Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 10 Liabilities 491

During fiscal 2004, Georgia-Pacific Companycalled the following bond issuances:

$243 million 9.875% bonds due November 1, 2021

$250 million 9.625% bonds due March 15, 2022

$250 million 9.500% bonds due May 15, 2022

$240 million 9.125% bonds due July 1, 2022

$250 million 8.250% bonds due March 1, 2023

$250 million 8.125% bonds due June 15, 2023

In groups of three or four:

1. Identify the face value, coupon rate, and maturity of each of the bond issues.


2. Discuss some of the potential reasons that Georgia-Pacific may have had for deciding to call
   these bond issues early.

Moody’s Investors Servicemaintains a Web site at http://www.Moodys.com. One of the ser-

vices offered at this site is a listing of announcements of recent bond rating changes. Visit this

site and read over some of these announcements. Write down several of the reasons provided

for rating downgrades and upgrades. If you were a bond investor or bond issuer, would you

care if Moody’s changed the rating on your bonds? Why or why not?

Activity 10-5

Investing in bonds

Activity 10-6

Bond ratings

ANSWERS TO SELF-STUDY QUESTIONS

1. B The net amount available to a borrower from dis-
   counting a note payable is called the proceeds. The proceeds
   of $4,900 (answer B) is determined as follows:

Face amount of note $5,000

Less discount ($5,00012%60/360) 100

Proceeds $4,900

2. B Employers are usually required to withhold a portion
   of their employees’ earnings for payment of federal income
   taxes (answer A), Medicare tax (answer C), and state and local
   income taxes (answer D). Generally, federal unemployment
   compensation taxes (answer B) are levied against the employer
   only and thus are not deducted from employee earnings.


3. D Current ratio: $800,000/$200,000 = 4.0
   Quick ratio: ($100,000 $300,000)/$200,000
   = 2.0

4. B

Sales Price of the Bonds:

Present value of bond principle:

PrinciplePresent Value of $1i= 9%, n= 5

$200,0000.64993 $129,986

Present value of bond interest:

PrinciplePresent Value of Annuity of $1i= 9%, n= 5

$20,0003.88965 77,793

$207,779

Calculation of bond premium:

Selling price of the bonds $207,779

Face value of the bonds 200,000

Bond premium (Selling price Face value) $ 7,779

5. D The number of times interest charges are earned is
   determined as: ($500,000 $100,000)/$100,000, or 6.0.