Chapter 15 Instructor Solutions Manual

CHAPTER 15 Long-Term Liabilities Instructor Solutions Manual, Searchable 66 page pdf
Long-Term Liabilities
Examples:
Kear Inc. should record the Jansen Delivery lease as a capital lease
because: (1) the lease term is greater than 75% of the estimated
economic life of the leased property and (2) the present value of the
lease payments is 90% or more of the fair market value of the computer. It
should be noted that only one condition needs to be met to require
capitalization.

Both the Flood Co. and Louis Auto leases should be reported as operating
leases because none of the four conditions is met to require treatment as
a capital lease.

ATWATER CORPORATION
Bond Premium Amortization
Effective-Interest Method—Semiannual Interest Payments

Ortiz Enterprises should record the Flynn Co. lease as a capital lease
because the lease term is greater than 75% of the estimated economic
life of the leased property.

Both the Miley Inc. and Renner Co. leases should be reported as
operating leases because none of the four conditions is met to require
treatment as a capital lease.

The Flynn Co. lease is a capital lease. The entry to record the capital
lease on January 1, 2010 therefore is as follows:

WHEELER SATELLITES
Bond Discount Amortization
Effective-Interest Method—Semiannual Interest Payments

NORDHAM CORPORATION
Income Statement

The higher the percentage of debt to total assets, the greater the risk
that a company may be unable to meet its maturing obligations.
PepsiCo’s 2007 debt to total assets ratio was approximately 1% more
than Coca-Cola’s and it would be considered slightly less able to meet
its obligations. The times interest earned ratio provides an indication
of a company’s ability to meet interest payments. Since PepsiCo’s times
interest earned ratio is higher than Coca-Cola’s, PepsiCo has more
ability to meet its interest payments than Coca-Cola. However, both times
interest earned ratios are excellent and therefore both companies will
have no difficulty meeting these payments.


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