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Exercise 10-11 (20 minutes)
2015
2016
Dec. 31 Interest Expense.............................................................5,423
Notes Payable.................................................................24,100
Cash........................................................................... 29,523
To record second installment payment.
2017
Dec. 31 Interest Expense.............................................................3,736
Notes Payable.................................................................25,787
Cash........................................................................... 29,523
To record third installment payment.
2018
Dec. 31 Interest Expense.............................................................1,933
Exercise 10-12 (15 minutes)
1a. Current debt-to-equity ratio = $220,000 / $400,000* = 0.55
1b. Potential debt-to-equity ratio = $720,000* / $400,000 = 1.80
2. Montclair’s risk will increase because it will have more debt. That debt
(plus interest) must be repaid even if the project does not work out as
Exercise 10-13B (30 minutes)
2. Total bond interest expense over the life of the bonds
Amount repaid
Six payments of $22,500*....................... $135,000
Par value at maturity............................... 500,000
Total bond interest expense..................... $171,860
3. Effective interest amortization table
Semiannual
Interest
Period-End
(A)
Cash Interest
Paid
[4.5% x $500,000]
(B)
Bond Interest
Expense
[6% x Prior (E)]
(C)
Discount
Amortization
[(B) - (A)]
(D)
Unamortized
Discount
[Prior (D) - (C)]
(E)
Carrying
Value
[$500,000 - (D)]
1/01/2015 $36,860 $463,140
6/30/2015 $ 22,500 $ 27,788 $ 5,288 31,572 468,428
6/30/2017 22,500 29,176 6,676 7,049 492,951
12/31/2017 22,500 29,549 * 7,049 0 500,000
$135,000 $171,860 $36,860
*Adjusted for rounding.
Exercise 10-14B (30 minutes)
1. Premium = Issue price - Par value = $409,850 - $400,000 = $9,850
2. Total bond interest expense over the life of the bonds
Amount repaid
Six payments of $26,000*....................... $ 156,000
Par value at maturity............................... 400,000
Total repaid.............................................. 556,000
Total bond interest expense..................... $ 146,150
3. Effective interest amortization table
Semiannual
Interest
Period-End
(A)
Cash Interest
Paid
[6.5% x $400,000]
(B)
Bond Interest
Expense
[6% x Prior (E)]
(C)
Premium
Amortization
[(A) - (B)]
(D)
Unamortized
Premium
[Prior (D) - (C)]
(E)
Carrying
Value
[400,000 + (D)]
1/01/2015 $9,850 $409,850
6/30/2015 $ 26,000 $ 24,591 $1,409 8,441 408,441
12/31/2015 26,000 24,506 1,494 6,947 406,947
12/31/2017 26,000 24,093 * 1,907 0 400,000
$156,000 $146,150 $9,850
*Adjusted for rounding.
Exercise 10-15 (40 minutes)
1. Straight-line amortization table (($100,000-$95,948)/8 = $506.5)
Semiannual
Period-End
Unamortized
Discount †
Carrying
Value
6/01/2015..................... $4,052 $95,948
11/30/2015..................... 3,546 96,454
5/31/2016..................... 3,040 96,960
11/30/2016..................... 2,534 97,466
5/31/2019..................... 0 100,000
* Adjusted for rounding difference.
† Supporting computations
Eight payments of $3,500**..................... $ 28,000
Par value at maturity................................ 100,000
Total repaid............................................... 128,000
Less amount borrowed........................... (95,948 )
Semiannual straight-line interest expense = $32,052 / 8 = $4,006 (rounded)
2.
2015
Nov. 30 Bond Interest Expense..................................................4,006
Dec. 31 Bond Interest Expense.................................................. 668
Discount on Bonds Payable.................................... 84
2016
May 31 Interest Payable.............................................................. 584
Bond Interest Expense..................................................3,338
the accrued interest liability.
Exercise 10-16C (20 minutes)
1. Semiannual cash interest payment = $3,400,000 x 9% x ½ year = $153,000
2. Journal entries
2015
May 1 Cash.................................................................................3,502,000
Interest Payable........................................................ 102,000
Sold bonds with 4 months’ accrued interest.
June 30 Interest Payable..............................................................102,000
Dec. 31 Bond Interest Expense..................................................153,000
Cash........................................................................... 153,000
Paid semiannual interest on the bonds.
Exercise 10-17D (10 minutes)
Exercise 10-18D (20 minutes)
1. Leased Asset—Office Equipment..............................................41,000
2. Depreciation Expense—Leased Asset, Office Equip...............8,200
Accum. Depreciation—Leased Asset, Office Equip........... 8,200
Exercise 10-19D (15 minutes)
[Note: 12% / 12 months = 1% per month as the relevant interest rate.]
Option 1: $1,750 per month for 25 months = $1,750 x 22.0232 = $38,541
Analysis: Option 2 has the lowest present value at $38,035 and, thus, is the
best lease deal for the customer.
Exercise 10-20 (20 minutes)
(amounts in euros millions)
1. Cash................................................................................. 1,663
2. Loans and Borrowings.................................................. 2,400
Premium on Loans and Borrowings............................. 24
Retirement of loans and borrowings pre-maturity.
3. Heineken’s Loans and Borrowings carried a premium of €112 as of
4. The contract rate was higher than the market rate at issuance. This is
(Recall: Contract rate > Market rate Premium)
PROBLEM SET A
Problem 10-1A (50 minutes)
Part 1
a.
Cash Flow Table Table Value* Amount Present Value
Par value...................... B.1 0.4564 $40,000 $18,256
Interest (annuity)......... B.3 13.5903 2,000** 27,181
Price of bonds...........
$45,437
Bond premium............. $ 5,437
* Table values are based on a discount rate of 4% (half the annual market rate) and 20
periods (semiannual payments).
** $40,000 x 0.10 x ½ = $2,000
b.
2015
Jan. 1 Cash.................................................................................45,437
Part 2
a.
Cash Flow Table Table Value* Amount Present Value
Par value...................... B.1 0.3769 $40,000 $15,076
same, the bonds sell at par and there is no discount or premium.)
b.
2015
Jan. 1 Cash.................................................................................40,000
Bonds Payable.......................................................... 40,000
Sold bonds on stated issue date.
Problem 10-1A (Concluded)
Part 3
a.
Cash Flow Table Table Value* Amount Present Value
Par value..................... B.1 0.3118 $40,000 $12,472
periods (semiannual payments).
b.
2015
Jan. 1 Cash.................................................................................35,412
