Financial Reporting and Analysis 【Reading 32】Sample company, 2012, following

mouse123

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 unamortized discount on the date when the bonds are issued?

A) $2,249.

B) $15,729.

C) $1,748.

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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)

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

A) $538.

B) $1,750.

C) $1,209.

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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)

terpsichorefan

thanks for sharing

clearlycanadian

Other things equal, and ignoring issuance costs, a firm that raises cash by issuing a new bond is most likely to:

A) increase its leverage ratios and increase its coverage ratios.

B) decrease its leverage ratios and increase its coverage ratios.

C) increase its leverage ratios and decrease its coverage ratios.

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Leverage ratios will increase because debt increases while equity remains unchanged, and (assuming equity is positive) debt increases proportionally by more than assets. Coverage ratios decrease because interest payments increase while EBIT is unchanged.

clearlycanadian

A firm is more solvent if it has:

A) low leverage and coverage ratios.

B) low leverage ratios and high coverage ratios.

C) high leverage and coverage ratios.

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Low leverage ratios suggest the firm has relatively little debt compared to its equity and assets. High coverage ratios suggest the firm generates enough earnings to meet its interest payments.

clearlycanadian

The asset or liability reported on the balance sheet for a defined benefit plan is equal to the plan’s funded status under:

A) Both IFRS and U.S. GAAP.

B) U.S. GAAP, but not IFRS.

C) Neither IFRS nor U.S. GAAP.

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Under U.S. GAAP, the asset presented for an overfunded plan or liability presented for an underfunded plan is the plan’s funded status. Under IFRS, the asset or liability presented does not include unrecognized prior service costs or unrecognized actuarial gains and losses.

clearlycanadian

The difference between a defined benefit pension plan’s assets and its defined benefit obligation is best described as the plan’s:

A) prior service cost.

B) funded status.

C) actuarial gain or loss.

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The funded status of a defined benefit plan is the difference between the plan’s assets and the defined benefit obligation. If assets are greater than the obligation, the plan is said to be overfunded, and if assets are less than the obligation, the plan is said to be underfunded.

clearlycanadian

An employer offers a defined benefit pension plan and a defined contribution pension plan. The employer’s balance sheet is most likely to present an asset or liability related to:

A) both of these pension plans.

B) the defined contribution plan.

C) the defined benefit plan.

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Only a defined benefit plan has a funded status that would appear on the balance sheet as an asset or liability. Employer payments into a defined contribution plan are recognized as expenses in the period incurred.

clearlycanadian

The present value of benefits earned during the current period by participants in a defined benefit pension plan is best described as the plan’s:

A) service cost.

B) prior service cost.

C) defined benefit obligation.

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Service cost refers to the benefits earned in the current period by a defined benefit plan’s participants. Prior service costs are benefits awarded retroactively when a plan is initiated or changed. Defined benefit obligation is the present value of future benefits earned to date.

clearlycanadian

In a defined benefit pension plan:

A) the employee is promised a periodic payment upon retirement.

B) the employee is responsible for making investment decisions.

C) the employer’s pension expense is equal to its contributions to the plan.

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In a defined benefit pension plan, a periodic payment, typically based on the employee’s salary, is promised to the employee upon retirement and the employer contributes to an investment trust that generates the principal growth and income to meet the pension obligation. The employees do not direct the investments in their accounts as they do in a defined contribution plan. Pension expense for a defined benefit plan has several components, including service cost, prior service cost, and interest cost, and depends on actuarial assumptions and the expected rate of return on plan assets.

clearlycanadian

The defined benefit obligation is best described as:

A) present value of future pension benefits earned to date.

B) projected value of pension benefits owed to plan participants.

C) stated periodic payment owed to a plan participant upon retirement.

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The defined benefit obligation is the present value of the future benefits earned to date by participants in a defined benefit pension plan.