QUESTION 1 - Z Financial Corporation
On January 2, 2010, the Z Financial Corporation sold a large issue of Series A $1,000 denomination bonds. The bonds had a stated coupon rate of 6%, had a term to maturity of four years, and made semi-annual coupon payments (on June 30 and December 31). Market conditions at the time were such that the bonds were sold at their face value.
During the ensuing two years, market interest rates fluctuated widely, and by January 2, 2012, the Z Financial bonds were trading at a price that provided an annual yield of 10%. Z Financials management was considering purchasing the Series A bonds in the open market and retiring them; the necessary capital was to be raised by a new bond issue—the Series B bonds. Series B bonds were to be $1,000 denomination coupon bonds with a stated coupon rate of 8% (paid quarterly), making coupon payments over a two year term.
Management felt that these bonds could be sold at a price yielding no more than 10%, especially if the Series A bonds were retired.
Required: Show the journal entries necessary to record the following transactions:
a. Issue of one Series A bond on 2 January 2010.
b. Purchase and retirement of one Series A bond on January 2, 2012.
c. Issue of one Series B bond on January 2, 2012 (yield was 10%).
d. The first coupon payment on the Series B bond issued.
QUESTION 2 - For Them Inc., is a family friendly boutique that sells haute couture apparel for the entire family. The company reported the following information about leases in its annual report (in thousands):
|
|
December 31
|
|
|
2015
|
2014
|
|
Capital lease asset, gross
|
$1,960
|
$1,960
|
|
Less: Accumulated depreciation
|
1,617
|
1,519
|
|
Capital lease asset, net
|
$343
|
$441
|
|
Capital lease obligation
|
$414
|
$475
|
The only asset under a capital lease is a warehouse and office building. The building has an economic life of twenty years and is being depreciated on a straight-line basis. Lease payments are made on the last day of the year.
Required:
a. Calculate the depreciation expense on the warehouse and office building for the fiscal year ending December 31, 2015.
b. The interest on the lease obligation was $38 (in thousands) in fiscal 2015. What is the interest rate used for the lease obligation? What was the total lease payment on December 31, 2015? Reconstruct the 2015 journal entry.
c. In what year was the building placed into service?
QUESTION 3 - Verizon
You are given portions of Verizon's 2016 Annual Report. (Note fiscal year 2016 ends on December 31, 2016 - all references to years in the questions refer to fiscal year). (File is available on Canvas).
PART A — The following questions relate to material already covered in class. You are required to submit answers to these questions.
a. Describe in no more than three lines Verizon's business.
b. What was the percentage change in Total Revenues for Verizon from 2015 to 2016? What was the corresponding change in Operating Income?
c. Which was higher in 2016 - Verizon's Net Income or Cash flow From Operations? By how much?
d. By how much (in dollars) did Verizon's Long-term debt increase during 2016? How much of the change could be attributed to a change in Current maturities (reported in Current Liabilities)?
e. Briefly explain the recognition policies adopted by Verizon for sales of its wireline and wireless businesses (other than equipment sales).
f. Who would win a game of soccer if Columbia Business School played against the Wharton Business School?
g. When does Verizon claim it expenses maintenance and repairs?
h. What were the cash expenditures for Property plant and equipment in 2016? Compare this amount to the 2015 expenditure. (Hint: Cash Flow Statement) Which depreciation method is used by Verizon for financial reporting? How does the company estimate useful lives, and what are the changes reported by the company for 2016 arising from this analysis? What was the depreciation expense recorded by the company in 2016?
I. How much did the company spend on acquisitions in 2016? (Cash flow statement) How much did this contribute to the change in goodwill reported by the company?
J. Besides goodwill, does the company report any other indefinite life intangible assets? How does the company test for impairment? Did the company report any impairment in 2016? What was its amortization expense in 2016?
k. What percentage of existing gross Accounts Receivable (reported at the end of 2016) does Verizon not expect to collect? Was this materially different from its 2015 estimate? What was the bad debt expense, write-offs of uncollectibles, and recovery of prior write-offs in 2016?
l. Which inventory flow method does the company use to report its inventories?
m. What is the amount recognized by Verizon at the end of 2016 as a liability for capital lease obligations? What is the implied interest on its capital lease obligations? What lease obligation would the company have reported for its operating leases, if the interest rate for operating leases is the same as capital leases (Assume that payment after 2021 is all made in 2022)?
n. Assume the interest expense on the Income statement relates only to the Long¬term debt and to half of the Short-term debt and current maturities (i.e., those were paid, on average, in the middle of the year) reported at the beginning of the year [i.e., 31 December 2015 balance]. Add interest capitalized (in 2016) to the reported interest expense to estimate actual interest costs for the year. What is the average effective interest rate for Verizon's debt?
PART B — The following questions relate to material not yet covered in class. You do not have to submit this with your problem set. It will be a good review for the final when we cover these materials in class.
o. In 2016, was Comprehensive Income higher or lower than Net Income? By how much?
Which item explains the highest portion of the difference?
p. What was the effective tax rate for the year? Which single item has the largest impact on the difference between statutory and effective rate? Provide the journal entry that summarizes Verizon's income tax expense for 2016?
q. What kind of dilutive instruments affect the Diluted EPS reported by Verizon?
