The following information is taken from the 2012 annual report of Bugant, Inc. Bugant’s fiscal year ends December 31 of each year. Bugant’s December 31, 2012, balance sheet is as follows.
Bugant, Inc.
Balance Sheet
December 31, 2012
Assets
Cash .......................$ 450
Inventory .....................1,800
Total current assets ..............2,250
Plant and equipment ...............2,000
Accumulated depreciation .............(160)
Total assets ..................$4,090
Liabilities
Bonds payable (net of discount) ..........$1,426
Stockholders’ equity
Common stock .................1,500
Retained earnings ................1,164
Total liabilities and stockholders’ equity .....$4,090
Additional information concerning 2013 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 2013.
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, 2013, and an income statement for the year ending December 31, 2013. 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 2012 to 2013? Bugant’s net income in 2012 was $550 and interest expense was $169.
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 balance sheet value of their long-term debt to the debt’s fair value and report the change in balance sheet 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.