$21,928
−
$20,000
=
$1,928
Beginning Discount
−
Amortization
=
Ending Discount
$30,723
−
$1,928
=
$28,795
Bond Carrying Value as of December 31, 2014
Bond Payable (Face Value)
$250,000
Discount on Bonds Payable
28,795
Carrying Value
$221,205
EXERCISE 7-24
a.
Date
Cash
Payment
Interest
Expense
Discount
Amortization
Carrying
Value
January 1, 2014
57,666
December 31, 2014
4,800
5,190*
390
58,056
December 31, 2015
4,800
5,225
425
58,481
December 31, 2016
4,800
5,263
463
58,944
December 31, 2017
4,800
5,305
505
59,449
December 31, 2018
4,800
5,351**
551**
60,000
Totals
24,000
26,334
2,334
*$57,666 x 9% = $5,190 rounded
**adjusted the final year for rounding
b. The balance sheet would show the carrying value of the bond liability. The carrying
value could be shown net of the discount, $58,481. Alternatively, the face value less
the discount could be shown as follows:
Bond liability
$60,000
Less: Bond discount
1,519*
Carrying value
$58,481
c. The income statement would show $5,225 of interest expense.
Since the stated rate of interest is lower than the effective interest rate the bonds will sell at
a discount. Because the effective interest rate method ties the amount of interest expense
SOLUTIONS TO PROBLEMS – CHAPTER 7
PROBLEM 7-26
a.
Powell Co.
Effect of Events on the General Ledger
2014 and 2015
Assets
=
Liabilities
+
Stockholders’ Equity
Event
Cash
Accts.
Rec.
=
Notes
Pay.
Int.
Pay.
+
Com.
Stock
Retained
Earnings
Acct.
Title/RE
2014
1.
20,000
20,000
2.
54,000
54,000
Rev.
3.
46,000
(46,000)
4.
(27,000)
(27,000)
Sal. Exp.
5.
1,2001
(1,200)
Int. Exp.
Bal.
39,000
8,000
=
20,000
1,200
+
-0-
25,800
2015
B. Bal.
39,000
8,000
=
20,000
1,200
+
-0-
25,800
1.
65,000
65,000
Rev.
2.
63,000
(63,000)
3.
(36,000)
(36,000)
Sal. Exp.
4.
4002
(400)
Int. Exp.
5.
(21,600)
(20,000)
(1,600)
Bal.
44,400
10,000
=
-0-
-0-
+
-0-
54,400
1$20,000 x 8% x 9/12 = $1,200
2$20,000 x 8% x 3/12 = $400
b.
$19,000 ($46,000− $27,000)
f.
$20,000 (loan)
c.
$1,200 (see note 1 above)
g.
$400 (see note 2 above)
d.
$21,200 ($20,000 + $1,200)
h.
$25,400 ($63,000 − $36,000 −$1,600)
e.
$25,800
i.
$54,400 ($44,400 + $10,000)
Problem 7-27
a. This contingent liability would be recorded on the books and reported on the
financial statements inclusive of note disclosure.
a. (1) Cash paid for interest: $60,000 x 6% x 6/12 = $1,800
(2) Interest Expense: $60,000 x 6% x 6/12 = $1,800
b.
Interest Payable
Sales Tax Payable
6.1 875
2.2 16,800
Bal. 875
4.3 (14,000)
Bal. 2,800
3$200,000 x 7% = $14,000
Warranties Payable
Notes Payable
3.4 4,800
1. 60,000
7. (3,800)
5. (60,000)
Bal. 1,000
6. 50,000
Bal. 50,000
4$240,000 x 2% = $4,800
Aliceville Company
Current Liabilities
Interest Payable
$ 875
Sales Tax Payable
2,800
Warranty Payable
1,000
Notes Payable
50,000
Total Current Liabilities
$54,675
Note: The contingent liability is not recorded since the attorney believes the lawsuit is
without merit (assumes remote likelihood of loss).
PROBLEM 7-28 (cont.)
c.
Event
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
1.
+
+
NA
NA
NA
NA
+ FA
2.
+
+
+
+
NA
+
+ OA
3.
NA
+
−
NA
+
−
NA
4.
−
−
NA
NA
NA
NA
− OA
5.
−
−
−
NA
+
−
− OA
− FA
6.
+
+
NA
NA
NA
NA
+ FA
7.
−
−
NA
NA
NA
NA
− OA
8.
NA
NA
NA
NA
NA
NA
NA
PROBLEM 7-29
a.
Ocktoc Co.
Effect of Events on the General Ledger
2014 and 2015
Assets
=
Liabilities
+
Stockholders’ Equity
Event
Cash
=
Sales Tax
Pay.
Int.
Pay.
