Chapter 14 – Long-Term Liabilities
Exercise 14-11 (20 minutes)
2015
Jan. 1 Cash………………………………………………………………………100,000
Notes Payable…………………………………………..….….. 100,000
Borrowed $100,000 by signing a 7%
installment note.
2015
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 14-12 (15 minutes)
1a. Current debt-to-equity ratio = $220,000 / $400,000* = 0.55
*Total equity = $620,000 – $220,000 = $400,000
2. Montclair’s risk will increase because it will have more debt. That debt
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Chapter 14 – Long-Term Liabilities
Exercise 14-13B (30 minutes)
1. Discount = Par value – Issue price = $500,000 – $463,140 = $36,860
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
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
12/31/2015 22,500 28,106 5,606 25,966 474,034
*Adjusted for rounding.
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Chapter 14 – Long-Term Liabilities
Exercise 14-14B (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
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
12/31/2017 26,000 24 ,093* 1,907 0 400,000
$156,000 $146 ,150 $9,850
*Adjusted for rounding.
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Chapter 14 – Long-Term Liabilities
Exercise 14-15 (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
11/30/2018….…………..... 506*99,494
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
Semiannual straight-line interest expense = $32,052 / 8 = $4,006 (rounded)
Semiannual bond discount amortization = $4,052 / 8 = $506 (rounded)
Exercise 14-15 (Concluded)
2.
2015
Nov. 30 Bond Interest Expense……………………………….………….4,006
Discount on Bonds Payable……………………….….…. 506
Cash………………………………………………………………… 3,500
To record 6 months’ interest and discount amortization.
Dec. 31 Bond Interest Expense……………………………….…………. 668
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2016
May 31 Interest Payable…………………………………………………….. 584
Bond Interest Expense……………………………….………….3,338
the accrued interest liability.
Exercise 14-16C (20 minutes)
1. Semiannual cash interest payment = $3,400,000 x 9% x ½ year = $153,000
Amount accrued for four months = $153,000 x 4/6 = $102,000
2. Journal entries
2015
May 1 Cash………………………………………………………………………3,502,000
Interest Payable……………………………………………….. 102,000
Bonds Payable……………………………………………….... 3,400,000
Sold bonds with 4 months’ accrued interest.
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Chapter 14 – Long-Term Liabilities
Exercise 14-17D (10 minutes)
Exercise 14-18D (20 minutes)
1. Leased Asset—Office Equipment…………….…………….…………..41,000
Lease Liability…………………………………………….…….…………. 41,000
To record capital lease of office equipment.
Exercise 14-19D (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
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Chapter 14 – Long-Term Liabilities
Exercise 14-20 (20 minutes)
(amounts in euros millions)
1. Cash……………………………………………………………………… 1,663
2. Loans and Borrowings……………….……….…………….….. 2,400
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
implied from the higher carrying value of its loans and borrowings
relative to the lower par value.
(Recall: Contract rate > Market rate Premium)
PROBLEM SET A
Problem 14-1A (50 minutes)
Part 1
a.
Cash Flow Table Table Value* Amount Present Value
Par value……………....... B.1 0.4564 $40,000 $18,256
* 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
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Chapter 14 – Long-Term Liabilities
b.
2015
Jan. 1 Cash……………………………………………………………………...45,437
Premium on Bonds Payable………………………..……. 5,437
Bonds Payable……………………………………………….... 40,000
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.
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Chapter 14 – Long-Term Liabilities
Problem 14-1A (Concluded)
Part 3
a.
Cash Flow Table Table Value* Amount Present Value
Par value…….………….. B.1 0.3118 $40,000 $12,472
b.
2015
Jan. 1 Cash………………………………………………………………….…..35,412
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