Financial Accounting - Access
4th Edition
ISBN: 9781259958533
Author: SPICELAND
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Question
Chapter 8, Problem 8.5APE
1.
To determine
To compare: the
2.
To determine
To Provide: a review whether the Company CCL has practiced an ethical way in this situation and to provide arguments for and against for given situation.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Mini CaseDavid Lyons, CEO of Lyons Solar Technologies, is concerned about his firm’s level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies average about 30% debt, and Mr. Lyons wonders why they use so much more debt and how it affects stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant.
Assume that Firms U and L are in the same risk class and that both have EBIT=$500,000. Firm U uses no debt financing, and its cost of equity is rsU=14%. Firm L has $1 million of debt outstanding at a cost of rd=8%. There are no taxes. Assume that the MM assumptions hold.
Find V, S, rs, and WACC for Firms U and L.
Apple Punch Company is experiencing financial difficulties and a downward trend in its operations. The firm is unable to service its debt and as a result, has missed payment of an annual interest on its loan from Bank of PUP. The principal amount of the loan is P2,000,000 (which is already due) with annual interest of 12% payable annually. Apple Punch management has negotiated a modification of its debt’s terms with its creditors. The creditors agree to the following new terms (assume that at this time, the prevailing market rate of interest remained at 12%):
• forgive all accrued interest
• reduce the principal amount of the loan to P1,800,000
• extend the payment of principal for two years
• reduce the interest rate for the remaining two years to 8% The gain on debt restructuring is
A. 562,040
B. 0
C. 440,000
D. 322,040
ETHICS CASE
The controller of Diaz Fashions believes that the yearly allowance for doubtful accounts for Diaz should be 2% of its accounts receivable balance at the end of the year. The president of Diaz, nervous that the shareholders might expect the company to sustain its 10% growth rate, suggests that the controller increase the allowance for doubtful accounts to 4%. The president thinks that the lower net income, which reflects a lower growth rate, will be a more sustainable rate for Diaz.
Instructions
Who are the stakeholders in this case? (List all)
Does the president’s request pose an ethical dilemma for the controller? Why?
Should the controller be concerned with Diaz’s growth rate? Explain your answer.
Answers should be within 150 to 350 words for the entire case.
Chapter 8 Solutions
Financial Accounting - Access
Ch. 8 - Prob. 1RQCh. 8 - Prob. 2RQCh. 8 - Prob. 3RQCh. 8 - Provide examples of current liabilities in the...Ch. 8 - Prob. 5RQCh. 8 - Prob. 6RQCh. 8 - How does commercial paper differ from a normal...Ch. 8 - Prob. 8RQCh. 8 - Prob. 9RQCh. 8 - Prob. 10RQ
Ch. 8 - Prob. 11RQCh. 8 - Prob. 12RQCh. 8 - Prob. 13RQCh. 8 - Prob. 14RQCh. 8 - Prob. 15RQCh. 8 - Prob. 16RQCh. 8 - Prob. 17RQCh. 8 - Prob. 18RQCh. 8 - Prob. 19RQCh. 8 - Prob. 20RQCh. 8 - Prob. 21RQCh. 8 - Prob. 22RQCh. 8 - Prob. 23RQCh. 8 - Record notes payable (LO82) Flip Side of BE82 On...Ch. 8 - Prob. 8.2BECh. 8 - Record notes receivable (LO82) Flip Side of BE81...Ch. 8 - Determine interest expense (LO82) Record...Ch. 8 - Prob. 8.5BECh. 8 - Record deferred revenues (LO84) On December 18,...Ch. 8 - Prob. 8.7BECh. 8 - Prob. 8.8BECh. 8 - Prob. 8.9BECh. 8 - Prob. 8.10BECh. 8 - Prob. 8.11BECh. 8 - Prob. 8.12BECh. 8 - Prob. 8.13BECh. 8 - Prob. 8.14BECh. 8 - Prob. 8.15BECh. 8 - Determine proper classification of liabilities...Ch. 8 - Prob. 8.2ECh. 8 - Prob. 8.3ECh. 8 - Prob. 8.4ECh. 8 - Determine interest expense (LO82) OS Environmental...Ch. 8 - Record a line of credit (LO82) The following...Ch. 8 - Calculate payroll withholdings and payroll taxes...Ch. 8 - Record payroll (LO83) During January, Luxury...Ch. 8 - Prob. 8.9ECh. 8 - Prob. 8.10ECh. 8 - Analyze and record a contingent liability (LO85)...Ch. 8 - Prob. 8.12ECh. 8 - Prob. 8.13ECh. 8 - Prob. 8.14ECh. 8 - Prob. 8.15ECh. 8 - Complete the accounting cycle using current...Ch. 8 - Prob. 8.1APCh. 8 - Prob. 8.2APCh. 8 - Prob. 8.3APCh. 8 - Record Payroll (LOS3) Vacation Destinations offers...Ch. 8 - Prob. 8.5APCh. 8 - Prob. 8.6APCh. 8 - Prob. 8.7APCh. 8 - Prob. 8.8APCh. 8 - Selected financial data regarding current assets...Ch. 8 - Prob. 8.1BPCh. 8 - Prob. 8.2BPCh. 8 - Prob. 8.3BPCh. 8 - Record Emily Turnbull, president of Aerobic...Ch. 8 - Prob. 8.5BPCh. 8 - Logins Roadhouse opened a new restaurant in...Ch. 8 - Record contingencies (LO85) Compact Electronics is...Ch. 8 - Prob. 8.8BPCh. 8 - Calculate and analyze rates (LO86) Selected...Ch. 8 - Great AdventuresContinuing Problem (This is a...Ch. 8 - Prob. 8.2APFACh. 8 - Prob. 8.3APFACh. 8 - Comparative Analysis American Eagle Outfitters,...Ch. 8 - Prob. 8.5APECh. 8 - Written Communication Western Manufacturing is...Ch. 8 - Earnings Management Quattro Technologies, a...
