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Please Show Your Work Accounting for Bonds Sold at a Discount The Biltmore National Bank raised capital through the sale of $100 million face value of 8% coupon rate, 10-year bonds. The bonds paid interest semiannually and were sold at a time when equivalent risk-rated bonds carried a yield rate of 10%. Calculate the proceeds that The Biltmore National Bank received from the sale of the 8% bonds. Use Excel or a financial calculator for your computations. Round your answers to the nearest dollar. How will the bonds be disclosed on Biltmore's balance sheet immediately following the sale? Round your answers to the nearest dollar. Balance sheet disclosure (following sale): Bonds payable Less: Bonds discount (enter as negative) Bonds payable(net) Calculate the interest expense on the bonds for the first year that the bonds are outstanding. Do not round until final answer. Round answers to the nearest dollar. First six months Second six months Calculate the book value of the bonds at the end of the first year. Do not round until final answer. Round answer to the nearest dollar. $Answer Accounting for Notes Issues at a Premium The Longo Corporation issued $50 million maturity value of 8 percent coupon rate notes, with interest paid semiannually. At the time of the note issuance, equivalent risk-rated debt instruments carried a yield rate of 6 percent. The notes matured in 5 years. Calculate the proceeds that the Longo Corporation would receive from the sale of the notes. Use Excel or a financial calculator for your computations. Round your answers to the nearest dollar. How will the notes be reported on Longo's balance sheet immediately following the sale? Round your answers to the nearest dollar. Bonds payable Plus: Bond Premium Book Value Calculate the interest expense on the notes for the first year. Do not round until final answer. Round answers to the nearest dollar. First six months Second six months Calculate the book value of the notes at the end of the first year. Do not round until final answer. Round answer to the nearest dollar. Retiring Debt Early Smith & Company issued $80 million maturity value of 5-year bonds, which carried a coupon rate of 6% and paid interest semiannually. At the time of the offering, the yield rate for equivalent risk-rated securities was 8%. Two years later, market yield rates had risen to 10%, and since the company no longer needed the debt financing, executives at Smith & Company decided to retire the debt. Calculate the gain or loss that Smith & Company will incur as a consequence of retiring the debt early. Use Excel or a financial calculator for your computations. Do not round until your final answer. Round your answer to the nearest dollar. If it is a loss, enter as a negative. Is the early retirement of the debt a good decision if Smith & Company does not need the financing? Answer Debt Retirement MTF Inc. is a manufacturer of electronic components for facsimile equipment. The company financed the expansion of its production facilities by issuing $100 million of 10-year bonds carrying a coupon rate of 8% with interest payable annually on December 31. The bonds had been issued on January 1. At the time of the issuance, the market rate of interest on similar risk-rated instruments was 6%. Two years later, the market rate of interest on comparable debt instruments had climbed to 12%. The CEO of MTF realized that this might be an opportune time to repurchase the bonds, particularly because an unexpected surplus of cash made the outstanding debt no longer necessary. Required 1. Calculate the proceeds received by the company when the debt was initially sold. Use Excel or a financial calculator for your computations. Round your answer to the nearest dollar. 