100/(1+current rfr)^weeks remaining/52 * Names * TB6M 6 month T-Bill * TB12M 12 Month T-Bill * 1YCP 10% coupon (semi-annual) 12 month T-bond * Accrued interest = (time since last coupon/312)*Coupon amount * Ex) purchase a bond 135 seconds in period 1 for 104.25 (clean price) * Accrued interest = (135/312)* (0.10/2 x 100) Security (Symbol) | End of 1st 6m period | End of 2nd 6m period | TB6M | $100 | | TB12M | $0 | $100 | 1YCP | $5 (0.10/2 x 100) | $105 | Endowment | $1000000 | Trading Period | 1 | Time | 312 | Time period | 6m | Compounding Interval | 1w(12sec) | RF | 7% | Per Interval Rfr | (1.07^1/52-1)*100 = 0.1302 | Endowment | $1000000 | Trading Peirods | 2 | Time | 312 (5min) | Time Period | 6m | Compounding Interval | 1w(12sec) | Rfr | FI2: * 7% period 1 * 9% period 2FI3 * 7% period 1 * 6% or 9% period 2 (up:200Bp, down:100Bp) * if rfr increase = T-bill increases | Per interval rfr | FI2: * (1.07^1/52-1)*100 = 0.1302 Period 1 * (1.09^1/52-1)*100 = 0.16959% Period 2FI3: * (1.07^1/52-1)*100 = 0.1302 Period 1 * (1.09^1/52-1)*100 = 0.16959% or (1.06^1/52-1)*100 = 0.1121% Period 2 |...
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...Quiz #1 – Part 2 1. Bonds are frequently issued at amounts greater or less than face value. Describe how the market interest rate, relative to the contractual interest rate, affects the selling price of bonds. Also explain the rationale for requiring an investor to pay accrued interest when a bond is purchased between interest payment dates. Type your answer here. Your answer should fit within this page. The market interest rate is usually different from the contractual interest rate. With that being said bonds are frequently issued at an amount higher than face value or could also be issued at an amount lesser than face value. When the market has a higher interest rate than the contractual rate, investors find other investments to contribute to which consequently makes that bond in less demand. To ensure bonds are more attractive to investors the issue price is lowered and bonds are sold at a discounted rate. If the market interest rate is less than the contractual rate there is greater demand for the bond because the interest rate is then higher. In this instance, the issue price would be greater than face value and the bonds are issued at a premium rate. Investors are required to pay interest accrued as it allows the issuer of the bond to make the same payment of interest to all bondholders on the same interest payment date. If this were not completed, the bond issuer would have to then determine the payment of interest to each bondholder based on aspects like how...
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...Exhibit 7 – 2 Lakeside Company Account 585, Estimated Bonus Expense, for Nine Months ended September 30, 2011 and 2012 |2011 Bonus Plan | | | | |STORE | | | | | |No.1 | |© |Computed Bonus Basis by subtracting rent and direct salary expense from GP | |® |The rate of the bonus basis was given | |§ |Computed bonus expense by X bonus basis by the given bonus % | (2) Comparison of Bonus Expense |Bonus Expense | | ...
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...What is a contingent liability? A contingent liability is a potential liability…it depends on a future event occurring or not occurring. For example, if a parent guarantees a daughter’s first car loan, the parent has a contingent liability. If the daughter makes her car payments and pays off the loan, the parent will have no liability. If the daughter fails to make the payments, the parent will have a liability. If a company is sued by a former employee for $500,000 for age discrimination, the company has a contingent liability. If the company is found guilty, it will have a liability. However, if the company is not found guilty, the company will not have an actual liability. In accounting, a contingent liability and the related contingent loss are recorded with a journal entry only if the contingency is both probable and the amount can be estimated. If a contingent liability is only possible (not probable), or if the amount cannot be estimated, a journal entry is not required. However, a disclosure is required. When a contingent liability is remote (such as a nuisance suit), then neither a journal nor a disclosure is required. A product warranty is often cited as a contingent liability that is both probable and can be estimated. What is the difference between a contingent liability and an estimated liability? A contingent liability is a potential liability (and a potential loss). It is dependent upon a future event occurring or not occurring. For instance...
