Question

On the last day of its fiscal year ending December 31, 2021, 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 8% stated rate bonds with a face amount of $115 million. The bonds mature on December 31, 2041 (20 years). The market rate of interest for similar bond issues was 9% (4.5% semiannual rate). Interest is paid semiannually (4.0%) on June 30 and December 31, beginning on June 30, 2022. 2. The company leased two manufacturing facilities. Lease A requires 20 annual lease payments of $350,000 beginning on January 1 2022. Lease B also is for 20 years, beginning January 1, 2022. Terms of the lease require 17 annual lease payments of $370,000 beginning on January 1, 2025. 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, 2021, 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.) Bond liability Lease A liability Lease B liability

Answer 1

For Bonds,

Face Value of the bond = $115 million

Coupon rate = 8% payable semiannually i.e 4% per period = 4% of $115 million = $4.6 million

No of periods = 20 years * 2 = 40 periods

Market rate for similar bond = 9% per year = 4.5% per period

Since the company needs to pay $4,6 million at the end of each period for a total of 40 periods also need to repay the face value of $115 million at the end of 40 period, value of bond to be recorded in the balance sheet can be calculated as follows

=

p1-(1+r)--) FV (1+r)

=

4.6 Million [1-(1+0.045)-401 0.045 115 Million (1 + 0.045)40

= $84.6473 million + $19.7718 million

= $ 104.4191 million

= $104 million

For Lease A

Annual lease payment = $350,000

Period of lease = 20 years

Rate of discounting = 10%

Therefore amount to be recorded as lease liability for lease A

=  

350000 1-(1-0.10)-20 0.10

= $2,979,747

For Lease B

Annual lease payment = $370,000

Period of lease = 20 years but total lease payments to be made for 17 years starting from January 1 2025( Year 4)

Rate of discounting = 10%

Value of lease payments at Year 3 i.e. January 1 2024 = = $2967974.7251

370000 1-(1-0.10)-17 0.10

Therefore amount to be recorded as lease liability for lease A

=

2967974.7251 (1+0.10)

= $2,229,883