Question

In June 2017, the board of directors for McElroy Enterprises Inc. authorized the sale of $10,000,000 of corporate bonds. Jennifer Grayson, treasurer for McElroy Enterprises Inc., is concerned about the date when the bonds are issued. The company really needs the cash, but she is worried that if the bonds are issued before the company’s year-end (December 31, 2017) the additional liability will have an adverse effect on a number of important ratios. In July, she explains to company president William McElroy that if they delay issuing the bonds until after December 31 the bonds will not affect the ratios until December 31, 2018. They will have to report the issuance as a subsequent event which requires only footnote disclosure. Grayson expects that with expected improved financial performance in 2018, ratios should be better.

Instructions

(b) Should McElroy agree to the delay?

Short answer

The form should not dictate the substance.

Step-by-step solution

Meaning of Interim Reporting

The interim report is an important aspect of the annual report, and deferrals and accruals should account for what will happen during the year. Companies should use this strategy to allocate expected costs at different times of the year based on sales volume or some other activity metric.

Discussing the status of the delay in acceptance

When the firm needs funds to boost its performance, bonds should be issued. Even if the ratios are lower than expected if the bonds are issued right away, investors and creditors benefit the most when the firm is doing its best. McElroy should not postpone issuing if a rapid cash influx helped him achieve better results.