ACTG 2011 Chapter Notes - Chapter 10-11: Pension, Promissory Note, Capital Asset

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20 Feb 2020

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Chapter 10 summary: explained why long-term liabilities are significant to users. Long term liabilities will affect a company for many years. Some long-term liabilities, such as bonds or employee pensions, may not be settled for 30-40 years. It is also important to be aware of the potential liabilities, such as contractual commitments or litigation involving the company. Identify the long-term liabilities that arise from transactions with lenders are explain how they are accounted for. Long-term liabilities, involving lenders include loans payable, mortgages payable, notes payable, and bonds payable. Mortgages are long term debt for which a capital asset has been pledged as collateral. Most loans and mortgages are instalments loans that require periodic loan payments. These are usually blended, meaning that they include both principal and interest components. It is common for loan financing agreements to specify certain covenants, which are conditions or restrictions on the borrower. The terms and conditions related to bonds are specified in indenture agreements.

Related Questions

Identification of Current Liabilities, Contingencies, andCommitments LO3 P 1. Listed below are common types of currentliabilities, contingencies, and commitments:

a. Accounts payable

b. Bank loans and commercial paper

c. Notes payable
d. Dividends payable

e. Sales and excise taxes payable

f. Current portion of long-term debt

g. Payroll liabilities

h. Unearned revenues

i. Income taxes payable

j. Property taxes payable

k. Promotional costs

l. Product warranty liability

m. Vacation pay liability

n. Contingent liability

o. Commitment

Required

1. For each of the following statements, identify the categoryabove to which it gives rise or with which it is most closelyassociated:

1. A company agrees to replace parts of a product ifthey fail.

2. An employee earns one day off for each monthworked.

3. A company signs a contract to lease a buildingfor five years.

4. A company puts discount coupons in thenewspaper.

5. A company agrees to pay insurance costs foremployees.

6. A portion of a mortgage on a building is due thisyear.

7. The board of directors declares a dividend.

8. A company has trade payables.

9. A company has a pending lawsuit against it.

10. A company arranges for a line of credit.

11. A company signs a note due in 60 days.

12. A company operates in a state that has a sales tax.

13. A company earns a profit that is taxable.

14. A company owns buildings that are subject to propertytaxes.

2. Of the items listed from a to o above, which oneswould you not expect to see listed on the balance sheet with adollar amount? Of those items that would be listed on the balancesheet with a dollar amount, which ones would you con- sider toinvolve the most judgment or discretion on the part ofmanagement?

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Case 2.3 Walgreens Co. and Subsidiaries

The following excerpts are from the 2013 Walgreen Co. Form 10-K:

CONSOLIDATED BALANCE SHEETS

Walgreens Co. and Subsidiaries at August 31,2013 and 2012

(in millions, except shares and per share amounts)

Cash and cash equivalents

Property & equipment, at cost,less accumulated deprec & amortization

$12,138

$12,038

Equity investment in Alliance Boots

$2,410

$2,161

Alliance Boots call option

Other noncurrent assets

Liabilities and Shareholders' Equity

Current Liabilities

Short-term borrowings

$570

$1,319

Trade accounts payable

$4,635

$4,384

Accrued expenses and other liabilities

Total Current Liabilites

$8,883

$8,722

Noncurrent liabilites

Long-term debt

$4,477

$4,073

Deferred income taxes

$600

$545

Other noncurrent liabilities

$2,067

$1,866

Total noncurrent liabilites

$7,144

$6,504

Commitments and contingencies(see note)

Shareholders' Equity

Preferred stock, $.0625 per value; authorized 32 million shares;

issued 1,028,180,150 shares in 2013 and 2012

Employee stock loan recievable

Accumulated other comprehensive (loss) income

($98)

$68

Treasury Stock at cost, 81,584,572 shares in 2013 and

84,124,816 shares in 2012

($3,114)

($2,985)

Total Shareholders' Equity

$19,454

$18,236

Total Liabilites and Shareholder's Equity

$35,481

$33,462

The accompanying Notes to Consolidated Financial Statements are integral parts of these statments.

