Reading 39: Long-Term Liabilities and Leases LOSa习题精选 2010, face, statements, discounts, actual

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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

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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.

 

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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.

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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.

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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?

A) $131,164.

B) $31,453.

C) $49,857.

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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].

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What is the unamortized discount on the date when the bonds are issued?

A) $499.

B) $4,493.

C) $1,748.

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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).

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What is the unamortized discount at the end of the first year?

A) $1,209.

B) $3,495.

C) $538.

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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.

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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.

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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?

A) $5,000,000.

B) $5,743,874.

C) $3,363,478.

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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

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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.

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Treating convertible debt as equity is not required but suggested for financial analysis.

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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?

A) $2,246.65.

B) $1,748.07.

C) $498.58.

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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.

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What is the unamortized discount at the end of the first year?

A) $1,209.61.

B) $1,748.07.

C) $538.46.

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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.

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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.

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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.

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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.

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For a given par value, which of the following debt issues will have the highest cash flows from financing?

A) Zero-coupon bond.

B) Bonds issued at premium.

C) Bonds issued at discount.

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The bonds issued at premium will have the highest cash flows from financing.