Page 628 - Accounting Principles (A Business Perspective)

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Visit the following website for Eastman Chemical Company:
http://www.eastman.com
Pursue choices on the screen until you locate the financial information. Then investigate long-term borrowings.

You will probably go down some "false paths" to get to this financial information, but you can get there. This
experience is all part of learning to use the Internet. Check to determine the composition of the long-term
borrowings. Check out the notes to the financial statements for further information. Browse around the site for any
other interesting information concerning the company. Write a memo to your instructor summarizing your
findings.

Answers to self-test
True-false
True. These unsecured bonds are called debenture bonds and are backed only by the general creditworthiness
of the issuer.
False. Callable bonds may be called at the option of the issuer.
True. This statement is the definition of favorable financial leverage. However, unfavorable financial leverage
can result when favorable financial leverage was planned. Unfavorable financial leverage will result if income before
interest and taxes is much lower than anticipated. Then earnings per share for the common stockholders would be

lower than they would have been without the borrowing.
True. Purchasers will not be willing to pay the face amount if the market rate of interest exceeds the contract
rate. By paying less than the face value, purchasers can earn the market rate of interest on the bonds.
False. The effective interest rate method is the recommended method. The straight-line method may be used
only when the results are not materially different from the interest method.
Multiple-choice
a. The discount of USD 4,000 must be recorded. Also, the accrued interest must be recognized (USD 100,000 X

12 per cent X 2/12 = USD 2,000).
c. The premium is USD 4,000, and the accrued interest is USD 2,000. Both must be recognized.
b. The interest is (USD 328,298 X 0.11 X 1/2 ) = USD 18,056.
d. The interest would have been (USD 400,000 X 0.04) + (USD 71,702/20) = USD 19,585.
c. Income before interest and taxes is (USD 100,000 + USD 40,000 + USD 20,000) = USD 160,000. This total
of USD 160,000 divided by interest of USD 20,000 = 8 times.

Accounting Principles: A Business Perspective 629 A Global Text