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Exam 7: Current Liabilities and Long-Term Liabilities

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Question 1

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On December 31st, 2017, Daniels Sportsplex opened for business. The company borrowed $18,000,000 at 8% and signed a 10 year note that is to be repaid in 19 equal semiannual payments of $975,000 on June 30th and December 31st, with a balloon payment at maturity. Use the financial statement effects template below to record the issuance of the note and the payments of the first four installments

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(1) Received $18 million cash from loan...

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Accrued liabilities are obligations for which there is no external transaction.

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InterTech Corporation needed financing to build a new manufacturing plant. On June 30th, 2017, InterTech issued $3,450,000 of 8-year bonds with a 6% coupon rate (payments due on December 31st and June 30^th). The effective interest rate was 8%. Use the financial statement effects template below to record the bond issue and InterTech's first two interest payments.

What is the difference between the reported gain (loss) on debt repurchase and the economic gain (loss) on the repurchase? How should such gains / losses be analyzed? Why are current values not reflected on a company's balance sheet?

InterTech Corporation needed financing to build a new manufacturing plant. On June 30th, 2017, InterTech issued $4,350,000 of 8-year bonds with a 6% coupon rate (payments due on December 31^st and June 30^th) . The effective interest rate was 8%. What amount in interest expense did InterTech record for the June 30, 2018 payment?

Assume that in January 2017, Vivendi announced a €1.2 billion bond issuance. The bonds have a coupon rate of 6.75% payable semiannually. Assume the bonds have been assigned credit ratings of BBB (stable outlook) by Standard and Poor's, Baa2 (stable outlook) by Moody's, and BBB (stable outlook) by Fitch. Which of the following is not true?

What is the risk premium for a company that has a yield rate of 6.24% when the risk-free rate is 4.88%?

The market rate of interest is equal to the risk-free rate plus a risk premium.

Compute the accrued interest as of December 31, 2017, on each of the following notes payable:

Following is a footnote for Abbott Laboratories 2016 annual report (in millions): The following is a summary of long-term debt at December 31: In November 2016, Abbott issued $15.1 billion of medium and long-term debt to primarily fund the cash portion of the acquisition of St. Jude Medical. Abbott issued $2.85 billion of 2.35% Senior Notes due November 22, 2019; $2.85 billion of 2.90% Senior Notes due November 30, 2021; $1.50 billion of 3.40% Senior Notes due November 30, 2023; $3.00 billion of 3.75% Senior Notes due November 30, 2026; $1.65 billion of 4.75% Senior Notes due November 30, 2036; and $3.25 billion of 4.90% Senior Notes due November 30, 2046. In November 2016, Abbott also entered into interest rate swap contracts totaling $3.0 billion related to the new debt, which have the effect of changing Abbott's obligation from a fixed interest rate to a variable interest rate obligation on the related debt instruments. Principal payments required on long-term debt outstanding at December 31, 2016 are $3 million in 2017, $2 million in 2018, $3.8 billion in 2019, $1.3 billion in 2020, $2.9 billion in 2021 and $12.9 billion in 2022 and thereafter. At December 31, 2016, Abbott's long-term debt rating was A+ by Standard & Poor's Corporation and A2 by Moody's Investors Service. In conjunction with the completion of the St. Jude Medical acquisition on January 4, 2017, the ratings were adjusted to BBB by Standard & Poor's Corporation and Baa3 by Moody's Investors Service. Abbott has readily available financial resources, including unused lines of credit of $5.0 billion which expire in 2019 and that support commercial paper borrowing arrangements. Abbott's weighted-average interest rate on short-term borrowings was 0.6% at December 31, 2016 and 0.2% at December 31, 2015 and 2014. Required: a. What proportion of long-term debt will Abbott Labs repay in 2017? b. How much does the company owe under the line of credit at year end? Why does Abbott Labs discuss this in its debt footnote? c. How did the acquisition of St. Jude Medical impact Abbott Labs' default risk?

Which of the following would not require the company to record an accrual on the balance sheet?

Unearned revenue, an operating liability, arises when a company receives cash before any goods are delivered or services are rendered.

Which of the following does Moody's not consider in deriving the credit rating of a company?

Heller Company issues $950,000 of 12% bonds that pay interest semiannually and mature in 10 years. What is the bonds' issue price assuming that the bonds' market interest rate is 10% per year?

Walter Company issues $750,000 of 12% bonds that pay interest semiannually and mature in 10 years. Compute the bonds' issue price assuming that the bonds' market interest rate is: a. 10% per year compounded semiannually b. 14% per year compounded semiannually

On July 1, 2017, Leahy Corporation took out a short-term loan of $45,000 to be repaid in one year. The annual interest rate is 4% with no interest payments due until the loan is repaid. How much interest should Leahy accrue by year-end December 31, 2017? How should it be recorded in the financial statements?

The table below shows financial ratios that Moody's uses to assess risk for corporate debt. For each ratio, indicate whether financial risk increases or decreases when the ratio is higher.

Higher credit-rated borrowers receive lower interest rates than lower credit-rated borrowers, but the differences are typically not significant.

Chang, Inc. issued a 3-month note in the amount of $360,000 on 12/01/17 with an annual rate of 5%. What amount of interest has accrued as of 12/31/17?

On June 30th, one year before maturity, Bava Industries retired $495,000 of 8% bonds at a cost of 96. The bond's had a net book value on June 30th of $457,500. Bond interest is presently paid up to the date of retirement. What is the gain or loss on the retirement of these bonds?