Case study of Lyons Document Storage Corporation: Bond Accounting

Introduction
The Lyons Company is currently a company providing storage of documents for other corporate customers. Lyons had operated conservatively without any long-term debt until it issued bonds in 1999. The bounds issued were $10 million in 20-year bonds, offering a coupon rate of 8% with interest paid semiannually, and sold to yield the 9% market rate of interest at the time. In the following essay, we take it as Alternative 1.

These bonds were issued on July 2, 1999 and would be due July 2, 2019. But now, the investment bankers told the company’s owner, Mr. Lyons, that $10 million in new 6% bonds with semiannual interest payments could be issued to provide the …show more content…

But for alternative 3, as the new bonds’ face value is $11.54 million, we do not have to pay the $1.54 million in Jan. 2009. And the differential annual cash flow is $53.8K, which is $11.54 million times 3% interest rate. Besides, we need to pay $1.54 million more when it comes to maturity. This is because the redemption value equals to the face value, $11.54million. The differential cash flow is listed in Exhibit 1.

With the cash flow of every period, we can calculate the differential cumulative PW. The differential cumulative PW for alternative 2: PW2=-1542K+100K(P/A,3%,21)=-$0.5K. The differential PW for alternative 3: PW3=53.8K(P/A,3%,21)-1542K(P/F,3%,21)=$0.5K. The negative differential PW for alternative 2 means the company will eventually pay more money compared to alternative 1. The positive differential PW for alternative 3 means it will eventually receive more money. From the cash flow perspective, it seems the company may issue the $11.54 million of 10-year 6% bonds.

Another aspect is book earnings. Earnings will be affected by: (i) the $2.2 million loss on refunding in 2009, (ii) differential interest payments in every period, and (iii) differential “amortized discount” expense in every period. The $2.2 million is from $11.54 million spent to retire bonds minus the $9.3 million listed on the balance sheet at that time. The differential interest payments are the same as those in the cash flow perspective. The amortized discount of alternative 2 and 3