Question

Please let us know if Facebook has any long-term debt on its balance sheet. Please give us some information about that long-term debt. You will have to look in the notes to the financial statements for this information. Also please calculate the times interest earned ratio for this corporation and let us know what this ratio indicates about its financial condition.

Part 2

What are unsecured notes? Why would they carry a relatively high interest rate? What are convertible securities? Why are they good for the investor and for the company? Why would they carry a relatively low interest rate? What does callable mean? What advantage does this feature give a company?

Responses to Instructor

Please check your thread for questions or comments from me and be sure to provide a comprehensive response, as requested.

Responses to Classmates

Please select one of the following bond issues and provide the journal entry when responding to your classmates this week:

1. Jan 1. ABC Corp issued $1,000,000 in bonds for a $75,000 discount.

2. Jan 1. ABC Corp issued $1,000,000 in bonds for a $50,000 premium.

Answer 1

Part-1:

Facebook had long term debt amounting to 424 Millions of USD as on 30.06.2020 in its Balance Sheet.In May 2016, it had entered into a $2.0 billion senior unsecured revolving credit facility, and any amounts outstanding under this facility will be due and payable on May 20, 2021.

Interest earned ratio can be defined as the times profit of the company is able to payback the interest . Formula for the same is : Interest earned Ratio:    Earning before Interest , taxes, Depreciation & Amortization

Interest Expenses.

Since any amount which is payable as interest expense is payable after May 20,2021 , therefore, for now there is no such Interest expenses charged in Financial Statements even though Long term Debt is outstanding amounting to 424 Millions of USD.

As this ratio is defined as covering the interest expenses of company , as more of the ratio more it is convinent for the lenders for recovery of interest expenses from profits of the company.

Part -2

Unsecured notes means loan taken without appropriating any security in favour of lender. These carry a higher interest rate as the risk of non payment associated with it relatively higher then the Secured loans.

Convertible securities means the securities which can be converted into equity at the later date on fulflling specified criteria of holding period . For E.g. Convertible Debentures are debt of the company but they had an option associated with them of converting them into equity of the company. These are good for the investors as they will get interest for a specified period and after that they can have a share in company in form of equity . By this , they will get assured of receiving minimum amount as interest which would not be possble in case of Equity ( If company is in loss).Since these are more secured from investor's point of view, therefore,company always offer less rate of interest on it as it is obligatory on the part of company to issue equity at the later stages.

Callable security mean at the option of company to get back the securities as and when they required. As company can call the higher interest rate securities from the investors at any time if they are anticipating the lower rate previaling in market . Fo e.g. If company had already issued securities @ 10% but after some time interest rate previaling in market is 8% then compnay would be liking to get back the securities as it would be like paying 2% extra then previaling market rate to the investors. So, it is always favouring company.

Entry for issuing bond $1,000,000 for $ 75,000 discount is as follows:

Bank/ Cash A/C _____________ 9,25,0000 DR

Discount on Issue of Bond _________ 75,000 Dr

To Bond A/C________________ 1,000,000 CR

Entry for issuing bond $1,000,000 for $ 50,000 Premium is as follows:

Bank/ Cash A/C _____________ 10,50,000 DR

To Bond A/C ________________ 1,000,000 CR

To Premium on issue of Bond ______ 50,000 CR

Yes, Facebook had long term debt standing in their Balance sheet. But the repayment for the same will be starting from May 2021 onwards.