Notes Pay.
+
Com.
Stock
Retained
Earnings
Acct.
Title/RE
2014
1.
50,000
NA
NA
50,000
NA
NA
2.
148,400
8,400
NA
NA
NA
140,000
Svc. Rev.
3.
(84,000)
NA
NA
NA
NA
(84,000)
Op. Exp.
4.
(6,600)
(6,600)
NA
NA
NA
NA
5.
NA
NA
1,8751
NA
NA
(1,875)
Int. Exp.
Bal.
107,800
=
1,800
1,875
50,000
-0-
54,125
2015
B. Bal.
107,800
=
1,800
1,875
50,000
-0-
54,125
1.
(1,800)
(1,800)
NA
NA
NA
NA
2.
164,300
9,300
NA
NA
NA
155,000
Svc. Rev.
3a.
NA
NA
6252
NA
NA
(625)
Int. Exp.
3b.
(52,500)
NA
(2,500)
(50,000)
NA
NA
4.
(96,000)
NA
NA
NA
NA
(96,000)
Op. Exp.
5.
(8,100)
(8,100)
NA
NA
NA
NA
Bal.
113,700
=
1,200
-0-
-0-
-0-
112,500
1$50,000 x 5% x 9/12 = $1,875
2$50,000 x 5% x 3/12 = $625
PROBLEM 7-29 (cont.)
b.
Ocktoc Co.
Income Statement
For the Year Ended December 31, 2014
Service Revenue
$140,000
Expenses
Operating Expenses
$84,000
Total Operating Expenses
(84,000)
Operating Income
56,000
Interest Expense
(1,875)
Net Income
$54,125
Ocktoc Co.
Statement of Changes of Stockholders’ Equity
For the Year Ended December 31, 2014
Common Stock
$ -0-
Beginning Retained Earnings
$ -0-
Add: Net Income
54,125
Ending Retained Earnings
54,125
Total Stockholders’ Equity
$54,125
PROBLEM 7-29 b. (cont.)
Ocktoc Co.
Balance Sheet
As of December 31, 2014
Assets
Cash
$107,800
Total Assets
$107,800
Liabilities
Sales Tax Payable
$ 1,800
Interest Payable
1,875
Notes Payable
50,000
Total Liabilities
53,675
Stockholders’ Equity
Retained Earnings
$54,125
Total Stockholders’ Equity
54,125
Total Liabilities and Stockholders’ Equity
$107,800
Ocktoc Co.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash Flows From Operating Activities:
Inflow from Customers
$140,000
Inflow from Sales Tax
8,400
Outflow for Expenses
(84,000)
Outflow for Sales Tax
(6,600)
Net Cash Flow from Operating Activities
$ 57,800
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Inflow from Loan
$ 50,000
Net Cash Flow from Financing Activities
50,000
Net Change in Cash
107,800
Plus: Beginning Cash Balance
-0-
Ending Cash Balance
$107,800
PROBLEM 7-29 (cont.)
f.
Ocktoc Co.
Income Statement
For the Year Ended December 31, 2015
Service Revenue
$155,000
Expenses
Operating Expenses
$96,000
Total Operating Expenses
(96,000)
Operating Income
59,000
Interest Expense
(625)
Net Income
$58,375
Ocktoc Co.
Statement of Changes of Stockholders’ Equity
For the Year Ended December 31, 2015
Common Stock
$ -0-
Beginning Retained Earnings
$54,125
Add: Net Income
58,375
Ending Retained Earnings
112,500
Total Stockholders’ Equity
$112,500
PROBLEM 7-29 f. (cont.)
Ocktoc Co.
Balance Sheet
As of December 31, 2015
Assets
Cash
$113,700
Total Assets
$113,700
Liabilities
Sales Tax Payable
$1,200
Total Liabilities
1,200
Stockholders’ Equity
Retained Earnings
$112,500
Total Stockholders’ Equity
112,500
Total Liabilities and Stockholders’ Equity
$113,700
Ocktoc Co.
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash Flows From Operating Activities:
Inflow from Customers
$155,000
Inflow from Sales Tax
9,300
Outflow for Expenses
(96,000)
Outflow for Sales Tax
(9,900)
Outflow for Interest
(2,500)
Net Cash Flow from Operating Activities
$ 55,900
Cash Flows From Investing Activities
-0-
Outflow for Loan Payment
$(50,000)
Net Cash Flow from Investing Activities
(50,000)
Cash Flows From Financing Activities
-0-
Net Change in Cash
5,900
Plus: Beginning Cash Balance
107,800
Ending Cash Balance
$113,700
PROBLEM 7-30
a.
Mixon Co.
