ACCT 2A&B: Accounting for Partnership & Corporation

BCSV

In its 2002 annual report to shareholders, Fox Entertainment Group Inc. disclosed the following:

On October 28, 1997, the Company issued $475,000,000 aggregate principal amount of 9-1/4% Senior Notes
Due 2007 ("Senior Notes") and $618,670,000 aggregate principal amount at maturity of 10-1/4% Senior Discount
Notes Due 2007 ("Senior Discount Notes" and collectively the "Notes") in a transaction not registered under the
Securities Act in reliance upon an exemption from the registration requirements of the Securities Act. Gross
proceeds from the offering amounted to $850,000,000. The discount on the Senior Discount Notes is being
accreted under the effective interest method.

Explain the last sentence of the disclosure to clarify what accounting was necessary and why.

Answer: Fox received only $850 million for all of the notes in the disclosure, while these notes had a maturity
value of over $1.093 billion. The discount notes either did not pay annual interest at all, in which case, they
would be issued at a substantial discount from maturity value, or they paid cash at a rate below the going
market rate, in which case the present value at issue date was less than the face value at maturity. In either
case, this discount is amortized each year to reflect the effective rate of interest on the notes.

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