Joan Holtz (D)
Case 8-4: Joan Holtz (D)*
Note: This case is unchanged from the Tenth Edition.
Approach
As with the earlier Joan Holtz cases, this one enables students to discuss some interesting issues, none of which requires a full class period. The instructor should be alert to newer situations to augment or supplant any of those described in the case. Also many of these issues tend eventually to result in an FASB, AICPA, or SEC pronouncement. Since seldom will a beginning student be aware of these pronouncements, they do not preclude continuing to use a part of this case, and then revealing at the end of that part's discussion whether the accounting rule-making body reached the same conclusion as the class did.
Comments on Questions
1. The question is equivalent to asking, what is the future value of $100 invested at 10 percent compound interest, 127 years (1998 - 1871) from now? The answer is $100 (1,10)127 = $18,066,000. We subsequently read that the man, after giving his town officials a good scare, did not pursue the matter further, becausehad he prevailedit would have bankrupted the town.
2. a. For a future value of $1,000 received 8 years hence, and a 15 percent discount rate, the present value is $327; so, yes, the yield was 15 percent. (This result can be gotten using a calculator, or by noting in Appendix Table A that the 8 yr., 15% PV factor is 0.327.)
b. The discount is $1,000 - 327 = $673; using straight-line amortization, that is $673 divided by 8 = $84.125/bond/yr., resulting in annual tax savings of $84.125 * 0.40 = $33.65. (Subsequent to the writing of the case, the U.S. Treasury reduced, but did not eliminate, the tax deductibility of original issue discount, so these zero-coupon bonds became less attractive.) Thus, the bond issuer contemplates the following cash flow pattern:
Time Zero + $327
Years 1-8 + $33.65/yr.
End of year 8 - $1,000
(Actually, straight-line discount amortization is not permitted, but we wanted to keep the
Note: This case is unchanged from the Tenth Edition.
Approach
As with the earlier Joan Holtz cases, this one enables students to discuss some interesting issues, none of which requires a full class period. The instructor should be alert to newer situations to augment or supplant any of those described in the case. Also many of these issues tend eventually to result in an FASB, AICPA, or SEC pronouncement. Since seldom will a beginning student be aware of these pronouncements, they do not preclude continuing to use a part of this case, and then revealing at the end of that part's discussion whether the accounting rule-making body reached the same conclusion as the class did.
Comments on Questions
1. The question is equivalent to asking, what is the future value of $100 invested at 10 percent compound interest, 127 years (1998 - 1871) from now? The answer is $100 (1,10)127 = $18,066,000. We subsequently read that the man, after giving his town officials a good scare, did not pursue the matter further, becausehad he prevailedit would have bankrupted the town.
2. a. For a future value of $1,000 received 8 years hence, and a 15 percent discount rate, the present value is $327; so, yes, the yield was 15 percent. (This result can be gotten using a calculator, or by noting in Appendix Table A that the 8 yr., 15% PV factor is 0.327.)
b. The discount is $1,000 - 327 = $673; using straight-line amortization, that is $673 divided by 8 = $84.125/bond/yr., resulting in annual tax savings of $84.125 * 0.40 = $33.65. (Subsequent to the writing of the case, the U.S. Treasury reduced, but did not eliminate, the tax deductibility of original issue discount, so these zero-coupon bonds became less attractive.) Thus, the bond issuer contemplates the following cash flow pattern:
Time Zero + $327
Years 1-8 + $33.65/yr.
End of year 8 - $1,000
(Actually, straight-line discount amortization is not permitted, but we wanted to keep the