LA NUEVA REFORMA. LA PAC EN EL HORIZONTE 2020

a. Total stockholders’ equity at Decembr 31, 2001

$910,240,000

b. Cost of treasury shares at December 31, 1001

$197,012,000

c. Treasury stock is subtracted from stockholders’ equity because it represents stock that was sold and later repurchased and not retired.

2. Reebok

a. Total current assets at December 31, 2001

$1,194,695,000

b. Net intangibles at December 31, 1001

$76,686,000

c. Intangibles that are amortized have a limited life.

3. Gap Inc.

Firms are allowed to incorporate by reference data that is required in the 10-K. Thus the information will not be found in the 10-K. Gap Inc. incorporated by reference to their annual report.

Item 8 of the 10-K included this statement.

“The information required by this item is incorporated herein by reference to pages 27 through 44 of the 2001 annual report to shareholders included as Exhibit 13 to this annual report on Form 10-K.”

Thus the answers to these questions cannot be found in the 10-K.

QUESTIONS

3- 1. Assets - Resources of the firm

Liabilities - Debts of the firm - Creditors' interest Owners' Equity - Owners' interest in the firm

3- 2. a. L e. A i. A m. A q. A b. L f. A j. E n. L r. A c. A g. L k. E o. L s. A d. A h. A l. E p. A t. A

3- 3. a. TA c. IA e. IA g. TA i. TA k. IV b. CA d. CA f. CA h. CA j. CA l. TA

3- 4. They are listed in order of liquidity, which is the ease with which they can be converted to cash.

3- 5. Marketable securities are held as temporary investments or idle cash. They are short-term, low risk, highly liquid, low yield. Examples are treasury bills and commercial paper. Investments are long-term, held for control or future use in operations. They are usually less liquid and expected to earn a higher return.

3- 6. Accounts receivable represents the money that the firm expects to collect; accounts payable represents the debts for goods purchased by a firm.

3- 7. A retailing firm will have only finished goods and supplies. A manufacturing firm will have raw

materials, work in process, finished goods, and supplies.

3- 8. Depreciation measures the wearing away of the usefulness of the asset. Tools, machinery, and buildings are

depreciated because they wear out. Land is not

depreciated, since its value typically does not decline.

If the land has minerals or natural resources, it may be subject to depletion.

3- 9. Straight-line depreciation is better for reporting, since gives higher profits than does accelerated depreciation.

Double-declining balance is preferable for tax purposes, since it allows the highest depreciation and, thereby, lower taxes in the early years of the life of the asset.

Using double-declining balance for taxes increases the firm's cash flow in the short run.

3-10. The rent is treated as a liability because it is

unearned. The rental agency owes the tenant the use of the property until the end of the term of the agreement.

The rent should be recognized as income over the period covered by the rent.

3-11. a. A bond will sell at a discount if its stated rate of interest is less than the market rate. It sells to yield the market rate. It might also sell low if there were a great deal of risk involved.

b. The discount is shown as a reduction of the liability.

Bonds payable $1000

Less: bond discount 170 $830

The bond discount is amortized, with the amortization shown as interest expense on the income statement.

3-12. Include minority interest as a long-term liability for primary analysis.

3-13. Historical cost causes difficulties in analysis because cost does not measure the current worth or value of the asset.

3-14. At the option of the bondholder (creditor), the bond is exchanged for a specified number of common shares (and the bondholder becomes a common stockholder). Often convertible bonds are issued when the common stock price is low, in the opinion of management, and the firm

eventually wants to increase its common equity. By

issuing a convertible bond, the firm may get more for the specified number of common shares. When the common stock price increases sufficiently, the bondholder will convert the bond to common stock.

3-15.

3-16. a. Accumulation of dividends. With the cumulative

feature, if a corporation fails to declare the usual dividend on the cumulative preferred stock, the

amount of passed dividends becomes dividends in arrears. Common stockholders cannot be paid any dividends until the preferred dividends in arrears and the current preferred dividends are paid.

b. Participation in excess of stated dividend rate.

When preferred stock is participating, preferred

stockholders may receive an extra dividend beyond the stated rate. The terms of the participation depend on the terms included with the stock certificates.

c. Convertibility into common stock. Convertible

preferred stock contains a provision that allows the preferred stockholders, at their option, to convert the share of preferred stock at a specific exchange ratio into another security of the corporation.

d. Callability by the corporation. Callable preferred stock may be retired (recalled) by the corporation at its option.

e. Preference in liquidation. Should the corporation liquidate, the preferred stockholders normally have preference to have their claims settled prior to any payment to common stockholders.