QUESTION 1 - Z Financial Corporation
On January 2, 2010, the Z Financial Corporation sold a large issue of Series A $1,000 denomination bonds. The bonds had a stated coupon rate of 6%, had a term to maturity of four years, and made semi-annual coupon payments (on June 30 and December 31). Market conditions at the time were such that the bonds were sold at their face value.
During the ensuing two years, market interest rates fluctuated widely, and by January 2, 2012, the Z Financial bonds were trading at a price that provided an annual yield of 10%. Z Financials management was considering purchasing the Series A bonds in the open market and retiring them; the necessary capital was to be raised by a new bond issue-the Series B bonds. Series B bonds were to be $1,000 denomination coupon bonds with a stated coupon rate of 8% (paid quarterly), making coupon payments over a two year term.
Management felt that these bonds could be sold at a price yielding no more than 10%, especially if the Series A bonds were retired.
Required: Show the journal entries necessary to record the following transactions:
a. Issue of one Series A bond on 2 January 2010.
b. Purchase and retirement of one Series A bond on January 2, 2012.
c. Issue of one Series B bond on January 2, 2012 (yield was 10%).
d. The first coupon payment on the Series B bond issued.
QUESTION 2 - For Them Inc., is a family friendly boutique that sells haute couture apparel for the entire family. The company reported the following information about leases in its annual report (in thousands):
|
|
December 31
|
|
|
2015
|
2014
|
|
Capital lease asset, gross
|
$1,960
|
$1,960
|
|
Less: Accumulated depreciation
|
1,617
|
1,519
|
|
Capital lease asset, net
|
$343
|
$441
|
|
Capital lease obligation
|
$414
|
$475
|
The only asset under a capital lease is a warehouse and office building. The building has an economic life of twenty years and is being depreciated on a straight-line basis. Lease payments are made on the last day of the year.
Required:
a. Calculate the depreciation expense on the warehouse and office building for the fiscal year ending December 31, 2015.
b. The interest on the lease obligation was $38 (in thousands) in fiscal 2015. What is the interest rate used for the lease obligation? What was the total lease payment on December 31, 2015? Reconstruct the 2015 journal entry.
c. In what year was the building placed into service?
QUESTION 3 - Verizon
You are given portions of Verizon's 2016 Annual Report. (Note fiscal year 2016 ends on December 31, 2016 - all references to years in the questions refer to fiscal year). (File is available on Canvas).
PART A - The following questions relate to material already covered in class. You are required to submit answers to these questions.
a. Describe in no more than three lines Verizon's business.
b. What was the percentage change in Total Revenues for Verizon from 2015 to 2016? What was the corresponding change in Operating Income?
c. Which was higher in 2016 - Verizon's Net Income or Cash flow From Operations? By how much?
d. By how much (in dollars) did Verizon's Long-term debt increase during 2016? How much of the change could be attributed to a change in Current maturities (reported in Current Liabilities)?
e. Briefly explain the recognition policies adopted by Verizon for sales of its wireline and wireless businesses (other than equipment sales).
f. Who would win a game of soccer if Columbia Business School played against the Wharton Business School?
g. When does Verizon claim it expenses maintenance and repairs?
h. What were the cash expenditures for Property plant and equipment in 2016? Compare this amount to the 2015 expenditure. (Hint: Cash Flow Statement) Which depreciation method is used by Verizon for financial reporting? How does the company estimate useful lives, and what are the changes reported by the company for 2016 arising from this analysis? What was the depreciation expense recorded by the company in 2016?
I. How much did the company spend on acquisitions in 2016? (Cash flow statement) How much did this contribute to the change in goodwill reported by the company?
J. Besides goodwill, does the company report any other indefinite life intangible assets? How does the company test for impairment? Did the company report any impairment in 2016? What was its amortization expense in 2016?
k. What percentage of existing gross Accounts Receivable (reported at the end of 2016) does Verizon not expect to collect? Was this materially different from its 2015 estimate? What was the bad debt expense, write-offs of uncollectibles, and recovery of prior write-offs in 2016?
l. Which inventory flow method does the company use to report its inventories?
m. What is the amount recognized by Verizon at the end of 2016 as a liability for capital lease obligations? What is the implied interest on its capital lease obligations? What lease obligation would the company have reported for its operating leases, if the interest rate for operating leases is the same as capital leases (Assume that payment after 2021 is all made in 2022)?
n. Assume the interest expense on the Income statement relates only to the Long¬term debt and to half of the Short-term debt and current maturities (i.e., those were paid, on average, in the middle of the year) reported at the beginning of the year [i.e., 31 December 2015 balance]. Add interest capitalized (in 2016) to the reported interest expense to estimate actual interest costs for the year. What is the average effective interest rate for Verizon's debt?
PART B - The following questions relate to material not yet covered in class. You do not have to submit this with your problem set. It will be a good review for the final when we cover these materials in class.
o. In 2016, was Comprehensive Income higher or lower than Net Income? By how much?
Which item explains the highest portion of the difference?
p. What was the effective tax rate for the year? Which single item has the largest impact on the difference between statutory and effective rate? Provide the journal entry that summarizes Verizon's income tax expense for 2016?
q. What kind of dilutive instruments affect the Diluted EPS reported by Verizon?
Attachment:- Assignment Files.rar