How to calculate warranty liability

1. What is the “current portion of long term debt”?

2. What are the three classifications of the Statement of Cash Flow?

3. (True or False) A company should accrue a liability for a loss contingency if it is at least reasonably possible that assets have been impaired and the amount of potential loss can be reasonably estimated.

4. Taylor Product Inc. distributed 100 million coupons in 2016. The coupons are redeemable for 30 cents each. Taylor anticipates that 70% of the coupons will be redeemed. The coupons expire on December 31, 2017. There were 45 million coupons redeemed in 2016 and 30 million redeemed in 2017. What was General's coupon liability as of December 31, 2016?

5. Taylor Inc. had a balance of $80,000 in its quality-assurance warranty liability account as of December 31, 2015. In 2016, Taylor's warranty expenditures were $445,000. Its warranty expense is calculated as 1% of sales. Sales in 2016 were $40 million. What was the balance in the warranty liability account as of December 31, 2016?

6. The rate of interest that actually is incurred on a bond payable is called the:

a. Face Rate

b. Contract Rate

c. Effective Rate

d. Stated Rate

7. If the discount rate is X, the present value of $100 received two years from now is?

8. If the discount rate is 3%, the present value of $100 received two years from now is?

9. Classifying liabilities as either current or long-term helps creditors assess:

a. Profitability

b. Relative risk of a firm’s liabilities

c. The degree of a firm’s liabilities

d. The amount of a firm’s liabilities.

10. The stated rate of a three year $100,000 annual bond is 10%. The effective rate of interest is 9%. What would be the selling price of the bond?

11. A three year $100,000 bond with a stated annual rate of 10% is sold for $95,000. What would the journal entry be at the time the bond was sold?

12. Zero-coupon bonds:

a. Offer a return in the form of a deep discount off the face value

b. Result in zero interest expense for the issuer

c. Result in zero interest income for the investor

d. Are reported as shareholder equity by the issuer.

13. Outstanding common stock is:

a. Stock that is performing well on one of the exchanges (i.e., New York StockExchange)

b. Stock that has been authorized by the state for issue

c. Stock held in the corporate treasury

d. Stock in the hands of shareholders.

14. Net income for the year was $120,000. There were no changes in non-cash current assets or current liabilities. There were no disposal of land or equipment. Depreciation expense for the period was $6,000. 1000 shares of stock were issued at $3 a share (a total of $30,000). What was Cash Flow from Operating Activities?

15. Wages payable increased by $5,000 for the period. Wage expense for the period was $76,000. How much cash was used to pay wages for the period?

16. Net income for the year was $120,000. Wages Payable was the only non-cash current asset and current liability that changed during the period. The Wages Payable ending balance is $7,000 higher than the Wages Payable beginning balance. There were no disposals of land or equipment. The Company received $25,000 from the issuance of a bond payable. What was Cash Flow from Operating Activities?

17. Net income for the year was $120,000. There were no changes in non-cash current assets or current liabilities. A piece of equipment was sold for $8,000. The Company recorded a $2,500 gain on disposal of equipment when the equipment was sold. What was Cash Flow from Operating Activities?

18. Taylor Company’s accounting records include the following information:

Payments to suppliers

$50,000

Collections on accounts receivable

79,000

Cash sales

44,000

What is the amount of net cash provided by operating activities indicated by the amounts provided?

19. What is the formula to calculate the annual cash payments of a zero coupon bond?

20. Assume that a three year $100,000 bond with an 11% stated rate and a 9% effective rate was sold for $105,063. Interest is paid annually. What is the interest expense in the first year of the bond?

21. Referring to the information in question 20, what is the cash coupon payment in year 3?

22. Referring to the information in question 20, prepare all of the year 3 journal entries related to this bond.

23. Referring to the information in question 20, what is the interest expense in the second year of the bond?

24. Referring to the information in question 20, what is the Amortization of the Bond Premium that would be recorded in Year 2?

