Please use the following information to answer questions 1 through 4. In August 2016, Microsoft Inc. sold $19.75 billion bonds to partially fund its acquisition of LinkedIn Corp ($26.2 billion). In January 2017, Microsoft Inc. issued another $17 billion in bonds (see the table below). Since most credit rating agencies rated Microsoft credit as AAA, bond interest managed to very favorable interest rates (the better the credit rating, the smaller interest rates the company could enjoy). Proceeds from the seven-part deal, were expected to be used for general corporate purposes, including stock buybacks and refinancing (the repayment of short-term debt used to help fund Microsofts acquisition of LinkedIn Corp).

Part	Billion	Interest	Due date	Maturity
1	1.5	1.85%	2020	3 years
2	1.75	2.40%	2022	5 years
3	2.25	2.875%	2024	7 years
4	4	3.30%	2027	10 years
5	2.5	4.10%	2037	20 years
6	3	4.25%	2047	30 years
7	2	4.50%	2057	40 years
Total 17 billion		Effective: 3.45%

What journal entry did Microsoft make when it issued $17 billion in bonds (ignore underwriting fees)?

• A.

  Assets

  =

  Liabilities

  Stockholders' Equity

  Revenue

  -

  Expense

  =

  Net Income

  Statement of Cash flow

  Cash

  +

  Prepaid expenses

  =

  Accounts payable

  +

  Bonds payable

  +

  Common Stock

  +

  Retained earnings

  -

  =

  17 billion

  +

  =

  17 billion

  +

  +

  +

  -

  =

  17 billion

  FA

• B.

  Assets

  =

  Liabilities

  Stockholders' Equity

  Revenue

  -

  Expense

  =

  Net Income

  Statement of Cash flow

  Cash

  +

  Prepaid expenses

  =

  Accounts payable

  +

  Bonds payable

  +

  Common Stock

  +

  Retained earnings

  -

  =

  17 billion

  +

  =

  +

  +

  +

  17 billion

  17 billion

  -

  =

  17 billion

  17 billion

  OA

• C.

  Assets

  =

  Liabilities

  Stockholders' Equity

  Revenue

  -

  Expense

  =

  Net Income

  Statement of Cash flow

  Cash

  +

  Prepaid expenses

  =

  Accounts payable

  +

  Bonds payable

  +

  Common Stock

  +

  Retained earnings

  -

  =

  17 billion

  +

  =

  +

  17 billion

  +

  +

  -

  =

  17 billion

  FA

• D.

  Assets

  =

  Liabilities

  Stockholders' Equity

  Revenue

  -

  Expense

  =

  Net Income

  Statement of Cash flow

  Cash

  +

  Prepaid expenses

  =

  Accounts payable

  +

  Bonds payable

  +

  Common Stock

  +

  Retained earnings

  -

  =

  17 billion

  +

  =

  +

  17 billion

  +

  +

  -

  =

  17 billion

  OA

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Question 2 of 6

1.0 Points

How was accounting equation impacted by the bond issuance?

• A. Assets increased, liabilities increased, equity increased.

• B. Assets increased, liabilities increased, equity decreased.

• C. Assets increased, liabilities increased, equity unaffected.

• D. Assets decreased, liabilities increased, equity unaffected

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Question 3 of 6

1.0 Points

The effective interest rate for bond issuance in January 2017 was 3.45%. How much will it cost Microsoft to serve its new debt annually? (To put it differently, what is an interest expense related to the mentioned bond issuance?

• A. $552.5 million

• B. $5.9 billion

• C. $586.5 million

• D. $59 million

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Question 4 of 6

0.5 Points

What is the reason Microsoft issued bonds instead of borrowing money from the bank? If you did not make relevant notes, you may find this summary helpful

• A. Bonds generally yield smaller interest rates

• B. Bank loans are more restrictive as banks may set up covenants

• C. Bond issuance enables corporations to attract a large number of lenders: banks, insurance companies, pension funds etc.

• D. Company controls many options about bonds: maturity, ability to convert bonds into stocks

• E. All of the above is correct.

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