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...1. What is the distinction between expenditures and expenses as the terms are used in governmental accounting? a. The distinction between expenditures and expenses is dependent upon GASB. Expenditures are defined as decreases in net financial resources. Expenses are defined as outflows or expirations of assets or the incurrence of liabilities during a period. 2. Using the summary table at the end of chapter 5 as well as the more specific information within the chapter, explain how and when each of these expenses/expenditures would be reported in the fund statements and the government-wide statements prepared on Dec. 31, 2012. Assume all take place within the general fund. a) Using the accrual method your government determined that employees had earned a total of $25,000 unused vacation pay by the end of 2012. Of this amount, 60% would be used during the 2013 fiscal year. Vacation pay expense 25,000 Wages Payable 15,000 Accrued vacation pay 10,000 The leftover vacation pay from 2012 will be accrued to be paid in the next year and shown by the accrued vacation pay account. b) Pension expense totaled $100,000 for 2012 when computed according to FASB standards for accrual accounting. Your government has made payments into the plan totaling $100,000 this year. Pension expenditure 100,000 Pension liability 100,000 This shows the payment amount into the pension fund as based on actuarial determinations not merely the amounts...
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...Accounts receivable 92,800 33,000 Incr $59,800 subtract (-) Inventories 112,500 102,850 Incr $9,650 subtract (-) Prepaid Expenses 28,400 26,000 Incr $2,400 subtract (-) Investments 138,000 114,000 Incr $24,000 Plant assets 270,000 242,500 Incr $27,500 Less: Accumulated depreciation (50,000) (52,000) Decr $2,000 Total $ 682,500 $ 514,750 Liabilities and Stockholders’ Equity: Accounts Payable $ 112,000 $ 67,300 Incr $44,700 add (+) Accrued expenses payable 16,500 17,000 Decr $500 subtract (-) Bonds payable 110,000 150,000 Decr $40,000 Common stock 220,000 175,000 Incr $45,000 Retained Earnings 224,000 105,450 Incr $118,550 Total $ 682,500 $ 514,750 ARMA COMPANY Income Statement For the Year ended December 31, 2011 Sales $ 392,780 Less: Cost of goods sold $ 135,460 Operating expenses 58,910 Income taxes 27,280 Interest expense 4,730 Loss on sale of plant assets 7,500 233,880 Net Income $ 158,900 Additional information: 1. Old plant assets with an original cost of $57,500 and accumulated depreciation of $48,500 were sold for $1,500 cash. 2. Depreciation expense is included in Operating expenses on the income statement. 3. Maturing bonds were retired at face value. 4. A cash dividend was declared and paid during the year. Solution – Indirect...
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...4-4 Dec. 31 Supplies Expense 7,700 Supplies 7,700 Supplies | | Supplies Expense | 8,800 | 12/31 7,700 | | 12/31 7,700 | | 12/31 Bal. 1,100 | | | | | BRIEF EXERCISE 4-5 Dec. 31 Depreciation Expense 2,750 Accumulated Depreciation— Equipment 2,750 Depreciation Expense | | Accumulated Depreciation—Equipment | 12/31 2,750 | | | | 12/31 2,750 | Balance Sheet: Equipment $22,000 Less: Accumulated Depreciation—Equipment 2,750 $19,250 BRIEF EXERCISE 4-6 July 1 Prepaid Insurance 12,400 Cash 12,400 Dec. 31 Insurance Expense ($12,400 X 6/24) 3,100 Prepaid Insurance 3,100 Prepaid Insurance | | Insurance Expense | 7/1 12,400 | 12/31 3,100 | | 12/31 3,100 | | 12/31 Bal. 9,300 | | | | | BRIEF EXERCISE 4-7 July 1 Cash 12,400 Unearned Service Revenue 12,400 Dec. 31 Unearned Service Revenue 3,100 Service Revenue ($12,400 X 6/24) 3,100 Unearned Service Revenue | | Service Revenue | 12/31 3,100 | 7/1 12,400 | | | 12/31 3,100 | | 12/31 Bal. 9,300 | | | | BRIEF EXERCISE 4-8 (a) Dec. 31 Interest Expense 300 Interest Payable 300 (b) 31 Accounts Receivable 1,700 Service Revenue 1,700 (c) 31 Salaries and Wages Expense 780 Salaries...
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...purpose offinancial accounting--to create useful financial information in the form of general-purpose financial statements. In other words, the sole purpose of recording transactions and keeping track of expenses and revenues is turn this data into meaning financial information by presenting it in the form of a balance sheet, income statement, statement of owner's equity, and statement of cash flows. The accounting cycle is a set of steps that are repeated in the same order every period. The culmination of these steps is the preparation of financial statements. Some companies prepare financial statements on a quarterly basis whereas other companies prepare them annually. This means that quarterly companies complete one entire accounting cycle every three months while annual companies only complete one accounting cycle per year. Accounting Cycle Steps This cycle starts with a business event. Bookkeepers analyze the transaction and record it in the general journal with a journal entry. The debits and credits from the journal are then posted to the general ledger where an unadjusted trial balance can be prepared. After accountants and management analyze the balances on the unadjusted trial balance, they can then make end of period adjustments like depreciation expense and expense accruals. These adjusted journal entries are posted to the trial balance turning it into an adjusted trial balance. Now that all the end of the year adjustments are made and the adjusted trial balance...
