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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
