Exam 12: Non-Current Financial Liabilities

Contrast the two methods used by investment banks when selling bonds on behalf of a company,their client?

On May 1,2017,SBC INC.buys a photocopier listed for $2,900.The office supply store agrees to accept a $800 down payment and a $2,100,three-year note payable at $798 per year.The company's banker has suggested that an appropriate market rate is 11% per annum for loans that mature in one year or less and 14% for loans with longer maturities.At what amount will the note be recorded at in the accounting records?

What is the role of debt rating agencies and what two benefits result from their rating a company?

Jamieson Inc.issues US$1,000,000 of two-year bonds on January 1,2017,at par that mature on December 31,2018. The coupon rate on the bonds is 4% payable annually on December 31.Jameison's year-end is December 31.It does not accrue interest throughout the year.Exchange rates: - January 1,2017,C$1.00 = US$0.99 - December 31,2017,C$1.00 = US$0.97 - December 31,2018,C$1.00 = US$1.01 - Average rate 2018,C$1.00 = US$0.98 - Average rate 2018,C$1.00 = US$0.99 Required: a)Record the journal entry on the date of issuance of the bond b)Record the journal entry to revalue the obligation at the period end,December 31,2017. c)Record the journal entry to record the payment of interest,December 31,2017.

When will bonds sell at a premium?

Really Amazing Vacations Ltd.issues $1,000,000 of ten-year,10% bonds dated January 1,2017.Interest is payable on January 1 and July 1 each year.The proceeds realized from the issue were the $1,048,801 sales price less the $80,000 fee charged by Really Amazing's investment bank.Really Amazing's year-end is December 31. Required: Prepare journal entries: a.The issuance of the bonds. b.Payment of interest and related amortization on July 1,2017. c.Accrual of interest and related amortization on December 31,2017.

Raysport Inc.sells $1,000,000 of three-year bonds on January 1,2017,for $980,000.The coupon rate on the bonds is 6% payable on July 1 and January 1.Transaction costs directly attributable to issuing the bonds total $20,000.Raysport Inc's fiscal year-end is December 31.The effective semi-annual rate is 3.6510%.On October 1,2018,Raysport Inc.repurchases the bonds on the open market for total consideration of $980,000 cash.Raysport uses the effective interest method. Required: Record the journal entries for derecognition at October 1,2018.

When will bonds sell at a discount?

Explain 3 instances when the fair value of the non-current liability will not equal the cash proceeds.

Cartwright Corporation had a $1,350,000,5% bond available for issue on September 1,2017.Interest is to be paid quarterly beginning November 30^th.All of the bonds were issued at par on October 1^st.Prepare the journal entries for October 1^st and November 30^th.

Why do lenders avoid lending large amounts of money to one borrower?

On April 15,2017,Cando Inc.sold $10,000,000 of five-year,3% bonds for $9,972,469. From the proceeds,Cando paid its investment bank a $200,000 sales commission. Interest is payable semi-annually on April 15 and October 15.What is the effective rate of interest?

Arlington Corp issued $7,000,000,5% 6-year bonds on January 1,2014 at par.Interest is due annually on December 31.The market rate of interest has since increased dramatically to 9%.As such,Arlington can repurchase its bonds on the open market for $6,507,449.They decided to take advantage of this situation,and on January 1,2018 issued a new series of bonds in the amount of $6,507,449 [two-year bonds,9% interest payable annually].The bonds were sold at par and the proceeds were used to retire the 5% bonds. Entry for sale of new bonds Arlington has recorded a gain on the retirement which increases its net income for the year.Ignoring transaction costs and taxation effects,is Arlington any better off? Discuss.

On June 1,2017,Bean LTD.provides a vendor with a $125,500 non-interest-bearing note due on June 1,2020,in exchange for equipment with a list price of $118,100.At what amount will the equipment be recorded in the accounting records? The company's banker has suggested that an appropriate market rate is 6% per annum for loans that mature in one year or less and 9% for loans with longer maturities.

On January 1,2014,Snuggly Bunny Ltd.issued $3,000,000 of 4%,fifteen-year bonds priced to yield 5%.Interest is payable on June 30 and December 31.Snuggly repurchases the outstanding bonds on July 1,2016,at which time the market rate of interest is 3.5%.Prepare the journal entries for these transactions.

Which statement is not correct about financial leverage for a $300,000 investment versus a $100,000 investment?

On June 1,2017,ABC LTD.provides a vendor with an $18,500 non-interest-bearing note due on June 1,2018,in exchange for furniture with a list price of $18,100.At what amount will the property be recorded in the accounting records? The company's banker has suggested that an appropriate market rate is 12% per annum for loans that mature in one year or less and 15% for loans with longer maturities.

Fast Track Inc.is in the process of acquiring another business.In light of the acquisition,shareholders are currently re-evaluating the appropriateness of the firm's capital structure (the types of and relative levels of debt and equity).The two proposals being contemplated are detailed below: Required: a.Calculate the estimated return on equity (ROE)under the two proposals.(ROE = net income after taxes / market value of equity;net income after taxes = (EBIT - interest on long-term debt)× (1 - tax rate)). b.Which proposal will generate the higher estimated ROE?

What are positive and negative covenants? Give an example of a positive and negative covenant.

A $100,000 5-year 7% bond is issued on January 1,2012.The bond pays interest annually.The market rate is 6%.What is the selling price of the bonds,rounded to nearest dollar?