2. Calculate the interest expense for each of the two years that the bonds were outstanding. Do not round until final answer. Round answers to the nearest dollar. Year 1 Year 2 3. Calculate the amount of cash needed to retire the debt after 2 years assuming a market yield rate of 12%. Use Excel or a financial calculator for your computations. Round your answer to the nearest dollar. Calculate the amount of the gain or (loss) that would result from early retirement of the debt. Do not round until final answer. Round answers to the nearest dollar. Where will the cash flow from the retirement of the bonds be reported on the company's statement of cash flows? Answer Capitalizing Operating Leases McDonald's Corp. was the lessee at 14,139 restaurant locations through ground leases at December 31, 2011. The lease terms are generally for 20 years. The company is also the lessee under noncancelable leases covering certain offices and vehicles. The company's footnotes also revealed that at year-end 2011, the minimum lease commitments under noncancelable operating leases were: In millions Restaurant Other Total 2012 $1,172.6 $74.4 $1,247.0 2013 1,104.8 62.8 1,167.6 2014 1,019.50 55.4 1,074.9 2015 921.9 43.1 965.0 2016 813.9 37.9 851.8 6,039.1 208.8 6,247.9 Thereafter Total minimum payments $11,071.8 $482.4 $11,554.2 The following represents a condensed balance sheet for McDonald's for 2011: MCDONALD'S CORPORATION Consolidated Balance Sheet ($ millions) 2011 Assets Current Assets Noncurrent Assets Total assets $4,403.0 28,586.9 $32,989.9 Liabilities and Shareholders' equity Current liabilities $3,509.2 MCDONALD'S CORPORATION Consolidated Balance Sheet ($ millions) 2011 Long-term debt 12,133.8 Other noncurrent liabilities 2,956.7 Shareholders' equity Total liabilities and Shareholders' equity 14,390.2 $32,989.9 Required 1. Calculate the present value of the company's operating leases assuming an interest rate of 6%. Hint - Assume any "thereafter" amount is straight-lined over the remaining lease period using the 5th year (2016) lease payment, with the final year amount as a plug figure to reconcile to the total future minimum lease payments. Use Excel or a financial calculator for your computations. Do not round until your final answer. Round your answer to the nearest million dollars. million 2. Restate the company's balance sheet assuming that all operating leases are capitalized. Use Excel or a financial calculator for your computations. Do not round until your final answer for each account balance. Round your answers to the nearest million dollars. MCDONALD'S CORPORATION Consolidated Balance Sheet ($ millions) Assets 2011 MCDONALD'S CORPORATION Consolidated Balance Sheet ($ millions) 2011 Current Assets Noncurrent Assets Total assets Liabilities and Shareholders' equity Current liabilities Long-term debt Other noncurrent liabilities Shareholders' equity Total liabilities and Shareholders' equity 3. Calculate the: (a) Long-term debt to shareholders' equity ratio, both with and without capitalization of operating leases. For your calculations, use the amounts as they appear in the above balance sheets. Answer in a percent rounded to one decimal place. Hint: To calculate ratio, use long-term debt amount only (do not include current portion). (a) With operating lease capitalization % (b) Without operating lease capitalization % (b) Total debt to total assets ratio, both with and without the capitalization of the operating leases. For your calculations, use the amounts as they appear in the above balance sheets. Answer in a percent rounded to one decimal place. (a) With operating lease capitalization % (b) Without operating lease capitalization % Accounting for Stock Dividends and Stock Splits The Irvine Corporation reported the following data at year-end: Common stock, par value $1 $100,000 Additional paid-in-capital 300,000 Retained earnings 1,400,000 Treasury shares (600,000) Other comprehensive income Total shareholders' equity 200,000 $1,400,000 The following transactions occurred during the year in the following sequence: 1. Declared and distributed a 10% stock dividend on the outstanding common shares at a time when the common shares were selling for $15 per share. 2. Declared a 3-for-2 forward stock split on the outstanding common shares. 3. Declared and issued a 20% stock dividend on the outstanding common shares at a time when the shares were selling for $30 per share. 