Question: Explain the modified accrual basis of accounting.

> Three put options on a stock have the same expiration date and strike prices of $55, $60, and $65. The market prices are $3, $5, and $8, respectively. Explain how a butterfly spread can be created. Construct a table showing the profit from the strategy.

> Consider a put option on a non-dividend-paying stock when the stock price is $40, the strike price is $42, the risk-free interest rate is 2%, the volatility is 25% per annum, and the time to maturity is three months. Use DerivaGem to determine the follow

> Consider an option on a stock when the stock price is $41, the strike price is $40, the risk-free rate is 6%, the volatility is 35%, and the time to maturity is 1 year. Assume that a dividend of $0.50 is expected after 6 months. (a) Use DerivaGem to valu

> You are the manager and sole owner of a highly leveraged company. All the debt will mature in 1 year. If at that time the value of the company is greater than the face value of the debt, you will pay off the debt. If the value of the company is less than

> What is the result corresponding to that in Problem 11.26 for European put options?

> Suppose that c1, c2, and c3 are the prices of European call options with strike prices K1, K2, and K3, respectively, where K3 > K2 > K1 and K3 K2 ¼ K2 K1. All options have the same maturity. Show that
(Hint: Consider a portfolio that is long one opt

> A trader buys two July futures contracts on frozen orange juice concentrate. Each contract is for the delivery of 15,000 pounds. The current futures price is 160 cents per pound, the initial margin is $6,000 per contract, and the maintenance margin is $4

> A European call option and put option on a stock both have a strike price of $20 and an expiration date in 3 months. Both sell for $3. The risk-free interest rate is 10% per annum, the current stock price is $19, and a $1 dividend is expected in 1 month.

> The prices of European call and put options on a non-dividend-paying stock with an expiration date in 12 months and a strike price of $120 are $20 and $5, respectively. The current stock price is $130. What is the implied risk-free rate?

> Calls were traded on exchanges before puts. During the period of time when calls were traded but puts were not traded, how would you create a European put option on a nondividend- paying stock synthetically.

> On July 20, 2004, Microsoft surprised the market by announcing a $3 dividend. The exdividend date was November 17, 2004, and the payment date was December 2, 2004. Its stock price at the time was about $28. It also changed the terms of its employee stock

> Use DerivaGem to calculate the value of an American put option on a non-dividendpaying stock when the stock price is $30, the strike price is $32, the risk-free rate is 5%, the volatility is 30%, and the time to maturity is 1.5 years. (Choose ‘‘Binomial

> ‘‘If a company does not do better than its competitors but the stock market goes up, executives do very well from their stock options. This makes no sense.’’ Discuss this viewpoint. Can you think of alternatives to the usual employee stock option plan th

> A trader writes 5 naked put option contracts with each contract being on 100 shares. The option price is $10, the time to maturity is 6 months, and the strike price is $64. (a) What is the margin requirement if the stock price is $58? (b) How would the a

> Calculate the intrinsic value and time value from the mid-market (average of bid and offer) prices for the September call options in Table 1.2. Do the same for the September put options in Table 1.3. Assume in each case that the current mid market stock

> Suppose that the structure in Figure 8.1 is created in 2000 and lasts 10 years. There are no defaults on the underlying assets until the end of the eighth year when 17% of the principal is lost because of defaults during the credit crisis. No principal i

> Suppose that the term structure of risk-free interest rates is flat in the United States and Australia. The USD interest rate is 7% per annum and the AUD rate is 9% per annum. The current value of the AUD is 0.62 USD. Under the terms of a swap agreement,

> Suppose that you own 5,000 shares worth $25 each. How can put options be used to provide you with insurance against a decline in the value of your holding over the next 4 months?

> Company A, a British manufacturer, wishes to borrow U.S. dollars at a fixed rate of interest. Company B, a U.S. multinational, wishes to borrow sterling at a fixed rate of interest. They have been quoted the following rates per annum: (Rates have been ad

> A portfolio manager plans to use a Treasury bond futures contract to hedge a bond portfolio over the next 3 months. The portfolio is worth $100 million and will have a duration of 4.0 years in 3 months. The futures price is 122, and each futures contract

> On June 25, 2017, the futures price for the June 2017 bond futures contract is 118-23. (a) Calculate the conversion factor for a bond maturing on January 1, 2033, paying a coupon of 10%. (b) Calculate the conversion factor for a bond maturing on October

> A Canadian company wishes to create a Canadian LIBOR futures contract from a U.S. Eurodollar futures contract and forward contracts on foreign exchange. Using an example, explain how the company should proceed. For the purposes of this problem, assume th

> Assume that a bank can borrow or lend money at the same interest rate in the LIBOR market. The 90-day rate is 10% per annum, and the 180-day rate is 10.2% per annum, both expressed with continuous compounding and actual/actual day count. The Eurodollar f

> It is March 10, 2017. The cheapest-to-deliver bond in a December 2017 Treasury bond futures contract is an 8% coupon bond, and delivery is expected to be made on December 31, 2017. Coupon payments on the bond are made on March 1 and September 1 each year

> A Eurodollar futures quote for the period between 5.1 and 5.35 years in the future is 97.1. The standard deviation of the change in the short-term interest rate in one year is 1.4%. Estimate the forward interest rate in an FRA.