3-17. The account unrealized exchange gains or losses is an owners' equity account that is used to record gains or losses from translating foreign currency financial

statements incorporated into the financial statements of an enterprise by consolidation, combination, or the equity method of accounting.

3-18. Treasury stock represents the stock of the company that has been sold, repurchased, and not returned. It is subtracted from stockholders' equity so that net stockholders' equity is for shares outstanding only.

3-19. The $60, or any portion, will occur as cost of sales if the goods are sold and as inventory if they are not sold.

3-20. These subsidiaries are presented as an investment on the parent's balance sheet.

3-21. Minority interest is presented on a balance sheet when an entity in which the parent company has less than 100%

ownership is consolidated.

3-22. If DeLand Company owns 100% of Little Florida, Inc., it will not have a minority interest, since minority interest reflects ownership of minority shareholders in the equity of consolidated subsidiaries that are not wholly owned.

If it only owns 60%, then there would be a minority

interest. Little Florida would not be consolidated when control is temporary or does not rest with the majority owner.

3-23. The account unrealized decline in market value of noncurrent equity investments is an owners' equity account that is used to record unrealized losses on long-term equity investments.

3-24. Redeemable preferred stock is subject to mandatory

redemption requirements or has a redemption feature that is outside the control of the issuer. Coupled with the typical characteristics of no vote and fixed return, this security is more like debt than equity for the issuing firm.

3-25. Donated capital results from donations to the company by stockholders, creditors, or other parties.

3-26. The land account under assets would be increased and the donated capital account in stockholders' equity would be increased. The donated land would be recorded at the appraisal amount.

3-27. A quasi-reorganization is an accounting procedure equivalent to an accounting fresh start. A

quasi-reorganization involves the reclassification of a deficit in retained earnings to paid-in capital. It changes the carrying values of assets and liabilities to reflect current values.

3-28. The unearned compensation is presented as a reduction in stockholders' equity and the offsetting amount is

presented as a liability.

3-29. An ESOP is a qualified bonus, or combination stock-bonus and money-purchase pension plan designed to invest primarily in the employer's securities.

3-30. These institutions are willing to grant a reduced rate of interest because they are permitted an exclusion from income for 50% of the interest received on loans used to finance an ESOP's acquisition of company stock.

3-31. Some firms do not find an ESOP attractive because it can result in a significant amount of voting stock in the hands of employees. This will likely dilute the control of management.

3-32. This firm records the commitment as a liability and as a deferred compensation deduction within stockholders' equity.

3-33. Depreciation is the process of allocating the cost of building and machinery over the periods of benefit.

Spreading the cost of an intangible asset is called amortization, while spreading the cost of a natural resource is called depletion.

3-34. The three factors usually considered when computing depreciation are asset cost, length of the life of the asset, and the salvage value when it is retired from service.

3-35. A firm will often want to depreciate slowly for the

financial statements because this results in the highest immediate income. The same firm would want to depreciate at a fast pace for income tax returns because this

results in the lowest immediate income and thus lower income taxes.

3-36. Over the life of an asset, the total depreciation will be the same, regardless of the depreciation method selected.

3-37. Yes. Depreciation is the process of allocating the cost of buildings and machinery over the periods of benefit.

3-38. Accumulated Other Comprehensive Income

Conceptually, this account balance represents retained earnings from other comprehensive income.

Categories of other comprehensive income are:

1. foreign currency translation adjustments.

2. unrealized holding gains and losses on available-for-sale marketable securities.

3. changes to stockholders equity resulting from additional minimum pension liability adjustments.

4. unrealized gains and losses from derivative instruments.

