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 7% 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 8% (4.0% semiannual rate). Interest is paid semiannually (3.5%) 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 $290,000 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 $310,000 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 a 9% 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

Following Balance will Appear in the Balance sheet:

Bond Payable	$                                  90,103,800
Lease Obligation- Lease A	$                                    2,885,532
Lease Obligation- Lease B	$                                    2,229,212

a)

Bond Face Value	$      100,000,000
Semi Annual Coupon Rate	3.50%
Semi Annual Coupon Payment(100*3.5%)	$          3,500,000
Semi Annual Market rate of interest	4%

Present value of Coupon payment	3500000*19.7928	$      69,274,800
Present value of Face Value	100000000*0.20829	$      20,829,000
Present value of Bond		$      90,103,800

For Bond
Year	PV factor@ 4%
1	0.96154
2	0.92456
3	0.889
4	0.8548
5	0.82193
6	0.79031
7	0.75992
8	0.73069
9	0.70259
10	0.67556
11	0.64958
12	0.6246
13	0.60057
14	0.57748
15	0.55526
16	0.53391
17	0.51337
18	0.49363
19	0.47464
20	0.45639
21	0.43883
22	0.42196
23	0.40573
24	0.39012
25	0.37512
26	0.36069
27	0.34682
28	0.33348
29	0.32065
30	0.30832
31	0.29646
32	0.28506
33	0.27409
34	0.26355
35	0.25342
36	0.24367
37	0.2343
38	0.22529
39	0.21662
40	0.20829
Annuity Factor	19.7928

b)

Lease A
Lease Payment	$              290,000
Lease Period	20 Years
Market interest Rate	9%

Present Value of Lease Payment(Lease A)

290000*9.95011

$        2,885,532

For Lease A
	Year	PV factor @ 9%
2019	0	1
2020	1	0.91743
2021	2	0.84168
2022	3	0.77218
2023	4	0.70843
2024	5	0.64993
2025	6	0.59627
2026	7	0.54703
2027	8	0.50187
2028	9	0.46043
2029	10	0.42241
2030	11	0.38753
2031	12	0.35553
2032	13	0.32618
2033	14	0.29925
2034	15	0.27454
2035	16	0.25187
2036	17	0.23107
2037	18	0.21199
2038	19	0.19449
	Annuity Factor	9.95011

Lease B
Lease Payment	$              310,000
Lease Period	20 Years
1st Lease Payment	Jan 1 ,2022
Market interest Rate	9%

Present Value of Lease Payment(Lease B)

310000*9.31256*(1/1.09^3)

$        2,229,212

For Lease B
Year	No.	PV factor @ 9%
2022	0	1
2023	1	0.91743
2024	2	0.84168
2025	3	0.77218
2026	4	0.70843
2027	5	0.64993
2028	6	0.59627
2029	7	0.54703
2030	8	0.50187
2031	9	0.46043
2032	10	0.42241
2033	11	0.38753
2034	12	0.35553
2035	13	0.32618
2036	14	0.29925
2037	15	0.27454
2038	16	0.25187
	Annuity Factor	9.31256

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