> The December Eurodollar futures contract is quoted as 98.40 and a company plans to borrow $8 million for three months starting in December at LIBOR plus 0.5%. (a) What rate can the company lock in by using the Eurodollar futures contract? (b) What positi

> A Treasury bond futures price is 103-12. The prices of three deliverable bonds are 115-06, 135-12, and 155-28. Their conversion factors are 1.0679, 1.2264, and 1.4169, respectively. Which bond is cheapest to deliver?

> A company enters into a forward contract with a bank to sell a foreign currency for K1 at time T1. The exchange rate at time T1 proves to be S1 (> K1). The company asks the bank if it can roll the contract forward until time T2 (> T1) rather than settle

> You would like to speculate on a rise in the price of a certain stock. The current stock price is $29 and a 3-month call with a strike price of $30 costs $2.90. You have $5,800 to invest. Identify two alternative investment strategies, one in the stock a

> What is the difference between a long forward position and a short forward position?

> For which funds are budgetary comparison schedules or statements required? Should the actual revenues and expenditures on the budgetary comparison schedules be reported on the GAAP basis? Why or why not?

> Distinguish among appropriations, allotments, expenditures, encumbrances, and expenses.

> Explain the essential differences between revenues and other financing sources and between expenditures and other financing uses. How is each of these items reported on the governmental funds statement of revenues, expenditures, and changes in fund b

> Describe the format prescribed by the GASB for the government-wide statement of activities and how that format benefits financial statement users.

> In relation to the government-wide statement of activities, define direct expenses and indirect expenses and why it is important to distinguish between them.

> Explain the different purposes of the fund-based and government-wide financial statements of a state or local government and the primary differences between the fund-based and government-wide operating statements.

> Identify the fund balance classifications and give an example of what might be included in each classification identified.

> What is meant by the terms deferred outflows of resources and deferred inflows of resources? When are these accounts used?

> What are the three categories of funds prescribed by GASB standards and which fund types are included in each? Which basis of accounting is used by each category?

> Identify the criteria for determining if a governmental or enterprise fund must be reported as a major fund. What other funds should or may be reported as major funds?

> For each characteristic, concept, or financial reporting requirement listed on the next page, place a Y for yes in the type of organization column if the item applies to that type of organization or N for no if it does not apply. To answer some of the it

> Identify and briefly describe the three broad categories of service activities that most general purpose governments perform.

> A not-for-profit organization is required to report expenses incurred for programs separately from management and general expenses and fund-raising costs. Explain who would use this information and why this separation matters.

> Identify and describe the four sections of a federal department or agency’s performance and accountability report.

> Proprietary fund accounting is more like for-profit accounting than the accounting for any other category of fund. Explain why you think this is the case, using the two types of proprietary funds as examples.

> What is the primary financial reporting objective for not-for-profit organizations? How does this differ from the primary financial reporting objective for a government?

> Explain the purpose of operational accountability and the purpose of fiscal accountability. Which category of financial statements is most useful in reporting on each of these accountability concepts?

> What is the primary reason that governmental entities need to use funds for financial reporting? How are funds established?

> The Beth House Museum is a nongovernmental not-for-profit organization. At the annual meeting, one of the new board members said, “I took a couple of accounting classes in college and we can choose to use either the FASB rules or the GASB rules.” Do you

> Describe how the reporting objectives for government-wide and governmental fund financial statements are different.

> Choose the best answer. 1. Which of the following is a special purpose government? a. The State of Arkansas. b. Greene County. c. Rutgers University. d. Seattle, Washington. 2 Which of the following is not a distinguishing difference between government

> Identify some differences between business organizations and government/ not-for-profit organizations.

