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Chapter 10
Accounting for Long-Term Liabilities
QUESTIONS
1. Notes payable generally involve borrowing from a single creditor, whereas bonds
2. A bond is a liability of the issuing company. A share of stock represents an ownership
interest in the company.
3. Bonds can allow a company’s owners to increase their return on equity without investing
additional amounts. This result occurs as long as the rate of return on the assets
4. A bond indenture is a legal contract between the issuing company and the bondholders
that identifies the obligations and rights of both parties. It specifies such items as the
5. A trustee for bondholders has the responsibility of monitoring the issuer’s actions,
6. The contract rate (also known as the coupon rate, stated rate, or nominal rate) is the rate
7. In general, the supply of and demand for bonds affect market rates. The market rate for
8.BThe effective interest method creates a constant rate of interest over a bond’s life
because the market rate at the time of issuance is multiplied by the beginning balance
9.CWhen issuing bonds between interest dates, a company collects accrued interest from
the purchasers to avoid keeping detailed records of bond purchasers and the dates
10. The price of bonds can be computed by finding the present value of both the par value at
11. The issue price of a $2,000 bond sold at 98 ¼ is 98.25% of $2,000, or $1,965. The issue
price of a $6,000 bond priced at 101 ½ is 101.5% of $6,000, or $6,090.
12. The debt-to-equity ratio is calculated by dividing total liabilities by total equity. The
higher a company’s debt-to-equity ratio, the higher proportion of a company’s assets
13. An entrepreneur (owner) must repay the bondholders the principal (par value) according
14. Apple reports long-term debt of $16,960 million on its balance sheet. Apple also reports
15. Samsung’s long-term borrowings decreased by 2,637,911 million (computed as₩
16. Per Samsung’s statement of cash flows (financing section), the company made
17. The balance sheet of Google indicates that for the year ended December 31, 2013, the
$0.27 is contributed by debt holders.
18.DIf a lease qualifies to be recorded as a capital lease, an asset account for the leased
payments. The corresponding credit will be to a lease liability account.
19.DAn operating lease is a short-term or cancelable lease in which the lessor retains the
risks and rewards of ownership. The lessee expenses operating lease payments when
20.DPension plans can be designed as defined benefit plans or defined contribution plans. In
a defined benefit plan the employer estimates the contribution necessary to pay a pre-
defined benefit amount to its retirees. For example, an employee’s monthly pension
QUICK STUDIES
Quick Study 10-1 (5 minutes)
3. A 6. D
Quick Study 10-2 (10 minutes)
2015
Jan. 1 Cash.................................................................................218,750
Quick Study 10-3 (10 minutes)
Using facts in QS 10-2, the bond’s cash proceeds for the bond selling at
a discount are computed as follows
Cash Flow Table Value Present Value
$250,000 par (maturity) value................ 0.3769 $ 94,225
Quick Study 10-4 (10 minutes)
2015
Jan. 1 Cash.................................................................................281,400
Bonds Payable.......................................................... 240,000
Quick Study 10-5 (10 minutes)
Using facts in QS 10-4, the bond’s cash proceeds for the bond selling at
a premium are computed as
Cash Flow Table Value Present Value
$240,000 par (maturity) value................ 0.3083 $ 73,992
$ 12,000 interest payment..................... 17.2920 207,504
(Instructor note: The price in QS 10-4 is rounded to 117.25 from 117.29, yielding the $96 difference.)
Quick Study 10-6 (10 minutes)
1. Bond’s cash proceeds: $250,000 x 0.875 = $218,750
2. Twenty semiannual interest payments of $10,000*................ $200,000
Plus bond discount ($250,000 - $218,750).............................. 31,250
Quick Study 10-7 (15 minutes)
2014
(a)
Dec. 31 Cash.................................................................................92,640
2015
(b)
June 30 Bond Interest Expense..................................................5,736
tization. *$7,360- $6,624 **$100,000 x10% x1/2
(c)
Dec. 31 Bond Interest Expense..................................................5,736
Discount on Bonds Payable*.................................. 736
Cash**........................................................................ 5,000
Quick Study 10-8 (10 minutes)
1. Bond’s cash proceeds: $250,000 x 1.23375 = $308,437.5 or $308,438 rounded
2. Twenty semiannual interest payments of $10,000*................ $200,000
Less bond premium ($250,000 - $308,438)............................. 58,438
Quick Study 10-9 (10 minutes)
2015
July 1 Bonds Payable................................................................400,000
Premium on Bonds Payable..........................................16,000
*$8,000 = $416,000 - $408,000
Quick Study 10-10 (10 minutes)
2015
Jan. 1 Bonds Payable.................................................................2,000,000
conversion. *1,000,000 shares x $1.00
Quick Study 10-11 (10 minutes)
Amount of annual payment =
a. 4%: Payment = $340,000 / 4.4518 = $76,374*
b. 8%: Payment = $340,000 / 3.9927 = $85,155*
Quick Study 10-12 (10 minutes)
Initial cash proceeds from note
Table B.3 present value for 5 payments
Quick Study 10-13 (10 minutes)
Ratio of debt to equity
Atlanta Company Spokane Company
Total liabilities........................... $429,000 $ 549,000
Total equity................................ $572,000 $1,830,000
Quick Study 10-14B (10 minutes)
1. Bond’s cash proceeds: $240,000 x .7525 = $180,600
2. Thirty semiannual interest payments of $12,000*.................. $360,000
3. Bond interest expense on first payment date:
Quick Study 10-15B (10 minutes)
1. Bond’s cash proceeds: $240,000 x 1.1725 = $281,400
2. Thirty semiannual interest payments of $12,000*.................. $360,000
3. Bond interest expense on first payment date:
Quick Study 10-16C (10 minutes)
2015
Mar. 1 Cash................................................................................405,333
Interest payable*....................................................... 5,333
Quick Study 10-17D (10 minutes)
Rental Expense...............................................................250
Quick Study 10-18D (10 minutes)
Leased Asset—Office Equipment.................................15,499
Quick Study 10-19 (10 minutes)
a. The par value of the 4.625% bond issuance is £ 313 million. The
b. Given part a, we know that the carrying value exceeds the par value.
Quick Study 10-20 (10 minutes)
a. There is an inverse relation between market rates and bond prices (to
see this, look at the decreasing discount rate as the yield rate increases
were issued. This is confirmed via its 1.710% market rate from Yahoo!
b. No, the change in market rates since it issued the bonds does not affect
c. Because the bonds trade at a premium in the market (111.67), it would
pay more to retire the bonds than the balance sheet (par) value. Its cash
d. Vodafone must repay the par amount of the bonds at maturity. Because
this is the only cash flow that the bondholders will receive, the market
EXERCISES
Exercise 10-1 (15 minutes)
1. Semiannual cash interest payment = $3,400,000 x 9% x 1/2 = $153,000
2. Journal entries
2015
(a)
Jan. 1 Cash.................................................................................3,400,000
Bonds Payable.......................................................... 3,400,000
Sold bonds at par.
(b)
3.
2015
(a)
Jan. 1 Cash*...............................................................................3,332,000
Sold bonds at 98. *($3,400,000 x 0.98)
(b)
Jan. 1 Cash*...............................................................................3,468,000
