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Question
A year-by-year transfer of wealth from bondholders to stockholders occurs when the market rate of interest increases and the historical cost accounting model is used to account for bonds.
Answer
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Perez Company sold equipment to Gomez, receiving in exchange a note that called for three equal annual principal payments of $100,000 plus annual interest payments of $4,000. Because the market rate of interest for companies with Gomez' credit standing was 6% at the time of the sale, Perez correctly recorded the note at its present value of $277,993. After receiving the first payment, Perez learns that the market rate of interest on loans of this type has fallen to 5%. Assume that there is an active market for these types of notes. The present value of $1 to be received n periods in the future = 1 (1 + r)n where r is the rate of interest per period.
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Required: a. What amount should Kay report as gross accounts receivable at December 31, 2012?
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Banks and other financial institutions are required by federal and state regulatory agencies to meet minimum capital requirements.
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A bank's estimated bad debt expense associated with its loan receivables is the
A. loan loss provision.
B. loan charge-offs.
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A factor that can reduce managers' short-term focus is the fact that incentive compensation plans are administered by a compensation committee that can intervene when circumstances warrant modification of the scheduled incentive award.
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The wide use of accounting-based incentives is controversial because earnings growth does not automatically translate into increased shareholder value.
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Stock options come in various forms, the choice of which is largely dependent on the financial accounting treatment for the executive and the company.
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Managerial strategies and decisions clearly affect stock prices both in the short and long run.
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Borrowers do not appear willing to pay substantially higher interest rates to retain accounting flexibility that may help them avoid covenant violations.
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Because covenant compliance can be jeopardized by mandated changes in accounting principles, many loan agreements have financial covenants that rely on the accounting rules in place when the loan is first granted.
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Financial covenants establish minimum financial tests with which a borrower must comply.
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Commercial lending agreements may contain provisions that are designed to protect the lender from a deterioration of the borrower's creditworthiness.
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Risky firms have a higher risk-adjusted cost of capital. Which one of the following factors would contribute to that firm also having a high price/earnings ratio?
A. High earnings per share.
B. Low earnings per share.
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D. High risk and high P/E ratio cannot occur simultaneously.
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Rate regulation provides incentives for public utility managers to
A. artificially decrease the asset base.
B. artificially increase the asset base.
C. artificially decrease operating expenses.
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In the utilities industry, rate formulas are established to allow the utilities to set total allowed revenues to recover
A. only the administrative costs of operations.
B. only the operating costs associated with operations.
C. all operating costs, depreciation, taxes, and a fair return on invested capital.
D. all operating costs other than depreciation and taxes, and a fair return on invested capital.
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Compensation incentives that motivate and reward executives for five years of growth and prosperity are called
A. base salaries.
B. short-term incentives.
C. long-term incentives.
D. executive compensation packages.
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Covenants that place direct restrictions on managerial decisions are called
A. affirmative restrictions.
B. affirmative covenants.
C. negative restrictions.
D. negative covenants.
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Debt covenants benefit
A. lenders.
B. borrowers.
C. both lenders and borrowers.
D. neither borrowers nor lenders, but are required by the SEC as a condition of issuing debt securities.
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A. few business relationships.
B. only relationships between investors and managers.
C. only relationships between borrowers and lenders.
D. many business relationships.
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Goods held on consignment are included in the inventory valuation of
A. the consignor.
B. the consignee.
C. both the consignor and the consignee.
D. neither the consignor nor the consignee.