> The pre-closing trial balance for the Chance County Woodland Park Capital Projects Fund is provided on the next page. Required: a. Prepare the June 30, 2017, statement of revenues, expenditures, and changes in fund balances for the capital projects fu

> In Fulbright County, the Culture and Recreation Department constructed a library in one of the county’s high growth areas. The construction was funded by a number of sources. Below is selected information related to the Library Capital Project Fund. All

> On July 20, 2017, the building occupied by Sunshine City’s Culture and Recreation Department suffered severe structural damage as a result of a hurricane. It had been 48 years since a hurricane had hit the Sunshine City area, although hurricanes in Sunsh

> The City of Rochester signed a 30-year agreement with East Coast Real Estate, Inc. to lease a newly constructed building for city services. The city agrees to make an initial payment of $1,000,000 and annual payments of $809,375 for the next 29 years. Us

> Carmel County has prepared the following schedule related to its capital asset activity for the fiscal year 2017. Carmel County has governmental activities only, with no business-type activities. Required: a. Does the above capital asset footnote discl

> In 2017, Riverside began work on an outdoor amphitheater and concession stand at the city’s park. It is to be financed by a $3,500,000 bond issue and supplemented by a $500,000 General Fund transfer. The following transactions occurred in 2017: 1. The Ge

> The following transactions affected various funds and activities of the Town of Big Springs. 1. The Fire Department, a governmental activity accounted for within the General Fund, purchased $100,000 of water from the Water Utility Fund, an enterprise fun

> The following transactions occurred during the 2017 fiscal year for the City of Evergreen. For budgetary purposes, the city reports encumbrances in the Expenditures section of its budgetary comparison schedule for the General Fund but excludes expenditur

> The City of Waterville applied for a grant from the state government to build a pedestrian bridge over the river inside the city’s park. On May 1, 2017, the city was notified that it had been awarded a grant of up to $200,000 for the project. The state w

> For this exercise refer to the Denver government-wide statement of net position (p . 40 ), the Denver government-wide statement of activities (p.42), the American Diabetes Association balance sheet (p. 528) , and the American Diabetes Association stateme

> At the end of fiscal year 2017, the City of Columbus General Fund pre-adjusting trial balance showed the following balances for operating and budgetary accounts and fund balance accounts. he City of Columbus uses the purchases method of accounting for

> The City of Troy collects its annual property taxes late in its fiscal year. Consequently, each year it must finance part of its operating budget using tax anticipation notes. The notes are repaid upon collection of property taxes. On April 1, 2017, the

> On July 1, 2017, the beginning of its fiscal year, Ridgedale County recorded gross property tax levies of $4,200,000. The county estimated that 5 percent of the taxes levied would be uncollectible. As of April 30, 2018, the due date for all property taxe

> During fiscal year 2017, the City of Hickory Hills issued purchase orders to various vendors in the amounts shown for the following functions of the city: General Government…………………………………..$ 164,200 Public Safety………………………………………………..302,000 Public Works……

> Jacqueline Ponce de Leon, a descendent of Juan Ponce de Leon, made a cash contribution of $1,500,000 to the City of Fountains to create and maintain a large dramatic fountain in front of City Hall in honor of her ancestor. For accounting purposes, the ci

> The City of Hinton’s General Fund had the following post-closing trial balance at April 30, 2016, the end of its fiscal year: During the year ended April 30, 2017, the following transactions, in summary form, with subsidiary ledger de

> The Town of Willingdon adopted the following General Fund budget for fiscal year 2017: Estimated revenues: Taxes………………………………………………….…. $15,000,000 Intergovernmental revenues………………………1,000,000 Licenses and permits………………

> On February 15, 2016, the Town of Evergreen police chief’s administrative assistant is preparing a purchase order to place an order for a new computer. The computer is estimated to cost $1,600. Prior to submitting the purchase order, he

> The following information is provided about the Town of York’s General Fund operating statement and budgetary accounts for the fiscal year ended September 30, 2016. (Note: The town has no restricted, committed, or assigned fund balances.) Estimated reve

> Review the computer generated budgetary comparison report presented below for the Lincoln City Culture and Recreation Department as of July 1 of its fiscal year ending December 31, 2016, and respond to the questions that follow. Required: a. Explain th

> For more than 100 years, the financial statements of the Town of Fordville have consisted of a statement of cash receipts and a statement of cash disbursements prepared by the town treasurer for each of its three funds: the General Fund, the Road Tax Fun

> The printout of the Revenues and Appropriations subsidiary ledger accounts for the General Fund of the City of Augusta as of March 31, 2017, appeared as follows: Required: Assuming that this printout is correct in all details and that there are no oth

> Forest City has recently implemented GAAP reporting and is attempting to determine which of the following special revenue funds should be classified as “major funds” and, therefore, be reported in separate columns on t

> During July 2016, the first month of the 2017 fiscal year, the Town of Willingdon issued the following purchase orders and contracts: General government………………….……………………$ 800,000 Public safety……………………………………………………..400,000 Public works……………………………………………………

> Choose the letter of the sample transaction in the right-hand column that would most likely be reported in the fund listed in the left-hand column. Fund 1. Agency 2. Capital projects 3. Debt service 4. Enterprise 5. General 6. Internal service 7. Investm

> Categories. For each fund or government-wide category listed in the left-hand column, choose the letter(s) of the applicable fund type or characteristic in the right-hand column. Multiple letters may apply to each category. Fund or Government-wide Catego

> For each of the following fund types, indicate its fund category by placing either “GF” for governmental funds, “PF” for proprietary funds, or “FF” for fiduciary funds in the space provided before each item. Fund Type ______ Agency fund ______ Permanent

> Utilizing the comprehensive annual financial report (CAFR) obtained for Exercise 1–16, follow these instructions: a Internal Service Funds. (1) Use of Funds. What activities of the government are reported as being administered by internal service funds?

