Assignment - Bond Memo
Background:
You are the controller for Utes.com. The Company is growing quickly and has not previously borrowed any money. The Company had net income of $22 million in 2015 and anticipates net income of $28 million in 2016. The Company is in process of issuing two series of bonds. The Company is printing the bond certificates but has not sold any bonds yet. The Company plans to price and issue the bonds on September 22, 2016. Details of the bonds are as follows:
Series 1:
Number of bonds: 4,000
Face value of each bond: $1,000
Stated rate: 7.5%
Maturity date: September 22, 2021
Interest is payable annually starting 1 year after the bonds are issued
Anticipated issuance costs: $280,000
Series 2:
Number of bonds: 10,000
Face value of each bond: $1,000
Stated rate: 7.0%
Maturity date: September 22, 2022
Interest is payable semi-annually starting 6 months after the bonds are issued
Anticipated issuance costs: $520,000
Series 2 is secured by all assets of the company and will be senior to Series 1. Series 1 is unsecured.
The CEO would like to know the following information:
• How much money will the company receive when it sells the bonds assuming the market rate on that date is 8%?
• Discuss whether or not you recommend using the straight-line or effective interest method for amortizing the discount/premium. NOTE: use straight-line for the debt issue costs.
• How will this transaction affect the Company's income statementeach year from 2016 through 2021? What lines and sub-totals / totals that will be affected and by how much?
• How will this transaction affect the Company's balance sheet at December 31, 2016. What line items and totals/sub-totals will be affected and by how much?
• Provide a draft of the debt footnote to the December 31, 2016 financial statements. Use the GAAP checklist provided. Also feel free to look at other company's debt footnotes for examples.
• Please provide the GAAP checklist as an attachment to the memo. [note: I've included the entire section on disclosure related to debt and long-term obligations, but only 96 and 97 will be applicable for this assignment.]
• Please provide a spreadsheet (the actual Microsoft excel file) as an attachment to the memo that shows the following for each series of bonds:
o Calculation of the present value
o Amortization table
o Calculation of amortization of debt issue costs
o Journal entries for each year
Note: assume the company records interest when paid and also records any adjusting journal entries at the end of each calendar year (December 31).
Your CEO (and the grader of this assignment) expects the following when receiving a memo:
1. Information is accurate.
2. The memo conveys all necessary information but is succinct, to-the-point, and as short as possible.
3. The memo is well written and easy to read.
4. The memo and any attachments are very neat, clean and well-organized.
Attachment:- GAAP Checklist Obligations.docx