Exam 12: Non-Current Financial Liabilities

Which statement best explains the concept of "leverage"?

Fredericton Aerospace Inc.raised $5,369,210 by selling $5,000,000 of six-year,12% bonds dated January 1,2013.Fredericton used part of the proceeds to pay its investment bank's fee of $100,000 and related legal and accounting fees of $600,000. Interest is payable on June 30 and December 31 each year.Fredericton can call the bonds on January 1,2016 at 103.The company exercises this privilege,redeeming 40% of the bonds on the call date and retiring them.The company year ends on December 31. Required: Prepare journal entries to record: a.The issuance of the bonds on January 1,2013. b.Before completing the entries for parts (b)and (c),prepare the amortization table for the bonds through to December 21,2015.Prepare entry for the payment of interest and related amortization on December 31,2015. c.Repurchase of the bonds on January 1,2016.

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

Universal 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?

Legally Yours,a law firm,sells $8,000,000 of four-year,8% bonds priced to yield 6.6%.The bonds are dated January 1,2018,but due to some regulatory hurdles are not issued until March 1,2018.Interest is payable on January 1 and July 1 each year.The bonds sell for $8,388,175 plus accrued interest. In mid-June,Legally Yours earns an unusually large fee of $11,000,000 for one of its cases.They use part of the proceeds to buy back the bonds in the open market on July 1,2018 after the interest payment has been made.Legally Yours pays a total of $8,456,234 to reacquire the bonds and retires them. Required: Prepare journal entries to record: a.The issuance of the bonds-assume that Legally Yours has adopted a policy of crediting interest expense for the accrued interest on the date of sale. b.Payment of interest and related amortization on July 1,2018. c.Reacquisition and retirement of the bonds.

What are "zero-coupon bonds"?

What are "stripped bonds"?

How should non-current financial liabilities be recorded initially?

Blue Sky Travel Inc.issues $2,000,000 of ten-year,8% bonds dated January 1,2015.Interest is payable on January 1 and July I each year.The proceeds realized from the issue were the $1,821,367 sales price less the $20,000 fee charged by Blue Sky's investment bank.Blue Sky'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 1,2015. c.Accrual of interest and related amortization on December 31,2015.

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 premium or discount on the bonds,rounded to nearest dollar?

On May 1,2017,Sea Escape Ltd.purchases a new automobile for $18,000 from the dealer who provides the financing.The three-year,interest-free loan is repayable at $500 per month.The market rate of interest for similar transactions is 0.25% per month. Required: Prepare journal entries to record: a.the purchase of the automobile. b.the accrual of interest and the loan payment at the end of May 2017.

What is "firm commitment" underwriting?

Canaroo Inc.sold $800,000 of two-year bonds for $701,500 less commissions of $50,500.Interest is of 5.5% is payable annually.What is the effective rate of interest (round to 2 decimal places)?

Over the River Co.(OTRC)sells $1,200,000 of 6-year,10% bonds at par plus accrued interest.The bonds are dated January 1,2015 but due to market conditions are not issued until May 1,2015.Interest is payable on June 30 and December 31 each year. Required: Prepare journal entries to record: a.The issuance of the bonds on May I,2015.Assume that OTRC has adopted a policy of crediting accrued interest payable for the accrued interest on the date of sale. b.Payment of interest on June 30,2015. c.Payment of interest on December 31,2015.

Non-current debt instruments exchanged for assets are recognized at:

Sarah Braun is the owner of Sarah's Shameless Boutique Corp.(SSBC),a newly incorporated company.Sarah believes that she has a great concept but does not have a lot of money to start the business.Sarah is fairly resourceful,though,and has been able to arrange the following: 1.On July 1,2018,SSBC provides a vendor with a $18,500 non-interest-bearing note due on July 1,2019,in exchange for furniture with a list price of $18,100.Sarah Braun guarantees the debt. 2.On August 1,2018,SSBC 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 including interest at 7% with the first payment due on August 1,2019.The loan is secured by a lien on the photocopier. 3.On September 1,2018,SSBC borrows $15,000 from its bank for working capital purposes.The loan,plus interest at 12% per annum,is due on June 30,2019.SSBC grants the bank a security interest in its accounts receivables and inventory. Unfortunately,SSBC's target audience is a bit more prudish than she anticipated and sales have been slow.While the company was able to retire the bank loan on the due date,it had insufficient cash to pay off the furniture loan.The vendor agrees to accept 2,000 common shares in SSBC in settlement of the obligation.Sarah believed that the shares are worth $20 each,but as this was the first time that SSBC had issued shares to anyone other than Sarah,a fair market price was not yet established. SSBC's year-end is June 30.The company's banker has suggested that an appropriate market rate for SSBC is 12% per annum for loans that mature in one year or less and 14% for loans with longer maturities. Required: a.Prepare journal entries to record: i.The purchase of the office furniture. ii.The acquisition of the photocopier. iii.The receipt of the loan proceeds. iv.Payments and accruals on June 30,2018. v.The retirement of the office furnishings loan on July 1,2018. b.Briefly describe the note disclosure that would be required with respect to the foregoing liabilities.

Explain how non-current liabilities are measured after initial recognition.

Explain the meaning of financial leverage and leveraged buyout.

Bank Buy 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? c.What is the primary benefit of leveraging an investment decision? What are two drawbacks to leveraging an investment decision?

Which statement is correct about offsetting?