Chapter 10: Long-Term Liabilities
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
173. The process of transferring a portion of premium or discount to interest expense. This method transfers an amount
resulting in a constant effective interest rate.
ANSWER:
k
174. The interest rate stated on the bond certificate. It is also called the nominal or coupon rate.
ANSWER:
f
175. The face value of a bond plus the amount of unamortized premium or minus the amount of unamortized discount.
ANSWER:
l
176. The interest rate that bondholders could obtain by investing in other bonds that are similar to the issuing firm’s
bonds.
ANSWER:
g
177. The difference between the carrying value and the redemption price at the time bonds are redeemed. This amount is
presented as an income statement account.
ANSWER:
m
178. The total of the present value of the cash flows produced by a bond. It is calculated as the present value of the
annuity of interest payments plus the present value of the principal.
ANSWER:
h
Subjective Short Answer
Sewickley Company
Use the liabilities section of Sewickley Company’s balance sheet to answer the questions that follow.
Sewickley Company
Consolidated Balance Sheets
(in millions)
December 31,
2017
2016
$ 354
$ 202
4,461
4,529
183
64
$4,998
$4,795
$2,651
$3,009
3,876
3,960
1,496
1,367
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
179. Review the consolidated balance sheets of Sewickley Company.
Required:
(1) Which long-term liability would also be listed in the short-term liability section? Why?
(2) What percent of the total liabilities for 2017 and 2016 are long-term liabilities? What implication does this have?
ANSWER:
(1) The long-term liability which is also listed in the short-term liability section is the portion
of long-term debt due within one year of the balance sheet date. The portion due in a period
longer than one year is classified as long-term debt.
(2) The percent of the total liabilities that are long-term liabilities for the two years are: 2017,
61.6%; 2016, 63.5%. The implication is that there were large amounts of long-term liabilities
that matured in 2017. The percent decreased from 2016 to 2017 due to the large increase in
short-term borrowings as compared with the other liability accounts. Management needs to
take steps to assure that the corporation will be able to generate the cash necessary to retire
the debt as it matures.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-01 – LO: 10-01
KEYWORDS:
Bloom’s: Analyzing
180. Review the consolidated balance sheets of Sewickley Company.
Required:
Which one of the liabilities shown in the balance sheets is used in the calculation of the debt-to–equity ratio?
If we can assume that the stockholders’ equity total remained relatively constant for the two years, how would the ratio
change (increase/decrease) from 2016 to 2017? What would this say about the company’s financial position?
ANSWER:
All liabilities are used in the calculation of the debt-to–equity ratio: total liabilities/total
stockholders’ equity. Total liabilities for the two years were: 2017, $13,021; 2016, $13,131
(in millions).
If it is assumed that stockholders’ equity remained relatively constant for the two years, then
the company’s financial position would have improved slightly.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-08 – LO: 10-08
KEYWORDS:
Bloom’s: Analyzing
DIFFICULTY:
Moderate
FACC.PONO.13.10-03 – LO: 10-03
Bloom’s: Analyzing
181. Review the consolidated balance sheets of Sewickley Company.
Required:
(1) What are the total long-term liabilities for the two years presented?
(2) What is the percent increase/decrease of long-term liabilities from 2016 to 2017? Which liability appears to have
caused the greatest change?
ANSWER:
(1) 2017 – $8,023 (in millions)
$2,651 (Long-term debt) + $3,876 (Other long-term debt) + $1,496 (Deferred income taxes)
= $8,023
2016 – $8,336 (in millions)
$3,009 (Long-term debt) + $3,960 (Other long-term debt) + $1,367 (Deferred income taxes)
= $8,336
(2) a decrease of 3.75 or 3.8% (Rounded)
2016 Long-term liabilities—$8,336
2017 Long-term liabilities—$8,023
[($8,023 – $8,336)/$8,336] × 100 = 3.75 or 3.8%. (Rounded)
The long-term liability which appears to have caused the greatest change is long-term debt.
