标题: Reading 39: Long-Term Liabilities and Leases LOSa习题精选 [打印本页]
作者: honeycfa 时间: 2010-4-20 13:56 标题: [2010]Session 9-Reading 39: Long-Term Liabilities and Leases LOSa习题精选
Session 9: Financial Reporting and Analysis: Inventories, Long-Term Assets, Deferred Taxes, and On- and Off-Balance Sheet Debt
Reading 39: Long-Term Liabilities and Leases
LOS a: Compute the effects of debt issuance and amortization of bond discounts and premiums on financial statements and ratios.
The actual coupon payment on a bond that a company issues is reported as which type of cash flow under U.S. GAAP, and which cash flow would be overstated by a premium bond?
Coupon payment Premium Bond
|
A) |
| Operating cash outflow |
Cash flow from financing | | |
|
B) |
| Operating cash outflow |
Cash flow from operations | | |
|
C) |
| Financing cash outflow |
Cash flow from operations | | |
The table below provides additional information about the effect of debt issuance and amortization on the cash flow statement.
|
|
Cash Flow from Financing |
Cash Flow from Operations |
|
Issuance of Debt |
Increased by Cash Received (Present value of the bond at the market interest rate) |
No effect |
|
Periodic Interest Payments |
No effect |
Decreased by interest paid
[(coupon rate) × (face or par value)] |
|
Payment at Maturity |
Decreased by face (par) value |
No effect |
Premium Bonds will overstate CFF and will understate CFO.
作者: honeycfa 时间: 2010-4-20 13:57
Which of the following statements about bonds issued at a discount is FALSE?
|
A) |
Cash flow from operations will be overstated and cash flow from financing will be understated. | |
|
B) |
The original liability will be higher than the bond's par value. | |
|
C) |
Interest expense will have an upward trend for each period. | |
Bonds issued at a discount will have an original liability that is lower than the bond's par value.
作者: honeycfa 时间: 2010-4-20 13:57
The actual coupon payment on a bond is reported on the statement of cash flow as:
|
A) |
a financing cash outflow. | |
|
B) |
an investing cash outflow. | |
|
C) |
an operating cash outflow. | |
The coupon payment is recorded on the statement of cash flows as an operating cash outflow because cash flow from operations includes a deduction for interest expense.
作者: honeycfa 时间: 2010-4-20 13:57
Assuming all else equal, if the coupon rate offered on a bond is less than the corresponding market rate of interest, the bond will be issued at:
If the coupon rate is less than the market rate, the bond must be sold at a discount so the effective rate on the bond equals the market rate.
作者: honeycfa 时间: 2010-4-20 14:00
For a given amount of financing, issuing which of the following bonds will result in the largest overstatement in cash flow from operations (CFO) compared to issuing a bond at its face value?
The zero-coupon bond will most likely cause cash from operations to be overstated by the greatest degree. This is because they pay no cash interest during the life of the bond and the entire amount of the interest expense is derived from amortizing the discount of the bond.
作者: honeycfa 时间: 2010-4-20 14:01
A long-term bond is sold at a discount. In subsequent years cash flow from operations will be:
Cash interest is only part of the interest expense. The amortization of the bond discount at maturity is charged to financing cash flow when in fact it should be charged against cash flow from operations, so CFO will be overstated.
作者: honeycfa 时间: 2010-4-20 14:01
Which of the following statements regarding the issuance of bonds is most accurate? Compared to bonds issued at par, bonds issued at a:
|
A) |
discount will have overstated cash flows from operations (CFO). | |
|
B) |
premium will have overstated cash flows from operations (CFO). | |
|
C) |
discount will have overstated cash flows from financing (CFF). | |
Bonds issued at discount will have more cash flows from operations and less cash flows from financing. Thus, CFO is overstated and CFF is understated. Bonds issued at a premium will have overstated CFF and understated CFO.
作者: honeycfa 时间: 2010-4-20 14:02
A company issued an annual-pay bond with the following characteristics:
|
Face value |
$67,831 |
|
Maturity |
4 years |
|
Coupon |
7% |
|
Market interest rates |
8% |
What is the present value of the interest payments on the date when the bonds are issued?