4. Declared a 2-for-1 forward stock split on the outstanding common shares. Calculate the par value per share and number of shares outstanding at year-end. Prepare the shareholders' equity section of the balance sheet for the Irvine Corporation at year-end. Do not round until your final answers. Par value per share at year end. Round to two decimal places. $Answer Number of shares outstanding at year end. Round to nearest whole number. Answer Do not use rounded answers in your calculations. Enter all answers in the nearest whole number. The Irvine Corporation Shareholders' Equity Year End Common stock, par value Additional paid-in-capital Retained earnings $Answer Answer Answer The Irvine Corporation Shareholders' Equity Year End Treasury stock Answer Answer Other comprehensive income Total shareholders' equity Accounting for Share Transactions At the beginning of the year, The Mann Corporation, a private entity, decided to go public. A charter of incorporation was constructed which authorized the sale of 10 million shares of $1 par value common stock, 100,000 shares of $100 par value, 8% preferred stock, and 200,000 shares of $5 no-parvalue convertible preferred stock. The following shares were sold as part of the firm's initial public offering: 1,000,000 shares of common stock at $10 per share. 100,000 shares of $100 par value, 8% preferred stock at $105 per share. 100,000 shares of $5 convertible, no-par preferred stock at $55 per share. At year-end, the full dividend was declared and paid on both preferred stock offerings. Required Using a spreadsheet, record the financial effects of the shareholders' equity transactions for The Mann Corporation for the year. Enter amounts in thousands. The Mann Corporation Transaction (in thousands) Common Shares IPO No-par 8% Preferred No-par 8% Preferred Preferred IPO Preferred IPO Dividend Dividend Balance Sheet Totals Assets $Answer $Answer $Answer $Answer $Answer $Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Cash Shareholders' Equity Common Stock APIC - Common $100 Preferred Stock APIC-Preferred $5 Conv. Preferred Retained Earnings The Mann Corporation Transaction (in thousands) Common Shares IPO No-par 8% Preferred No-par 8% Preferred Preferred IPO Preferred IPO Dividend Dividend Total Shareholders' Equity Accounting for Share Transactions The shareholders' equity section of the consolidated balance sheet of CompX International appeared as follows at the beginning of the year: Shareholders' Equity Class A common stock, $0.01 par value; 20,000,000 shares authorized; 6,100,000 shares issued $61,000 Additional paid-in-capital 118,127,000 Retained earnings 14,270,000 Currency translation adjustment Total equity (2,412,000) $130,046,000 Balance Sheet Totals The Mann Corporation Common Shares IPO Transaction (in thousands) No-par 8% Preferred No-par 8% Preferred Preferred IPO Preferred IPO Dividend Dividend The following events occurred sequentially during the year: 1. A 2-for-1 forward stock split was executed. 2. A ten percent stock dividend was distributed when the CompX share price was $20 per share. 3. Treasury stock valued at $3,000,000 was repurchased when the CompX share price was $15 per share. Required 1. How many Class A common shares are outstanding following the above events? Answer 2. What is the par value per share of the Class A common stock following the above events? Round to the nearest three decimal places. $Answer 3. Prepare a spreadsheet to illustrate the financial effects associated with the above three share transactions. Round answers to nearest whole number. CompX International Transaction Assets Stock Split Stock Dividend Share Repurchase Balance Sheet Totals Balance Sheet Totals The Mann Corporation Common Shares IPO Transaction (in thousands) No-par 8% Preferred No-par 8% Preferred Preferred IPO Preferred IPO Dividend Dividend CompX International Transaction Cash Stock Split Stock Dividend Share Repurchase Balance Sheet Totals $Answer $Answer $Answer $Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Answer Shareholders' Equity Common stock APIC Retained earnings Treasury stock Answer Answer Answer Answer $Answer Total Shareholders' Equity Balance Sheet Totals The Mann Corporation Transaction (in thousands) Common Shares IPO No-par 8% Preferred No-par 8% Preferred Preferred IPO Preferred IPO Dividend Dividend 4. Calculate the total value of shareholders' equity following the above events. $Answer Balance Sheet Totals Accounting for Bonds Sold at a Discount The Biltmore National Bank raised capital through the sale of $100 million face value of 8% coupon rate, 10-year bonds. The bonds paid interest semiannually and were sold at a time when equivalent risk-rated bonds carried a yield rate of 10%. Calculate the proceeds that The Biltmore National Bank received from the sale of the 8% bonds. Use Excel or a nancial calculator for your computations. Round