Chapter 10 – Reporting and Interpreting Bonds
1
Solutions Chapter 10 – Set B Exercises – Libby 7e
E10–1B.
The Atkinson bonds have a coupon interest rate of 7.5%. If bonds with a $10,000 face
E10–2B.
Case A:
$200,000 x 0.5835 ………………………………………………..
$ 116,700
$16,000 x 5.2064 ………………………………………………….
83,302
Issue price (market and stated rate same) ……………….
$200,002
(at par; $2
rounding error)
Case B:
$200,000 x 0.6651 ………………………………………………..
$133,020
$16,000 x 5.5824 ………………………………………………….
89,318
Issue price (market rate less than stated rate) …………..
$222,338
(at a premium)
Case C:
$200,000 x 0.5132 ………………………………………………..
$ 102,640
$16,000 x 4.8684 ………………………………………………….
77,894
Issue price (market rate more than stated rate) …………
$ 180,534
(at a discount)
E10–3B.
Computations:
$100,000 x 5% x 1/2
=
$2,500
Present value:
$100,000 x 0.6756
=
$67,560
$ 2,500 x 8.1109
=
20,277
Issue price
=
$87,837
E10–4B.
Computations:
Chapter 10 – Reporting and Interpreting Bonds
Interest:
$950,000 x 7%
=
$ 66,500
$950,000 x 0.4224
=
$401,280
$ 66,500 x 6.4177
=
426,777
Issue price
=
$828,057
Req. 1
January 1:
Cash (+A) ……………………………………………………………………
828,057
Discount on Bonds Payable (+XL, –L) ……………………………..
121,943
Bonds Payable (+L) …………………………………………………..
950,000
Req. 2
December 31:
Interest Expense (+E, –SE)…………………………………………….
78,694
Discount on Bonds Payable (-XL, +L) ($121,943 ÷ 10 years)
12,194
Cash (-A) …………………………………………………………………
66,500
Req. 3
December 31, 2014:
Income statement:
Interest expense
$ 78,694
Balance sheet:
Long-term Liabilities
Bonds payable
$950,000
Less: Unamortized discount ($121,943 – $12,194)
109,749
$840,251
E10–5B.
Computations:
Interest:
$700,000 x 8.0% x 1/2
=
$ 28,000
$700,000 x 0.7168
=
$501,760
$ 28,000 x 6.6638
=
186,586
Issue price
=
$688,346
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Cash (+A) ……………………………………………………………………
Discount on bonds payable (+XL, –L) …………………………..….
Bonds payable (+L) …………………………………………………..
4
1. Reported interest expense, $30,800 – Discount amortized, $2,800 = $28,000 (cash
interest).
2. $28,000 ÷ $400,000 = 7% coupon (stated interest) rate.
Interest expense:
Interest expense (+E, –SE) …………………………………………….
30,800
Discount on bonds payable ($28,000 ÷ 10 years) (-XL, +L)
2,800
Cash ($400,000 x 7%) (-A) …………………………………………
28,000
E10–7B.
1. Issue price: $2,844. Stated rate, 6%; effective or yield rate, 8% (both were given).
2. Discount: $3,000 – $2,844 = $156.
3. $3,000 x 6% = $180.
4. 2014, $228; 2015, $231; 2016, $237.
5. Balance sheet:
2014
$ 2,892
2015
$ 2,943
2016
$3,000
(immediately before retirement)
6. Effective-interest amortization was used.
7. (a) $3,000 x 6% = $180.
8. Effective-interest amortization measures the amount of interest expense and net
liability for each period on a present value basis. The interest expense and related
amortization computations are based on the actual unpaid balance of the debt and
=
=
$749,132
E10–8B.
Computations:
Interest:
$700,000 x 8% x 1/2
=
$ 28,000
Chapter 10 – Reporting and Interpreting Bonds
Computations:
Interest:
$1,200,000 x 10%
=
$120,000 ÷ 2 = $60,000
Present value
$ 1,200,000 x 0.4564
=
$547,680
$ 60,000 x 13.5903
=
815,418
$ 1,363,098
June 30:
Cash (+A) ……………………………………………………………………
1,363,098
Bonds payable (+L) …………………………………………………..
1,200,000
Premium on bonds payable(+L) ………………………………….
163,098
Req. 2
The amortization of bond premium does not affect cash flows directly but does result in
cash payments for interest that are higher than reported interest expense for the period.
E10–10B.
Bonds payable (-L) ……………………………………………………….
750,000
Loss on bond call (+Loss, –SE) ………………………………………
45,000
Cash (-A) …………………………………………………………………
795,000