Question: The following information is taken from the 2017 annual report of Bugant, Inc. Bugant’s fiscal year ends December 31 of each year. Bugant’s December 31, 2017, balance sheet is as follows.
Bugant, Inc. Balance Sheet December 31, 2017 Assets Cash \( 450 Inventory 1,800 Total current assets 2,250 Plant and equipment 2,000 Accumulated depreciation (160) Total assets \)4,090 Liabilities Bonds payable (net of discount) \(1,426 Stockholders’ equity Common stock 1,500 Retained earnings 1,164 Total liabilities and stockholders’ equity \)4,090 Note X: Long Term Debt: On January 1, 2016, Bugant issued bonds with face value of \(1,500 and a coupon rate equal to 10%. The bonds were issued to yield 12% and mature on January 1, 2021. |
Additional information concerning 2018 is as follows.
- Sales were \)3,500, all for cash.
- Purchases were \(2,000, all paid in cash.
- Salaries were \)700, all paid in cash.
- Property, plant, and equipment was originally purchased for \(2,000 and is depreciated straight-line over a 25-year life with no salvage value.
- Ending inventory was \)1,900.
- Cash dividends of \(100 were declared and paid by Bugant.
- Ignore taxes.
- The market rate of interest on bonds of similar risk was 12% during all of 2018.
- Interest on the bonds is paid semiannually each June 30 and December 31.
Accounting
Prepare a balance sheet for Bugant, Inc. at December 31, 2018, and an income statement for the year ending December 31, 2018. Assume semiannual compounding of the bond interest.
Analysis
Use common ratios for analysis of long-term debt to assess Bugant’s long-run solvency. Has Bugant’s solvency changed much from 2017 to 2018? Bugant’s net income in 2017 was \)550 and interest expense was $169.
Principles
The FASB and the IASB allow companies the option of recognizing in their financial statements the fair values of their long-term debt. That is, companies have the option to change the balance sheet value of their long-term debt to the debt’s fair value and report the change in balance sheet value as a gain or loss in income. In terms of the qualitative characteristics of accounting information (Chapter 2), briefly describe the potential trade-off(s) involved in reporting long-term debt at its fair value.
