时间证明Chapter 03 - Analyzing Financing Activities
Problem 3-2—continued c.
Payments of Interest and Principal
Total Interest Payment of Principal Year Payment at 8% Principal Balance $39,930.00 1 10,000 $3,194.40 $6,805.60 33,124.40 2 10,000 2,649.95 7,350.05 25,774.35 3 10,000 2,061.95 7,938.05 17,836.30 4 10,000 1,426.90 8,573.10 9,263.20 5 10,000 736.80 9,263.20 $50,000 $10,070.00 $39,930.00 — d.
Expenses to Be Charged to Income Statement
Lease Total Year Expense Amortization Interest Expenses
1 $10,000 $ 7,986.00 $ 3,194.40 $11,180.40 2 10,000 7,986.00 2,649.95 10,635.95 3 10,000 7,986.00 2,061.95 10,047.95 4 10,000 7,986.00 1,426.90 9,412.90 5 10,000 7,986.00 736.80 8,722.80 $50,000 $39,930.00 $10,070.00 $50,000.00
e. The income and cash flow implications from this capital lease are apparent in the solutions to parts c and d. The student should note that reported expenses exceed the cash flows in earlier years, while the reverse occurs in later years.
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Chapter 03 - Analyzing Financing Activities
Problem 3-3 (30 minutes)
a. A lease should be classified as a capital lease when it transfers substantially all of the benefits and risks inherent to the ownership of property by meeting any one of the four criteria for classifying a lease as a capital lease. Specifically:
? Lease J should be classified as a capital lease because the lease term is equal to 80 percent of the estimated economic life of the equipment, which exceeds the 75 percent or more criterion.
? Lease K should be classified as a capital lease because the lease contains a bargain purchase option.
? Lease L should be classified as an operating lease because it does not meet any of the four criteria for classifying a lease as a capital lease.
b. Borman records the following liability amounts at inception:
? For Lease J, Borman records as a liability at the inception of the lease an amount equal to the present value at the beginning of the lease term of minimum lease payments during the lease term, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon. However, if the amount so determined exceeds the fair value of the equipment at the inception of the lease, the amount recorded as a liability should be the fair value.
? For Lease K, Borman records as a liability at the inception of the lease an amount determined in the same manner as for Lease J, and the payment called for in the bargain purchase option should be included in the minimum lease payments.
? For Lease L, Borman does not record a liability at the inception of the lease.
c. Borman records the MLPs as follows:
? For Lease J, Borman allocates each minimum lease payment between a reduction of the liability and interest expense so as to produce a constant periodic rate of interest on the remaining balance of the liability.
? For Lease K, Borman allocates each minimum lease payment in the same manner as for Lease J.
? For Lease L, Borman charges minimum lease (rental) payments to rental expense as they become payable.
d. From an analysis viewpoint, both capital and operating leases represent economic liabilities as they involve commitments to make fixed payments. The fact that companies can structure leases as \leases\to avoid balance sheet recognition is problematic from the perspective of analysis of assets. If the leased assets are used to generate revenues, they should be considered in ratios such as return on assets and other measures of financial performance and condition.
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Chapter 03 - Analyzing Financing Activities
Problem 3-4 (25 minutes)
a. Detachable stock purchase warrants are equity instruments that have a separate fair value at the issue date. Consequently, the portion of the proceeds from bonds issued with detachable stock purchase warrants allocable to the warrants should be accounted for as paid-in capital. The remainder of the proceeds should be allocated to the debt portion of the transaction. This usually results in issuing the debt at a discount (or, occasionally, a reduced premium).
b. A serial bond progressively matures at a series of stated installment dates, for example, one-fifth each year. A term (straight) bond completely matures on a single future date.
c. If a bond is issued at a premium, interest expense and the carrying value of the debt will decrease over the life of the bond as the premium is amortized towards zero. If a bond is issued at a discount, interest expense and the carrying value of the debt will increase over the life of the bond as the discount is amortized towards zero. In each case, the carrying value of the debt is the face value of the debt at the maturity date (plus or minus any premium or discount).
d. The gain or loss from the reacquisition of a long-term bond prior to its maturity is the difference between the amount paid to settle the debt and the carrying value of the debt. The gain or loss should be included in the determination of net income for the period reacquired. These gains (losses) are no longer treated as extraordinary items, net of related income taxes, unless they meet the text of both unusual and infrequent.
e. Accounting standards require many useful bond-related disclosures including: amounts borrowed, interest rates, due dates, encumbrances, restrictive covenants, and events of default. While bonds are reported at their fair value at the date of issuance, subsequent changes in fair value are not recognized on the balance sheet. If the analyst is interested in the fair value of a firm’s bonds, the analyst must examine the note disclosures and make appropriate adjustments to market.
