E10–21.
Bonds payable (-L) ……………………………………………………….
1,200,000
Loss on bond call (+Loss, –SE) ………………………………………
159,000
Discount on bonds payable (-XL,+ L) …………………………..
75,000
Cash (-A) …………………………………………………………………
1,284,000
E10–22.
1. Impacts Statement of Cash Flows (SCF) : report $960,000 inflow in financing
section
2. Does not impact SCF
3. Impacts SCF : report $57,000 payment in operating activities section
10–22 Solutions Manual
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PROBLEMS
P10–1.
Req. 1—Comparison of results:
Item
Actual Results
Results with an Increase
in Debt and a Decrease in
Stockholders’ Equity
(a)
Total debt ………………………………………….
$ 40,000
$90,000
(b)
Total assets ………………………………………
360,000
360,000
(c)
Total stockholders’ equity ……………………
320,000
270,000
(d)
Interest expense (total at 9%) ………………
3,600
8,100
(e)
Net income ………………………………………..
70,280
67,130
(f)
Return on total assets …………………………
20.2%
20.2%
(g)
Earnings available to stockholders:
(1) Amount …………………………..……………
$ 70,280
$ 67,130
(2) Per share ……………………………………..
3.06
3.73
(3) Return on stockholders’ equity ………..
22.0%
24.9%
Computations:
(a) Given
(b) Given
(c) Given
(d) $90,000 x 9% = $8,100.
(e) ($300,000 – $196,000 – $8,100) = $95,900, pretax; $95,900 x (100% – 30%) =
$67,130.
20.2%.
$67,130 + [$8,100 x (100% – 30%) = $5,670] = $72,800; $72,800÷ $360,000 =
20.2%.
(g–1) From Item (e)
(g–2) $70,280 23,000 shares = $3.06 EPS.
P10–1. (continued)
Req. 2 Interpretation:
The recommendation provided higher financial leverage compared with actual
P10–2.
Req. 1
Interest:
$500,000 x 8%
=
$ 40,000 ÷ 2 = $20,000
Present value
$ 500,000 x .6756
=
337,800
$ 20,000 x 8.1109
=
162,218
Issue price
$500,018
$20,000
$20,000
$20,000
$20,000
P10–3.
Case A
Case B
Case C
a.
Cash received at issue ……………………………………
$500,000
$490,000
$515,000
b.
Bond interest expense (pretax) …………………………
$ 35,000
$ 36,000
$ 33,500
c.
Bonds payable, 7% …………………………………………
$500,000
$500,000
$500,000
d.
Unamortized discount (deduct) ** ……………………..
9,000
e.
Unamortized premium (add) ** …………………………
13,500
f.
Net liability …………………………………………………….
$500,000
$491,000
$513,500
**Balance in discount or premium account
(January 1, 2014) ………………………………………..
$ 10,000
$ 15,000
Amortization during 2014 ………………………………..
(1,000)
)
(1,500
)
Unamortized balance on December 31, 2014 ….
$ 9,000
$ 13,500
g.
Stated rate of interest (given) …………………………...
7%
7%
7%
P10–4.
Req. 1
December 31, 2014—Financial statements:
Case A
Case B
Case C
At Par,
100
At 99
At 104
a.
Interest expense ……………………………….
$ 10,000
$ 10,100
$ 9,600
b.
Bonds payable …………………………..……..
$100,000
$100,000
$100,000
c.
Unamortized premium or discount ……….
(900
)
3,600
d.
Net liability ……………………………………….
$100,000
$ 99,100
$103,600
e.
Stated rate of interest ………………………..
10%
10%
10%
f.
Cash interest paid ……………………………..
$ 10,000
$ 10,000
$ 10,000
P10–4. (continued)
Req. 2—Explanation of differences:
Item a, interest expense, is different (in this situation) from Item f, cash interest paid, by
the amount of any bond discount or premium amortized for the period. This divergence
P10–5.
1. Computation of the amount of the bond liability when issued:
$200,000 x .4632
=
$92,640
$ 12,000 x 6.7101
=
80,521
Issue Price
$173,161
2. Computation of interest expense recorded on December 31, 2014:
$173,161 x 8% = $13,853
3. Managers are normally relatively indifferent between the straight-line and effective-
4.
Date
Debt-to-Equity
Times Interest Earned
Issue date
Increase
No effect
Interest payment date
Increase
Decrease
P10–6.
Req. 1
Computations:
Interest:
$700,000 x 8% x 1/2
=
$ 28,000
Present value
$ 700,000 x 0.3769
=
263,830
$ 28,000 x 12.4622
=
348,942
Issue Price
$612,772
Req. 2
June 30
December
31
Interest expense ……………………………….
$32,361
*
$32,361
*
*$700,000 – $612,772 = $87,228 20 periods = $4,361 + $28,000 = $32,361
Req. 3
June 30
December
31
Cash paid ………………………………………..
