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ACCOUNTING 3220 CORPORATE FINANCIAL REPORTING 1 Spring 2018 Assignment #9 – Noncurrent Liabilities This assignment is...

ACCOUNTING 3220 CORPORATE FINANCIAL REPORTING 1 Spring 2018

Assignment #9 – Noncurrent Liabilities

This assignment is due at 9:00am Monday, April 30, 2018 regardless of your section. The assignment must be submitted electronically via D2L. DO NOT EMAIL ME YOUR HOMEWORK.

You may submit your homework in Excel, Word, or .pdf style (not .zip or other). Please format the pages for printing and clearly state all group members’ names and section numbers on the first page.

The assignment may be done in groups (ideally, not more than 3 people). You may work with students across sections if you prefer. However, each person must submit a copy of the homework through D2L to ensure submission is done properly.

The standard university Honor Code applies to this assignment. Other than the members of your group, you may not consult with any other person about this assignment.

Kraft Foods Inc. issued four tranches of notes in 2010 to finance its acquisition of Cadbury. The four types of notes were individually priced. Below you will find excerpts from their prospectuses and 8-K disclosure of material events. The Settlement Date is the date on which Kraft Foods Inc. received the proceeds from the note issue (some terms were modified for analytical simplicity). Questions for the assignment follow the excerpts.

Kraft Foods Inc.'s notes prospectus

Filed pursuant to Rule 433 Relating to Preliminary Prospectus Supplement dated February 3, 2010 to Prospectus Dated December 4, 2007 Registration Statement No. 333-147829

Pricing Term Sheet

$9,500,000,000
$1,000,000,000 2.625% Notes due 2013 (the “2013 Notes”) $1,750,000,000 4.125% Notes due 2016 (the “2016 Notes”) $3,750,000,000 5.375% Notes due 2020 (the “2020 Notes”) $3,000,000,000 6.500% Notes due 2040 (the “2040 Notes”)

Issuer:
Offering Format: Size:

Maturity:

Coupon:

Price to Public:

Interest Payment Dates:

Kraft Foods Inc. (“Kraft”)

SEC Registered

$1,000,000,000 of 2013 Notes $1,750,000,000 of 2016 Notes $3,750,000,000 of 2020 Notes $3,000,000,000 of 2040 Notes

2013 Notes: May 8, 2013
2016 Notes: February 9, 2016 2020 Notes: February 10, 2020 2040 Notes: February 9, 2040

2013 Notes: 2.625% 2016 Notes: 4.125% 2020 Notes: 5.375% 2040 Notes: 6.500% 2013 Notes: 99.731% 2016 Notes: 99.658% 2020 Notes: 99.176% 2040 Notes: 99.036%

2013 Notes: Semi-annually in arrears on May 8 and November 8, commencing on November 8, 2010

Settlement Date:

2016 Notes: Semi-annually in arrears on February 9 and August 9, commencing on August 9, 2010

2020 Notes: Semi-annually in arrears on February 10 and August 10, commencing on August 10, 2010

2040 Notes: Semi-annually in arrears on February 9 and August 9, commencing on August 9, 2010

May 8, 2010

Interest on the 2013 Notes is payable semiannually on May 8 and November 8, commencing November 8, 2010, to holders of record on the preceding April 23 and October 24. Interest on the 2016 Notes is payable semiannually on February 9 and August 9, commencing August 9, 2010, to holders of record on the preceding January 25 and July 25. Interest on the 2020 Notes is payable semiannually on February 10 and August 10, commencing August 10, 2010, to holders of record on the preceding January 26 and July 26. Interest on the 2040 Notes is payable semiannually on February 9 and August 9, commencing August 9, 2010, to holders of record on the preceding January 25 and July 25. Interest on the Notes will be computed on the basis of a 360-day year consisting of twelve 30-day months.

The 2013 Notes will mature on May 8, 2013. The 2016 Notes will mature on February 9, 2016. The 2020 Notes will mature on February 10, 2020. The 2040 Notes will mature on February 9, 2040.

Answer the following questions based on the prospectus of Kraft Foods Inc.'s bond issue. You can provide your answers in the spaces below or in a separate document.

1. Are the notes issued at a premium or discount? How do you know?

2. What is the coupon interest rate on the “2013 Notes”?

3. What is the market rate of interest rate (also known as effective interest rate) on the “2013 Notes”?

4. Show the journal entry for the “2013 Notes” on May 8, 2010.

5. Construct an amortization schedule that shows premium/discount amortization over the life of the “2013 Notes” (similar to the examples in class).

6. Show the journal entries for the “2013 Notes” on November 8, 2010.

7. Assume the fiscal year ends on December 31, 2010. Show the appropriate adjusting entries related to the “2013 Notes” (round interest for the period to the nearest month for simplicity).

8. Show the entries on May 8, 2011 (related to the “2013 Notes”), assuming the financial statements were correct on December 31, 2010 (round interest for the period to the nearest month for simplicity).

9. Show the entries on November 8, 2011 (related to the “2013 Notes”).

10. Assume 60% of the “2013 Notes” are redeemed early on May 8, 2012 for $595,000,000 in cash. Provide all the journal entries required on this date related to the “2013 Notes,” assuming the financial statements were correct on December 31, 2011.

11. Does the early redemption affect the income statement? If so, what is the effect?

Expert Solution

1) Are the notes issued at a premium or discount? How do you know?

The notes were issued at a discount

	Size	Public Price	Public Price	Discount
2013 Notes	$ 1,000,000,000	99.731%	$ 997,310,000	$ 2,690,000
2016 Notes	$ 1,750,000,000	99.658%	$ 1,744,015,000	$ 5,985,000
2020 Notes	$ 3,750,000,000	99.176%	$ 3,719,100,000	$ 30,900,000
2040 Notes	$ 3,000,000,000	99.036%	$ 2,971,080,000	$ 28,920,000

2) What is the coupon interest rate on the “2013 Notes”?

	Size	Coupen	Annual Coupen
2013 Notes	$ 1,000,000,000	2.625%	5.250%

3) What is the market rate of interest rate (also known as effective interest rate) on the “2013 Notes”?

Effective interest rate per period wil be as under

i=(1+rm ) m ?1 i=(1+rm)m?1

= 5.3189%

4) Show the journal entry for the “2013 Notes” on May 8, 2010.

Accounts	Debit	Credit
Note application a/c	$ 1,000,000,000
To Capital a/c		$ 1,000,000,000
( issue of $1,000,000,000 2.625% Notes due 2013)

Bank a/c	$ 997,310,000
Discount on 2013 note A/c	$ 2,690,000
To Note application a/c		$ 1,000,000,000

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