(2016 – $3,009; 2017 – $2,651)
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.10-01 – LO: 10-01
FACC.PONO.13.10-08 – LO: 10-08
KEYWORDS:
Bloom’s: Analyzing
182. On March 1, 2016, Farmer Co. issued at a price of 100 $20 million of 8%, 25-year bonds payable. Interest is payable
semiannually each March 1 and September 1.
Required:
Present the adjusting entry necessary at December 31, 2016, regarding this bond issue.
ANSWER:
Dec. 31
Bond Interest Expense
533,333
Bond Interest Payable
533,333
(20,000,000 × 8% × 4/12)
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
183. East Liberty Corp. received authorization on December 31, 2016, to issue $7,000,000 face value of 6%, 10-year
bonds. The interest payment dates are June 30 and December 31. All the bonds were issued at par, plus accrued interest,
April 1, 2017. The bonds are callable by East Liberty at any time at 102.
Required:
Prepare the journal entry to record issuance of the bonds on April 1, 2017.
ANSWER:
2017
April 1
Cash
7,105,000
Bonds Payable
7,000,000
Bond Interest Payable
105,000
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
Cash
7,105,000
Bonds Payable
7,000,000
Bond Interest
Payable 105,000
Issued $7,000,000 face value bonds at par, plus three months’ accrued interest.
($7,000,000 × 6% × 3/12 = $105,000)
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 – LO: 10-03
KEYWORDS:
Bloom’s: Analyzing
for the last six months of a year is paid and does not appear as a liability in the balance sheet.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-04 – LO: 10-04
KEYWORDS:
Bloom’s: Analyzing
184. East Liberty Corp. received authorization on December 31, 2016, to issue $7,000,000 face value of 6%, 10-year
bonds. The interest payment dates are June 30 and December 31. All the bonds were issued at par, plus accrued interest,
April 1, 2017. The bonds are callable by East Liberty at any time at 102.
Required:
Prepare the journal entry to record the first semiannual interest payment on the bonds at June 30, 2017.
ANSWER:
2017
June 30
Bond Interest Payable
105,000
Bond Interest Expense
105,000
Cash
210,000
To record payment of semiannual interest.
($7,000,000 × 6% × 1/2)
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
Cash
(210,000)
Bond
Interest
Payable
(105,000)
(105,000)
Bond
Interest
Expense
105,000
(105,000)
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 – LO: 10-03
KEYWORDS:
Bloom’s: Analyzing
185. East Liberty Corp. received authorization on December 31, 2016, to issue $7,000,000 face value of 6%, 10-year
bonds. The interest payment dates are June 30 and December 31. All the bonds were issued at par, plus accrued interest,
April 1, 2017. The bonds are callable by East Liberty at any time at 102.
Required:
1. What is the amount of bond interest expense that appears in East Liberty’s 2017 income statement relating to these
bonds?
2. What is the amount of accrued bond interest expense that appears in East Liberty’s balance sheet at December 31, 2017,
with respect to these bonds?
ANSWER:
1. $315,000 interest expense.
Since the bonds were issued at par, interest expense is equal to the contractual interest for the
186. East Liberty Corp. received authorization on December 31, 2016, to issue $7,000,000 face value of 6%, 10-year
bonds. The interest payment dates are June 30 and December 31. All the bonds were issued at par, plus accrued interest,
April 1, 2017. The bonds are callable by East Liberty at any time at 102.
Required:
East Liberty exercises the call provision and retires one-half of the bond issue on July, 1, 2019. Prepare the journal entry
to record this transaction on July 1, 2019.