Knowledge Booster
Similar questions
- Gonzales Company currently uses maximum trade credit by not taking discounts on its purchases. The standard industry credit terms offered by all its suppliers are 2/10, net 42 days, and the firm pays on time. The new CFO is considering borrowing from its bank, using short-term notes payable, and then taking discounts. The firm wants to determine the effect of this policy change on its net income. Its net purchases are $11,760 per day, using a 365-day year. The interest rate on the notes payable is 10%, and the tax rate is 40%. If the firm implements the plan, what is the expected change in net income? Do not round intermediate calculations. $29,981 $33,878 $26,083 $34,178 $35,677arrow_forwardAssume you work as an assistant to the chief financial officer (CFO) of Fashions First, Inc. TheCFO reminds you that the fiscal year-end is only two weeks away and that he is looking to you toensure the company stays in compliance with its loan covenant to maintain a debt-to-assets ratio ofno more than 75 percent. A review of the general ledger indicates that assets total $690,000 and liabilities are $570,000. Your company has an excess of Cash ($300,000) and an equally large balancein Accounts Payable ($270,000), although none of its Accounts Payable are due until next month.Required:1. Determine whether the company is currently in compliance with its loan covenant.2. Assuming the level of assets and liabilities remains unchanged until the last day of the fiscalyear, evaluate whether Fashions First should pay down $210,000 of its Accounts Payable onthe last day of the year, before the Accounts Payable become duearrow_forwardIndiana Jones Adventure Tours has the following year-end data; $775,000 in credit sales, $250,000 in accounts receivable, and a $10,000 debit balance in its allowance for doubtful accounts account. It estimates 6% of its accounts receivable will be uncollectible. During the year, the company writes off a $3,000 uncollectible account. What is the company’s bad debt expense for the year? Group of answer choices $15,000 $28,000 $18,000 $25,000arrow_forward
- (Bad-Debt Reporting Issues) Clark Pierce conducts a wholesale merchandising business that sells approximately 5,000 items per month with a total monthly average sales value of $250,000. Its annual bad debt rate has been approximately 1½% of sales. In recent discussions with his bookkeeper, Mr. Pierce has become confused by all the alternatives apparently available in handling the Allowance for Doubtful Accounts balance. The following information has been presented to Pierce.1. An allowance can be set up (a) on the basis of a percentage of receivables or (b) on the basis of a valuation of all past dueor otherwise questionable accounts receivable. Those considered uncollectible can be charged to such allowance at theclose of the accounting period, or specific items can be charged off directly against (1) Gross Sales or to (2) Bad Debt Expense in the year in which they are determined to be uncollectible.2. Collection agency and legal fees, and so on, incurred in connection with the…arrow_forwardReed plc is considering how to improve its debtor collection policy. The following information is available. Current Credit Sales: £912,000 Average debtor collection period (days): 94 days Wishing to introduce a new policy of payment within (days): 60 days Anticipated reduction in sales per year: £40,000 Increased collection costs per yer: £2,000 Short-term cost of borrowing (%): 30% Sales contribution to profit: 20% Required What will be the net benefit if Reed successfully enforces the new policy? When a corporation raises finance, there are two options: long-term debt finance (bank loan or corporate bonds) and equity finance (ordinary shares). The two approaches have fundamental consequences to the corporation. What are the main differences between the two approaches?arrow_forwardAggressive Corporation approaches Matt Taylor, a loan officer for Oklahoma State Bank, seeking toincrease the company's borrowings with the bank from $100,000 to $150,000. Matt has an uneasyfeeling as he examines the loan application from Aggressive Corporation, which just completed itsfirst year of operations. The application included the following financial statements The income statement submitted with the application shows a net income of $30,000 in the first yearof operations. Referring to the balance sheet, this net income represents a more-than-acceptable15% rate of return on assets of $200,000.Matt's concern stems from his recollection that the $100,000 note payable reported on the balancesheet is a three-year loan from his bank, approved earlier this year. He recalls another promising newcompany that, just recently, defaulted on its loan due to its inability to generate sufficient cash flowsto meet its loan obligations.Seeing Matt's hesitation, Larry Bling, the CEO of…arrow_forward