Present value of the interest payments on the date of issue is $15,726. I/Y = 8.00%; N = 4; PMT = $4,748.17 ($67,831 × 0.07 ); FV = $0; CPT → PV.
What is the unamortized discount on the date when the bonds are issued?
The unamortized discount at the time bonds are issued will be $2,249.
Face value of bonds = $67,831
Proceeds from bond sale = $65,582 [I/Y = 8.00%; N = 4; PMT = $4,748.17 ($67,831 × 0.07); FV = $67,831; CPT → PV]
Unamortized discount = $2,249 ($67,831 ? $65,582)
What is the unamortized discount at the end of the first year?
The unamortized discount will decrease by $499 at the end of first year and will be $1,750.
Interest expense = $5,247 ($65,582 × 0.08)
Coupon payment = $4,748 ($67,831 × 0.07)
Change in discount = $499 ($5,247 ? $4,748)
Discount at the end of first year = $1,750 ($2,249 ? $499)
作者: honeycfa 时间: 2010-4-20 14:02
Which of the following statements regarding the issuance of a discount bond is most accurate?
|
A) |
The cash from investing (CFI) is increased by the amount of the proceeds. | |
|
B) |
The cash from operations (CFO) is understated. | |
|
C) |
The cash from financing (CFF) is increased by the amount of the proceeds. | |
The cash from financing (CFF) is increased by the amount of the proceeds. The cash from operations (CFO) is overstated because it will not include the amortization of the discount, which increases interest expense. There is no effect on CFI.
作者: honeycfa 时间: 2010-4-20 14:02
Over time, the reported amount of the annual interest expense on a long-term bond issued at a discount will:
A portion of the discount must be amortized to the interest expense each year. The amortized amount is debited to interest expense and credited to debt. So debt goes up. The interest expense is debt times the effective interest rate. Thus, interest expense will increase over time.
作者: honeycfa 时间: 2010-4-20 14:03
At the date of issuance the market interest rate was above the coupon rate. Bonds of this nature would sell for:
When the contract rate on a bond is lower than the market rate, a bond will sell for a discount.
作者: honeycfa 时间: 2010-4-20 14:03
Interest expense is reported on the income statement as a function of:
|
|
|
|
|
C) |
the unamortized bond discount. | |
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.
作者: honeycfa 时间: 2010-4-20 14:03
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:
The coupon payment is a cash outflow from operations. ($10,000,000 × 0.09) = $900,000.
作者: honeycfa 时间: 2010-4-20 14:04
On December 31, 2004, Newberg, Inc. issued 5,000 $1,000 face value seven percent bonds to yield six percent. The bonds pay interest semi-annually and are due December 31, 2011. On its December 31, 2005, income statement, Newburg should report interest expense of:
Newberg, upon issuance of the bonds, recorded bonds payable of (N = (2 × 7) = 14, PMT = $175,000, I/Y = (6/2) = 3, FV = $5,000,000) $5,282,402. Interest paid June 30, 2005, was ($5,282,402 × (0.06 / 2) =) $158,472. The coupon payment was $175,000, reducing bonds payable to ($5,282,402 – ($175,000 - $158,472) =) $5,265,874. Interest paid December 31, 2005, was ($5,265,874 × (0.06 / 2) =) $157,976. Total interest paid in 2005 was ($158,472 + $157,976 =) $316,448.
作者: honeycfa 时间: 2010-4-20 14:04
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:
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
作者: honeycfa 时间: 2010-4-20 14:04
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 |
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:
- 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.
- 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
作者: honeycfa 时间: 2010-4-20 14:04
A bond is issued with an 8 percent semiannual coupon rate, 5 years to maturity, and a par value of $1000. What is the liability at the beginning of the third period if market interest rates are 10%?
Beginning liability of the third period = liability of the second period + difference in the cash payment and the interest expense for the third period.
Liability for the first period = present value of the bond present value of the bond is computed as follows: FV = 1000 PMT = [(1000)(0.08)]/2 = 40 I/Y = 5 N = 10 Compute PV = -923
Liability for the second period = 923 + [(0.05)(923) – 40] = 923 + 6 = 929
Liability for the third period = 929 + [(0.05)(929) – 40] = 929 + 6 = 935
作者: honeycfa 时间: 2010-4-20 14:04
When the market rate is greater than the coupon rate, the bond is called a:
When the market rate is greater than the coupon rate, the bond will sell at a discount as investors will only buy the bond at a price which is less than fair value due to the coupon being lower than the market rate.