$28,000
$28,000
Req. 4
June 30
December
31
Bonds payable …………………………………
$617,133
*
$621,494*
*
*$612,772 + $4,361 = $617,133
**$617,133 + $4,361 = $621,494
P10–7.
Req. 1
Computations:
Interest:
$1,000,000 x 10% x 1/2
=
$ 50,000
Present value
$ 1,000,000 x 0.3118
=
311,800
$ 50,000 x 11.4699
=
573,495
Issue Price
$885,295
Req. 2
June 30
December
31
Interest expense ……………………………….
$53,118
*
$53,305
**
$885,295 x 12% x ½ = $53,118
**[$885,295 + ($53,118 – $50,000)] x 12% x ½= $53,305
Req. 3
June 30
December
31
Cash paid ………………………………………..
$50,000
$50,000
Req. 4
June 30
December
31
Bonds payable …………………………………
$888,413
*
$891,718
**
*$885,295 + $3,118 = $888,413
**$888,413+ $3,305 = $891,718
P10–8.
Req. 1
Principal:
$800,000 x 0.5674 ………………………………………………………
$453,920
Interest:
$ 64,000 x 3.6048 ……………………………………………………….
230,707
Bond issue price ………………………………………………………
$684,627
The stated rate of interest is used only to compute the periodic cash interest payments
of $64,000. This amount is necessary because it is discounted to PV using the effective
2014
2015
2016
2017
2018
a.
Cash interest payment
($800,000 x 8%) ……………….
$64,000
$64,000
$64,000
$64,000
$64,000
b.
Amortization of discount
($115,373 5 years) …………
23,075
23,075
23,075
23,075
23,075
c.
Bond interest expense ………….
$87,075
$87,075
$87,075
$87,075
$87,075
1/1/2014
$684,627
12/31/2014
=
12/31/2015
=
12/31/2016
=
12/31/2017
=
P10–9.
Req. 1
Computations:
Interest:
$2,000,000 x 10% x 1/2
=
$ 100,000
Present value
$ 2,000,000 x 0.4564
=
912,800
$ 100,000 x 13.5903
=
1,359,030
Issue price
$2,271,830
Req. 2
June 30
December
31
Interest expense ……………………………….
$86,408
*
$86,408
*
*$2,271,830 – $2,000,000= $271,830 20 periods = $13,592
$100,000 – $13,592 = $86,408
Req. 3
June 30
December
31
Cash paid ………………………………………..
$100,000
$100,000
Req. 4
June 30
December
31
Bonds payable …………………………………
$2,258,238
*
$2,244,646
**
*$2,271,830- $13,592 = $2,258,238
**$2,258,238- $13,592 = $2,244,646
P10–10.
Req. 1
Computations:
Interest:
$700,000 x 13% x 1/2
=
$ 45,500
=
=
$43,546
$45,500
P10–11.
Req. 1
Principal:
$300,000 x 0.6209 …………………………………………………….
$186,270
Interest:
$33,000 x 3.7908 ………………………………………………………
125,096
Issue (sale) price ……………………………………………………….
$311,366
Req. 2
Cash (+A) ……………………………………………………………………
311,366
Premium on bonds payable (+L) …………………………………
11,366
Bonds payable (+L) …………………………………………………..
300,000
Sale of bonds at a premium.
Req. 3
December 31, 2014:
Bond interest expense (+E, –SE) …………………………………….
30,727
Premium on bonds payable (-L) ……………………………………..
2,273
Cash (-A) …………………………………………………………………
33,000
Interest payment plus premium amortization.
Long-term Liabilities:
Bonds payable ………………………………………………………….
$300,000
Add: Unamortized premium
($11,366 – $2,273) …………………………………………………
9,093
$309,093
P10–12.
1. Missing amounts are underlined:
Date
Cash
Interest
Amortization
Balance
Jan. 1, 2014 ………………………..
$48,808
End of Year 2014 …………………
$3,600
$3,417
$183
48,625
End of Year 2015 …………………
3,600
3,404
196
48,429
End of Year 2016 …………………
3,600
3,390
210
48,219
End of Year 2017 …………………
3,600
3,381*
219
*
48,000
2. Maturity (par) amount: $48,000 from last column at end of the last year.
3. Cash received: $48,808 from last column at January 1, 2014.
4. Premium: $48,808 – $48,000 = $808.
5. Cash disbursed for interest: $3,600 per period x 4 years = $14,400 total.
6. Effective-interest amortization: Evident from the computations in the schedule.
The amortization amount is different each year.
7. Stated rate of interest: $3,600 $48,000 = 7.5%.
8. Yield or effective rate of interest: $3,417 $48,808 = 7%.
9. Interest expense: 2014, $3,417; 2015, $3,404; 2016, $3,390; 2017, $3,381.
10. Balance sheet:
2014
2015
2016
2017
Long-Term Liabilities
Bonds payable, 7.5%
Maturity amount $48,000, plus unamortized
premium …………………………………………………
$48,625
$48,429
$48,219
*
$48,000
*