FINANCIAL REPORTING
Financial Reporting Problem
The Procter & Gamble Company (P&G)
The financial statements of P&G are presented in Appendix 5B. The company's complete annual report, including the notes to the financial statements, can be accessed at the book's companion website, www. wiley.com/college/kieso.
Instructions
Refer to P&G's 2011 financial statements and the accompanying notes to answer the following questions.
(a) What cash outflow obligations related to the repayment of long-term debt does P&G have over the next 5 years?
Due from July 2011 to June 30 2016.
$13501 millions
https://www.pg.com/annualreport2011/_files/pdf/PG_2011_AnnualReport_notes.pdf
(b) P&G indicates that it believes that it has the ability to meet business requirements in the foreseeable future. Prepare an assessment of its liquidity, solvency, and financial flexibility using ratio analysis.
2011 2010
Current Ratio 0.80 0.77
Debt Equity Ratio 1.03 1.09
Times Interest Earned Ratio 19.03 16.94
Return on Equity 17.35% 20.73%
Return on Assets 8.53% 9.94%
Operating Cash flows $ 13,231 $ 16,072
Free Cash Flow $ 9,749 $ 15,475
The liquidity and solvency position have improved slightly in 2011, as the current ratio only increase by .03 and debt equity ratio decreased by .06, however the times interest earned has increased by around 2%, it shows that the company has more earnings to pay interest in 2011 as compared to 2010. The decline in return on equity and return on assets suggests that resources of the company have not been utilized effectively. Moreover the financial condition has also weakened in 2011 as the cash generated from operating cash flows and the free cash flows has declined in 2011 as compared to 2011.
Comparative Analysis Case The Coca-Cola Company and PepsiCo, Inc.
Instructions
Go to the book's companion website and use information found there to answer the following questions related to The Coca-Cola Company and PepsiCo, Inc.
(a) Compute the debt to assets and the times interest earned ratios for these two companies. Comment on the quality of these two ratios for both Coca-Cola and PepsiCo
2011 COKE PEPSI
Total Liabiliteis 48050 51983
Total Assets 79971 72882
Debt to total assets 0.60 0.71
The Pepsi has used more debt financing as compared to Coke. Around 71% of total assets have been financed by debt for PEPSI and around 60% by Coke. The PEPSI is more exposed to financial risk as compared to COKE>
(b) . (b) What is the difference between the fair value and the historical cost (carrying amount) of each com-
pany's debt at year-end 2011? Why might a difference exist in these two amounts?
For PEPSI the fair value was lower than historical cost and it was around $830 million due to interest rate swapping. For Coke the fair value was more than historical cost and it was around $663 million due to adjustment for company debt equivalent to other companies debt of similar nature.
(c) Both companies have debt issued in foreign countries. Speculate as to why these companies may use foreign debt to finance their operations. What risks are involved in this strategy, and how might they
adjust for this risk?
The cost of acquiring debt might be lower in foreign countries therefore the company would have issued debt in foreign counties. But there is risk of foreign exchange rate fluctuation which may have impact on the cost of financing abroad which may be mitigated by forward booking of foreign exchange rate or by using hedging technique.
https://assets.coca-colacompany.com/b6/f3/ecad445f4fc1819dd37e04e057ad/form_10K_2011.pdf
https://www.pepsico.com/docs/album/annual-reports/PEP_AR11_2011_Annual_Report.pdf
P14-5 (Comprehensive Bond Problem) In each of the following independent cases the company closes its books on December 31.
1. Sanford Co. sells $500,000 of 10% bonds on March 1, 2014. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2017. The bonds yield 12%. Give entries through December 31, 2015.
2. Titania Co. sells $400,000 of 12% bonds on June 1, 2014. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2018. The bonds yield 10%. On October 1, 2015, Titania buys back $120,000 worth of bonds for $126,000 (includes accrued interest). Give entries through December 1, 2016.
Instructions
For the two cases prepare all of the relevant journal entries from the time of sale until the date indicated. Use the effective-interest method for discount and premium amortization (construct amortization tables where applicable). Amortize premium or discount on interest dates and at year-end. (Assume that no reversing entries were made.
See attached excel sheet)
P14-6 (Issuance of Bonds between Interest Dates, Straight-Line, Redemption) Presented below are selected transactions on the books of Simonson Corporation.
May 1, 2014 Bonds payable with a par value of $900,000, which are dated January 1, 2014, are sold at 106 plus accrued interest. They are coupon bonds, bear interest at 12% (payable annually at January 1), and mature January 1, 2024. (Use interest expense account for accrued interest.
Dec. 31 Adjusting entries are made to record the accrued interest on the bonds, and the amortiza- tion of the proper amount of premium. (Use straight-line amortization.)
Jan. 1, 2015 Interest on the bonds is paid.
April 1 Bonds with par value of $360,000 are called at 102 plus accrued interest, and redeemed. (Bond premium is to be amortized only at the end of each year.)
Dec. 31 Adjusting entries are made to record the accrued interest on the bonds, and the proper amount of premium amortized.
Instructions
(Round to two decimal places.)
Prepare journal entries for the transactions above
See attached excel
P14-7 (Entries for Life Cycle of Bonds) On April 1, 2014, Seminole Company sold 15,000 of its 11% 15-year, $1,000 face value bonds at 97. Interest payment dates are April 1 and October 1, and the company uses the straight-line method of bond discount amortization. On March 1, 2015, Seminole took advantage of favorable prices of its stock to extinguish 6,000 of the bonds by issuing 200,000 shares of its $10 par value common stock. At this time, the accrued interest was paid in cash. The company's stock was selling for $31 per share on March 1, 2015.
Instructions
Prepare the journal entries needed on the books of Seminole Company to record the following.
(a)April 1, 2014: issuance of the bonds.
(b) October 1, 2014: payment of semiannual interest.
(c) December 31, 2014: accrual of interest expense.
(d) March 1, 2015: extinguishment of 6,000 bonds. (No reversing entries made.
See excel sheet