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nikitadnepr [17]
3 years ago
7

A corporation called an outstanding bond obligation four years before maturity. At that time there was an unamortized discount o

f $300,000. To extinguish this debt, the company had to pay a call premium of $100,000. Ignoring income tax considerations, how should these amounts be treated for accounting purposes? A) Amortize $400,000 over four years B) Charge $400,000 to a loss in the year of extinguishment C) Charge $100,000 to a loss in the year of extinguishment and amortize $300,000 over four years D) Either amortize $400,000 over four years or charge $400,000 to a loss immediately, whichever management selects
Business
1 answer:
Alex17521 [72]3 years ago
4 0

Answer:

B) Charge $400,000 to a loss in the year of extinguishment.

Explanation:

The $300,000 of amortized discount means that the corporation issued the bonds at a discount and was amortizing the discount over the bond's lifespan.  A discount is already a loss, and we must add the $100,000 that the corporation had to pay in excess (premium) to repurchase the bonds. So the total loss resulting from this bond issuance and repurchase was $300,000 + $100,000 = $400,000. Accrual accounting recognizes losses as soon as they happen, so this loss must be recognized as soon as the bonds are repurchased.

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Larry should try to gauge what kind of effect in the company would produce each one of this three alternatives. For example, sharing the information only with the employees might not seat well with managers, while the sharing the information only with management may be more effective but less transparent.

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Fama’s Llamas has a WACC of 9.7 percent. The company’s cost of equity is 12 percent, and its pretax cost of debt is 7.5 percent.
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Answer:

0.4766

Explanation:

Given:

WACC = 9.7%

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Now,

WACC

=  Weight × Cost of equity + (1 - weight) × Pretax cost of debt × (1-tax rate)

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0.097 = weight × 0.12 + ( 1 - weight ) × 0.075 × (1 - 0.35)

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or

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also,

weight = \frac{\textup{Equity}}{\textup{Debt + Equity}}

or

\frac{\textup{1}}{\textup{weight}}  = \frac{\textup{Debt+equity}}{\textup{Equity}}

or

\frac{1}{0.6772} = \frac{\textup{Debt}}{\textup{Equity}}  + 1

or

1.4766 = \frac{\textup{Debt}}{\textup{Equity}}  + 1

or

\frac{\textup{Debt}}{\textup{Equity}}  = 0.4766

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Answer:

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