University:
Massachusetts Institute of Technology
Course:
15.501 | Introduction To Financial And Managerial Accounting
Academic year:

2023
Views:

172

Pages:

2
Author:

Nancy Reilly

Quiz Solution 1. Marketable Securities (18 points, 6 points for each part) The following information relates to the investment securities held by Trimex Corporation. The abbreviations used in the chart are HTM (Held to Maturity Securities), TR (Trading Securities), and AFS (Available for Sale Securities). Marketable Value 12/31 Security A (HTM) B (TR) C (AFS) Acquisition Date 3/13/01 6/24/01 10/3/01 Acquisition Cost $35,000 65,000 100,000 Date Sold 5/27/03 6/30/03 Selling Price $70,000 105,000 2001 $38,000 60,000 102,000 2002 $30,000 67,000 98,000 2003 $33,000 - Trimex closes its books on December 31 each year. Asume tax rate is 40%. What’s the net effect on net income, other equity, and deferred tax? A) HTM - leave at acquisition cost, same amount $35,000 each year. No effect on net income, other equity, and deferred tax. B) TR - mark to market each year. Gain and losses are recorded under retained earnings as part of net income. Other equity account is not affected. Date Cash 6/24/01 12/31/01 12/31/02 5/27/03 EB (65,000) 65,000 70,000 Marketable Securities (65,000) 0 Adj. To M.S. = (5,000) 7,000 (2,000) 0 Tax Payable 2,000 Deferred Tax Liability Retained Earnings (Net Income) (2,000) 2,800 (800) 0 (3,000) 4,200 1,800 3,000 C) AFS Date 10/3/01 12/31/01 12/31/02 6/30/03 EB Cash Marketable Securities (100,000) 100,000 105,000 (100,000) 0 Adj. To M.S. 2,000 (4,000) 2,000 0 = Tax Payable 2,000 Deferred Tax Liability Other Equity R/E (Net Income) 800 (1,600) 800 0 1,200 (2,400) 1,200 0 3,000 3,000 2. Long-term Liabilities (20 Points, 10 points for part a, 5 points for part b, 5 points for part c) a) $25,200,000 = .63 x $40,000,000 of cash must be raised to retire the old issue. Issue of new bonds (dollars in thousands) Cash (A) = Bonds Payable (L) Retained Earnings (SE) +25,200 +25,200 Bonds Payable-9 Percent (25,200) (40,000) 14,800 Gain on Bond Retirement (5,920) (5,920) =0.40 x $14,800. Income Tax Expense b) Income increases by $8,880,000 [= (1 - .40) x $14,800,000], or by 88% (= 8,800/$10,000) to $18.8 million. Retained earnings increases by $8,880,000. c) Debt-equity ratio (in thousands): Before: (5,000 + 40,000)/35,000 = 1.29 After: (5,000 + 25,200)/(35,000 + 8,880) = 30,200/43,800 = 0. 69 3. Leases (7 points. No point deducted if fail to deduct the current portion of the liability) Year 2002 2003 2004 2005 2006 2007 Amount 85,882 88,524 86,302 86,000 82,954 Discount Factor 0.9025 0.8146 0.7352 0.6635 0.5988 Present Value of all future payments Less: Current portion Increase in Non Current Liabilities Present Value 77,511 72,108 63,446 57,061 49,675 218,684 538,485 77,511 460,974