Exam 3: Analyzing Financing Activities

Harms Inc. reported in its 2006 annual report the following information: Plan Status: December 31, 2006 Accumulated Benefit Obligation (ABO) \ 90 Million Projected Benefit Obligation (PBO) \ 95 Million Plan Assets (at fair value) \ 80 Million Unrecognized transition asset \ 11 Million Unrecognized actuarial losses \ 1 Million Assumptions: discount rate 8\% return on assets 9\% compensation growth 5\% -Funded status at the end of 2006 was:

On January 1, a company entered into a capital lease resulting in an obligation of $20,000 being recorded on the balance sheet. The lessor's implicit interest was 10 percent. At the end of the first year of the lease, the cash flow from financing activities section of the lessee's statement of cash flows showed a use of cash of $2,200 applicable to the lease. How much did the company pay the lessor in the first year of the lease?

If a company that leases equipment from another company records these leases as operating leases rather than capital leases, its: I. recorded liabilities will be lower. II. recorded assets will be higher. III. total cash flows will be higher. IV. leverage ratios will be higher.

Dylan Corporation issues a zero-coupon bond with $100,000 face value, with a 5-year maturity, and the market rate is 7%. Interest on corporate bonds is normally paid semiannually. In the liability section of Dylan's balance sheet, the proceeds from selling the zero-coupon immediately after issuance will be closest to:

Companies report the funded status of pension plans as a separate line item on the balance sheet.

Cash flow from Operations 5. Current Ratio

If a company leases equipment to other companies and records these leases as operating leases rather than capital leases, its: I. recorded liabilities will be lower. II. recorded assets will be higher. III. total cash flows will be higher. IV. leverage ratios will be higher.

Creditors of a business are more concerned with the future cash flows of a business than the future return on equity.

Many postretirement benefits other than pensions are not funded, in part because they are not required to be funded by law, unlike pension plans.

Which of the following might give rise to off-balance sheet financing? I. Long-term operating leases II. Sale of receivables without recourse III. Through-put agreements IV. Purchase commitments

Which of the following would not be found listed as a liability on a company's balance sheet?

A company issues a $100,000K 9% bond and receives $99,000K (ignoring transaction costs). This implies that the effective interest rate is less than 9%.

Minority interest appears on the balance sheet of some companies. Minority interest:

The plan is said to be underfunded, if:

A company's current ratio is 1.5. If the company uses cash to retire notes payable due within one year, would this transaction increase or decrease the current ratio and return on assets ratio?

Following recent SPE abuses, a new rule requiring a minimum of 3% external financing was enacted.

One way for a company to increase its book value per share is to:

Below is part of Harnischfeger's footnote on Postretirement Benefits other than Pensions from its X6 Annual report. (in thousands) Accumulated Postretirement Benefit Obligation (APBO) \ 69,439 \ 78,800 Plan assets at fair value APBO in excess of plan assets 69,439 78,800 Unrecognized prior service credit 20,653 31,433 Unrecognized gain 7,214 7,873 Accrued postretirement benefit liability 97,306 118,106 Less: Current Portion 18,492 16,501 \ 78,814 \ 101,605 (in thousands) Service Cost \ 327 \ 502 Interest cost on APBO 5,623 6,475 Amortization of prior service (credit) (10,780) (9,417) Net amortization and deferral (2,624) (225) Net periodic postretirement benefit cost \ (7,454) \ (2,665) a. What amount is Harnischfeger showing as a liability on their balance sheet with respect to postretirement benefits other than pensions at the end of fiscal X6? b. What amount is Harnischfeger showing as an expense on the income statement for the fiscal year X6? c. Why is Harnischfeger's accrued postretirement benefit liability greater than the APBO? d. If Harnischfeger wanted to reduce its APBO how might they do it? Provide three ways.

The net deferrals are included in the balance sheet as part of:

Werter Inc. has a defined benefit pension plan. Information related to this plan as of the end of 2006 is as follows: PBO \ 5,350,000 ABO \ 4,100,000 Plan Assets \ 3,500,000 Unamortized Prior Service Cost \ 360,000 Unamortized transition asset \ 540,000 Discount rate 8\% Compensation rate increase 5\% Expected rate of return 10\% a. Estimate pension expense for 2006 assuming that the pension plan assumptions remain unchanged from 2006, service cost is 10% of beginning of year PBO and that the prior service costs and transition assets are being amortized over 20 years. b. Calculate the liability to be recorded in the balance sheet at the end of fiscal 2006.