Title: Question 1
QA_Ori: Notes payable generally involve borrowing from a single creditor, whereas
Title: Question 2
QA_Ori: A bond is a liability of the issuing company. A share of stock represents
Title: Question 3
QA_Ori: Bonds can allow a company’s owners to increase their return on equity
Title: Question 4
QA_Ori: A bond indenture is a legal contract between the issuing company and
the bondholders that identifies the obligations and rights of both parties. It specifies
Title: Question 5
QA_Ori: A trustee for bondholders has the responsibility of monitoring the
Title: Question 6
QA_Ori: The contract rate (also known as the coupon rate, stated rate, or
Title: Question 7
QA_Ori: In general, the supply of and demand for bonds affect market rates. The
QA_Ori: The effective interest method creates a constant rate of interest over a
Title: Question 9
QA_Ori: When issuing bonds between interest dates, a company collects
accrued interest from the purchasers to avoid keeping detailed records of bond
Title: Question 10
QA_Ori: The price of bonds can be computed by finding the present value of both
Title: Question 11
QA_Ori: The issue price of a $2,000 bond sold at 98 ¼ is 98.25% of $2,000, or
Title: Question 12
QA_Ori: The debt-to-equity ratio is calculated by dividing total liabilities by total
equity. The higher a company’s debt-to-equity ratio, the higher proportion of a
Title: Question 13
QA_Ori: An entrepreneur (owner) must repay the bondholders the principal (par
Title: Question 14
QA_Ori: Polaris has $100,000,000 of long-term debt on its balance sheet, of
which none of it is current.
Title: Question 15
QA_Ori: KTM’s long-term interest-bearing loans increased by €2,941 thousand
Title: Question 16
QA_Ori:
31, 2011.
Title: Question 17
QA_Ori: The balance sheet of Arctic Cat indicates that for the year ended March
Title: Question 18
QA_Ori: If a lease qualifies to be recorded as a capital lease, an asset account
Title: Question 19
QA_Ori: An operating lease is a short-term or cancelable lease in which the
lessor retains the risks and rewards of ownership. The lessee expenses operating
Title: Question 20
QA_Ori: Pension plans can be designed as defined benefit plans or defined
contribution plans. In a defined benefit plan the employer estimates the contribution
necessary to pay a pre-defined benefit amount to its retirees. For example, an
Title: Quick Study 14-1
QA_Ori:
1. Bond’s cash proceeds: $250,000 x 0.875 = $218,750
Title: Quick Study 14-2
QA_Ori:
1. Bond’s cash proceeds: $240,000 x 1.1725 = $281,400
2. Thirty semiannual interest payments of $12,000* $360,000
3. Bond interest expense on first payment date:
Title: Quick Study 14-3
QA_Ori:
2013
Jan. 1 Cash 218,750
Discount on Bonds Payable 31,250
Title: Quick Study 14-4
QA_Ori:
a. Using facts in QS 14-1, the bond’s cash proceeds for the bond selling at a
discount are computed as follows
Cash Flow Table Value Present Value
$250,000 par (maturity) value 0.3769 $ 94,225
b. Using facts in QS 14-2, the bond’s cash proceeds for the bond selling at a
premium are computed as
Cash Flow Table Value Present Value
$240,000 par (maturity) value 0.3083 $ 73,992
*Agrees with $281,400 as given in QS 14-2, except for rounding difference.
Title: Quick Study 14-5
QA_Ori:
2012
(a)
Dec. 31 Cash 92,640
2013
(b)
June 30 Bond Interest Expense 5,736
(c)
Dec. 31 Bond Interest Expense 5,736
Title: Quick Study 14-6
QA_Ori:
2013
July 1 Bonds Payable 400,000
Title: Quick Study 14-7
QA_Ori:
2013
Jan. 1 Bonds Payable 2,000,000
Common Stock* 1,000,000
Title: Quick Study 14-8
QA_Ori:
1. A Registered bond 5. E Convertible bond
Title: Quick Study 14-9
QA_Ori:
Amount of annual payment = Initial cash proceeds from note / Table B.3 present
value for 5 payments
*Rounded to whole dollars.
Title: Quick Study 14-10
QA_Ori:
Ratio of debt to equity
Atlanta Company Spokane Company
Total liabilities $429,000 $ 548,000
Analysis and interpretation: Atlanta Company’s debt-to-equity ratio of 0.75 implies a
riskier financing structure than Spokane Company’s 0.30 debt-to-equity ratio.
Title: Quick Study 14-11
QA_Ori:
2013
Mar. 1 Cash 405,333
Interest payable* 5,333
Title: Quick Study 14-12
QA_Ori:
Rental Expense 250
Title: Quick Study 14-13
QA_Ori:
Leased Asset—Office Equipment 15,499
Title: Quick Study 14-14
QA_Ori:
b. Given part a, we know that the carrying value exceeds the par value. Thus, the
Title: Quick Study 14-15
QA_Ori:
a. There is an inverse relation between market rates and bond prices (to see this, look
at the decreasing discount rate as the yield rate increases in present value tables of
b. No, the change in market rates since it issued the bonds does not affect interest
c. Because the bonds trade at a discount in the market (98.0), it would be paying less to
d. Vodafone must repay the par amount of the bonds at maturity. Because this is the
Title: Exercise 14-1
QA_Ori:
1. Semiannual cash interest payment = $3,400,000 x 9% x 1/2 = $153,000
2. Journal entries
2013
(a)
Jan. 1 Cash 3,400,000
(b)
June 30 Bond Interest Expense 153,000
(c)
Dec. 31 Bond Interest Expense 153,000
3.
2013
(a)
Jan. 1 Cash* 3,332,000
(b)
Jan. 1 Cash* 3,468,000
Title: Exercise 14-2
QA_Ori:
2. QA_Ori:
Total bond interest expense over the life of the bonds
Amount repaid
Six payments of $7,200* $ 43,200
or:
Six payments of $7,200 $ 43,200
3. Straight-line amortization table ($9,138/6 = $1,523)
Semiannual
Period-End
Unamortized
Discount
Carrying
Value
(0) 1/01/2013 $9,138 $170,862
(1) 6/30/2013 7,615 172,385
Title: Exercise 14-3
QA_Ori:
2. Total bond interest expense over the life of the bonds
Amount repaid
Six payments of $22,500* $135,000
or
Six payments of $22,500 $135,000
3. Effective interest amortization table
Semiannu
al
Interest
Period-En
d
(A)
Cash Interest
Paid
[4.5% x
$500,000]
(B)
Bond Interest
Expense
[6% x Prior
(E)]
(C)
Discount
Amortizatio
n
[(B) – (A)]
(D)
Unamortize
d
Discount
[Prior (D) –
(C)]
(E)
Carrying
Value
[$500,000 –
(D)]
1/01/2013
$36,860 $463,140
6/30/2013
$ 22,500 $ 27,788 $ 5,288 31,572 468,428
12/31/201
3
22,500 28,106 5,606 25,966 474,034
22,500 28,442 5,942 20,024 479,976
*Adjusted for rounding.
Title: Exercise 14-4
QA_Ori:
2. Total bond interest expense over the life of the bonds
Amount repaid
Six payments of $26,000* $156,000
or
Six payments of $26,000 $156,000
3. Straight-line amortization table ($9,850/6 = $1,642)
QA_Ori:
Semiannual
Interest Period-End
Unamortized
Premium
Carrying
Value
1/01/2013 $9,850 $409,850
6/30/2013 8,208 408,208
*Adjusted for rounding.