(AICPA Adapted)
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Chapter 03 - Analyzing Financing Activities
Problem 3-5 (45 minutes)
a. Ratio calculations for Jerry’s Department Stores (JDS) and Miller Stores (MLS)
1. Price-to-book ratio:
Ratio
Book value
Price/book value
JDS
MLS
= $7,500 / 400 shares = $18.75 = $49.50 / $18.75 = 2.64
= $6,000 / 250 shares = $24.00 = $51.50 / $24.00 = 2.15
2. Total debt to equity ratio:
Ratio
Total debt to equity [Total debt = (S-T debt + L-T debt)] / Equity
JDS
MLS
=$1,000 + $2,500 / $7,500 = $3,500 / $7,500
= 46.67%
= $0 + 2,700 / $6,000 = $2,700 / $6,000 = 45.00%
3. Fixed-asset utilization (turnover):
Ratio
Sales / fixed assets
JDS
MLS
= $18,500 / $5,500 = 3.36
= $21,250 / $5,700 = 3.73
b. Investment Choice and Justification Based on Part A
Based on Westfield’s investment criteria for investing in the company with the lowest price-to-book ratio (P/B) and considering solvency and asset utilization ratios, JDS is the better purchase candidate. The analysis justification follows: i. ii. iii.
Ratio JDS 2.15 45% 3.73
MLS 2.64 47% 3.36
Company Favored JDS: lower P/B JDS: lower debt or ratios are very similar JDS: higher turnover
Price-to-book ratio (P/B) Total debt to equity Asset turnover
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Chapter 03 - Analyzing Financing Activities
Problem 3-5—continued
c. Investment Choice and Justification Based on Note Information
Note: Details underlying the Balance Sheet Adjustments ($ millions): JDS: i. Leases – recognition of MDS’s present value lease payments will add $1,000 to
JDS’s property, plant, and equipment (PP&E) and is offset by a $1,000 addition to JDS’s long-term debt.
ii. Receivables – recognition of JDS’s sale of receivables with recourse will
increase assets (accounts receivable) by $800 and short-term debt used to finance accounts receivable by $800.
MLS: iii. Pension – recognition of current excess funding for the pension plan will add
$1,600 to assets and $1,600 to owners’ equity ($3,400 plan assets - $1,800 projected benefit obligation).
Adjusted Calculations Made ($ millions)
JDS:
Needed adjustments: Assets Liabilities (PP&E) (Long-term debt [LTD]) +$1,000 +$1,000 (Accounts receivable) (Short-term debt [STD]) +$800 +$800 i. Book value per common share: No net adjustment to JDS owners’ equity of
$6,000; thus, $6,000 / 250 million shares = $24.00 book value per share
ii.
Adjusted total debt-to-equity ratio:
Historical LTD
LTD STD
Adjusted total debt
$2,700
+1,000 + 800 $4,500 Adjusted debt-to-equity ration = $4,500 / $6,000 = 75%
iii.
Fixed-asset utilization (turnover) =
MLS:
$5,700 Historical fixed assets
+1,000 PP&E (JDS leases) $6,700 JDS adjusted fixed assets Adjusted fixed-asset utilization (sales/adjusted fixed assets): $21,250 / $6,700 = 3.17
Needed adjustments:
Assets
(Pension) +$1,600
Owner’s Equity +$1,600
i. Book value per common share:
$7,500 historical equity + $1,600 = $9,100 Adjusted equity; thus,
$9,100 / 400 million shares = $22.75 adjusted book value per share
ii. iii.
Adjusted total debt-to-equity ratio:
Debt (no adjustments) / Adjusted equity = Adjusted debt / equity $3,500 / $9,100 = 38%
Fixed-asset utilization (turnover):
Sales / Fixed assets (no adjustments) $18,500 / $5,500 = 3.36
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