Reading 39: Non-current (Long-term) Liabilities-LOS b 习题精选 桌面

1215

Session 9: Financial Reporting and Analysis: Inventories, Long-lived Assets, Income Taxes, and Non-current Liabilities
Reading 39: Non-current (Long-term) Liabilities

LOS b: Discuss the effective interest method and calculate interest expense, amortisation of bond discounts/premiums, and interest payments.

 

 

Interest expense is reported on the income statement as a function of:

A) the coupon payment.

B) the market rate.

C) the unamortized bond discount.

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Interest expense is always equal to the book value of the bond at the beginning of the period multiplied by the market rate at issuance.

1215

Assume a city issues a $5 million bond to build a new arena. The bond pays 8 percent semiannual interest and will mature in 10 years. Current interest rates are 9%. Interest expense in the second semiannual period is closest to:

A) $106,550.

B) $210,830.

C) $80,000.

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Step 1: Compute the present value of the bond: Since the current interest rate is above the coupon rate the bond will be issued at a discount.

FV = $5,000,000; N = 20; PMT = (0.04)(5 million) = $200,000; I/Y = 4.5; CPT → PV = -$4,674,802

Step 2: Compute the interest expense at the end of the first period.

= (0.045)(4,674,802) = $210,366

Step 3: Compute the interest expense at the end of the second period.

= (new balance sheet liability)(current interest rate)

= $4,674,802 + $10,366 = $4,685,168 new balance sheet liability

(0.045)(4,685,168) = $210,833

1215

A bond is issued with the following data:

• $10 million face value.
• 9% coupon rate.
• 8% market rate.
• 3-year bond with semiannual payments.

Assuming market rates do not change, what will the bond's market value be one year from now and what is the total interest expense over the life of the bond?

Value in 1-Year

Total Interest Expense

A) 10,181,495  2,962,107

B) 11,099,495  2,437,893

C) 10,181,495   2,437,893

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To determine the bond's market value one year from now: FV = 10,000,000; N = 4; I = 4; PMT = 450,000; CPT → PV = $10,181,495.

To determine the total interest expense:

1. FV = 10,000,000; N = 6; I = 4; PMT = 450,000; CPT → PV = $10,262,107. This is the price the purchaser of the bond will pay to the issuer of the bond. From the issuer's point of view this is the amount the issuer will receive from the bondholder.
2. Total interest expense over the life of the bond is equal to the difference between the amount paid by the issuer and the amount received from the bondholder.

[(6)(450,000) + 10,000,000] – 10,262,107 = 2,437,893

1215

Nomad Company issued $1,000,000 face value 2-year zero coupon bonds on December 31, 20X2 to yield 8% interest. Bond proceeds were $857,339. In 20X3 Nomad recorded interest expense of $68,587. In 20X4 Nomad recorded interest expense of $74,074 and paid out $1,000,000 to redeem the bonds. Based on these transactions only, Nomad’s Statement of Cash Flows would show cash flow from operations (CFO) of:

A) zero in all years.

B) -$68,587 in 20X3 and -$74,074 in 20X4.

C) -$142,661 in 20X4.

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All of the cash flows for zero coupon bonds are included in cash flow from financing activities and none in cash flow from operations.

1215

A firm issues a $5 million zero coupon bond with a maturity of four years when market rates are 8%. Assuming semiannual compounding periods, the total interest on this bond is:

A) $1,346,549.

B) $1,200,000.

C) $1,600,000.

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The interest paid on the bond will be the difference between the future value of the bond of $5,000,000 and the proceeds of the bond when it was originally issued.

First find the present value of the bond found by N = 8; FV = 5,000,000; I = 4; PMT = 0; CPT → PV = ?3,653,451.  This is the amount of money the bond generated when it was originally issued.

Then take the difference between the $5,000,000 future price and the $3,653,451 from the proceeds  = $1,346,549 which is the interest paid on the bond.

1215

When bonds are issued at a premium:

A) earnings of the firm increase over the life of the bond as the bond premium is amortized.

B) coupon interest paid decreases each period as bond premium is amortized.

C) earnings of the firm decrease over the life of the bond as the bond premium is amortized.

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As bond premium is amortized, interest expense will be successively lower each period, thus increasing earnings over the life of the bond.

1215

Which of the following statements for a bond issued with a coupon rate above the market rate of interest is least accurate?

A) The bond will be shown on the balance sheet at the premium value.

B) The value of the bond will be amortized toward zero over the life of the bond.

C) The associated interest expense will be lower than that implied by the coupon rate.

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The value of the bond’s premium will be amortized toward zero over the life of the bond, not the value of the bond.

1215

For a firm financed with common stock and long-term fixed-rate debt, an analyst should most appropriately adjust which of the following items for a change in market interest rates?

A) Interest expense.

B) Debt-to-equity ratio.

C) Cash flow from financing.

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For the purpose of analysis, the value of debt should be adjusted for a change in interest rates. This will change the debt-to-equity ratio. Because changes in interest rates will change the market value of the debt, but not the coupon, interest expense will be unchanged. (However, if a firm has variable-rate debt, interest expense will change when interest rates change, but the market value of the variable-rate debt will not change significantly.)

1215

An analyst is considering a bond with the following characteristics:

• Face value = $10.0 million
• Annual coupon = 5.6%
• Market yield at issuance = 6.5%
• 5 year maturity

At issuance the bond will:

A) provide cash flow from investing of approximately $9.626 million.

B) increase total assets by $9.626 million.

C) increase total liabilities by $10.0 million.

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First we must determine the present value of the bond. FV = 10,000,000; PMT = 560,000; I/Y = 6.5; N = 5; CPT → PV = 9,625,989, or approximately $9.626 million. At issuance, the university will receive cash flow from financing of $9.626 million.

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Using the effective interest method, the interest expense in year 3 and the total interest paid over the bond life are approximately:

Year 3 Interest Expense

Total Interest

A) $634,506 $3.17 million

B) $560,000 $2.80 million

C) $560,000 $3.17 million

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• Interest expense in any given year is calculated by multiplying the market interest rate (at time of issuance) by the bond carrying value. For example, in year 1, interest expense = 9,625,989 × 0.065 = 625,689. Since the coupon payment = 10,000,000 × 0.056 = 560,000, the interest expense is “too high” by 65,689, and the carrying value of the bond is increased (through a decrease in the unamortized bond discount account) to $9,691,678. In year 2, using a similar calculation, the carrying value of the bond increases to $9,761,637. Thus, the interest expense in year 3 = 9,761,637 × 0.065 = 634,506, or approximately $0.635 million.

   

• Total interest expense is equal to the amount paid by the issuer less the amount received from the bondholder.

Amount paid by issuer = face value + total coupon payments
= 10,000,000 + (0.056 × 10,000,000 × 5) = 12,800,000
Total interest paid over the life = 12,800,000 – 9,625, 989 = 3,174,011, or approximately $3.2 million.

1215

On December 31, 20X3 Okay Company issued 10,000 $1000 face value 10-year, 9% bonds to yield 7%. The bonds pay interest semi-annually. On its financial statements (prepared under U.S. GAAP) for the year ended December 31, 20X4, the effect of this bond on Okay's cash flow from operations is:

A) -$700,000.

B) -$755,735.

C) -$900,000.

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The coupon payment is a cash outflow from operations. ($10,000,000 × 0.09) = $900,000.