Case 2 Eurotec Consider the following events relating to Eurotec's long-term debt in a recent year. 1. The company decided on February 1 to refinance 500 million in short-term 7.4% debt to make it long-term 6%. 2. 780 million of long-term zero-coupon bonds with an effective-interest rate of 10.1% matured July 1 and were paid. 3. On October 1, the company issued 250 million in Australian dollars 6.3% bonds at 102 and 95 million in Italian lira 11.4% bonds at 99. 4. The company holds 100 million in perpetual foreign interest payment bonds that were issued in 1989 and presently have a rate of interest of 5.3%. These bonds are called perpetual because they have no stated due date. Instead, at the end of every 10-year period after the bond's issuance, the bondholders and Eurotec have the option of redeeming the bonds. If either party desires to redeem the bonds, the bonds must be redeemed. If the bonds are not redeemed, a new interest rate is set, based on the then-prevailing interest rate for 10-year bonds. The company does not intend to cause redemption of the bonds but will reclassify this debt to current next year since the bondholders could decide to redeem the bonds. Instructions a. Consider event 1. What are some of the reasons the company may have decided to refinance this short-term debt, besides lowering the interest rate? b. What do you think are the benefits to the investor in purchasing zero-coupon bonds, such as those described in event 2? What journal entry would be required to record the payment of these bonds? If financial statements are prepared each December 31, in which year would the bonds have been included in current liabilities? c. Make the journal entry to record the bond issues described in event 3. Note that the bonds were issued on the same day, yet one was issued at a premium and the other at a discount. What are some of the reasons that this may have happened? d. What are the benefits to Eurotec in having perpetual bonds as described in event 4? Suppose that in the current year, the bonds are not redeemed and the interest rate is adjusted to 6% from 7.5%. Make all necessary journal entries to record the renewal of the bonds and the change in rate. Accounting, Analysis, and Principles www.freebookslides.comThe following information is taken from the 2019 annual report of Bugant SA. Bugant's fiscal year ends December 31 of each year. Bugant, SA Statement of Financial Position December 31, 2019 Assets Plant and equipment (net of accumulated depreciation of 160) 1,840 Inventory 1,800 Cash 450 Total current assets 2,250 Total assets 4,090 Equity Share capital 1,500 Retained earnings 1,164 Liabilities Bonds payable (net of discount) 1,426 Total equity and liabilities 4,090 Note X: Long-Term Debt On January 1, 2017, Bugant issued bonds with face value of 1,500 and coupon rate equal to 10%. The bonds were issued to yield 12% and mature on January 1, 2022. Additional information concerning 2020 is as follows. 1. Sales were 2,922, all for cash. 2. Purchases were 2,000, all paid in cash. 3. Salaries were 700, all paid in cash. 4. Plant and equipment was originally purchased for 2,000 and is depreciated on a straight-line basis over a 25-year life with no residual 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 16% during all of 2020. 9. Interest on the bonds is paid semiannually each June 30 and December 31. Accounting Prepare an income statement for Bugant for the year ending December 31, 2020, and a statement of financial position at December 31, 2020. Assume semiannual compounding. www.freebookslides.comAnalysis Use common ratios for analysis of long-term debt to assess Bugant's long-run solvency. Has Bugant's solvency changed much from 2019 to 2020? Bugant's net income in 2019 was 550 and interest expense was 169.39. Principles Recently, the FASB and the IASB allowed 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 statement of financial position value of their long-term debt to the debt's fair (or market) value and report the change in statement of financial position value as a gain or loss in income. In terms of the qualitative characteristics of accounting information (Chapter 2), briefly describe the potential trade-off (s) involved in reporting long-term debt at its fair value.