978-0078025679 Chapter 11 Solution Manual Part 5

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The issue price would by $219.231 million if the market yield is 8.125% and

$290.816 million if the market yield is 6.125%.

Requirement 8:

Century and millennium bonds share a common feature: a very large share of

C11-2 Tuesday Morning Corporation: Interpreting long-term debt disclosures

Requirement 1:

$1,402 from the balance sheet

$104) and $432 is (4 x $108).

Requirement 4:

Current portion is $2,747

$1,794 Remaining principal on note

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Simple interest = $1,401 x .14 x 1/4 = $49

Requirement 6:

Journal entry for April 30:

DR Current installment on mortgage $1,794

C11-3. Groupe Casino: Determining whether it is debt or equity

Requirement 1:

International Accounting Standards (IAS) No. 32 states that “[t]he issuer of a

financial instrument shall classify the instrument, or its component parts, on

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obligation to deliver cash (or another financial asset) to the note holder in the

future. In addition, the notes are not convertible into equity shares, so there

is no contractual obligation to settle the note with equity or equity-like

instruments.

where interest payments can be suspended at any time, the principal is never

repaid, and there is no equity conversion privilege? The notes seem to be

characterized by consider cash flow risk to the investor, and this risk should

translate into a price discount not a price premium. So, the red flag raised by

C11-4. Kellogg Company’s Organic Corn Hedge

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organic corn. This sort of matching would normally result in a fully effective

hedge. However, the hedged item (organic corn) is not identical to the

futures contract item (non-organic corn) and consequently changes in the

price of organic corn may not be reflected fully by changes in the fair values

of the purchased futures contracts. This possibility is why the organic corn

accounting can be used in this situation because:

• The hedge item is an anticipated (forecasted) future transaction;

• The hedging instrument is a futures contract;

• The risk being hedged (described above) is cash flow risk;

• The hedge is assumed to be sufficiently effective for GAAP purposes.

DR Investment in corn futures contracts $3,200,000

CR Cash $3,200,000

To record the April 30, 2015 fair value adjustment to the futures contracts

investment account:

DR Investment in corn futures contracts $300,000

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To record the May 31, 2015 sale of the “matched” corn futures contracts for

$420,000, which happens to correspond to the April 30th fair value of the

contracts sold.

DR Cash $420,000

CR Investment in corn futures contracts $420,000

CR Raw materials inventory (organic corn) $48,500

To record the May 31st fair value adjustments to the remaining corn futures

contracts. The adjustment amount is the difference between the May 31st fair

value ($3,800,000) and the investment carrying value on that date

($3,500,000 minus $420,000 contracts sold).

amount of the price increase is captured by the cumulative balance of Other

comprehensive income ($971,500 = $300,000 – $48,500 + $720,000).

Consequently, Kellogg had to pay more for the organic corn purchase May

31st than would otherwise have been the case. However, because Kellogg

hedged its organic corn purchase, saved $48,500 and this savings is

lower than expected on March 31st, the this purchase price savings would

have been offset by the loss in value on its investment in corn futures

contracts. As explained in the chapter, when futures contracts are used to

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increased value of the corn futures contracts. Kellogg loses, on the other

hand, if corn prices fall. In that case, the savings obtained from buy organic

C11-5. Cardinal Health: Contingent receivables

Requirement 1:

ASC 450-20-25 on loss contingency recognition says: “An estimated loss

from a loss contingency shall be accrued by a charge to income if both of the

ASC 450-30-25 on gain contingency recognition says: “A contingency that

might result in a gain usually should not be reflected in the financial

statements because to do so might be to recognize revenue before its

realization.” The ASC do not provide guidance as to what is meant by

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facts argue against realization—Cardinal did not possess a claim that was

“readily convertible into known amounts of cash.”

Requirement 3:

Here is some of what management said in its letter to shareholders:

“The reporter also directly alleges that the recording of the vitamin pricing

comprehensive guidance about our expectations based on this process,

analysts’ estimates tend to follow our expectations. Second, every quarter

has business and accounting issues that are unique to a given quarter and

impact reported results. It is an oversimplification to pick one particular item

and conclude that it was the key to the quarter—the appropriate view is of the

• Cardinal Health has had quarters with unusual expenses, for example, the

fourth quarter of FY 2002 had $28 million of inventory write-down

adjustments charged against cost of sales, but there’s been no recognition

on the reporter’s part of how that quarter could have been $0.04 better

without those charges.

timing and amounts.”

Requirement 4:

An alternative to recording the estimated recovery amounts is to disclose

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to be recovered. However, it would not help Cardinal Hospital to “meet the

consensus” EPS forecasts for the quarter.