Exercise 9-1
Requirement 1
Issue Bonds Issue Stock
Operating income $12,000,000 $12,000,000
Interest expense (bonds only) 4,000,000
Income before tax 8,000,000 12,000,000
Requirement 2
Issuing bonds results in earnings per share of $2.60 compared with earnings
per share of $1.95 for issuing stock.
Exercise 9-2
Terms
__b___ 1. Term bond.
__f___ 2. Serial bond.
__a___ 3. Sinking fund.
__d___ 4. Bond issue costs.
__e___ 5. Callable bond.
__h___ 6. Convertible bond.
__c___ 7. Secured bond.
__g___ 8. Unsecured bond.
Definitions
a. Money set aside to pay debts as they come due.
b. Matures on a single date.
c. Supported by specific assets pledged as collateral by the issuer.
Chapter 9
Long-Term LiabilitiesEXERCISES
d. Includes underwriting, legal, accounting, registration, and printing fees.
Exercise 9-3
Requirement 1
Premium. The issue price is $86,235,6645
Calculator Input
Bond
Characteristics Key Amount
1. Face amount FV $80,000,000
2. Interest payment PMT $2,400,000 = $80,000,000 x 6% x ½ year
Calculator Output
Issue price PV $86,235,665
Requirement 2
Face amount. The issue price is $80,000,000.
Calculator Input
Bond
Characteristics Key Amount
1. Face amount FV $80,000,000
2. Interest payment PMT $2,400,000 = $80,000,000 x 6% x ½ year
Calculator Output
Issue price PV $80,000,000
Requirement 3
Discount. The issue price is $74,315,039
Calculator Input
Bond
Characteristics Key Amount
1. Face amount FV $80,000,000
2. Interest payment PMT $2,400,000 = $80,000,000 x 6% x ½ year
Calculator Output
Issue price PV $74,315,039
Exercise 9-4
Requirement 1
Premium. The issue price is $55,338,768
Calculator Input
Bond
Characteristics Key Amount
1. Face amount FV $50,000,000
2. Interest payment PMT $2,000,000 = $50,000,000 x 8% x ½ year
Calculator Output
Issue price PV $55,338,768
Requirement 2
Face amount. The issue price is $50,000,000.
Calculator Input
Bond
Characteristics Key Amount
1. Face amount FV $50,000,000
2. Interest payment PMT $2,000,000 = $50,000,000 x 8% x ½ year
Calculator Output
Issue price PV $50,000,000
Requirement 3
Discount. The issue price is $45,399,604
Calculator Input
Bond
Characteristics Key Amount
1. Face amount FV $50,000,000
2. Interest payment PMT $2,000,000 = $50,000,000 x 8% x ½ year
Calculator Output
Issue price PV $45,399,604
Exercise 9-5
January 1, 2015
Cash 500,000
June 30, 2015
Interest Expense 17,500
December 31, 2015
Interest Expense 17,500
Exercise 9-6
Requirement 1
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Increase in
Carrying
Value
(5)
Carrying
Value
Face Amount
x Stated Rate
Carrying Value
x Market Rate (3) – (2)
Prior Carrying
Value + (4)
1/ 1 /15 $ 466,024
Requirement 2
January 1, 2015
Cash 466,024
June 30, 2015
Interest Expense 18,641
Bonds Payable (difference) 1,141
December 31, 2015
Interest Expense 18,687
Bonds Payable (difference) 1,187
Exercise 9-7
Requirement 1
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Decrease in
Carrying
Value
(5)
Carrying
Value
Face Amount
x Stated Rate
Carrying Value
x Market Rate (2) – (3)
Prior Carrying
Value – (4)
1/ 1 /15 $ 537,194
Requirement 2
January 1, 2015
Cash 537,194
June 30, 2015
Interest Expense 16,116
Bonds Payable (difference) 1,384
December 31, 2015
Interest Expense 16,074
Bonds Payable (difference) 1,426
Exercise 9-8
January 1, 2015
Cash 200,000
June 30, 2015
Interest Expense 7,000
December 31, 2015
Interest Expense 7,000
Exercise 9-9
Requirement 1
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Increase in
Carrying
Value
(5)
Carrying
Value
Face Amount
x Stated Rate
Carrying Value
x Market Rate (3) – (2)
Prior Carrying
Value + (4)
1/ 1 /15 $ 186,410
Requirement 2
January 1, 2015
Cash 186410
June 30, 2015
Interest Expense 7,456
Bonds Payable (difference) 456
December 31, 2015
Interest Expense 7,475
Bonds Payable (difference) 475
Exercise 9-10
Requirement 1
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Decrease in
Carrying
Value
(5)
Carrying
Value
Face Amount
x Stated Rate
Carrying Value
x Market Rate (2) – (3)
Prior Carrying
Value – (4)
1/ 1 /15 $ 214,877