1) Financial Statement Impact of a Lease On January 1, 2017, Muske Trucking Comp
ID: 2398923 • Letter: 1
Question
1)
Financial Statement Impact of a Lease
On January 1, 2017, Muske Trucking Company leased a semitractor and trailer for five years. Annual payments of $28,300 are to be made every December 31 beginning December 31, 2017. Interest expense is based on a rate of 8%. The present value of the minimum lease payments is $112,994 and has been determined to be greater than 90% of the fair market value of the asset on January 1, 2017. Muske uses straight-line depreciation on all assets.
Required:
1. Prepare a table to show the five-year amortization of the lease obligation. Enter all amounts as positive numbers. If required, round all calculations and answers to the nearest dollar.
*Note: Due to rounding you will have to adjust the interest expense for 12/31/21 to result in a zero balance for the lease obligation.
2. Identify and analyze the effect of the lease transaction on January 1, 2017.
How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.
3. Identify and analyze the effect of all of the transactions on December 31, 2018 (the second year of the lease).
a. For lease payment and interest expense:
How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.
b. For Depreciation Expense:
How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item. For depreciation expense: Round your answers to the nearest whole dollar.
4. Prepare the balance sheet presentation as of December 31, 2018, for the leased asset and the lease obligation.
2)
Present Value of $1 PV of Annuity of $1
Amortization of Discount
Stacy Company issued five-year, 10% bonds with a face value of $10,000 on January 1, 2017. Interest is paid annually on December 31. The market rate of interest on this date is 12%, and Stacy Company receives proceeds of $9,279 on the bond issuance.
Required:
Refer to the tables above for present value factors.
1. Prepare a five-year table to amortize the discount using the effective interest method.
Note: Round the 12/31/18 interest expense and discount amortized up to the nearest dollar. For all other computations, follow normal rounding to the nearest dollar. Enter all amounts as positive numbers.
2. What is the total interest expense over the life of the bonds? cash interest payment? discount amortization?
3. Identify and analyze the effect of the payment of interest and the amortization of discount on December 31, 2019 (the third year).
How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item.
Determine the balance sheet presentation of the bonds for December 31, 2019.
$
3)
Bond Redemption Decision
Armstrong Aero Ace, a flight training school, issued $100,000 of 20-year bonds at face value when the market rate was 10%. The bonds have been outstanding for ten years. The company pays annual interest on January 1. The current rate for similar bonds is 4%. On January 1, the controller would like to retire the bonds at 102 and then issue $100,000 of ten-year bonds to pay 4% annual interest.
Required:
Complete the memo to the controller advising him to retire the outstanding bonds and issue new debt. Ignore taxes.
TO: Controller
RE: Retirement of Outstanding Bonds
The outstanding bonds require the company to continue to pay % in a market that requires only a % return. If the company issues new bonds at 4%, the new issuance will yield the company $100,000 and the interest cash payment will be much at % than at the old rate of %. The benefit to the company is that in the future ten years, the company is required to pay only $ each year rather than $ in annual interest. Discounting the savings of $ per year yields a benefit to the company of . This is than the call premium of 2% and the retirement of the original bonds. Therefore, I that the company retire the outstanding bonds and reissue the bonds at the lower rate in order to reduce future cash outflow.
4)
Partial Classified Balance Sheet for Walgreens
The following items, listed alphabetically, appear on Walgreens Boots Alliance, Inc consolidated balance sheet at August 31, 2015 (in millions):
Source: Walgreens, 2015 Form 10-K.
Required:
1. Prepare the Current Liabilities and Long-Term Liabilities sections of Walgreens's classified balance sheet at August 31, 2015. Enter your answers in millions.
2. Walgreens had total liabilities of $16,633 and total shareholders’ equity of $20,561 at August 31, 2014. Total shareholders’ equity at August 31, 2015, amounted to $31,300. (All amounts are in millions.) Compute Walgreens’ debt-to-equity ratio at August 31, 2015 and 2014. Round your answers to two decimal places.
As an investor, how would you react to the changes in the debt-to-equity ratio?
If the ratio is constant and less than 1, it indicates the company is safe to invest or remain invested.
If the ratio has increased over 2 periods and is more than 1, it indicates the company is safe to invest and remain invested.
If the ratio has decreased over 2 periods and is less than one, it indicates the company is not a safe investment and you would look for better options to invest.
This ratio is not at all significant from the investor's point of view, you would ignore this ratio.
3. What other related ratios would the company’s lenders use to assess the company? What do these ratios measure?
The lenders would be interested in Walgreens’ and . Both ratios measure the degree to which a company can make its out of current cash flows.
Check My Work
5)
Bond Transactions
Brand Company issued $1,000,000 face value, eight-year, 12% bonds on April 1, 2017, when the market rate of interest was 12%. Interest payments are due every October 1 and April 1. Brand uses a calendar year-end.
