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Question
When interest rates have increased and bonds are retired before maturity, market value is below book value generating an accounting loss.
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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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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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.
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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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B. only the operating costs associated with operations.
C. all operating costs, depreciation, taxes, and a fair return on invested capital.
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A. base salaries.
B. short-term incentives.
C. long-term incentives.
D. executive compensation packages.
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A. affirmative restrictions.
B. affirmative covenants.
C. negative restrictions.
D. negative covenants.
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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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B. only relationships between investors and managers.
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D. many business relationships.
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A. the consignor.
B. the consignee.
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D. neither the consignor nor the consignee.