your answers to the nearest dollar. $100,000,000 1.0520 + $100,000,000 4% 1 1.0520 = $87,537,790 0.05 How will the bonds be disclosed on Biltmore's balance sheet immediately following the sale? Round your answers to the nearest dollar. Balance sheet disclosure (following sale): Bonds payable Less: Bond discount Bonds payable (net) 100,000,000 (12,462,210) 87,537,790 Calculate the interest expense on the bonds for the rst year that the bonds are outstanding. Do not round until nal answer. Round answers to the nearest dollar. First six months: $87,537,790 5% = $4,376,889 Second six months: ($87,537,790 1.05 $4,000,000 ) 5% = $4,395,734 Calculate the book value of the bonds at the end of the rst year. Do not round until nal answer. Round answer to the nearest dollar. $87,537,790 1.052 $4,000,000 1.05 $4,000,000 = $88,310,413 Accounting for Notes Issues at a Premium The Longo Corporation issued $50 million maturity value of 8 percent coupon rate notes, with interest paid semiannually. At the time of the note issuance, equivalent risk-rated debt instruments carried a yield rate of 6 percent. The notes matured in 5 years. Calculate the proceeds that the Longo Corporation would receive from the sale of the notes. Use Excel or a nancial calculator for your computations. Round your answers to the nearest dollar. $50,000,000 1.03 10 + $50,000,000 4% 1 1.03 10 = $54,265,101 0.03 How will the notes be reported on Longo's balance sheet immediately following the sale? Notes payable Plus: Notes premium Notes payable (net) 50,000,000 4,265,101 54,265,101 Calculate the interest expense on the notes for the rst year. Do not round until nal answer. Round answers to the nearest dollar. First six months: $54,265,101 3% = $1,627,953 Second six months: ($54,265,101 1.03 $2,000,000 ) 3% = $1,616,792 Calculate the book value of the notes at the end of the rst year. Do not round until nal answer. Round answer to the nearest dollar. $54,265,101 1.032 $2,000,000 1.03 $2,000,000 = $53,509,846 Retiring Debt Early Smith & Company issued $80 million maturity value of 5-year bonds, which carried a coupon rate of 6% and paid interest semiannually. At the time of the oering, the yield rate for equivalent risk-rated securities was 8%. Two years later, market yield rates had risen to 10%, and since the company no longer needed the debt nancing, executives at Smith & Company decided to retire the debt. Calculate the gain or loss that Smith & Company will incur as a consequence of retiring the debt early. Use Excel or a nancial calculator for your computations. Do not round until your nal answer. Round your answer to the nearest dollar. If it is a loss, enter as a negative. Carrying Amount of Bonds: $80,000,000 1.04 6 + $80,000,000 3% 1 1.04 6 = $75,806,291 0.04 Cash Required to Retire Bond $80,000,000 1.056 + $80,000,000 3% 1 1.056 = $71,878,893 0.05 Gain on Retirement: $75,806,291 $71,878,893 = $3,927,398. Is the early retirement of the debt a good decision if Smith & Company does not need the nancing? Yes. Retirement was also favourable at this point because the yields are higher. Debt Retirement MTF Inc. is a manufacturer of electronic components for facsimile equipment. The company nanced the expansion of its production facilities by issuing $100 million of 10-year bonds carrying a coupon rate of 8% with interest payable annually on December 31. The bonds had been issued on January 1. At the time of the issuance, the market rate of interest on similar risk-rated instruments was 6%. Two years later, the market rate of interest on comparable debt instruments had climbed to 12%. The CEO of MTF realised that this might be an opportune time to repurchase the bonds, particularly because an unexpected surplus of cash made the outstanding debt no longer necessary. Required 1. Calculate the proceeds received by the company when the debt was initially sold. Use Excel or a nancial calculator for your computations. Round your answer to the nearest dollar. $100,000,000 1.06 10 + $100,000,000 8% 1 1.06 10 = $114,720,174 0.06 2. Calculate the interest expense for each of the two years that the bonds were outstanding. Do not round until nal answer. Round answers to the nearest dollar. First six months: $114,720,174 6% = $6,883,210 Second six months: ($114,720,174 1.06 $8,000,000 ) 6% = $6,816,203 3. Calculate the amount of cash needed to retire the debt