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...The Eye of the Potato Brief facts: Small Fries, Inc. has agreed with the Occupational Health and Safety Administration to undertake an “action plan” involving two of its plants, to bring them up to OSHA standards related to worker safety. The action plan includes an estimated $20 million of expenses, which we are told can be classified as repairs and maintenance. As the changes are to be completed within one year, the expenses have been budgeted into the 1997 operating budget. Small Fries intends to capitalize the repair costs, and has accrued none of them. Question 1: Should the costs associated with OSHA compliance be capitalized as an asset, or charged to expense? According to Keiso (Intermediate Accounting, 14th edition) accounting for improvements to assets is dependent on the type of improvements that are made, which is determined by asking whether the expenditure increases “future service potential”, or whether it simply maintains the existing level of service of the asset. Expenditures increasing future service potential should be capitalized, while maintenance should be expensed. Future service potential is unfortunately left undefined by Keiso, but several other writers have described it as related to production or output of the company’s product or service. Under this commonly understood definition, an improvement to an auto assembly line allowing production of ten cars in the time it previously took to build eight, would clearly enhance future service...
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...two-year performance financial forecast including debt requirements at the fiscal years ending 2002 and 2003. 3. Recommendations about operating and financial changes based on the historical analysis and forecast. 4. Analyse the option to invest now or wait three years to buy the packaging equipment. 1. Key insights on Star River historical performance by considering the income statements of the last four years (1998 to 2001). * Interest coverage: as depicted in the graph 1.1L, the capacity of Star River to pay current interests with available earnings increased to 2.18 in the past fiscal year as a consequence of the increase of EBIT in about 18% and an interest expense decrease of 1.5% (see Annex 1). Even though, the ability of the company to meet its interest expenses may be questionable by the bank as generally, below 2.5 is considered as a warning sign of poor solvency. * Debt to equity and debt to total capital: As a consequence of a higher year-by-year increase of debt in comparison to equity and total capital (see graph below), the debt-to-equity and the debt-to-total capital ratios present a growing trend. This aggressive leveraging aimed at financing operations, endangers shareholders’ and total capital benefits. * Working capital cycle: A huge increase in inventory of 94.6% in the fiscal year 1999-2000 shows a big percentage of inventory held in terms of sales. This is, in average 74.8 SDG were held in inventory for each SDG...
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...MacCloud Winery Case Study Due 11/17/13 1. Should the leased building be accounted for as an asset? No, the lease should be considered an operating lease. The building is the asset. The expense should be accrued on the building. The length of the lease should be less than 75% of the life of the asset leased. The lease is a ten year lease and the building has a 30-year economic life. Therefore this is an operating lease. The rental payments should be expensed as they are paid and offset by the cash used to make them. Should the agreement to pay lease rentals be recorded as a liability? No liabilities should be recorded because the future payments on the lease should be noted in the footnotes of the company’s financial statements. 2. Record the journal entries to account for the bank loan for all 3 years. Assume the loan was made at the beginning of the year and repaid at the end of year. Assume all interest payments are made on an annual basis. The $10,000 per year payment is to reduce the loan’s principal. Loan Issuance: DR Cash $180,000 CR Notes Payable $180,000 Year One Loan Repayment: DR Notes Payable $10,000 CR Cash $10,000 Year Two Loan Repayment: DR Notes Payable $10,000 CR Cash $10,000 Year Three Loan Repayment: DR Notes Payable $160,000 CR Cash $160,000 To record the interest payments annually (10% interest rate on $180,000 principal): DR Interest Payable $18,000 CR Cash $18,000 3. Applying the principals of accrual accounting, how...