PROBLEMS

Marketable securities 10,042

Accounts receivable $ 67,551

Investment and special funds 11,901

Property, plant, and equipment:

Property, plant, and

equipment $809,980

Less: Accumulated

depreciation 220,541 589,439

Unearned transportation

revenue 6,808

Current installments of

long-term debt 36,875

Total current liabilities $145,551

Long-term debt, less current

portion 393,808

Deferred income taxes 42,070

Stockholders' equity:

Common stock $ 7,152

Capital in excess of par 72,913

Retained earnings 67,361

Total stockholders' equity 147,426

Total liabilities and stockholders' equity $728,855

PROBLEM 3 - 2

Receivables, less allowance of $3,000 Plant and equipment:

Buildings

Machinery and equipment

Less: accumulated depreciation Land

Current portion of long-term debt Total current liabilities

Long-term liabilities:

Long-term debt, less current portion Deferred income tax liability

Total long-term liabilities Stockholders’ equity:

Common stock, no par value 10,000 shares authorized, 5,724 shares issued

Retained earnings

Total stockholders’ equity

Total liabilities and stockholders’ equity

$ 75,000

PROBLEM 3 - 3

Current maturities of long-term debt Total current liabilities

Common stock, no par value

21,000 shares authorized at $1 par value, 10,000 shares issued

Additional paid-in capital Retained earnings

Total stockholders’ equity

Total liabilities and stockholders’ equity

$ 13,000

PROBLEM 3 - 4

a. Restricted cash in sinking fund should be classified as long-term investment.

b. Investment in Subsidiary Company is long-term.

c. Measurement basis of marketable securities should be disclosed.

d. Preferable to show land and buildings separately, since land is not depreciable.

e. Treasury stock should be deducted from stockholders' equity.

f. Discount on bonds payable is a contra liability and should be classified as a deduction from bonds payable.

g. Prepaid expenses should be classified as a current asset.

h. For most industries, liabilities should be classified as current and long-term.

i. Preferred and common stock should be separated, as should capital in excess of par.

j. Net income and dividends are usually shown on a separate statement of retained earnings.

PROBLEM 3 - 5

a. Heading date is wrong. It should read December 31, 2003.

b. Disclose allowance for doubtful accounts.

c. Treasury stock should be deducted from stockholders' equity.

d. Land and building are disclosed net. Accumulated depreciation should be disclosed.

e. Short-term U.S. Notes should be classified under current assets.

f. Supplies should be classified under current assets.

g. Bonds payable should be under long-term liabilities.

h. Premium on bonds payable should be presented with bonds payable under long-term liabilities.

i. Minority interest should be presented before stockholders' equity.

j. Redeemable preferred stock should be presented before stockholders' equity.

PROBLEM 3 - 6

a. Balance sheet should be in the heading.

b. $10,000 cash should be classified under “other assets”

(restricted for payment of long-term note).

c. Disclose accumulated depreciation related to building.

d. Patent should be classified under intangibles.

e. Organizational costs should be disclosed under intangibles.

f. Prepaid insurance should be under current assets.

g. Dividends payable should be classified as a current liability.

h. Notes payable and bonds payable due in the years 2006 and 2013 respectively, should not be classified as a current liability.

PROBLEM 3 - 7

a. The dividends would reduce retained earnings on the balance sheet.

b. You would disclose a contingent liability in footnote format.

c. No accounting recognition is given for possible general business risks for which losses cannot be estimated.

d. This subsequent event requires a footnote.

e. Restricted cash should be classified as a long-term asset.

f. Securities held for control should be classified as long-term investments.

g. Land must be listed at cost. It will have to be written back down.

h. This would be disclosed in a footnote. (Also on the income statement, the loss will be disclosed as an

PROBLEM 3 - 8

a. Minority interest will be 20% of the total equity of

$300,000, or $60,000. Minority interest should be classified as a liability for purposes of financial analysis.

b. The minority share of earnings will be 20% of $50,000, or $10,000.

PROBLEM 3 - 9

Preferred Common a. Year 1 0 0 Year 2

Preferred

Cumulative from year 1

10,000 shares x $100 par value =

$1,000,000 x 10% $100,000 Year 2 dividend

10,000 shares x $100 par value =

$1,000,000 x 10% $100,000

Total $200,000 0 Year 3

Preferred

Year 3 dividend

10,000 shares x $100 par value =

$1,000,000 x 10% $100,000 Common

The common gets the remaining dividends because the preferred

is nonparticipating $120,000 Total $100,000 $120,000

b. Preferred Common Year 1 0 0

Year 2 Preferred

Arrears (see computation in a.) $100,000 Year 2 dividend

(See computation in a.) $100,000

Total $200,000 0 Year 3

Preferred

Year 3 dividend

(See computation in a.) $100,000 Common

80,000 shares x $5 = $400,000

x 10% = 40,000 40,000 2% to preferred

(2% x $1,000,000) 20,000 2% to common

(2% x $400,000) 8,000 Remaining dividend to common 52,000 Total $120,000 $100,000 c. Preferred Common Year 1 0 0 Year 2

Preferred

Arrears (see computation in a.) $100,000 Year 2 Dividend

(See computation in a.) $100,000

Total $200,000 0 Year 3

Preferred

Year 3 dividend

(See computation in a.) $100,000 Common

80,000 shares x $5 = $400,000

x 10% = 40,000 40,000

Fully participating; therefore, the remaining dividend will be split between preferred and common in proportion to their outstanding stock at total par value.

