Question:
On the last day of its fiscal year ending December 31, 2013, 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.
1. S&R issued 8% stated rate bonds with a face amount of $100 million. The bonds mature on December
31, 2033 (20 years). The market rate of interest for similar bond issues was 9% (4.5% semiannual rate).
Interest is paid semiannually (4%) on June 30 and December 31, beginning on June 30, 2014.
2. The company leased two manufacturing facilities. Lease A requires 20 annual lease payments of
$200,000 beginning on January 1, 2014. Lease B also is for 20 years, beginning January 1, 2014. Terms
of the lease require 17 annual lease payments of $220,000 beginning on January 1, 2017. Generally
accepted accounting principles require both leases to be recorded as liabilities for the present value of the
scheduled payments. Assume that a 10% interest rate properly reflects the time value of money for the
lease obligations.
Required:
What amounts will appear in S&R’s December 31, 2013, balance sheet for the bonds and for the leases?
Answer:
Bond liability:
PV = $4,000,0001 (18.40158) + 100,000,000 (.17193)
PV = $73,606,320 + 17,193,000 = $90,799,320 = Initial bond liability
1
$100,000,000 x 4 % = $4,000,000
Present value of an ordinary annuity of $1: n = 40, i = 4.5% (from Table 4)
Present value of $1: n = 40, i = 4.5% (from Table 2)
On the last day of its fiscal year ending December 31, 2013, 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.
1. S&R issued 8% stated rate bonds with a face amount of $100 million. The bonds mature on December
31, 2033 (20 years). The market rate of interest for similar bond issues was 9% (4.5% semiannual rate).
Interest is paid semiannually (4%) on June 30 and December 31, beginning on June 30, 2014.
2. The company leased two manufacturing facilities. Lease A requires 20 annual lease payments of
$200,000 beginning on January 1, 2014. Lease B also is for 20 years, beginning January 1, 2014. Terms
of the lease require 17 annual lease payments of $220,000 beginning on January 1, 2017. Generally
accepted accounting principles require both leases to be recorded as liabilities for the present value of the
scheduled payments. Assume that a 10% interest rate properly reflects the time value of money for the
lease obligations.
Required:
What amounts will appear in S&R’s December 31, 2013, balance sheet for the bonds and for the leases?
Answer:
Bond liability:
PV = $4,000,0001 (18.40158) + 100,000,000 (.17193)
PV = $73,606,320 + 17,193,000 = $90,799,320 = Initial bond liability
1
$100,000,000 x 4 % = $4,000,000
Present value of an ordinary annuity of $1: n = 40, i = 4.5% (from Table 4)
Present value of $1: n = 40, i = 4.5% (from Table 2)