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...Auditing Program Design Part II The purpose of this part of the audit process for Apollo Shoes is to design tests of controls, substantive tests of transactions, and analytical procedures for the sales, collection, payroll, personnel, acquisition, and payment cycles. These test and procedures are with intent to attest operating effectiveness of internal controls of Apollo Shoes on the basis of documentation provided. It is with the understanding that with the performing of test and procedures an opinion can be formed but management of Apollo shoes is responsible for the maintenance and assessment internal controls of over financial reporting. The design of test of controls of the sales and collection cycle follows. Sales and Collection Cycle Tests of Controls Sales Cycle: The review of the revenue and collection cycle manual of Apollo Shoes provides the improper record keeping of sales orders and that sales orders are not numbered which may affect the accuracy of pricing on invoices so steps. The test of controls for sale cycle to determine accuracy will be: 1. Examine sample 1004345 for Anglonesia Rehabilitation and Reprogramming Institute invoice to review unit prices of merchandise listed. 2. Compare unit prices on invoice for merchandise to these shoe types from inventory status report of 2007. 3. Verify unit prices on invoices are correct. Collection Cycle: A review of balance confirmation from customers provides a customer of Apollo Shoes Neutralizer’s account...
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...The Trolley Dodgers 1) It is the auditor’s objective to determine if management’s assertions are materially complete, valid and accurate. Auditors have various procedures and testing to achieve their objectives. The test of controls is used to determine the reliability of the financial statements by identifying the existence of internal controls, so it is important to understand how inaccuracies within the payroll system would affect accounts on the balance sheet and income statement. Wages are recorded as an expense on the income statement, so they reduce net income. In this Trolley Dodgers case, wages were being fraudulently inflated, so the affect would be understatement of net income on the income statement. Wages are also an accrued expense that require an adjusting entry; the wage amount would be recorded as a current liability on the balance sheet and an accrued expense on the income statement. Again, if wages are being fraudulently inflated, the current liabilities on the balance sheet would also be inflated and the overall result is a misrepresentation of the client’s performance on the financial statements. If it has been determined that the internal controls are ineffective, substantive testing is then necessary to verify accuracy of the dollar amounts. This is a more in-depth and analytical testing to verify the figures the client has provided. Auditors must test management’s assertions about account balances as they are reflected on the balance sheet. When testing...
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...Question 2 | | Here are comparative balance sheets for Taguchi Company. | TAGUCHI COMPANY | Comparative Balance Sheets | ------------------------------------------------- December 31 | Assets | ------------------------------------------------- 2011 | | ------------------------------------------------- 2010 | Cash | $73,000 | | $22,000 | Accounts receivable | 85,000 | | 76,000 | Inventories | 170,000 | | 189,000 | Land | 75,000 | | 100,000 | Equipment | 260,000 | | 200,000 | Accumulated depreciation | ------------------------------------------------- (66,000) | | ------------------------------------------------- (32,000) | Total | ------------------------------------------------- $597,000 | | ------------------------------------------------- $555,000 | | | | | Liabilities and Stockholders' Equity | | | Accounts payable | $39,000 | | $47,000 | Bonds payable | 150,000 | | 200,000 | Common stock ($1 par) | 216,000 | | 174,000 | Retained earnings | ------------------------------------------------- 192,000 | | ------------------------------------------------- 134,000 | Total | ------------------------------------------------- $597,000 | | ------------------------------------------------- $555,000 | Additional information: 1. Net income for 2011 was $103,000. 2. Cash dividends of $45,000 were declared and paid. 3. Bonds payable amounting to $50,000 were redeemed for cash $50,000. ...
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...deductions from deposit Oil and grease inventory 6,320 Operating supplies and uniforms 4,130 Equipment 25,000 Deposit 35,450 7) $1500 Lease payment Lease expense 1,500 Cash 1,500 8) $49,800 Equipment payable Equipment 49,800 Equipment payable 49,800 9) $108,600 Bank deposits Cash 108,600 Parking revenue 3,300 Services revenue 105,300 10) $8,230 Inventory purchases (oil and grease) Inventory 8,230 Cash 8,230 11) $34,560 Payroll payments Payroll expense 34,560 Cash 34,560 12) $1700 Utilities payments Utilities expense 1,700 Cash 1,700 13) $6,600 miscellaneous payments Miscellaneous expenses 6,600 Cash 6,600 14) $26,400 Lease payments Lease expense 26,400 Cash 26,400 15) $2,490 Equipment payables payments Equipment payable 2,490 Cash 2,490 16) $4,500 Withdrawals (Knight) Withdrawals 4,500 Cash 4,500 17) $340 Receivable – parking Accounts receivable 340 Parking Revenues 340 18) $730 Receivable – local merchant Accounts receivable 730 Service Revenues 730 19) $2100 Unpaid payroll Payroll expense 2100 Accrued payroll 2100 20) $350...
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