Q32. On December 15, 2004, the Zeisler Company faces a financial crisis. Zeisler’s industry has gone into recession and net

     income has declined to nearly zero. Jeremiah Welch, the company’s CFO, is extremely concerned that, when the final figures

     for 2004 come in, the poor operating results will throw the firm into violation of its debt covenants, which specify that it must

     meet a certain return on assets (ROA) and not exceed a certain debt-to-asset ratio. A violation of either covenant would trigger

     a provision in the lending agreement allowing lenders to put Zeisler’s debt back to the firm and likely force Zeisler into bankruptcy.

With only two weeks before the close of the firm’s fiscal year on December 31, there is no way to avoid bankruptcy through improved operations. Welch calls an emergency meeting with Olivia Dupree, the firm’s controller, to come up with a plan of action to keep Zeisler out of bankruptcy. He explains to Dupree that they need to increase Zeigler’s reported ROA and reduce its reported debt-to-assets ratio relative to the numbers that would otherwise be reported for 2004.

Dupree suggests that Zeisler’s equity investments might be useful in staving off bankruptcy. Zeisler acquired 100,000 shares of the Market Square Corporation on January 1, 2004, at $25 per share. Market Square paid dividends during 2004 of $1.50 per share and was expected to have earnings for 2004 of $2.50 per share. Zeisler also holds 250,000 shares of General Nuclear, purchased for $72 per share. General Nuclear has no dividends and is expected to report a loss for 2004. Both securities are classified on the financial statements as available-for-sale. 

Dupree added that Zeisler also holds several million dollars of

Dupree left the meeting with Welch for a moment to check the stock market. She found that

Dupree suggested to Welch, “We could reclassify our equity investment in

Welch suggested that, instead of reclassifying

What is the investment income that Zeisler Company will report for the year 2004 on its investment in Market Square Corporation shares if it continues to account for the shares as an available-for-sale investment?

A)   $200,000.

B)   $250,000.

C)   $150,000.

答案和详解如下：

Q32. On December 15, 2004, the Zeisler Company faces a financial crisis. Zeisler’s industry has gone into recession and net

     income has declined to nearly zero. Jeremiah Welch, the company’s CFO, is extremely concerned that, when the final figures

     for 2004 come in, the poor operating results will throw the firm into violation of its debt covenants, which specify that it must

     meet a certain return on assets (ROA) and not exceed a certain debt-to-asset ratio. A violation of either covenant would trigger

     a provision in the lending agreement allowing lenders to put Zeisler’s debt back to the firm and likely force Zeisler into bankruptcy.

With only two weeks before the close of the firm’s fiscal year on December 31, there is no way to avoid bankruptcy through improved operations. Welch calls an emergency meeting with Olivia Dupree, the firm’s controller, to come up with a plan of action to keep Zeisler out of bankruptcy. He explains to Dupree that they need to increase Zeigler’s reported ROA and reduce its reported debt-to-assets ratio relative to the numbers that would otherwise be reported for 2004.

Dupree suggests that Zeisler’s equity investments might be useful in staving off bankruptcy. Zeisler acquired 100,000 shares of the Market Square Corporation on January 1, 2004, at $25 per share. Market Square paid dividends during 2004 of $1.50 per share and was expected to have earnings for 2004 of $2.50 per share. Zeisler also holds 250,000 shares of General Nuclear, purchased for $72 per share. General Nuclear has no dividends and is expected to report a loss for 2004. Both securities are classified on the financial statements as available-for-sale. 

Dupree added that Zeisler also holds several million dollars of

Dupree left the meeting with Welch for a moment to check the stock market. She found that

Dupree suggested to Welch, “We could reclassify our equity investment in

Welch suggested that, instead of reclassifying

What is the investment income that Zeisler Company will report for the year 2004 on its investment in Market Square Corporation shares if it continues to account for the shares as an available-for-sale investment?

A)   $200,000.

B)   $250,000.

C)   $150,000.

Correct answer is C)

The investment income for available-for-sale securities includes dividends, interest, and realized gains. In this case, the investment income from Market Square Corporation would be the dividends it paid to the number of shares Zeisler owns:

100,000 shares × $1.50 per share = $150,000.

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