after 2 years assuming a market yield rate of 12%. Use Excel or a nancial calculator for your computations. Round your answer to the nearest dollar. $100,000,000 1.128 + $100,000,000 8% 1 1.128 = $80,129,441 0.12 Calculate the amount of the gain or (loss) that would result from early retirement of the debt. Do not round until nal answer. Round answers to the nearest dollar. Carrying Amount of Bonds: $100,000,000 1.06 8 + $100,000,000 8% 1 1.06 8 = $112,419,588 0.06 Gain on Retirement: $112,419,588 $80,129,441 = $32,290,147. Where will the cash ow from the retirement of the bonds be reported on the company's statement of cash ows? Financing activities section Capitalizing Operating Leases McDonald's Corp. was the lessee at 14,139 restaurant locations through ground leases at December 31, 2011. The lease terms are generally for 20 years. The company is also the lessee under noncancelable leases covering certain oces and vehicles. The company's footnotes also revealed that at year-end 2011, the minimum lease commitments under noncancelable operating leases were: In millions 2012 2013 2014 2015 2016 Thereafter Total minimum payments Restaurant 1,172.60 1,104.80 1,019.50 921.90 813.90 6,039.10 11,071.80 Other 74.40 62.80 55.40 43.10 37.90 208.80 482.40 Total 1,247.00 1,167.60 1,074.90 965.00 851.80 6,247.90 11,554.20 The following represents a condensed balance sheet for McDonald's for 2011: MCDONALD'S CORPORATION Consolidated Balance Sheet 2,011.00 ($ millions) Assets Current Assets 4,403.00 28,586.90 Noncurrent Assets Total assets 32,989.90 Liabilities and Shareholders' equity Current liabilities Long-term debt Other noncurrent liabilities Shareholders' equity Total liabilities and Shareholders' equity Required 3,509.20 12,133.80 2,956.70 14,390.20 32,989.90 1. Calculate the present value of the company's operating leases assuming an interest rate of 6%. Hint Assume any "thereafter" amount is straight-lined over the remaining lease period using the 5th year (2016) lease payment, with the nal year amount as a plug gure to reconcile to the total future minimum lease payments. Use Excel or a nancial calculator for your computations. Do not round until your nal answer. Round your answer to the nearest million dollars. In millions 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Total minimum payments Total 1,247.00 1,167.60 1,074.90 965.00 851.80 851.80 851.80 851.80 851.80 851.80 851.80 851.80 285.30 11,554.20 PV Factors 0.9434 0.8900 0.8396 0.7921 0.7473 0.7050 0.6651 0.6274 0.5919 0.5584 0.5268 0.4970 0.4688 Present Value 1,176.42 1,039.16 902.51 764.37 636.51 600.49 566.50 534.43 504.18 475.64 448.72 423.32 133.76 8,205.99 2. Restate the company's balance sheet assuming that all operating leases are capitalized. Use Excel or a nancial calculator for your computations. Do not round until your nal answer for each account balance. Round your answers to the nearest million dollars. MCDONALD'S CORPORATION Consolidated Balance Sheet ($ millions) Assets Current Assets Noncurrent Assets Total assets 4,403.00 36,792.89 41,195.89 Liabilities and Shareholders' equity Current liabilities Long-term debt Other noncurrent liabilities Shareholders' equity Total liabilities and Shareholders' equity 4,685.62 19,163.38 2,956.70 14,390.20 41,195.89 2,011.00 3. Calculate the: a. Long-term debt to shareholders' equity ratio, both with and without capitalization of operating leases. For your calculations, use the amounts as they appear in the above balance sheets. Answer in a percent rounded to one decimal place. Hint: To calculate ratio, use longterm debt amount only (do not include current portion). $19,163.38 + $2,956.70 = 153.7% $14,390.20 $12,133.80 + $2,956.70 Without operating lease capitalization: = 104.9% $14,390.20 With operating lease capitalization: b. Total debt to total assets ratio, both with and without the capitalization of the operating leases. For your calculations, use the amounts as they appear in the above balance sheets. Answer in a percent rounded to one decimal place. $4,685.62 + $19,163.38 + $2,956.70 = 65.1% $41,195.89 $3,509.20 + $12,133.80 + $2,956.70 Without operating lease capitalization: = 56.4% $32,989.90 With operating lease capitalization: Accounting for Stock Dividends and Stock Splits The Irvine Corporation reported the following data at year-end: Common stock, par value $1 Additional paid-in-capital Retained earnings Treasury shares Other comprehensive income Total shareholders' equity 100,000 300,000 1,400,000 (600,000) 200,000 1,400,000 The following transactions occurred during the year in the following sequence: 1. 