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96. On the last day of its fiscal year ending December

Question : 96. On the last day of its fiscal year ending December : 1412663

 

 

96.

On the last day of its fiscal year ending December 31, 2016, the Boatright Ship Builders completed two financing arrangements. The funds provided by these initiatives will allow the company to expand its operations.

1. Boatright issued 6% stated rate bonds with a face amount of $200 million. The bonds mature on December 31, 2036 (20 years). The market rate of interest for similar bond issues was 8% (4% semiannual rate). Interest is paid semiannually (3%) on June 30 and December 31, beginning on June 30, 2017.
2. The company leased two manufacturing facilities. Lease A requires 10 annual lease payments of $50,000 beginning on January 1, 2017. Lease B also is for 10 years, beginning January 1, 2017. Terms of the lease require seven annual lease payments of $60,000 beginning on January 1, 2020. Accounting standards require both leases to be recorded as liabilities for the present value of the scheduled payments. Assume that an 8% interest rate properly reflects the time value of money for the lease obligations.

Required:

What amounts will appear in Boatright's December 31, 2016, balance sheet for the bonds and for the leases? 
 
 

 

Bond liability:

PV = $6,000,0001 (19.79277*) + 200,000,000 (0.20829**)
PV = $118,756,620 + 41,658,000 = $160,414,620 = initial bond liability
1 $200,000,000 × 3% = $6,000,000
* Present value of an ordinary annuity of $1: n = 40, i = 4% (from Table 4)
** Present value of $1: n = 40, i = 4% (from Table 2)

Lease liability:

Lease A:
PVAD = $50,000 (7.24689*) = $362,345 = Liability
*Present value of an annuity due of $1: n = 10, i = 8% (from Table 6)

Lease B:
PVAD = $60,000 × 5.62288* = $337,373
* Present value of an annuity due of $1: n = 7, i = 8% (from Table 6)
PV = $337,373 × 0.79383** = $267,817
**Present value of $1: n = 3, i = 8% (from Table 2)

Or, alternatively for Lease B:

PVA = $60,000 × 5.20637* = $312,382
*Present value of an ordinary annuity of $1: n = 7, i = 8% (from Table 4)
PV = $312,382 × 0.85734** = $267,818 (difference due to rounding)
**Present value of $1: n = 2, i = 8% (from Table 2)

Or, alternatively for Lease B:

PV = $60,000 (4.46363*) = $267,818 (difference due to rounding)

From Table 4,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

97.

White & Decker Corporation's 2016 financial statements included the following information in the long-term debt disclosure note:

 

 

($ in millions)

 

2016

Zero-coupon subordinated debentures, due 2031:

$275



The disclosure note stated the debenture bonds were issued late in 2011 and have a maturity value of $500 million. The maturity value indicates the amount that White & Decker will pay bondholders in 2031. Each individual bond has a maturity value (face amount) of $1,000. Zero-coupon bonds pay no cash interest during the term to maturity. The company is "accreting" (gradually increasing) the issue price to maturity value using the bonds' effective interest rate computed on an annual basis.

Required:

1. Determine the effective interest rate on the bonds.
2. Determine the issue price in late 2011 of a single, $1,000 maturity-value bond.


 
 

 

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Solution
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