Required:
1. Identify and analyze the effect of the issuance of the bonds on April 1, 2017.
How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.
2. Identify and analyze the effect of the interest payment on October 1, 2017.
How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.
3. On December 31, Brand should
4. Determine the total cash inflows and outflows that occurred on the bonds over the eight-year life.
Total cash outflows
6)
Factors That Affect the Bond Issue Price
Becca Company is considering the issue of $100,000 face value, ten-year term bonds. The bonds will pay 6% interest each December 31. The current market rate is 6%; therefore, the bonds will be issued at face value.
Required:
1. For each of the following situations, indicate whether you believe the company will receive a premium on the bonds or will issue them at a discount or at face value.
a. Interest is paid semiannually instead of annually.
b. Assume instead that the market rate of interest is 7%; the nominal rate is still 6%.
2. For each situation in part (1), prove your statement by determining the issue price of the bonds given the changes in (a) and (b). If necessary, round all calculations to the nearest dollar.
Here are some time value of money factors:
Present value of an annuity, n=10, i=7%, PV=7.02358
Present value of an annuity, n=20, i=3%, PV=14.87747
Present value of a single amount, n=10, i=7%, PV=0.50835
Present value of a single amount, n=20, i=3%, PV=0.55368
$
7)
Amortization of Premium
Stacy Company issued five-year, 10% bonds with a face value of $10,000 on January 1, 2017. Interest is paid annually on December 31. The market rate of interest of January 1, 2017, is 8% and the proceeds from the bond issuance equal $10,799.
Required:
1. Prepare a five-year table to amortize the premium using the effective interest method. Enter all amounts as positive numbers. If required, round all calculations and final answers to the nearest dollar.
*Note: Due to rounding you will have to adjust the interest expense for 12/31/21 so the carrying value equals $10,000.
2. What is the total interest expense over the life of the bonds? cash interest payment? premium amortization?
3. Identify and analyze the effect of the payment of interest and the amortization of premium on December 31, 2019 (the third year)
How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.
Determine the balance sheet presentation of the bonds on December 31, 2019.
$
$
$
Muske Trucking Company Effective Interest Method of Amortization Date Lease Payment Interest Expense 8% Reduction of Obligation Lease Obligation 1/01/17 $ 12/31/17 $ $ $ 12/31/18 12/31/19 12/31/20 12/31/21Explanation / Answer
1. Prepare a table to show the five-year amortization of the lease obligation. Enter all amounts as positive numbers. If required, round all calculations and answers to the nearest dollar. *Note: Due to rounding you will have to adjust the interest expense for 12/31/21 to result in a zero balance for the lease obligation. Muske Trucking Company Effective Interest Method of Amortization Date Lease Payment Interest Expense 8% Reduction of Obligation Lease Obligation 1/01/17 $112,994.00 12/31/17 $28,300.00 $9,039.52 $19,260.48 $93,733.52 12/31/18 $28,300.00 $7,498.68 $20,801.32 $72,932.20 12/31/19 $28,300.00 $5,834.58 $22,465.42 $50,466.78 12/31/20 $28,300.00 $4,037.34 $24,262.66 $26,204.12 12/31/21 $28,300.00 $2,095.88 $26,204.12 -$0.00 2. Identify and analyze the effect of the lease transaction on January 1, 2017. Activity Accounts Leased Asset Increase Statement(s) Balance Sheet How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Balance Sheet Income Statement Stockholders' Assets = Liabilities + Stockholders' Equity Revenues – Expenses = Income Leased Assets $112,994 3. Identify and analyze the effect of all of the transactions on December 31, 2018 (the second year of the lease). a. For lease payment and interest expense: Activity operating and financing activities Accounts Lease Obligation Decrease, Interest Expenses Increase, Cash Decrease Statement(s) Balance Sheet and Income Statement How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Balance Sheet Income Statement Stockholders' Assets = Liabilities + Stockholders' Equity Revenues – Expenses = Income Cash -$28,300 Lease Obligation -$19,260.48 -9039.52 Interest Exp. $9039.52 -9039.52 b. For Depreciation Expense: Activity Operating Activities Accounts Depreciation Statement(s) Income Statement How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item. For depreciation expense: Round your answers to the nearest whole dollar. Stockholders' Assets = Liabilities + Stockholders' Equity Revenues – Expenses = Income Accumulated Depreciation $22598.80 Depreciation Exp. -22598.80 - 22598.80 Depreciation = $112,994/5 $22,598.80 4. Prepare the balance sheet presentation as of December 31, 2018, for the leased asset and the lease obligation. Muske Trucking Company Balance Sheet (Partial) December 31, 2018 Long-term assets: Leased Assets $112,994.00 Less: Accumulated Dep. $22,598.80 x 2 $45,197.60 Current liabilities: Lease Obligation (Interest Expense) $20,801.32 Long-term liabilities: Lease Obligation (Principal) $72,932.20
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