> Utilizing the CAFR obtained for Exercise 1–16, in Chapter 1, review the governmental fund financial statements and related data and government-wide financial statements. Note particularly these items: a. Statement of Activities at the Government-wide Lev

> Ray County administers a tax agency fund, an investment trust fund, and a private-purpose trust fund. The tax agency fund acts as an agent for the county, a city within the county, and the school district within the county. Participants in the investment

> Evergreen County acts as the disbursing agent for a state grant for the performing arts. The state is responsible for determining which local governments are eligible for the grant money and for following up to ensure that the recipients comply with the

> Statement of Financial Accounting Concepts 1 , “Objectives of Federal Financial Reporting” at (http://www.fasab.gov/pdffiles/handbook_sffac_1.pdf ) identifies accountability and decision usefulness as the fundamental values of federal governmental financ

> The Albertville City Council decided to pool the investments of its General Fund with Albertville Schools and Richwood Township in an investment pool to be managed by the city. Each of the pool participants had reported its investments at fair value as o

> Following is a list of fund names and descriptions from comprehensive annual financial reports (CAFRs). Required: Indicate which of the following are fiduciary funds. If not a fiduciary fund, identify which type of fund should be used to account for th

> Residents of Green Acres, a gated community located in the City of Foothills, voted to form a local improvement district to fund the construction of a neighborhood park. The city agreed to administer the bonded debt; however, residents of Green Acres a

> The county collector of Suncoast County is responsible for collecting all property taxes levied by funds and governments within the boundaries of the county. To reimburse the county for estimated administrative expenses of operating the tax agency fund,

> Bluff County’s schedule of changes in net pension liability and related ratios is shown below. Required: Compute the missing amounts.

> Inglis City had a beginning cash balance in its enterprise fund of $895,635. During 2017, the following transactions occurred: 1. Interest received on investments totaled $42,400. 2. The city acquired additional equity investments totaling $75,000. 3. A

> Following is the June 30, 2017, statement of net position for the City of Bay Lake Water Utility Fund. Required: a. For fiscal year 2017, prepare general journal entries for the Water Utility Fund using the following information. (1) The amount in the

> The Town of Elizabeth operates the old train station as an enterprise fund. The train station is on the national register of historic buildings. Since the town has held the building for such a long time, the Central Station Fund has no long-term debt. Th

> During 2017, the Town of Falmouth had a number of transactions that affected net position of its town skating rink, which is operated as an enterprise fund. You are provided with the following information for 2017 1. The beginning net position balances a

> The City of Saltwater Beach established an enterprise fund in 2015 to construct and operate Tribute Aquatic Center, a public swimming pool. The pool was completed and began operations in 2016. All costs, including repayment of debt, are to be paid by use

> GASB Concepts Statement No. 1, “Objectives of Financial Reporting,” states that “Accountability is the cornerstone of all financial reporting in government.” FASB Statements of Financial Accounting Concepts Statement No. 8, “Conceptual Framework for Fina

> The City of Ashville operates an internal service fund to provide garage space and repairs for all city-owned and-operated vehicles. The Central Garage Fund was established by a contribution of $300,000 from the General Fund on July 1, 2017, at which tim

> Washington City created an Information Technology department in 2013 to centralize information technology (IT) functions for the city. The goal of the department was to reduce costs, avoid duplication of efforts, and provide up-to-date technology to all

> Brown County operates a solid waste landfill for the citizens of the county. The following events occurred during the county’s fiscal year ended September 30, 2017. 1. The county paid interest costs of $6,869,000; of this amount, $214,000 was required to

> In July 1, 2016, the first day of its 2017 fiscal year, the City of Nevin issued at par $2,000,000 of 6 percent term bonds to construct a new city office building. The bonds mature in five years on July 1, 2021. Interest is payable semiannually on Januar

> As of December 31, 2016, Sandy Beach had $9,500,000 in 4.5 percent serial bonds outstanding. Cash of $509,000 is the debt service fund’s only asset as of December 31, 2016, and there are no liabilities. The serial bonds pay interest semiannually on Janua