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C11-2 Tuesday Morning Corporation: Interpreting long-term debt
disclosures
Requirement 1:
Requirement 2:
Requirement 3:
The difference is $104. This appears to suggest that payment on the
note payable in Note 5 was not made during Year 2, but that it is
Requirement 4:
Current portion is $2,747
$1,794
Requirement 5:
Journal entry for March 31:
DR Current installment on mortgage $108
Requirement 6:
Journal entry for April 30:
11-1
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Requirement 7:
C11-3 Dentsply International: Analyzing long-term debt disclosures (LO
11-1, LO 11-2)
Requirement 1: Change in amount and composition of debt
The debt amount declined slightly from 2011 to 2012. Individual
amount changes appear to have occurred because of premium or
Requirement 2: Difference between fair value and book value
At December 31, 2012, the fair value of debt of $1,515.2 million
Requirement 3: Weighted-average interest rate
The weighted-average rate of interest on Dentsply’s long-term debt
is 3.01%. To arrive at this figure, multiply the principal balance of
There are two features of this calculation to notice. First, the
weighted-average interest rate is not simply the average of the
interest rates reported in the financial statement note. Each reported
interest rate is weighted by the dollar amount of debt to which it is
11-2
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Requirement 4: Interest expense for 2013
Forecasted interest expense for 2013 is $44.296 million. This
Requirement 5: Cash payout on debt
The company is obligated to make 2013 cash payments on debt in
the amount of $295.174 million. This figure is the sum the schedule
Requirement 6: Dentsply’s ability to meet its debt obligations
The note indicates that Dentsply should be able to meet its debt
obligations. The fair value of its debt exceeds the debt book value
Compare this analysis to the one connected with the Chesapeake
Energy Corporation information in Exhibit 11.10. Chesapeake’s debt
C11-4. Groupe Casino: Determining whether it is debt or equity (LO
11-10)
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 initial recognition as a financial liability, a
financial asset or an equity instrument in accordance with the
A financial liability is any liability that is: (a) a contractual obligation to deliver
cash or another financial asset to another entity, or a contractual obligation to
11-3
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McGraw-Hill Education.
exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavourable to the entity; or (b) a contract that will
or may be settled in the entity’s own equity instruments and is a non-derivative for
An equity instrument is any contract that evidences a residual interest in the
Requirement 2:
Equity treatment seems appropriate in this case. The notes have no
maturity date and the lender cannot force redemption. Moreover,
interest payments can be suspended at any time. Thus Casino does
Requirement 3:
The following entries would be made on the books of Groupe Casino:
To record the issuance of the notes on January 1, 20X5 (in millions of
euros)
To record the interest payment on December 31, 20X5 (in millions of
euros)
The notes themselves would be shown in the equity section of
11-4
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Requirement 4:
Why would an investor pay a premium (i.e., more than the principal)
for notes 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
C11-5. Kellogg Company’s Organic Corn Hedge (LO 11-7, LO 11-8)
Requirement 1:
Notice that the non-organic corn futures contracts are exactly
“matched” in bushel amount and delivery month to the company’s
anticipated purchases of organic corn. This sort of matching would
Requirement 2:
The eligible market risk being hedged is an overall change in cash
flow arising from the risk of changes in organic corn commodity price
between now and the dates of future planned purchases or organic
corn. Hedge accounting can be used in this situation because:
Requirement 3:
The following entries would be made on March 31, 2015 and April 30th.
11-5
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To record the March 31, 2015 purchase of “matched” corn futures
contracts:
Requirement 4:
To record the May 31, 2015 purchase and delivery of organic corn for
use in the production of cereal:
To eliminated the balance in Other comprehensive income that
pertains to the corn futures contracts sold. These contracts were
purchase for $371,500 and had a fair value of $420,000 when sold.
To record the May 31st fair value adjustments to the remaining corn
futures contracts. The adjustment amount is the difference between
11-6
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Requirement 5:
Corn prices rose substantially during the period from March 31st to
May 31st, as evidenced by the increase in corn futures contracts fair
value. The dollar amount of the price increase is captured by the
cumulative balance of Other comprehensive income ($971,500 =
Requirement 6:
If corn prices had moved in the opposite direction and fallen in value
over this time period, the corn futures contracts themselves would
have lost value. Kellogg would have been able to buy organic corn on
Kellogg benefits from the futures contracts hedge if corn prices rise
because the higher price paid to buy organic corn will be partially
offset by the increased value of the corn futures contracts. Kellogg
C11-5. Southwest Airlines: Interpreting cash flow hedge (LO
11-7, LO 11-8)
All amounts are in millions.
Requirement 1 - Reason for increase in 2015 net income
Selected income statement items
a b a - b (a - b) / b
2015 2014
Change
from 2014
% change
from 2014
11-7
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Common size (amounts as a percent of total revenue)
a b a - b (a - b) / b
2015 2014
Change
from 2014
% change
from 2014
Both the raw analysis and the common size analysis indicate that lower fuel and oil
expense was the main reason for the higher net income.
Requirement 2 - Economic hedge versus accounting hedge
Under U.S. GAAP, price changes in the hedge must be highly correlated with the
hedged item. The economic hedges may not meet the threshold of high correlation. For
Requirement 3 - Reason for eliminating hedges
Note 3 indicates that Southwest experienced losses on its derivatives, which were
Requirement 4 - Losses in OCI
No. This is the net after-tax new losses and losses recycled to operating income. The
11-8
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Unrealized loss on fuel derivatives (164)
Deferred taxes (97)
(261)
The $525 represents the actual amount of new pretax losses occurring in 2015. Note
Requirement 5 - Fuel and oil expense without hedging
The third table of Note 4 shows that $264 in pretax losses were transferred to Fuel
and oil expense. If not for hedging, the Fuel and oil expense would have been $264
lower. It is important to note that losses and gains on cash flow hedges affect the item
Requirement 6 - Timing of derivative payments
Note 5 shows that Accrued liabilities (a current liability) includes $541 for Derivative
contracts, which indicates that $541 will be paid within the next 12 months. Southwest
also has Derivative contracts of $265 in Other noncurrent liabilities that will be paid
11-9
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