2. 3. 4. Declared and distributed a 10% stock dividend on the outstanding common shares at a time when the common shares were selling for $15 per share. Declared a 3-for-2 forward stock split on the outstanding common shares. Declared and issued a 20% stock dividend on the outstanding common shares at a time when the shares were selling for $30 per share. Declared a 2-for-1 forward stock split on the outstanding common shares. Calculate the par value per share and number of shares outstanding at year-end. Prepare the shareholders' equity section of the balance sheet for the Irvine Corporation at year-end. Do not round until your nal answers. Par value per share at year end. Round to two decimal places. $1 2 1 = $0.3333 3 2 Number of shares outstanding at year end. Round to nearest whole number. 100,000 1.10 3 1.20 2 = 396,000 2 Do not use rounded answers in your calculations. Enter all answers in the nearest whole number. Common stock, par value $0.33 Additional paid-in-capital Retained earnings Treasury shares Other comprehensive income Total shareholders' equity 132,000 440,000 1,228,000 (600,000) 200,000 1,400,000 Accounting for Share Transactions At the beginning of the year, The Mann Corporation, a private entity, decided to go public. A charter of incorporation was constructed which authorized the sale of 10 million shares of $1 par value common stock, 100,000 shares of $100 par value, 8% preferred stock, and 200,000 shares of $5 no-parvalue convertible preferred stock. The following shares were sold as part of the rm's initial public oering: 1,000,000 shares of common stock at $10 per share. 100,000 shares of $100 par value, 8% preferred stock at $105 per share. 100,000 shares of $5 convertible, no-par preferred stock at $55 per share. At year-end, the full dividend was declared and paid on both preferred stock oerings. Required Using a spreadsheet, record the nancial eects of the shareholders' equity transactions for The Mann Corporation for the year. Enter amounts in thousands. The Mann Corporation Transaction (in thousands) Assets Cash Shareholders' Equity Common Stock APICCommon $100 par, Preferred Stock APICPreferred $5 Conv. Preferred Retained Earnings Total Shareholders' Equity 8% Common Preferred Shares IPO IPO 10,000,000 10,500,000 No-par Preferred IPO 5,500,000 8% Preferred Dividend No-par Preferred Dividend Balance Sheet Totals (800,000) (500,000) 24,700,000 (800,000) (500,000) (800,000) (500,000) 24,700,000 1,000,000 9,000,000 10,000,000 500,000 5,500,000 10,000,000 10,500,000 5,500,000 Accounting for Share Transactions The shareholders' equity section of the consolidated balance sheet of CompX International appeared as follows at the beginning of the year: Shareholders' Equity Class A common stock, $0.01 par value; 20,000,000 shares authorized; 6,100,000 shares issued $61,000 Additional paid-in-capital 118,127,000 Retained earnings 14,270,000 Currency translation adjustment (2,412,000) Total equity $130,046,000 The following events occurred sequentially during the year: 1. A 2-for-1 forward stock split was executed. 2. A ten percent stock dividend was distributed when the CompX share price was $20 per share. 3. Treasury stock valued at $3,000,000 was repurchased when the CompX share price was $15 per share. Required 1. How many Class A common shares are outstanding following the above events? 6,100,000 2 1.10 200,000 = 13,220,000 2. What is the par value per share of the Class A common stock following the above events? Round to the nearest three decimal places. $0.01 / 2 = $0.005 3. Prepare a spreadsheet to illustrate the nancial eects associated with the above three share transactions. Round answers to nearest whole number. CompX International Transaction (in thousands) Assets Cash Shareholders' Equity Common Stock APIC Retained earnings Treasury stock Total Shareholders' Equity Stock Split 0 Stock Dividend Share Repurchase 0 (3,000,000) 0 6,100 0 24,393,900 0 (24,400,000) 0 0 (3,000,000) 0 (3,000,000) 0 4. Calculate the total value of shareholders' equity following the above events. $130,046,000 $3,000,000 = $127,046,000 Balance Sheet Totals (3,000,000) (3,000,000)