the following information is taken from the 2012 annual report 260306

The following information is taken from the 2012 annual report of Bugant, Inc. Bugant’s fiscal year ends December 31 of each year. Bugant’s December 31, 2012, balance sheet is as follows.

Bugant, Inc.

Balance Sheet

December 31, 2012

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

Additional information concerning 2013 is as follows.

1. Sales were $3,500, all for cash.

2. Purchases were $2,000, all paid in cash.

3. Salaries were $700, all paid in cash.

4. Property, plant, and equipment was originally purchased for $2,000 and is depreciated straight-line over a 25-year life with no salvage value.

5. Ending inventory was $1,900.

6. Cash dividends of $100 were declared and paid by Bugant.

7. Ignore taxes.

8. The market rate of interest on bonds of similar risk was 12% during all of 2013.

9. Interest on the bonds is paid semiannually each June 30 and December 31.

Accounting

Prepare a balance sheet for Bugant, Inc. at December 31, 2013, and an income statement for the year ending December 31, 2013. 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 2012 to 2013? Bugant’s net income in 2012 was $550 and interest expense was $169.

Principles

Recently, the FASB and the IASB allowed 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.

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