Notes to Consolidated financial Statements

1.Summary of Major Accounting Policies

Description of Business

The company is principally in the retail drugstore business and its operations are within one reportable segment. At August 31,2013 there was 8,582 drugstore and other locations in 50 states, the District of Columbia, Guam, and Puerto Rico. Prescription sales were 62.9% of total sales for fiscal 2013 compared to 63.2% in 2012 and 64.7% in 2011.

Allowance for Doubtful Accounts

The provision for bad debt is based on both historical write-off percentages and specifically identified receivables. Activity in the allowance for doubtful accounts was as follows (In millions):

	2013	2012	2011
Balance at beginning of year	$99	$101	$104
Bad debt provision	$124	$107	$88
Write-offs	($69)	($109)	($91)
Balance at end of year	$154	$99	$101

Inventories

Inventories are valued on a lower of last-in, first-out (LIFO) cost or market basis. At August 31, 2013 and 2012, inventories would have been greater by $2.1 billion and $1.9 billion, respectively, if they had been valued on a lower of first-in, first-out (FIFO) cost or market basis. As a result of declining inventory levels, the fiscal 2013 and 2012 LIFO provisions were reduced by $194 million and $268 million of LIFO liquidation, respectively. Inventory includes product costs, inbound freight, warehousing costs, and vendor allowances not classified as a reduction of advertising expense.

3.Leases

The company owns 20.2% of its operating locations; the remaining locations are leased premises. Initial terms are typically 20 to 25 years, followed by additional terms containing renewal options at five-year intervals, and may include rent escalation clauses. The commencement date of all lease terms is the earlier of the date the company becomes legally obligated to make rent payments or the date the Company has to right to control the property. The Company recognizes rent expense on a straight-line basis over the term of the lease. In addition to minimum fixed rentals, some leases provide for contingent rentals based upon a portion of sales.

Minimum rental commitments at August 31, 2013, under all leases having an initial or remaining non-cancelable term of more than one year are shown below (in Millions):

	Capital Lease	Operatin Lease
2014	$19	$2,536
2015	$19	$2,514
2016	$18	$2,464
2017	$17	$2,389
2018	$15	$2,292
Later	$270	$23,507
Total Minimum lease Payments	$358	$35,702

The capital lease amoutn includes $155 million of imputed interest and executory costs. Total minimum lease payments have not been reduced by minimum sublease rentals of approximately $140 million on leases due in the future under non-cancelable subleases.

The Company remains secondarily liable on 26 assigned leases. The maiximum potential undiscounted future payments are $18 million at August 31, 2013. Lease option dates vary, with some extending to 2041.

WALGREEN CO. INFORMATION FROM CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended August 31,2013 and 2012 (in millions)
	2013	2012
Sales	$72,217	$71,633
Net Income	$2,450	$2,127

Required:

a. Using the consolidated balance sheets for Walgreen Co. for August 31,2013 and 2012, prepare a common-size balance sheet.

b. Which current asset is the most significant? Which noncurrent asset is the most significant? Are the relative proportions of current and noncurrent assets what you would expect for a drug store?

c. Analyze accounts recievable and allowance for doubtful accounts.

d. What inventory is used to value inventories? Has Walgreen experienced inflation or deflation? Explain your answer. Explain the reference in the inventory note to the LIFO liquidation and what this means with regard to net income reported.

e. Assess the level of debt and risk that Walgreen has by looking only at the balnce sheet.

f. Estimate the dollar amount of dividends Walgreens paid in 2013.

g. Does Walgreen use off-balance sheet fiancing? Explain your answer.

h. Evaluate the creidtworthiness of Walgreen based on the Balance sheet and the excerpts from the notes.

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1. All of the following are characteristics of currentliabilities except:

a. they may involve estimated amounts. b. they are due withinone year or within the operating cycle, whichever is longer. c.they may be replaced with a new short-term liability rather thanbeing paid in cash. d. all three of the above are characteristic ofcurrent liabilities.

