4. The Reeves Company issued 10% bonds, dated January 1, 2017 with a face amount of $8 million. The bonds mature on December 31, 2026 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30th and December 31st. Required: 1. Determine the price of the bonds at January 1, 2017 2. Prepare the journal entry to record their issuance on January 1, 2017 3. Prepare the journal entry to record interest on June 30, 2017 (at the effective rate) 4. Prepare the journal entry to record interest on December 31, 2017 (at the effective rate)

Part 1

Johnson Transformers Inc. Following is the seven-year forecast for a new venture called Johnson Transformers: (all amounts in $000) 2020 2021 2022 2023 2024 2025 2026 EBIT $(1000) $(900) $200 $1,200 $2,500 $3000 $3,050 Capital Expenditures $550 $350 $200 $175 $175 $160 $150 Changes in Working Capital $400 $300 $200 $100 $100 ($100) ($100) Depreciation $40 $80 $125 $150 $150 $150 $150 Beginning after year 2026 the annual growth in EBIT is expected to be 1.5%, a rate that is projected to be constant over Johnson Transformers remaining life as an enterprise. Beginning in 2026 Johnson's Transformers capital expenditures and depreciation are expected to offset each other (capex - depreciation = 0) and year to year changes in working capital are expected to be zero (working capital levels remain constant year over year). For discounting purposes consider 2020 as year 1. Assume a tax rate is 21% and a cost of capital of 7.75% Question 1: Determine the NPV of Johnson Transformers Free Cash Flow for the years 2020 -2026. HINT: Remember to account for loss carry-forwards when determining income taxes. The answer to this question was determined in Excel. Your answer may deviate slightly depending upon differences in truncation and rounding. Answers below are in $000.

Part 2

Calculate the fair market value (NPV) for Johnson Transformers. For this problem assume that the Net Present Value of Johnson Transformers free cash flow for the period 2020 - 2026 is $3000 (NOTE its not $3000 but make this assumption in case the answer you determined in the first question was incorrect. Assume no underlying changes to any of the data in the problem. DO NOT USE YOUR ANSWER FROM THE QUESTION ABOVE. All ANSWERS ARE IN $000

Francon Construction Inc, is an international company situated in Quebec City and uses IFRS. It is engaged in the construction of very high scale buildings in many countries for commercial and residential uses. On January 1, 2011, it issued 15-year redeemable bonds. These bonds could be redeemed at any time five years following the date of issue, at the option of the company. If these bonds were to be redeemed earlier than their maturity date, the company would have to pay a redemption premium of 3% of the face value of the bonds redeemed (ie: at 103). Interest was paid annually on December 31.

The company showed a credit unamortized balance (ie: book value) of $777,507.12 in the Bonds Payable account on December 31, 2014. On December 31, 2015, the company prepared the following journal entry related to this bond issue:

      Interest Expense                                       $69,975.64

            Cash                                                                    $63,000.00

            Bonds Payable                                                    $ 6,975.64

On January 1, 2016, the company redeemed all the outstanding bonds. The cash payment was equal to the unamortized balance of the bonds plus a redemption premium of $27,000.

Required:

1.   With the information given above, determine

      a]   The coupon rate of the bond;

      b]   The effective rate of the bonds;

      c]   The face value of the bonds.

2.   Prepare the journal entry required to record the redemption of the bonds.

3.   Show in good format, how the company would report the bonds on their balance sheet on December 31, 2015.

4.   For this part only, now assume that the above redemption of bonds by Francon Construction Inc. did not occur and that the bonds have a face value (and book value) of $800,000 due on June 30, 2026. On March 30, 2026, it issued $600,000 in common shares and used the proceeds of this against the total payment required on June 30, 2026. The financial statements for the year ended December 31, 2025 were released on April 10, 2026.

       How would they classify the bond payable on the December 31, 2025 statement of financial position if they used:

            -IFRS?

            -ASPE?

