Title: Exercise 14-5
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. Effective interest amortization table
Semiannu
al
Interest
Period-En
d
(A)
Cash Interest
Paid
[6.5% x
$400,000]
(B)
Bond Interest
Expense
[6% x Prior
(E)]
(C)
Premium
Amortizatio
n
[(A) – (B)]
(D)
Unamortize
d
Premium
[Prior (D) –
(C)]
(E)
Carrying
Value
[400,000 +
(D)]
1/01/2013
$9,850 $409,850
6/30/2013
$ 26,000 $ 24,591 $1,409 8,441 408,441
*Adjusted for rounding.
Title: Exercise 14-6
QA_Ori:
2013
(a)
Dec. 31 Cash 186,534
2014
(b)
June 30 Bond Interest Expense 7,684
(c)
Dec. 31 Bond Interest Expense 7,684
Title: Exercise 14-7
QA_Ori:
2013
(a)
Dec. 31 Cash 188,000
(b)
2014
June 30 Bond Interest Expense 8,000
Discount on Bonds Payable* 3,000
Dec. 31 Bond Interest Expense 8,000
2015
June 30 Bond Interest Expense 8,000
Dec. 31 Bond Interest Expense 8,000
(c)
Dec. 31 Bonds Payable 200,000
Title: Exercise 14-8
QA_Ori:
2012
(a)
Dec. 31 Cash 216,222
2013
(b)
June 30 Bond Interest Expense 8,378
(c)
Dec. 31 Bond Interest Expense 8,378
Title: Exercise 14-9
QA_Ori:
3. The 6% contract rate is less than the 8% market rate; therefore, the bonds are
issued at a discount.
4. Estimation of the market price at the issue date
Cash Flow Table Table Value* Amount Present Value
Par (maturity) value B.1 0.4564 $800,000 $365,120
* Table values are based on a discount rate of 4% (half the annual market rate)
and 20 periods (semiannual payments).
5.
Cash 691,287
Title: Exercise 14-10
QA_Ori:
4. Estimation of the market price at the issue date
Cash Flow Table Table Value* Amount Present Value
Par (maturity) value B.1 0.6756 $150,000 $101,340
* Table values are based on a discount rate of 4% (half the annual market rate)
and 10 periods (semiannual payments).
5.
Title: Exercise 14-11
QA_Ori:
1. Cash proceeds from sale of bonds at issuance
2. Discount at issuance
Par value $700,000
3. Total amortization for first 6 years
The first six years (from 1/1/13 to 12/31/18) equals 40% of the bonds’ 15-year
4. Carrying value of the bonds at 12/31/2018
Remaining discount
Entire Group
Retired 20%
Remaining discount
Carrying value
5. Cash purchase price
6. Loss on retirement
7. Journal entry at retirement for 20% of bonds
2019
Jan. 1 Bonds Payable 140,000
Title: Exercise 14-12
QA_Ori:
2. Journal entries
2013
May 1 Cash 3,502,000
June 30 Interest Payable 102,000
Dec. 31 Bond Interest Expense 153,000
Title: Exercise 14-13
QA_Ori:
1. Straight-line amortization table (($100,000-$95,948)/8 = $506.5)
Semiannual
Period-End
Unamortized
Discount †
Carrying
Value
6/01/2013 $4,052 $95,948
11/30/2013 3,546 96,454
* Adjusted for rounding difference.
† Supporting computations
Eight payments of $3,500** $ 28,000
or
Eight payments of $3,500 $ 28,000
2.
2013
Nov. 30 Bond Interest Expense 4,006
Dec. 31 Bond Interest Expense 668
Discount on Bonds Payable 84
2014
May 31 Interest Payable 584
Bond Interest Expense 3,338
Title: Exercise 14-14
QA_Ori:
1. Amount of each payment = Initial note balance / Table B.3 value
2. Amortization table for the loan
Payments
Period
Ending
Date
(A)
Beginning
Balance
[Prior (E)]
(B)
Debit
Interest
Expense
[7% x (A)]
+
(C)
Debit Notes
Payable [(D)
– (B)] =
(D)
Credit
Cash
[computed]
(E)
Ending
Balance
[(A) – (C)]
2013 $100,000 $ 7,000 $ 22,523 $ 29,523 $77,477
*Adjusted for rounding.
Title: Exercise 14-15
QA_Ori:
2013
Jan. 1 Cash 100,000
2013
2014
Dec. 31 Interest Expense 5,423
2015
Dec. 31 Interest Expense 3,736
2016
Dec. 31 Interest Expense 1,933
Title: Exercise 14-16
QA_Ori:
2. Montclair’s risk will increase because it will have more debt. That debt (plus
Title: Exercise 14-17
QA_Ori:
1. Operating
Title: Exercise 14-18
QA_Ori:
1. Leased Asset—Office Equipment 41,000
2. Depreciation Expense—Office Equipment 8,200
Title: Exercise 14-19
QA_Ori:
[Note: 12% / 12 months = 1% per month as the relevant interest rate.]
Analysis: Option 2 has the lowest present value at $38,035 and, thus, is the best lease
deal.
Title: Exercise 14-20
QA_Ori:
1. Cash 1,920
2. Loans and Borrowings 3,000
3. Heineken’s Loans and Borrowings carried a premium of € 78 as of December 31,
2010. This is computed as its carrying value of € 8,078 less its par value of € 8,000.
4. The contract rate was higher than the market rate at issuance. This is implied
(Recall: Contract rate > Market rate Premium)