Question

On the last day of its fiscal year ending December 31, 2018, the Sedgwick & Reams (S&R) Glass Company completed two financing arrangements. The funds provided by these initiatives will allow the company to expand its operations. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)1. S&R issued 9% stated rate bonds with a face amount of $100 million. The bonds mature on December 31, 2036 (20 years). The market rate of interest for similar bond issues was 10% (5.0% semiannual rate). Interest is paid semiannually (4.5%) on June 30 and December 31, beginning on June 30, 2019.2. The company leased two manufacturing facilities. Lease A requires 20 annual lease payments of $210,000 beginning on January 1, 2019. Lease B also is for 20 years, beginning January 1, 2019. Terms of the lease require 17 annual lease payments of $230,000 beginning on January 1, 2022. Generally accepted accounting principles require both leases to be recorded as liabilities for the present value of the scheduled payments. Assume that an 11% interest rate properly reflects the time value of money for the lease obligations.Required:What amounts will appear in S&R's December 31, 2018, balance sheet for the bonds and for the leases? (Enter your answers in whole dollars. Do not round intermediate calculations. Round your final answers to nearest whole dollar amount.)

Answer 1

Answer:

Bonds payable (net)  91,491,479.66

Lease Liaiblity              3,255,489.77

Explanation:

We need to solve for the carrying value of the bonds at december 31th:

Which is the present value of the coupon payment and maturity.

COUPON PAYMENT (ANNUITY)

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 4,500,000.00

time 39

rate 0.5

$4500000 \times \frac{1-(1+0.5)^{-39} }{0.5} = PV$

PV $8,999,998.7791

MATURITY (LUMP SUM)

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  100,000,000.00

time  39.00

rate  0.05000

$\frac{100000000}{(1 + 0.05)^{39} } = PV$  

PV   14,914,796.6415

PV c $76,576,683.0226

PV m  $14,914,796.6415

Total $91,491,479.6642

2. The company leased two manufacturing facilities. Lease A requires 20 annual lease payments of $210,000 beginning on January 1, 2019. Lease B also is for 20 years, beginning January 1, 2019. Terms of the lease require 17 annual lease payments of $230,000 beginning on January 1, 2022. Generally accepted accounting principles require both leases to be recorded as liabilities for the present value of the scheduled payments. Assume that an 11% interest rate properly reflects the time value of money for the lease obligations

A)

The lease are annuity-due as payment are at the beginning.

$C \times \frac{1-(1+r)^{-time} }{rate} (1+rate)= PV$

C 210,000.00

time 19

rate 0.11

$210000 \times \frac{1-(1+0.11)^{-19} }{0.11}(1+0.11) = PV$

PV $1,827,339.4804

B)

We first calculate the present value of the annuity due:

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 210,000.00

time 17

rate 0.11

$210000 \times \frac{1-(1+0.11)^{-17} }{0.11} = PV$

PV $1,759,623.9738

Then, as payment beginning on 2022 we discount for an additional two years:

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  1,759,623.97

time  2.00

rate  0.11000

$\frac{1759623.97382009}{(1 + 0.11)^{2} } = PV$  

PV   1,428,150.2912

Total lease liability: 1,827,339.48 + 1,428,150.29 = 3,255,489.77

Answer 2

The amounts that will appear in Sedgwick & Reams (S&R) Glass Company's December 31, 2018, Balance Sheet for the bonds and the two leases are as follows:

Sedgwick & Reams (S&R) Glass Company

Balance Sheet

December 31, 2018

Long-term Liabilities:

Bonds Payable          $91,420,456.82

Lease A Payable          $1,856,251.78

Lease B Payable          $1,927,207.21

How are the values of Bonds Payable and Leases Payable determined?

The bond value can be measured based on the present value of the future interest payments the bondholder will receive.

Similarly, the values of the lease liabilities can be determined using the present value of the future annual payments discounted using the appropriate interest rates.

These amounts are determined by computing their present values using an online finance calculator as follows:

Data and Calculations:

Bonds Payable:

Face value of bonds = $100 million

Price of bonds = $91,420,456.82

Bond discounts = $8,579,543.18 ($100,000,000 - $91,420,456.82)

Stated interest rate = 9%

Effective interest rate = 10%

Interest Payment = semi-annually

Maturity period = 20 years

N (# of periods) = 40 (20 years x 2)

I/Y (Interest per year) = 10%

PMT (Periodic Payment) = $4,500,000 ($100,000,000 x 9% x 1/2)

FV (Future Value) = $100,000,000

P/Y (# of periods per year) = 2

C/Y (# of times interest compound per year) = 2

Results:

PV = $91,420,456.82

Sum of all periodic payments = $180,000,000 (40 x $4.5 million)

Total Interest $188,579,543.18

Lease A Payable:

Annual lease period = 20 years

Annual lease payment = $210,000

N (# of periods) = 20 years

I/Y (Interest per year) = 11%

PMT (Periodic Payment) = $210,000

FV (Future Value) = $0

Results:

PV = $1,856,251.78

Sum of all periodic payments = $4,200,000 ($210,000 x 20)

Total Interest = $2,343,748.22

Lease B Payable:

Annual lease period = 17 years

Annual lease payment = $230,000

N (# of periods) = 20 years

I/Y (Interest per year) = 11%

PMT (Periodic Payment) = $230,000

FV (Future Value) = $0

Results:

PV = $1,927,207.21

Sum of all periodic payments = $3,910,000 (17 x $230,000)

Total Interest = $1,982,792.79

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