- (Warranties) The Dotson Company, owner of Bleacher Mall, charges Rich Clothing Store a rental fee of $600 per month plus 5% of yearly profits over $500,000. Matt Rich, the owner of the store, directs his accountant, Ron Hamilton, to increase the estimate of bad debt expense and warranty costs in order to keep profits at $475,000.InstructionsAnswer the following questions.(a) Should Hamilton follow his boss’s directive?(b) Who is harmed if the estimates are increased?(c) Is Matt Rich’s directive ethical?arrow_forward6. Identifying the Stakeholders and Alternative Courses of Action Gail Easy, the Controller of Tech-It-Up, just left a meeting with Bob Devious, the CFO of the company. Easy told Devious that because the inventory was slow-moving, it should be written down by $100,000. Devious told Easy not to record her proposed $100,000 write-down of inventory because it would reduce the current ratio below debt covenant requirements on a $1 million loan to Pay-Up-Now Bank & Trust. Moreover, the company anticipates a new public offering of stock next year and Devious wants the earnings to be as high as possible. Question: Identify the stakeholders in this case. Group of answer choices a. suppliers b. creditors c. investors d. all of the abovearrow_forwardThe Raattama Corporation had sales of $3.5 million last year, and it earned a 5% return (after taxes) on sales. Recently, the company has fallen behind in its accounts payable. Although its terms of purchase are net 30 days, its accounts payable represents 60 days’ purchases. The company’s treasurer is seeking to increase bank borrowing in order to become current in meeting its trade obligations (that is, to have 30 days’ payables outstanding). The company’s balance sheet is as follows (in thousands of dollars): How much bank financing is needed to eliminate the past-due accounts payable? Assume that the bank will lend the firm the amount calculated in part a. The terms of the loan offered are 8%, simple interest, and the bank uses a 360-day year for the interest calculation. What is the interest charge for 1 month? (Assume there are 30 days in a month.) Now ignore part b and assume that the bank will lend the firm the amount calculated in part a. The terms of the loan are 7.5%, add-on interest, to be repaid in 12 monthly installments. What is the total loan amount? What are the monthly installments? What is the APR of the loan? What is the effective rate of the loan? Would you, as a bank loan officer, make this loan? Why or why not?arrow_forward
- Clovis Enterprises reports $845,500 in credit sales for 2018 and $933,000 in 2019. It has a $758,000 accounts receivable balance at the end of 2018 and $841,000 at the end of 2019. Clovis uses the income statement method to record bad debt estimation at 4% during 2018. To manage earnings more favorably, Clovis changes bad debt estimation to the balance sheet method at 5% during 2019. A. Determine the bad debt estimation for 2018. B. Determine the bad debt estimation for 2019. C. Describe a benefit to Clovis Enterprises in 2019 as a result of its earnings management.arrow_forwardDavid Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: e. Suppose the expected free cash flow for Year 1 is 250,000 but it is expected to grow faster than 7% during the next 3 years: FCF2 = 290,000 and FCF3 = 320,000, after which it will grow at a constant rate of 7%. The expected interest expense at Year 1 is 128,000, but it is expected to grow over the next couple of years before the capital structure becomes constant: Interest expense at Year 2 will be 152,000, at Year 3 it will be 192,000 and it will grow at 7% thereafter. What is the estimated horizon unlevered value of operations (i.e., the value at Year 3 immediately after the FCF at Year 3)? What is the current unlevered value of operations? What is the horizon value of the tax shield at Year 3? What is the current value of the tax shield? What is the current total value? The tax rate and unlevered cost of equity remain at 25% and 14%, respectively.arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning
Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College
Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Cornerstones of Financial Accounting
Accounting
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Cengage Learning
Principles of Accounting Volume 1
Accounting
ISBN:9781947172685
Author:OpenStax
Publisher:OpenStax College
Financial Reporting, Financial Statement Analysis...
Finance
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning