The following information is taken from the 2025 annual report of Bugant, Inc. Bugant’s fiscal year ends December 31 of each year. Bugant’s December 31, 2025, balance sheet is as follows.

Note X: Long Term Debt:

On January 1, 2024, Bugant issued bonds with face value of $1,500 and a coupon rate equal to 10%. The bonds were issued to yield 12% and mature on January 1, 2029. Additional information concerning 2026 is as follows.

1. Sales were $3,500, all for cash.

2. Purchases were $2,000, all paid in cash.

3. Salaries were $700, all paid in cash.

4. Property, plant, and equipment was originally purchased for $2,000 and is depreciated straight-line over a 25-year life with no salvage value.

5. Ending inventory was $1,900.

6. Cash dividends of $100 were declared and paid by Bugant.

7. Ignore taxes.

8. The market rate of interest on bonds of similar risk was 12% during all of 2026.

9. Interest on the bonds is paid semiannually each June 30 and December 31.

Accounting

Prepare a balance sheet for Bugant, Inc. at December 31, 2026, and an income statement for the year ending December 31, 2026. Assume semiannual compounding of the bond interest.

Analysis

Use common ratios for analysis of long-term debt to assess Bugant’s long-run solvency. Has Bugant’s solvency changed much from 2025 to 2026? Bugant’s net income in 2025 was $550 and interest expense was $169.

Principles

The FASB and the IASB allow companies the option of recognizing in their financial statements the fair values of their long-term debt. That is, companies have the option to change the balance sheet value of their long-term debt to the debt’s fair value and report the change in value as a gain or loss in income. In terms of the qualitative characteristics of accounting information (Chapter 1), briefly describe the potential trade-off(s) involved in reporting long-term debt at its fair value.

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Assets Cash Inventory Bugant, Inc. Balance Sheet December 31, 2025 Total current assets Plant and equipment Accumulated depreciation Total assets Liabilities Bonds payable (net of discount) Stockholders' equity Common stock Retained earnings Total liabilities and stockholders' equity $450 1,800 2,250 2,000 (160) $4,090 $1,426 1,500 1,164 $4,090