Requirement 2
January 1, 2015
Cash 644,161
December 31, 2015
Interest Expense 38,650
Bonds Payable (difference) 3,350
December 31, 2016
Interest Expense 38,449
Bonds Payable (difference) 3,551
Exercise 9-14 (LO 9-5)
Requirement 1
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Increase in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 4.5% Stated
Rate
Carrying Value
x 5% Market
Rate
(3) – (2)
Prior Carrying
Value + (4)
1/ 1 /15 $ 457,102
6/30/15 $ 22,500 $ 22,855 $ 355 457,457
12/31/15 22,500 22,873 373 457,830
Requirement 2
If the market rate drops to 7%, it will cost $601,452 to retire the bonds.
Calculator Input
Bond
characteristics Key Amount
1. Face amount FV $500,000
2. Interest payment each period PMT $22,500 = $500,000 x 9% x ½ year
Calculator Output
Issue price PV $601,452
December 31, 2016
Bonds Payable 458,633
Loss 142,819
Exercise 9-15 (LO 9-5)
Requirement 1
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Decrease in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 3.5% Stated
Rate
Carrying Value
x 3% Market
Rate
(2) – (3)
Prior Carrying
Value – (4)
1/ 1 /15 $ 644,632
6/30/15 $ 21,000 $ 19,339 $ 1,661 642,971
12/31/15 21,000 19,289 1,711 641,260
6/30/16 21,000 19,238 1,762 639,498
Requirement 2
If the market rate increases to 8%, it will cost $568,311 to retire the bonds.
Calculator Input
Bond
Characteristics Key Amount
1. Face amount FV $600,000
2. Interest payment each period PMT $21,000 = $600,000 x 7% x ½ year
Calculator Output
Issue price PV $568,311
December 31, 2017
Bonds Payable 633,887
Gain 65,576
Exercise 9-16 (LO 9-6)
January 1, 2015
Cash 50,000
January 31, 2015
Interest Expense ($50,000 x 6% x 1/12) 250.00
Notes Payable (difference) 578.64
February 28, 2015
Interest Expense ([$50,000-578.64] x 6% x 1/12) 247.11
Notes Payable (difference) 581.53
Exercise 9-17 (LO 9-6)
Requirement 1
Assets = Liabilities +
Stockholders’
Equity
Stockholders’ equity must be $10 million ($25 million – $15 million).
Requirement 2
Total
Liabilities ÷
Stockholders’
Equity =
Debt to Equity Ratio
Requirement 3
Total
Liabilities ÷
Stockholders’
Equity =
Debt to Equity Ratio
$15 + $2 =
Requirement 4
Under an operating lease, Coney Island reports a more favorable (lower) debt to
equity ratio.
Exercise 9-18 (LO 9-7)
Requirement 1
($ in thousands)
Total
Liabilities ÷
Stockholders’
Equity =
Debt to Equity
Ratio
E-Travel $4,254,475 ÷$3,182,681 = 1.34
E-Travel has a higher debt to equity ratio than Pricecheck. The soft drink industry
Requirement 2
($ in thousands)
Net Income +
Interest + Taxes ÷ Interest =
Times Interest
Earned Ratio
E-Travel $588,159 ÷$94,233 = 6.2
Pricecheck, with a times interest earned ratio of 17.6, is better able to meet interest
payments as they become due than E-Travel with a ratio of only 6.2. The soft drink
Problems: Set a
Problem 9-1A (LO 9-3, 9-4)
Requirement 1
Face amount. The issue price is $1,300,000.
Calculator Input
Bond
Characteristics Key Amount
1. Face amount FV $1,300,000
2. Interest payment PMT $45,500 = $1,300,000 x 7% x ½ year
Calculator Output
Issue price PV $1,300,000
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Increase in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 3.5% Stated
Rate
Carrying Value
x 3.5% Market
Rate
(3) – (2)
Prior Carrying
Value + (4)
1/ 1 /15 $ 1,300,000
Requirement 2
Discount. The issue price is $1,187,602.
Calculator Input
Bond
Characteristics Key Amount
1. Face amount FV $1,300,000
2. Interest payment PMT $45,500 = $1,300,000 x 7% x ½ year
Calculator Output
Issue price PV $1,187,602
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Increase in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 3.5% Stated
Rate
Carrying Value
x 4% Market
Rate
(3) – (2)
Prior Carrying
Value + (4)
1/ 1 /15 $ 1,187,602
Requirement 3
Premium. The issue price is $1,427,403.
Calculator Input
Bond
Characteristics Key Amount
1. Face amount FV $1,300,000
2. Interest payment PMT $45,500 = $1,300,000 x 7% x ½ year
Calculator Output
Issue price PV $1,427,403
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Decrease in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 3.5% Stated
Rate
Carrying Value
x 3% Market
Rate
(2) – (3)
Prior Carrying
Value – (4)
1/ 1 /15 $ 1,427,403
Problem 9-2A (LO 9-4)
Requirement 1
January 1, 2015
Cash 600,000
June 30, 2015
Interest Expense 24,000
December 31, 2015
Interest Expense 24,000
Requirement 2
January 1, 2015
Cash 544,795
June 30, 2015
Interest Expense ($544,795 x 9% x ½) 24,516
December 31, 2015
Interest Expense ([$544,795+$516] x 9% x ½) 24,539
Requirement 3
January 1, 2015
Cash 664,065
June 30, 2015
Interest Expense (664,065 x 7% x ½) 23,242
Bonds Payable (difference) 758
December 31, 2015
Interest Expense ([$664,065 – $758] x 7% x ½) 23,216
Bonds Payable (difference) 784
Problem 9-3A (LO 9-4)
1. Discount
2. $37,281,935
3. $40,000,000
4. 7% ($1,400,000 cash paid ÷ $40,000,000 face value) x 2
5. 8% ($1,491,277 interest expense ÷ $37,281,935 carrying value) x 2
6. $28,000,000 ($1,400,000 x 20 payments)
Problem 9-4A (LO 9-4)
Requirement 1
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Increase in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 4% Stated
Rate
Carrying Value
x 4.5% Market
Rate
(3) – (2)
Prior Carrying
Value + (4)
1/ 1 /15 $ 841,464
Requirement 2
January 1, 2015
Cash 841,464
Requirement 3
June 30, 2015
Interest Expense ($841,464 x 9% x ½) 37,866
Bonds Payable (difference) 1,866
December 31, 2015
Interest Expense ($843,330 x 9% x ½) 37,950
(Pay semiannual interest)