978-0077862275 Chapter 14 Solution Manual Part 8

Ethics Challenge — BTN 14-3

1. The ethics of the Traverse County officials are questionable. The

financial impact of the leasing arrangement is the same as bond

In reality, the taxpayers of Traverse County reacted very negatively to

the actions of the county officials when they learned of the leasing

2. Because the lease requires payments of a non-binding nature, investors

5

Communicating in Practice — BTN 14-4

MEMORANDUM

TO:

FROM:

SUBJECT:

The body of the memorandum should make the following points:

The associate is confused about the concept of a bond premium. Bonds

that sell at a premium provide the issuing company more cash than they

are required to pay the bondholders at their maturity date. When a bond is

The bottom line is that the market prices the bonds according to their

A cordial closing that indicates willingness to discuss the issue further

would be appropriate.

Taking It to the Net — BTN 14-5

1. Home Depot’s long-term liabilities as of February 2, 2014, follow:

2 a. These Home Depot notes offer a 5.875% interest rate. If the interest

rate for similar notes from companies with similar risk was 5.875%,

b. Cash interest that must be paid:

Teamwork in Action — BTN 14-6

Parts 1 and 2

Effective Interest Amortization of Bond Premium

Semi-

annual

Period-end

(A)

Cash

Interest

Paid

(B)

Bond

Interest

Expense

(C)

Premium

Amortization

(D)

Unamortized

Premium

(E)

Carrying

Value

1/01/2015 $ 4,100 $ 104,100

6/30/2015 $ 4,500 $ 4,164 $ 336 3,764 103,764

Since teams generally have 4 or 5 members, the team solution will likely end about

here. The remainder of the table is shown for help in answering part 3.

12/31/2017 4,500 4,091 409 1,872 101,872

*Discrepancy due to rounding.

The following computations should be articulated by team members as

each line is explained and prepared:

Column (B) Bond interest expense = Bonds’ prior period carrying value x

Column (C) Premium Amortization = difference between cash interest paid and

bond interest expense, or [(A) – (B)].

Column (D) Unamortized Premium = prior period’s unamortized premium less

the current period’s premium amortization, or [(D) – (C)].

Column (E) Bonds’ Carrying Value = Bonds’ par value plus unamortized

premium, or [$100,000 + (D)] or Previous book value – Period’s amortization.

Teamwork in Action (Concluded)

Part 3

Without completing the table, team members should be able to project the

final number in the first column and for each of the columns (A), (D), and

(E). Specifically:

(Col. 1) Last interest period date is 12/31/2019 because this is a five-year

(Col. D) Zero unamortized premium (by the last interest period the

(Col. E) Ending carrying value is $100,000 (the carrying value always

Part 4

Total Bond interest expense = Interest Paid – Premium

Part 5 List likely includes:

Similarities Differences

a. Table column headings

for the period and for

columns (A), (B), and (E).

a. Column (C) will be Discount Amortization and

Column (D) will be Unamortized Discount.

b. Dates in the period

column and interest paid in

column (A).

b. Bond interest expense is higher (lower) than the

interest paid and will increase (decrease) as we

amortize a discount (premium).

each period

Entrepreneurial Decision — BTN 14-7

Part 1

The table below reveals how the five alternative interest-bearing notes

would affect this company’s interest expense, net income, equity, and

return on equity (net income/equity):

Alternative Notes for Expansion

Current 10% Note 15% Note 16% Note 17% Note 20% Note

Income before

interest…………. $ 40,000 $ 56,000 $ 56,000 $ 56,000 $ 56,000 $ 56,000

Part 2

The analysis in Part 1 illustrates the general rule (called “financial

leverage” or “trading on the equity”): When a company earns a higher

The table in Part 1 reveals this result, where those notes with interest

expense below 16% are profitable (that is, yield a return greater than the

Hitting the Road — BTN 14-8

Students’ answers will depend on the municipality and time period chosen

for analysis. Students often find this assignment interesting as it

reinforces the relevance of their accounting studies.

Global Decision — BTN 14-9

1. Samsung’s current year debt-to-equity ratio (in KRW millions):

Samsung’s prior year debt-to-equity ratio (in KRW millions):

2. Samsung’s debt-to-equity ratio decreased slightly from the prior year to

the current year. For the current year, Samsung’s debt-to-equity ratio is