Amortization Schedule
$90,000, 3-Yr. Term Note, 7% Interest Rate
Year
Prin. Bal. on
Jan 1
Cash Pay.
Dec. 31
Applied to
Interest
Applied to
Principal
Prin. Bal.
End of Period
2014
$90,000
$34,295
$6,300
$27,995
$62,005
2015
62,005
34,295
4,340
29,955
32,050
2016
32,050
34,295
2,245*
32,050
-0-
*rounded for final year
b.
Mixon Co.
Effect of Events on the General Ledger
2014, 2015 and 2016
Assets
=
Liabilities
+
Stk. Equity
Event
Cash
+
Land
=
Note Pay.
+
Ret. Earn.
Acct. Title/RE
2014
1/1
90,000
NA
90,000
NA
1/1
(90,000)
90,000
NA
NA
12/31
45,000
NA
NA
45,000
Rent Rev.
12/31
(34,295)
NA
(27,995)
(6,300)
Int. Exp.
Bal.
10,705
90,000
62,005
+
38,700
2015
12/31
45,000
NA
NA
+
40,000
Rent Rev.
12/31
(34,295)
NA
(29,955)
(4,340)
Int. Exp.
Bal.
21,410
90,000
32,050
79,360
2016
12/31
45,000
NA
NA
45,000
Rent Rev.
12/31
(34,295)
NA
(32,050)
(2,245)
Int. Exp.
Bal.
32,115
90,000
-0-
+
122,115
PROBLEM 7-30 b. (cont.)
Mixon Co.
Financial Statements
2014
2015
2016
Income Statements for the Year Ended December 31
Lease Revenue
$45,000
$45,000
$45,000
Interest Expense
(6,300)
(4,340)
(2,245)
Net Income
$38,700
$40,660
$42,755
Balance Sheets as of December 31
Assets
Cash
$ 10,705
$ 21,410
$ 32,115
Land
90,000
90,000
90,000
Total Assets
$100,705
$111,410
$122,115
Liabilities
Notes Payable
$ 62,005
$ 32,050
$ -0-
Stockholders’ Equity
Retained Earnings
38,700
79,360
122,115
Total Liab. and Stockholders’ Equity
$100,705
$111,410
$122,115
Statements of Cash Flows for the Year Ended December 31
Cash Flows From Operating Act.:
Inflow from Rental
$45,000
$45,000
$45,000
Outflow for Interest
(6,300)
(4,340)
(2,245)
Net Cash Flow from Operating Act.
38,700
40,660
42,755
Cash Flow From Investing Act.:
Outflow to Purchase Land
(90,000)
-0-
-0-
Cash Flow From Financing Act.:
Inflow from Loan
90,000
-0-
-0-
Outflow to Repay Loan
(27,995)
(29,955)
(32,050)
Net Cash Flow from Financing Act.
62,005
(29,955)
(32,050)
Net Change in Cash
10,705
10,705
10,705
Plus: Beginning Cash Balance
-0-
10,705
21,410
Ending Cash Balance
$10,705
$21,410
$32,115
PROBLEM 7-30 (cont.)
c. Because the company is making both principal and interest payments on the loan
decreases.
PROBLEM 7-31
Provided for the use of the instructor:
Stegal Company
Amortization Schedule
$400,000, 10-Yr. Term Note, 6% Interest Rate
Year
Prin. Bal. on
Jan 1
Cash Pay. Dec.
31
Applied to
Interest
Applied to
Principal
Prin. Bal.
End of Period
2014
$400,000
$54,348
$24,000
$30,348
$369,652
2015
369,652
54,348
22,179
32,169
337,483
2016
337,483
54,348
20,249
34,099
303,384
a.
Stegal Company
Effect of Events on the General Ledger
2014
Assets
=
Liabilities
+
Stk. Equity
Event
Cash
+
Land
=
Note Pay.
+
Comm.
Stock
+
Ret. Earn.
Acct.
Title/RE
2014
1.
200,000
NA
NA
200,000
NA
2.
400,000
NA
400,000
NA
NA
3.
(120,000)
120,000
NA
NA
NA
4.
240,000
NA
NA
NA
240,000
Svc. Rev.
5.
(170,000)
NA
NA
NA
(170,000)
Op. Exp.
6.
(54,348)
NA
(30,348)
NA
(24,000)
Int. Exp.
Bal.
495,652
120,000
369,652
200,000
46,000
PROBLEM 7-31 (cont.)
b.
Stegal Company
Income Statement
For the Year Ended December 31, 2014
Service Revenue
$240,000
Operating Expenses
(170,000)
Net Operating Income
70,000
Non-Operating Items:
Interest Expense
(24,000)
Net Income
$46,000
Stegal Company
Balance Sheet
As of December 31, 2014
Assets