2. Progressive Corporation (a properly and casualty insurance company) reported

Question

2. Progressive Corporation (a properly and casualty insurance company) reported e following n its 2013 annual report: In March 201 3, we entered into an unsecured, discretionary line of credit (the ^''Line of Credit^'') with PNC Bank, National Association (^''PNC^'') in the maximum principal amount of dollar100 million. Subject to the terms and conditions of the Line of Credit documents, advances under the Line of Credit (if any) will bear interest at a variable rate equal to the higher of PNC^?s Prime Rate and the sum of the Federal Funds Open Rate plus 50 basis points. Each advance must be repaid on the 30th date after the advance or, if earlier, on March 25, 2014, the expiration date of the Line of Credit. Prepayments are permitted without penalty. All advances under the Line of Credit are subject to PNC^?s discretion. We had no borrowings under the Line of Credit in 2013. Aggregate principal payments on debt outstanding at December 31 , 201 3, is as follows: Required: a. What amount does Progressive report for long-term debt on its balance sheet? b. Why is there a difference between the fair value and the carrying value of Progressive^?s long-term debt? C. Were the 3.75% notes originally issued at par, at a discount or at a premium? How do you know?

Explanation / Answer

a) Amount for long term debt in balance sheet in year 2012 =$2063.1 And in year 2013 = 1860.9

b) Carrying value and fair value are two different accounting measures used to determine the value of a company's assets and liabilities. The carrying value, or book value, is an asset or liability's value based on a company's balance sheet, while the fair value of an asset or liability is based on the mark-to-market value. The carrying value is the value of an asset based on the figures of the asset on the balance sheet.

c) 3.75% notes issued at discount of 7.28% , we come to know this by following method-

{(fair value in year 2013 - fair value in year 2012)/ fair value in year 2013} *100

{(509.1 - 549.1)/549.1}*100

= -7.28%

Therefore we can say 3.75% notes are issued at discount.

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