作者: honeycfa 时间: 2010-4-20 14:05
The real estate group of a manufacturing company needs to finance a large construction project. The CEO wants to use zero coupon bonds, because “they are easy to understand.” The Executive Vice President (EVP) recommends a bond issued with a coupon rate greater than the current market rate of interest. A consultant recommends a bond issued at par. Regarding the financial and cash flow impact, which of the following statements is least accurate? All else equal, if the company follows the:
|
A) |
CEO's recommendation, there will be no impact on cash flow from operations. | |
|
B) |
EVP's suggestion, both the cash flow from financing and cash flow from operations will be understated compared to that of the par value bond recommended by the consultant. | |
|
C) |
EVP's suggestion, interest expense will decrease over time. | |
If the company issues a premium bond (defined as coupon rate greater than the current market rate), the cash flow from financing will be overstated and cash flow from operations will be understated compared to the par value bond recommended by the consultant.
The other statements are true. With the premium bond, interest expense decreases over time because the carrying value of the bond decreases as the unamortized premium decreases by the difference between the coupon payment and the interest expense (market rate times carrying value.) All cash flows for a zero-coupon bond are financing cash flows, but the bond still has interest expense (used to amortize the unamortized discount account).
作者: honeycfa 时间: 2010-4-20 14:05
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. | |
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.
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 |
-
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.
作者: honeycfa 时间: 2010-4-20 14:06
A company sells a long-term, zero-coupon bond. The company’s cash flow from operations in subsequent years, compared to what it would have been if the company had issued debt at par for the same proceeds, will be:
Cash flow from operations (CFO) is systematically “overstated” when a zero-coupon bond is issued because the interest on a zero-coupon bond never reduces operating cash flow. The amortization of the bond discount at maturity is charged to financing cash flow when, in fact, it should be charged against CFO. Thus, CFO will be overstated.
作者: honeycfa 时间: 2010-4-20 14:06
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) |
-$68,587 in 20X3 and -$74,074 in 20X4. | |
|
|
|
|
All of the cash flows for zero coupon bonds are included in cash flow from financing activities and none in cash flow from operations.
作者: honeycfa 时间: 2010-4-20 14:07
Which of the following statements regarding zero-coupon bonds is most accurate?
|
A) |
The interest expense in each period is found by applying the discount rate to the book value of debt at the end of the period. | |
|
B) |
A company should initially record zero-coupon bonds at their discounted present value. | |
|
C) |
Interest expense is a combination of operating and financing cash flows. | |
The liability initially recorded for a zero-coupon bond is equal to the proceeds received, which is the present value of the principal repayment discounted at the company's normal borrowing rate. Interest expense is found by applying the discount rate to the book value of debt at the beginning of the period, and there is no cash outflow from operations for a zero coupon bond.
作者: honeycfa 时间: 2010-4-20 14:07
For a given par value, which of the following debt issues will have the highest cash flows from financing?
|
|
|
B) |
Bonds issued at premium. | |
|
C) |
Bonds issued at discount. | |
The bonds issued at premium will have the highest cash flows from financing.
作者: honeycfa 时间: 2010-4-20 14:07
A zero coupon bond, compared to a bond issued at par, will result in higher:
|
|
|
B) |
cash flows from financing (CFF). | |
|
C) |
cash flows from operations (CFO). | |
The zero-coupon bond will have higher cash flows from operations, as the cash interest expense in this case is zero and no cash is paid until maturity. Candidates should remember that any bond issued at a discount will have more cash flow from operations and less cash flow from financing.
作者: honeycfa 时间: 2010-4-20 14:07
Which of the following statements is FALSE? When a bond is issued at a discount:
|
A) |
the interest expense will be equal to the coupon payment plus the amortization of the discount. | |
|
B) |
cash flows from financing will be increased by the par value of the bond issue. | |
|
C) |
the interest expense will increase over time. | |
Upon issuance, cash flow from financing will be increased by the amount of the proceeds.
