2millionplus lossondebtrepurchaseof390million b

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Unformatted text preview: d gains and losses—compared to the amounts reported on the balance sheet. E11–16 a. Cash paid to redeem the bonds = = = Face value 101% $500,000 101% $505,000 Bonds Payable (–L) Loss on Redemption (Lo, –SE) 500,000 15,000 Discount on Bonds Payable (+L) 10,000* Cash (­A) 505,000 Redeemed bonds. * $10,000 = Face Value – Book Value = $500,000 – $490,000 b. Bonds Payable (–L) Premium on Bonds Payable (–L) (Ga, +SE) 500,000 7,000 Cash (–A) 505,000 Gain on Redemption 2,000 Redeemed bonds. E11–17 a. b. The $4.8 million is a benefit to the company because the loss offsets against the operating income of Lilly. As a result it reduces the amount of tax that Lilly will have to pay. Therefore the loss on retiring this debt provides a tax benefit to Lilly. c. d. Lilly paid $47 million to retire this debt. This is comprised of $35 million (book value of bonds), $7.2 million (after tax loss) plus $4.8 million (tax benefit of loss). The loss would be shown as part of the net income that is shown on the first line item on the statement of cash flows. It would be added back to compute cash from operating activities. The loss would be shown as an extraordinary item on the income statement. E11–18 a. American Greetings paid cash of $181.2 million to retire the debt (book value of $142.2 million plus loss on debt repurchase of $39.0 million). b. The company, in effect, paid extra to make the debt go away. The debt was on the books for $142.2 million, but the company—through negotiations with the holders of the debt—agreed to pay a total of $181.2 million to retire the obligations. The additional amount paid, above the book value of the debt, is the amount of the loss recorded on the income statement. c. American Greetings refinanced the debt at much lower interest rates. A company would be willing to incur a loss on its income statement if it can refinance debt at much lower rates. Over the life of the new debt the company figures it will more than make up for the amount booked on the income statement as a loss by lowering its interest expense in all t...
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