On August 1 , Saola issued a $ 7 4 0 , ooo, semi - annual, 7
Question:
On August Saola issued a $ooo, semiannual, year, bond. The market rate for similar
bonds on that day was Saola uses the effective interest method to record the amortization or
premiums and discounts. Saola's management has decided to report net bonds on the balance sheet,
instead of reporting the bond and its premium or discount separately. No entries have yet been made
for the bond.
Saola's management would like to know the effect of your adjustment on the following ratios:
Debt to Equity Ratio Total Liabilities Total Equity
Current Ratio
ROA
Calculations
Make the appropriate journal entries, if any, to account for the new bond and any accruedinterest including any necessary changes to income tax expenseMake any necessary changes to the financial statements.Critical ThinkingCalculate each of the required ratios using the original values before any changes and theupdated values after your changesIssuing this bond has left Saola with a lot of cash on hand. Do you think holding so muchcash is a good decision? What do you think investor's reaction will be to such a high cashbalance? Consider the effect it has had on the three ratios you calculated. Would the changesimprove or reduce investors' perception of Saola? Defend your answer.Saola's CFO has been concerned about the issuance of this bond. The company really doesn'tneed the additional cash at the moment, despite some vague plans to expand in the nearfuture. The rest of the management team, on the other hand, felt that the additional cashwould allow them to repurchase shares and pay a larger dividend for the period, both ofwhich would help to calm investors' fears after all of the changes that needed to be made tothe financial statements this period. Provide two arguments that the CFO could haveused to try to talk his colleagues out of issuing the bond.
Principles of Accounting
ISBN: 978-1133626985
12th edition
Authors: Belverd E. Needles, Marian Powers and Susan V. Crosson