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

At the beginning of 20X3, Creston Company issues $10 million face amount of 6% coupon bonds when the market rate of interest is 7%. The bonds mature in four years and pay interest annually. Assuming the effective interest rate method, what is the bond liability Creston will report at the end of 20X3?

A) $9,737,568

B) $9,661,279

C) $10,346,511

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Under the effective interest rate method, the bond liability is equal to the present value of the remaining cash flows discounted at the market rate of interest at the issue date. At the end of this year, there are 3 annual payments of $600,000 and one payment of $10,000,000 remaining. Using your financial calculator, the present value is $9,737,568 (N = 3, I = 7, PMT = 600,000, FV = 10,000,000, Solve for PV).

1215

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 discount.

C) Bonds issued at premium.

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

1215

A zero coupon bond, compared to a bond issued at par, will result in higher:

A) interest expense.

B) cash flows from financing (CFF).

C) cash flows from operations (CFO).

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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.

1215

Which of the following statements is least accurate? When a bond is issued at a discount:

A) cash flows from financing will be increased by the par value of the bond issue.

B) the interest expense will be equal to the coupon payment plus the amortization of the discount.

C) the interest expense will increase over time.

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Upon issuance, cash flow from financing will be increased by the amount of the proceeds.

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.

1215

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:

A) $316,448.

B) $300,000.

C) $350,000.

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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.

1215

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%?

A) 935.

B) 929.

C) 923.

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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

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

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.