14 Long-Term Liabilities Financial Reporting Problem 14
Financial Reporting Problem
The Procter & Gamble Company (P&G)
The financial statements of P&G are presented in Appendix B. The company’s complete annual report, including the notes to the financial statements, is available online.
USING YOUR JUDGMENT 765
Instructions
Refer to P&G’s 2014 financial statements and the accompanying notes to answer the following questions.
(a) What cash outflow obligations related to the repayment of long-term debt does P&G have over the next 5 years?
(b) P&G indicates that it believes that it has the ability to meet business requirements in the foreseeable future. Prepare an assessment of its liquidity, solvency, and financial flexibility using ratio analysis.
Comparative Analysis Case
The Coca-Cola Company and PepsiCo, Inc.
The financial statements of Coca-Cola and PepsiCo are presented in Appendices C and D, respectively. The companies’ complete annual reports, including the notes to the financial statements, are available online.
Instructions
Use the companies’ financial information to answer the following questions.
(a) Compute the debt to assets and the times interest earned ratios for these two companies. Comment on the quality of these two ratios for both Coca-Cola and PepsiCo.
(b) What is the difference between the fair value and the historical cost (carrying amount) of each company’s debt at yearend 2014? Why might a difference exist in these two amounts?
(c) Both companies have debt issued in foreign countries. Speculate as to why these companies may use foreign debt to finance their operations. What risks are involved in this strategy, and how might they adjust for this risk?
Financial Statement Analysis Case
Commonwealth Edison Co.
The following article appeared in the Wall Street Journal.
Bond Markets
Giant Commonwealth Edison Issue Hits Resale Market With $70 Million Left Over new york—Commonwealth Edison Co.’s slow-selling new 91/4% bonds were tossed onto the resale market at a reduced price with about $70 million still available from the $200 million offered Thursday, dealers said.
The Chicago utility’s bonds, rated double-A by Moody’s and double-A-minus by Standard & Poor’s, originally had been priced at 99.803, to yield 9.3% in 5 years. They were marked down yesterday the equivalent of about $5.50 for each $1,000 face amount, to about 99.25, where their yield jumped to 9.45%.
Instructions
(a) How will the development above affect the accounting for Commonwealth Edison’s bond issue?
(b) Provide several possible explanations for the markdown and the slow sale of Commonwealth Edison’s bonds.
Accounting, Analysis, and Principles
The following information is taken from the 2017 annual report of Bugant, Inc. Bugant’s fiscal year ends December 31 of each year. Bugant’s December 31, 2017, balance sheet is as follows.
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Accounting
Prepare a balance sheet for Bugant, Inc. at December 31, 2018, and an income statement for the year ending December 31, 2018. Assume semiannual compounding of the bond interest.
Analysis
Use common ratios for analysis of long-term debt to assess Bugant’s long-run solvency. Has Bugant’s solvency changed much from 2017 to 2018? Bugant’s net income in 2017 was $550 and interest expense was $169.
Principles
The FASB and the IASB allow companies the option of recognizing in their financial statements the fair values of their long-term debt. That is, companies have the option to change the balance sheet value of their long-term debt to the debt’s fair value and report the change in balance sheet value as a gain or loss in income. In terms of the qualitative characteristics of accounting information (Chapter 2), briefly describe the potential trade-off(s) involved in reporting long-term debt at its fair value.