Total par value of preferred

$1,000,000 71.43%

Total par value of common

$ 400,000 28.57%

Total $1,400,000 100.00%

Preferred 71.43% x $80,000 = $ 57,144

Common 28.57% x $80,000 = $ 22,856 Total $157,144 $ 62,856 d. Preferred Common Year 1 0 0 Year 2

Preferred

Year 2 dividend

(See computation in a.) $100,000 Common

Remainder to common $100,000 Total $100,000 $100,000

Year 3 Preferred

Year 3 dividend

(See computation in a.) $100,000 Common

Remainder to common $120,000 Total $100,000 $120,000

PROBLEM 3 - 10 a.

Year 1

Preferred

5,000 x $100 x 9% = $45,000 $ 40,000 0 Year 2

Preferred

Cumulative $ 5,000 5,000 x $100 x 9% = $45,000 45,000 Common

10,000 x $10 x 9% = $9,000 9,000 Fully participating; therefore, the

remaining dividend will be split between preferred and common in proportion to their outstanding stock at total par value.

Total par value of preferred

$ 500,000 83.3%

Total par value of common

$ 100,000 16.7%

Total $ 600,000 100.0%

$65,000 - $5,000 - $45,000 - $9,000

= $6,000 5,000 1,000 $55,000 $10,000 b. Preferred Common Year 1

Preferred

5,000 x $100 x 9% = $45,000 $ 40,000 0 Year 2

Preferred

5,000 x $100 x 9% = $45,000 $45,000

Common $20,000

Remaining dividend to common ($65,000 - $45,000)

c.

Year 1

Preferred

5,000 x $100 x 9% = $45,000 $ 40,000 0 Year 2

Preferred

Cumulative $ 5,000 5,000 x $100 x 9% = $45,000 45,000 Common

10,000 x $10 x 9% = $ 9,000 Additional % to preferred and common:

Preferred: 5,000 x $100 x 1% 5,000

Common : 10,000 x $10 x 1% 1,000 $ 55,000 $ 10,000 d.

Year 1

Preferred

5,000 x $100 x 9% = $45,000 $ 40,000 0 Year 2

Preferred

Cumulative $ 5,000 5,000 x $100 x 9% = $45,000 45,000

Remaining to common $ 15,000 $ 50,000 $ 15,000 PROBLEM 3 - 11

a.

Straight-line method = $100,000 - $10,000 = $9,000 10 per year b.

Declining-balance method Year 1

1/10 x 2 x $100,000 = $20,000 Year 2

1/10 x 2 x $ 80,000 = $16,000 Year 3

1/10 x 2 x $ 64,000 = $12,800

c.

Sum-of-the-years’-digits method

Year 1 10/55 x $90,000 = $16,363.63 Year 2 9/55 x $90,000 = $14,727.27 Year 3 8/55 x $90,000 = $13,090.91 PROBLEM 3 - 12

$60,000 - $10,000 = $2.00 per hour 25,000 hrs.

Year 1 5,000 x $2.00 = $10,000 Year 2 6,000 x $2.00 = $12,000 Year 3 4,000 x $2.00 = $ 8,000 PROBLEM 3 - 13

a. The straight line method will result in the lowest depreciation in the first year. With the depreciation being the lowest for straight line, the income will be the highest using the straight-line method. The straight-line method should be used for the financial statements. The declining-balance method will result in the maximum

depreciation in the first year. With the depreciation being the highest, the income will be the lowest. The declining-balance method should be used for taxes.

Straight-line ($50,000 - $10,000)/5 = $8,000 Declining-balance method = 1/5 x 2 x $50,000 = $20,000

Sum-of-the-years’-digits = 5/15 x ($50,000 - $10,000) = $13,333

b. It is permissible to use different depreciation methods in financial statements than in tax returns.

CASES

In document I. PANORAMA DE LA AGRICULTURA, LA ALIMENTACIÓN Y EL MEDIO AMBIENTE (página 42-47)