2. Which of the following is an example of a contingentliability?

a. A corporate long-term employment contract with the chiefexecutive officer. b. A lawsuit pending against a restaurant chainfor improper preparation of food. c. A liability for notes payablewith interest included in the face amount. d. The liability forfuture warranty repairs on computers sold during the currentperiod

. 3. A company will have to pay a $50,000 liability in 4 years.How much must be deposited now into a bank account earning 8%compounded semiannually to fully fund the future payment? HINT: PVof $1 The solution to this problem requires time value of moneycalculations. Reference to Tables 9-1 through 9-4 in the text isnecessary to complete the calculations.

a. $35,500 b. $36,535 c. $36,665 d. $34,000

4. On October 1, Lawrence Company borrowed $60,000 from FourthNational Bank on a 1-year, 7% note. If the company's fiscal yearends as of December 31, Lawrence should make an entry toincrease

a. interest payable, $1,050. b. prepaid interest, $3,150. c.notes payable, $1,050. d. interest expense, $4,200.

5. Warranty expenses are the result of the selling companyâsestimate of the number of units sold during the current year thatmay become defective and need repair or replacement during thewarranty period.

a. True b. False

6. Estimated liability for product warranties to be paid in thefuture is a long term liability.

a. True b. False

7. The future value of equal semi-annual payments of $500 at 8%compounded semiannually for 4 years is HINT: FV of Annuity of $1The solution to this problem requires time value of moneycalculations. Reference to Tables 9-1 through 9-4 in the text isnecessary to complete the calculations.

a. $ 868 b. $9,320 c. $2,000 d. $4,607

8. What is the correct classification of the account: Discounton Notes Payable?

a. a revenue b. a contra liability c. an asset d. an expense

9. If the annual interest is 12%, but the compounding is donequarterly, then the interest rate is 3% per period.

a. True b. False

10. A convertible bond is one where a. the issuer can convertfrom

a fixed interest rate to a floating one. b. the issuer canconvert it from long-term to short-term. c. the issuer can retirethe bond before its specified due date. d. the holder can convertthe bond into common stock at a future time.

11. Which of the following statements regarding serial bonds istrue?

a.They are likely to be issued by food companies.

b. They have shorter lives than term bonds.

c.They are strongly backed by the issuer's collateral.

d. The bonds do not all mature on the same date.

12. Bonds are a popular source of financing because

a.bond interest expense is deductible for tax purposes, whiledividends paid on stock are not.

b. financial analysts tend to downgrade a company that hasraised large amounts of cash by frequent issues of stock.

c. a company having cash flow problems can postpone payment ofinterest to bondholders.

d. the bondholders can always convert their bonds into stock ifthey choose.

13. When determining the amount of interest to be paid on abond, which of the following information is not necessary?

a.The face amount of the bonds

b. The selling price of the bonds

c.The face rate of interest on the bonds

d. The length of the interest period, annually or semiannually14. Which of the following statements is correct?

a.Bonds are issued at a price that reflects the stated rate ofinterest on the day the bond is purchased.

b. If the face rate of interest on a bond is not equal to themarket rate of interest, then the company desiring to issue thebonds must reprint its bond certificates.

c.The actual issue price of a bond represents the present valueof all future cash flows related to the bond.

d. The market rate of interest has no bearing on the sellingprice of the bonds.

15. Endeavor Company issued 20-year bonds with a coupon rate of6% when the market rate of interest was 9%. This means that thebonds were issued

a.at a premium. b. at a discount. c.at the face value. d. withan additional 3 years of interest.

16. Which of the following statements regarding leases isfalse?

a. Lease agreements are a popular form of financing the purchaseof assets because leases do not require a large initial outlay ofcash.

b. Accounting recognizes two types of leases--operating andcapital leases.

c. If a lessor classifies a lease as a capital lease, then thelessee records a lease liability on its balance sheet.

d. If a lease is classified as an operating lease, the lesseerecords a lease liability on its balance sheet.

17. Which of the following accounts would not appear on thebalance sheet of a lessee company recording a capital lease?

a. Accumulated depreciation on the leased asset

b. Lease obligation in the current liability section

c. Lease obligation in the long-term liability section

d. Rent expense on the income statement

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ACTG 2011 Chapter Notes - Chapter 10-11: Pension, Promissory Note, Capital Asset

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