Financial Accounting Long Term Liabilities

Tutorial Week 8 – Long-Term Liabilities - Solution

Part I: Johnson and Johnson – Long-Term Debt

1. What is the net book value of Johnson and Johnson’s long-term debt (including current maturities) as of December 29, 2002?

From Footnote, Total LTD is 2,099 (includes the current portion).

2. Were the 8.25% Notes due 2004 issued at a discount, premium, or par? How do you know?

The coupon rate (8.25%) is below the effective rate (8.37%), indicating the bond was issued at a discount. This observation is supported by the increase in net book value of the bond.

3. Assume that the 7.375% Notes due 2002 were due January 1, 2002.

a. What is your best estimate of the face value of the 7.375% Notes? Explain.

As of Dec 29, 2001 they had a net book value of $200 million. If they came due the next day, then the NBV = face value at that point. Thus, the face value must have been $200 million.

b. Suppose that the current market interest rate at December 30, 2001 is 6.0%. What is your best estimate of the fair value of the 7.375% Notes at December 30, 2001? Explain.

Since they were due the next day, then it doesn’t matter what the market rate was at the time. At that point the face value = fair value = net book value. Thus, $200 million is also the fair value of the Notes.

The questions below relate to the 3% Zero Coupon Convertible Subordinated Debentures due 2020. During 2002, some of these Debentures have been converted to shares of Johnson and Johnson stock. You may assume that these conversions all occurred on the last day of the year (i.e., on December 29, 2002), and that there are no early retirements of the 3% Zero Coupon Debentures.

4. What is the present value of the 3% Zero Coupon Debentures’ face value discounted using the historical effective interest rate on December 29, 2002? Is this amount the same as, lower than, or higher than the net book value of these Debentures on December 29, 2002? Why or why not?

The present value of all...