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