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 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.

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Bonds issued at a discount will have an original liability that is lower than the bond's par value.

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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.

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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.

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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:

A) a premium.

B) a discount.

C) par.

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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.

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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?

A) Convertible bond.

B) Premium bond.

C) Zero-coupon bond.

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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.

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A long-term bond is sold at a discount. In subsequent years cash flow from operations will be:

A) overstated.

B) properly stated.

C) understated.

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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.

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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).

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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.

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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?

A) $49,857.

B) $65,582.

C) $15,726.

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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.

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

A) $15,729.

B) $1,748.

C) $2,249.

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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) $1,209.

C) $1,750.

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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)

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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.

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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.

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Over time, the reported amount of the annual interest expense on a long-term bond issued at a discount will:

A) remain constant.

B) decrease.

C) increase.

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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.