14–77
FINANCIAL STATEMENT ANALYSIS CASE
COMMONWEALTH EDISON CO.
(a) Due to the markdown from 99.803 to 99.25, Commonwealth Edison
would record a slightly larger discount and, of course, receive and
(b) In the same Wall Street Journal article, the following explanation was
provided for Commonwealth Edison’s bond markdown and slow sale:
Other economic events that can and do affect the price of securities
issued are:
1. A change in the Federal Reserve’s lending rate.
2. A change in the bank prime rate.
14–78
FINANCIAL STATEMENT ANALYSIS CASE (Continued)
Of course, noneconomic, political, or other world events can also affect
the day-to-day sale of securities.
14–79
ACCOUNTING, ANALYSIS, AND PRINCIPLES
Accounting
BUGANT, INC.
Income Statement
For the year Ended December 31, 2013
Sales revenue
$3,500
Expenses:
Cost of goods sold (1)
$1,900
Salaries and wages expense
Depreciation expense (2)
Interest expense (3)
Net income
$ 648
14–80
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
BUGANT, INC.
Balance Sheet
December 31, 2013
ASSETS
Cash (1) …………………………………………………………..
$1,000
Inventory …………………………………………………………
1,900
Total current assets …………………………………………
Total liabilities and stockholders’ equity ……………
(1) $450 + $3,500 – $2,000 – $700 – $100 – $150 = $1,000
(2) $(160) + $(80) = $(240)
Plant and equipment ………………………………………..
Total assets ……………………………………………………..
4,660
LIABILITIES
Bonds payable (3)…………………………………………….
$1,448
Common stock ………………………………………………..
$1,500
Retained earnings (4) ……………………………………….
1,712
3,212
14–81
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
Analysis
2013
2012
Debt to Assets Ratio
$1,448
= 0.31
$1,426
= 0.35
$4,660
$4,090
Times Interest
$648 + $172
= 4.77
$550 + $169
= 4.25
Earned Ratio
$172
$169
Principles
One could argue that this represents a classic trade-off between
relevance and faithful representation. Many people think that the fair
values of assets and liabilities are relevant to making investing and
14–82
PROFESSIONAL RESEARCH
(a) According to FASB ASC 835-30–05
05-2 Business transactions often involve the exchange of cash or
property, goods, or service for a note or similar instrument. When
a note is exchanged for property, goods, or service in a bargained
transaction entered into at arm’s length, there should be a general
05-3 This Subtopic provides guidance for the appropriate accounting
when the face amount of a note does not reasonably represent the
present value of the consideration given or received in the
14–83
PROFESSIONAL RESEARCH (Continued)
According to FASB ASC 835-30–15
15-2 The guidance in the Subtopic applies to receivables and payables
that represent contractual rights to receive money or contractual
obligations to pay money on fixed or determinable dates, whether
or not there is any stated provision for interest, with certain
25-3 If an established exchange price is not determinable and if the
note has no ready market, the problem of determining present
value is more difficult. To estimate the present value of a note
(c) According to FASB ASC 835-30–45
45-1 The guidance in this Section does not apply to the amortization of
premium and discount and the debt issuance costs of liabilities
that are reported at fair value.
14–84
PROFESSIONAL RESEARCH (Continued)
45–1A The discount or premium resulting from the determination of
present value in cash or noncash transactions is not an asset or
45-2 The description of the note shall include the effective interest
rate. The face amount shall also be disclosed in the financial
statements or in the notes to the statements.
14–85
PROFESSIONAL SIMULATION
Journal Entries
April 1, 2011
Cash ……………………………………………
5,307,228.36
*
Premium on Bonds Payable ……..
307,228.36
Bonds Payable ………………………..
5,000,000.00
April 1, 2012
Interest Payable …………………………...
550,000.00
Cash ……………………………………….
550,000.00
Interest Expense ………………………….
Premium on Bonds Payable ………….
Interest Payable ………………………
550,000.00
Resources
14–86
PROFESSIONAL SIMULATION (Continued)
Financial Statements
BALZAC INC.
Balance Sheet
as of March 31, 2012
Long-term liabilities
11% bonds payable (Note A) ………………………….
$5,000,000
Premium on bonds payable …………………………..
287,951
Asset retirement obligation, warehouse site …..
Notes payable (Note B) …………………………..……..
14–87
IFRS CONCEPTS AND APPLICATION
IFRS14-1
Bond discount and bond premium are amortized on an effective-interest
basis. The effective-interest method results in an increasing or decreasing
IFRS14-2
A transfer of noncash assets (real estate, receivables, or other assets) or the
issuance of the debtor’s shares can be used to settle a debt obligation in an
extinguishment. In these situations, the noncash assets or equity interest
IFRS14-3
January 1
(a)
Cash …………………………………………………………
559,224
Bonds Payable ………………………………….
559,224
(b)
Interest Expense ($559,224 X 8% X 6/12) ……..
Cash ($600,000 X 7% X 6/12) ………………
(c)
Interest Expense ($560,593 X 8% X 6/12) ……..
14–88
IFRS14-4
January 1
(a)
Cash …………………………………………………………………
644,636
Bonds Payable ………………………………………….
644,636
IFRS14-5
(a)
1/1/12
Cash ($800,000 X 1.19792) ………………………….
958,336
Bonds Payable ………………………………….
958,336
Bonds Payable ………………………………………….
Cash ($800,000 X 10% X 6/12) …………….
Bonds Payable ………………………………………….
Interest Payable …………………………..
IFRS14-6
(a)
1/1/12
Cash ($800,000 X 0.8495) …………………………..
679,600
Bonds Payable ………………………………….
679,600
Bonds Payable ………………………………….
(b)
Interest Expense ($644,636 X 6% X 6/12) ……………..
Bonds Payable …………………………..………………………
Cash ($600,000 X 7% X 6/12) ………………………
(c)
Interest Expense ($642,975 X 6% X 6/12) ……………..
Bonds Payable …………………………..………………………
Cash ($600,000 X 7% X 6/12) ………………………
14–89
IFRS14-6 (Continued)
(c)
12/31/12
Interest Expense
[ ($679,600 + $766) X 12% X 6/12) ]…………….
40,822
Bonds Payable ………………………………….
822
Interest Payable …………………………..
40,000
IFRS14-7
According to IAS 39:
(a) Initial measurement of financial assets and financial liabilities
(b) Derecognition of a financial liability
An entity shall remove a financial liability (or a part of a financial
liability) from its statement of financial position when, and only when,
it is extinguished—ie when the obligation specified in the contract is
discharged or cancelled or expires. (para. 39)
14–90
IFRS14-8
(a) From Note 22
(b) Working capital = (£370.3 million) (£1,520.2 – £1,890.5)
Current ratio = .80 (£1,520.2 ÷ £1,890.5)
Acid-test ratio = 0.48
=
£405,800,000 + £48,100,000 + £281,400,000 +
£171,700,000
£1,890,000,000
14–91
IFRS14-8 (Continued)
=
0.59 times
Cash debt coverage ratio =
Net cash provided by operating
activities
Average total liabilities
=
£1,229.0
(£4,967.3 + £5,157.5)/2
=
0.24 times
Total assets
As discussed above, M&S’s acid-test and current ratios are below one
and its working capital is negative. The lower acid-test ratio may not
be a problem. Many large companies carry relatively high levels of
accounts payable, which charge no interest. For example, M&S has