ANSWER:
2019
July 1
Bonds Payable
3,500,000
Loss on Retirement of Bonds
70,000
Cash
3,570,000
To record retirement of $3,500,000-face-value
bonds, originally issued at par, at 102.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
Cash
(3,570,000)
Bonds
Payable
(3,500,000)
(70,000)
Loss on
Retirement
of Bonds
70,000
(70,000)
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-06 – LO:10-06
KEYWORDS:
Bloom’s: Analyzing
187. A bond payable is dated January 1, 2016, and is issued on that date. The face value of the bond is $120,000, and the
face rate of interest is 6%. The bond pays interest semiannually. The bond will mature in five years.
Required:
1. What will be the issue price of the bond if the market rate of interest is 6% at the time of issuance?
2. What will be the issue price of the bond if the market rate of interest is 10% at the time of issuance?
ANSWER:
1. If the face rate is equal to the market rate, the bond will be issued at face value, or
$120,000.
2. $120,000 × 0.614 = $73,680 Table 9-2 n = 10, i = 5%
Issue price $101,479
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-03 – LO: 10-03
KEYWORDS:
Bloom’s: Analyzing
Income Statement
(1,609,178)
188. A company issued 10-year bonds with a par value of $20,000,000 and an 8% annual face on January 2, 2016. The
issue price of the bond issue was $19,866,397 which reflected an 8.1% effective interest rate.
Required:
a)
Determine the effect on the accounting equation upon recording the issuance of the bonds.
b)
Determine the effect on the accounting equation upon recording the recognition of interest
expense at December 31, 2016. Any premium or discount should be amortized using the effective
interest rate method.
c)
Determine the effect on the accounting equation upon recording the interest paid to the
bondholders on January 2, 2017.
d)
Determine the effect on the accounting equation upon recognizing the interest expense at
December 31, 2017. Any premium or discount should be amortized using the effective interest
rate method.
ANSWER:
a.
Balance Sheet
Income Statement
Stockholders’
Net
Stockholders’
(2,412,305)
Stockholders’
Net
189. A company issued 5-year bonds with a par value of $35,000,000 and a 7% annual face on January 2, 2016. The issue
price of the bond issue was $35,216,127 which reflected a 6.85% effective interest rate.
Required:
a) Determine the effect on the accounting equation upon recording the issuance of the bonds.
b) Determine the effect on the accounting equation upon recording the recognition of interest expense at December 31,
2016. Any premium or discount should be amortized using the effective interest rate method.
c) Determine the effect on the accounting equation upon recording the interest paid to the bondholders on January 2, 2017.
d) Determine the effect on the accounting equation upon recognizing the interest expense at December 31, 2017. Any
premium or discount should be amortized using the effective interest rate method.
ANSWER:
a.
Balance Sheet
Income Statement
Stockholders’
Net
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
190. Bonds payable are dated January 1, 2016, and are issued on that date. The face value of the bonds is $200,000, and
the face rate of interest is 8%. The bonds pay interest semiannually. The bonds will mature in five years. The market rate
of interest at the time of issuance was 6%.
Required:
1. What is the bond issuance price?
2. Using the effective interest amortization method, what amount should be amortized for the first six-month period?
What amount of interest expense should be reported for the first six-month period?
3. Using the effective interest amortization method, what amount should be amortized for the period from July 1 to
December 31, 2016? What amount of interest expense should be reported for the period from July 1 to December 31,
2016?
ANSWER:
1.
$200,000 × 0.744
=
$148,800
Table 9-2 n = 10, i = 3%
8,000 × 8.530
=
68,240
Table 9-4 n = 10, i = 3%
Issue price
$217,040
Cash
Interest Expense
Amortized
Present Value
$ 217,040.00
$8,000.00
$6,511.20*
$1,488.80
215,551.20
8,000.00
6,466.54**
1,533.46
214,017.74
2. Amount amortized is $1,488.80.
Amount of interest expense is $6,511.20.*
3. Amount amortized is $1,533.46.
Amount of interest expense is $6,466.54.**
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.10-05 – LO: 10-05
KEYWORDS:
Bloom’s: Analyzing