F5 - Payables and Accrued Liabilities

Question 1

A company has outstanding accounts payable of $30k and a ST construction loan of $100k at year end. The loan was refinanced through the issuance of long-term bonds after year end but before issuance of the financial statements. How should these liabilities be recorded on the financials? Current/LT

Answer 1

$30k Current and $100k as LT - because the company financed the debt prior to the issuance of the F/S

Question 2

At the beginning of the year, the CV of an asset was $1M with 20 years of remaining life. The FV of the liability for the asset retirement obligation was $100k. At year end, the CV of the asset was $950k. The risk-free interest rate was 5%. the credit adjusted risk-free interest rate was 10%. What was the amount of accretion expense?

Answer 2

Beg ARO X adj risk-free rate = accretion expense
1M X 10% = $10k

Accretion expense is the increase in ARO liability due to the passage of time calculated using the appropriate accretion rate. It is added to the ARO liability each period.

Question 3

Hemple maintains escrow accounts for various mortgage companies. Hemple collects the receipts and pays the bills on behalf of the customers. Hemple holds the escr ow monies in interest-bearing accounts. They charge a 10% maintenance fee to the customers based on interest earned. Here is the following data:
Escrow Liability beg Yr $500k
Escrow receipts during Yr $1.2M
RE tax paid during Yr $1.45M
Interest earned during Yr $40k
What amount represents the escrow liability balance on Hemple’s books?

Answer 3

Beg  $500k
\+1.4M
-1.45M
\+40k
-4k (40*10%)
------------
286,000 Liability

Question 4

In Yr 1, a company hired an executive whose contract included the promise of payment of $100k in each Yr 6,7 and 8, if the executive is employed at the end of year 5. How should the compensation expense associated with this contract be recorded?

Answer 4

$60k In each of years 1 thru 5
If the terms of a deferred comp arrangement attribute all or a portion of expected future benefits to a period of service greater than one year, the cost of the benefit should be recognized over that required period.

Question 5

Which of the two bonds payable issued are have scheduled maturities at various dates.?
Serial/Term/Debenture

Answer 5

Serial bonds is correct
Term bonds have a single fixed date
Debenture bonds are unsecured

Question 6

Cali had a $4M NP due on 3/15/05. On 1/28/05, before the issuance of its year 4 financials, Cali issued LT bonds for $4.5M. Proceeds of the bonds was used to pay the note when it became due. How should Cali classify the note on the year 4 B/S?

a. noncurrent liability, with no disclosure
b. current liability with disclosure
c. noncurrent liability with separate disclosure of refinancing
d. current liability with disclosure.

Answer 6

C.

Question 7

The discount resulting from the determination of a NP’s PV should be reported on the B/S as a(n):

a. Addition to the Face amount of the note
b. Deferred Credit separate from the note
c. Deferred charge separate from the note
d. Direct reduction from the face amount of the note

Answer 7

d. NP’s are reported net of their discount and the discount is a dr. balance

Question 8

A company issued a ST payable with a stated 12% rate of interest to a bank. The bank charged a .5% loan origination fee and remitted the balance to the company. The effective interest rate paid by the company in this transaction would be:

a. Equal to 12.5%
b. More than 12.5%
c. Independent of 12.5%
d. Less than 12.5%

Answer 8

B - The effective interest rate paid by the company would include all costs charged by the bank such as the .5% loan origination fee. Since the loan origination fee was taken out up front, the company’s effective interest rate is more than 12.5% (12%int rate + .5% fee) due to the loss to the company of the time value of money involved.
12.5% int. rate + .5% loan orig. fee 12.5%
———————————————— = ——– = 12.563%
100% Face of N/P - .5% loan orig fee 99.5%

Question 9

On 1/1/01, boston issued $100k par value, 5% five-year bonds when the mkt rate of interest was 8%. Interest is payable annually on Dec 31. the following PV info is available:
5% 8%
PV of $1 (n=5) .78353 .68058
PV of ordinary annuity (n=5) 4.32948 3.99271
What amount is the value of net bonds payable at the end of yr 1?
a. $110,638
b. $100,000
c. $88,022
d. $90,064

Answer 9

100kX5%= 5,000

(100k X .68058) + (5000*3.99271) = 90,064

Question 10

Weald took advantage of market conditions to refund debt. This was the fifth refunding operation carried out by Weald within the last four years. The excess of the carrying amount of the old debt over the amount paid to extinguish ist should be reported as a(n):

a. Deferred credit to be amortized over the life of new debt.
b. Separate item, net of income taxes
c. A reduction of interest exp for the year
d. Part of continuing operations

Answer 10

d.