作者: honeycfa 时间: 2010-4-20 14:07
A $1,000 bond is issued with an 8% semiannual coupon rate and 5 years to maturity when market interest rates are 10%. What is the initial liability?
FV = 1000; PMT = 80/2; N = 5 × 2; I/Y = 10/2; solve for PV = 923.
作者: honeycfa 时间: 2010-4-20 14:08
A company issued a bond with a face value of $67,831, maturity of 4 years, and 7% coupon, while the market interest rates are 8%.
What is the unamortized discount when the bonds are issued?
Coupon payment = ($67,831)(0.07) = $4,748.17.
Present value of bond: FV = $67,831, N = 4, I = 8, PMT = $4,748.17, CPT PV = $65,584.35.
Discount = $67,831 - $65,584.35 = $2,246.65.
What is the unamortized discount at the end of the first year?
Interest expense = ($65,584.35)(0.08) = $5,246.75.
Coupon payment = ($67,831)(0.07) = $4,748.17.
Change in discount = $5,246.75 - 4,748.17 = $498.58.
Discount at the end of the first year = $2,246.65 - 498.58 = $1,748.07.
作者: honeycfa 时间: 2010-4-20 14:08
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:
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.
作者: honeycfa 时间: 2010-4-20 14:09
A company issued an annual-pay bond with a face value of $135,662, maturity of 4 years, and 7% coupon, while the market interest rates are 8%.
What is the present value of the interest payments on the date when the bonds are issued?
Present value of the interest payments on the date of issue is $31,453 = [I/Y = 8.00%; N = 4; PMT = $9,496.34 ($135,662 × 0.07); FV = $0; CPT → PV].
What is the unamortized discount on the date when the bonds are issued?
The unamortized discount rate at the time bonds are issued will be $4,493.
Face value of bonds = $135,662.
Proceeds from bond sale = $131,168.70 [I/Y = 8.00%; N = 4; PMT = $9,496.34 ($135,662 × 0.07 ); FV = $135,662; CPT → PV].
Unamortized discount = $4,493 = ($135,662 ? $131,169).
What is the unamortized discount at the end of the first year?
The unamortized discount will decrease by $998 at the end of first year and will be $3,495.
Interest expense = ($131,169)(0.08) = $10,493.52, or $10,494.
Coupon payment = ($135,662)(0.07) = $9,496.
Change in discount = ($10,494 ? $9,496) = $998.
Discount at the end of first year = $4,493 ? $998 = $3,495.
作者: honeycfa 时间: 2010-4-20 14:09
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. | |
As bond premium is amortized, interest expense will be successively lower each period, thus increasing earnings over the life of the bond.
作者: honeycfa 时间: 2010-4-20 14:09
Assume a city issues a $5 million bond to build a hockey rink. The bond pays 8% semiannual interest and will mature in 10 years. Current interest rates are 6%. What is the present value of this bond?
Since current interest rates are lower than the coupon rate the bond will be issued at a premium. FV = $5,000,000 N = 20 I/Y = 3 PMT = (0.04)($5,000,000) = $200,000. Compute PV = $-5,743,874
作者: honeycfa 时间: 2010-4-20 14:09
Which of the following statements about debt is least accurate?
|
A) |
When a bond’s coupon rate is greater than the market rate of return at issuance, the bond’s balance sheet value will be greater than the face value. | |
|
B) |
Convertible debt must be treated as equity when computing the firm's debt to equity ratio. | |
|
C) |
If a firm issues bonds with detachable warrants, the proceeds must be allocated between the two components on the firm's balance sheet. | |
Treating convertible debt as equity is not required but suggested for financial analysis.
作者: honeycfa 时间: 2010-4-20 14:10
Which of the following statements for a bond issued with a coupon rate above the market rate of interest is FALSE?
|
A) |
The value of the bond will be amortized toward zero over the life of the bond. | |
|
B) |
The bond will be shown on the balance sheet at the premium value. | |
|
C) |
The associated interest expense will be lower than that implied by the coupon rate. | |
The value of the bond’s premium will be amortized toward zero over the life of the bond, not the value of the bond.
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