Railback Battery Systems Following is the seven-year forecast for a new venture called Railback Battery Systems:

Part 1:

Beginning after year 2026 the annual growth in EBIT is expected to be 1.5%, a rate that is projected to be constant over Railback's life as an enterprise. Beginning in 2026 Railback's capital expenditures and depreciation are expected to offset each other (capex - depreciation = 0) and year to year changes in working capital are expected to be zero (working capital levels remain constant year over year). For discounting purposes consider 2020 as year 1. Assume a tax rate is 21% and a cost of capital of 7.75% Question: Determine the NPV of Railback Battery Systems Free Cash Flow for the years 2020 - 2026. HINT: Remember to account for loss carry-forwards when determining income taxes. The answer to this question was determined in Excel. Your answer may deviate slightly depending upon differences in truncation and rounding. Answers below are in $000.

Part 2:

Calculate the fair market value (NPV) for Railback Battery Systems. For this problem assume that the Net Present Value of Railback's free cash flow for the period 2020 - 2026 is $3000 (NOTE its not $3000 but make this assumption in case the answer you determined in the first question was incorrect. Assume no underlying changes to any of the data in the problem. DO NOT USE YOUR ANSWER FROM THE QUESTION ABOVE. All ANSWERS ARE IN $000

Tea Ltd is a public company whose common shares are traded in the stock market. Tea recently issued various financial instruments to the public, as described below.

(a) 7% convertible bonds with a face value of $1,000 and maturity date on December 31, 2027. Each bond can be converted into whatever number of Tea’s common shares such that the value of the common shares which the holder receives from conversion is equal to $1,500.   

2. 5% convertible, cumulative, redeemable preference shares. Each preference share can be converted into 5 of Tea’s common shares at the conversion price of $10 per common share. The conversion period is from January 1, 2022 to June 30, 2026. At the date of issue of the convertible preference shares, Tea’s common shares were traded at $50 per share.

If the preference shares are not converted by June 30, 2026, it will be mandatorily redeemed on July 1, 2026 at the redemption price of $300 per share.   

3. 2% perpetual bonds (bonds with no maturity date which pay a stream of interest forever as long as the issuer still exists). The bonds entitle the holders to a 2% interest to be paid annually in arrears on December 31. In addition, the holders can receive the repayment of principal when the issuer (Tea) liquidates in the future.   

Required: Discuss the classification of the financial instruments above.

As part of its stock-based compensation package, International Electronics (IE) granted 10 million stock appreciation rights (SARs) to top officers on January 1, 2021. At exercise, holders of the SARs are entitled to receive stock equal in value to the excess of the market price at exercise over the share price at the date of grant. The SARs cannot be exercised until the end of 2024 (vesting date) and expire at the end of 2026. The $1 par common shares have a market price of $43 per share on the grant date. The fair value of the SARs, estimated by an appropriate option pricing model, is $3 per SAR at January 1, 2021. The fair value re-estimated at December 31, 2021, 2022, 2023, 2024, and 2025, is $4, $3, $4, $2.50, and $3, respectively. All recipients are expected to remain employed through the vesting date.
  
Required:

1-a. Will the SARs be reported as debt or as equity?
1-b to 4. Prepare the appropriate journal entries pertaining to the SARs on January 1, 2021 and December 31, 2021–December 31, 2024. Assuming the SARs remain unexercised on December 31, 2025, prepare the appropriate entry. Prepare the entry when the SARs are exercised on June 6, 2026, when the share price is $50.

LG

Following is the seven-year forecast for LG: (all amounts in $000)

Beginning after year 2026 the annual growth in EBIT is expected to be 1.5%, a rate that is projected to be constant over LG remaining life as an enterprise.   Beginning in 2026 LG capital expenditures and depreciation are expected to offset each other (capex - depreciation = 0) and year to year changes in working capital are expected to be zero (working capital levels remain constant year over year). For discounting purposes consider 2020 as year 1.

Assume a tax rate is 21% and a cost of capital of 7.75%

Calculate the fair market value (NPV) for LG. Assume that the Net Present Value of LG free cash flow for the period 2020 - 2026 is $3000

What is the value on January 1, 2026, of $40,000 deposited on January 1, 2019, which accumulates interest at 12% compounded annually?

What is the value on January 1, 2025, of $10,000 deposited on July 1, 2019, which accumulates interest at 16% compounded quarterly?