Problem 9-5A (LO 9-6)
Requirement 1
January 1, 2015
Building 360,000
Cash 60,000
Requirement 2
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Decrease in
Carrying
Value
(5)
Carrying
Value
Monthly
Payment
Carrying Value
x 0.07 x 1/12 (2) – (3)
Prior Carrying
Value – (4)
1/1/15 $ 300,000.00
Requirement 3
January 31, 2015
Interest Expense ($300,000 x 7% x 1/12) 1,750.00
Notes Payable (difference) 1,733.25
In the first monthly payment, $1,750.00 goes to interest expense and $1,733.25
Requirement 4
Total payments on the loan are $417,990. Since actual payments on the loan are
Problem 9-6A (LO 9-6, 9-7)
Requirement 1
Stockholders’
Assets = Liabilities + Equity
Stockholders’ equity must be $29 million ($81 million – $52 million).
Requirement 2
Total
Liabilities ÷
Stockholders’
Equity =
Debt to Equity Ratio
Requirement 3
An operating lease is like a rental. Over the lease term, the company making the
lease payments records rent expense and the company receiving the rent
payments records rent revenue. A capital lease is di,erent. In a capital lease, the
Requirement 4
Yes. The debt to equity ratio will not be a,ected under an operating lease.
However, under a capital lease, assets and liabili(es will both increase $16 million
Requirement 5
The debt to equity ratio will not be in viola(on (exceed 2.0) under an operating
lease, but will be in viola(on (exceed 2.0) under a capital lease. Therefore,
Operating lease:
Total
Liabilities ÷
Stockholders’
Equity =
Debt to Equity Ratio
Capital lease:
Total
Liabilities ÷
Stockholders’
Equity =
Debt to Equity Ratio
Problem 9-7A (LO 9-7)
Requirement 1
($ in millions)
Total
Liabilities ÷
Stockholders’
Equity =
Debt to Equity
Ratio
Starwood Hotels and Resorts has a higher debt to equity ratio than Hyatt. The hotel
Requirement 2
($ in millions)
Net
Income ÷
Average
Total Assets =
Return on Assets
Ratio
Starwood $562 ÷$9,210.5* = 6.1%
Hyatt $88 ÷ $7,573.5** = 1.2%
($ in millions)
Net
Income
÷
Average
Stockholders’
Equity
= Return on
Equity Ratio
Starwood $562 ÷$3,045.5* = 18.5%
Starwood has be9er profitability ratios than Hya9. However, Coca-Cola and Pepsi
Requirement 3
($ in millions)
Net Income +
Interest + Taxes ÷ Interest =
Times Interest
Earned Ratio
Starwood, with a times interest earned ratio of 5.2, is better able to meet interest
payments as they become due than Hyatt with a ratio of only 2.4. The soft drink
Problems: Set B
Problem 9-1B (LO 9-3, 9-4)
Requirement 1
Face amount. The issue price is $850,000.
Calculator Input
Bond
Characteristics Key Amount
1. Face amount FV $850,000
2. Interest payment PMT $25,500 = $850,000 x 6% x ½ year
Calculator Output
Issue price PV $850,000
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Increase in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 3% Stated
Rate
Carrying Value
x 3% Market
Rate
(3) – (2)
Prior Carrying
Value + (4)
1/ 1 /15 $ 850,000
Requirement 2
Discount. The issue price is $789,597.
Calculator Input
Bond
Characteristics Key Amount
1. Face amount FV $850,000
2. Interest payment PMT $25,500 = $850,000 x 6% x ½ year
Calculator Output
Issue price PV $789,597
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Increase in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 3% Stated
Rate
Carrying Value
x 3.5% Market
Rate
(3) – (2)
Prior Carrying
Value + (4)
1/ 1 /15 $ 789,597
Requirement 3
Premium. The issue price is $916,254.
Calculator Input
Bond
Characteristics Key Amount
1. Face amount FV $850,000
2. Interest payment PMT $25,500 = $850,000 x 6% x ½ year
Calculator Output
Issue price PV $916,254
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Decrease in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 3% Stated
Rate
Carrying Value
x 2.5% Market
Rate
(2) – (3)
Prior Carrying
Value – (4)
1/ 1 /15 $ 916,254
Problem 9-2B (LO 9-4)
Requirement 1
January 1, 2015
Cash 3,000,000
June 30, 2015
Interest Expense 135,000
December 31, 2015
Interest Expense 135,000
Requirement 2
January 1, 2015
Cash 2,813,067
June 30, 2015
Interest Expense ($2,813,067 x 10% x ½) 140,653
Bonds Payable (difference) 5,653
December 31, 2015
Interest Expense ([$2,813,067+$5,653] x10% x ½) 140,936
Bonds Payable (difference) 5,936
Requirement 3
January 1, 2015
Cash 3,203,855
June 30, 2015
Interest Expense ($3,203,855 x 8% x ½) 128,154
Bonds Payable (difference) 6,846
December 31, 2015
Interest Expense ([$3,203,855 – $6,846] x 8% x ½) 127,880
Bonds Payable (difference) 7,120
Problem 9-3B (LO 9-4)
1. Premium
2. $66,934,432
3. $60,000,000
4. 7% ($2,100,000 cash paid ÷ $60,000,000 face value) x 2
5. 6% ($2,008,033 interest expense ÷ $66,934,432 carrying value) x 2
6. $84,000,000 ($2,100,000 x 40 payments)
Problem 9-4B (LO 9-4)
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 $ 1,098,002
Requirement 2
January 1, 2015
Cash 1,098,002
Requirement 3
June 30, 2015
Interest Expense ($1,098,002 x 6% x ½) 32,940
Bonds Payable (difference) 2,060
December 31, 2015
Interest Expense ($1,095,942 x 6% x ½) 32,878
Bonds Payable (difference) 2,122
Problem 9-5B (LO 9-6)
Requirement 1
January 1, 2015
Building 610,000
Cash 110,000
Requirement 2
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Decrease in
Carrying
Value
(5)
Carrying
Value
Monthly
Payment
Carrying Value
x 0.09 x 1/12 (2) – (3)
Prior Carrying
Value – (4)
1/1/15 $ 500,000.00