25. Referring to the information in question 20, why were investors willing to pay a premium for this bond?

26. Houston Inc makes baseball bats. Occasionally, baseball bats break. Houston will refund the money to a customer whose bat breaks within 90 days of purchase. Based on the Houston’s warranty history, 4% of total bat sales will have to be refunded. Record the warranty expense for this month. Assume that bat sales for this month totaled $470,000.

27. Entering into a capital lease would have what effect on assets, liabilities, and oweners equity?

28. On January 1, 2015, Taylor Company issued and sold 1,000 shares of stock. The issuing price was $4 a share (Taylor received $4,000 at stock issuance). On February 1, 2015 the stock price increased from $4.00 a share (original issuance price) to $4.50 a share. Record the journal entry Taylor Company would make to recognize the $.50 increase in share price.

29. Issuance of dividends reduces owners equity. Is the issuance of dividends an expense (yes or no). If no, what is it?

30. The financing section of the Statement of Cash Flows reports cash transactions between whom?

YOU CAN DOWNLOAD THE HARLEY DAVIDSON ANNUAL REPORT FOR THE YEAR ENDING DECEMBER 31, 2015 FROM THE FOLLOWING WEBSITE. YOU WILL NEED TO REFER TO THE ANNUAL REPORT IN ORDER TO ANSWER THE FOLLOWING QUESTIONS.

http://investor.harley-davidson.com/phoenix.zhtml?c=87981&p=irol-reportsannual&locale=en_US&bmLocale=en_US

31. Who is Harley Davidson’s (HD) auditor and who is responsible for the financial statements?

32. Calculate HD’s cash flow yield, cash flow to sales (use total revenue), and cash flow to average assets for 2015 and explain what information you obtain from this ratio.

33. What is HD’s 2015 return on assets?

34. What is HD’s 2015 and 2014 current ratio?

35. A current ratio less than one implies what?

36. Using the average of the High and Low market prices in the fourth quarter of 2015 and Basic Earnings Per Share as listed in HD’s 10-K/annual report, calculate HD’s PE ratio as of December 31, 2015

37. Letting P=price, E=earnings, r=cost of capital and using the following pricing model P=E/r (this assumes earnings will be a constant perpetuity), and using the information you used in question 36, (a) calculate the HD’s estimated cost of capital and (b) if the average firm in the market has a cost of capital of 10%, is HD riskier or less risky than the average firm in the market?

38. Using 365 days in a year, what are the average number of days in fiscal 2015 that it took HD to collect its accounts receivable? [Use net accounts receivable and total revenue for net sales].

39. Calculate the 2015 amount of revenue HD generated from a dollar of assets and state the name of this ratio.

40. What is HD’s estimated useful life of reacquired distribution rights?

41. On August 4, 2015, HD completed the purchase of certain assets and liabilities of what company?

42. HD’s 2015 depreciation and amortization on the Operating Section of the Statement of Cash Flows was?

43. HD’s inventory obsolescence reserves deducted from FIFO cost as of December 31, 2015 were?

44. The auditor audited the financial statements with the standards of whom?

45. Of the recurring fair value measurements, what was HD’s 2015 marketable securities that were priced as Level 1 assets?

46. Of the recurring fair value measurements, what was HD’s 2015 marketable securities that were priced as Level 2 assets?

47. How much does HD project as 2016 principal payments for debt obligations?

48. What is HD’s statutory tax rate and what item was the largest deduction from the statutory tax rate to the effective tax rate of 34.6%?

49. What is HD’s 2015 service cost for Pension and SERPA benefits?

50. What was the ending 2015 balance in HD’s allowance for doubtful accounts?

ANSWER SHEET

1. CPLTD is a liability entry on the balance sheet to account for the amount of long-term debt that is due within the accounting year.

2. Operating Activities- Cash activities pertaining to net income.

Investing Activities- Cash activities pertaining to noncurrent assets (Long-term investments, PP&E, etc)

Financing Activities- Cash Activities pertaining to owners’ equity and noncurrent liabilities (long-term debt principle, stock sale, dividend payments, etc).

3 False

4 $2,100,000

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6 C

7 Y=$100/(1+X)^2

8 $94.26=100/(1+.03)^2

9 B

10 $115,119.30

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12 A

13 D

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18 $73,000

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