Fundamental Accounting Principles, 21st Edition
854
Problem 14-10B (30 minutes)
Part 1
Atlas Company
Debt–to-equity ratio = $81,000 / $99,000 = 0.82
Bryan Company
Part 2
Bryan’s debt–to-equity ratio is much higher than that for Atlas. This implies
Problem 14-11BD (35 minutes)
Part 1
Present Value of the Lease Payments
$20,000 x 3.7908 (from Table B.3) = $75,816
Part 2
Leased Asset—Office Equipment ……………………….….
75,816
Lease Liability ………………………………………………….
75,816
To record capital lease of office equipment.
Part 3
Capital Lease Liability Payment (Amortization) Schedule
Period
Ending
Date
Beginning
Balance of
Lease
Liability
Reduction
of Lease
Liability
Cash
Lease
Payment
Ending
Balance of
Lease
Liability
Year 1
$75,816
$12,418
$ 20,000
$63,398
Year 2
63,398
13,660
20,000
49,738
Year 3
49,738
15,026
20,000
34,712
Year 4
34,712
16,529
20,000
18,183
Year 5
18,183
18,183
20,000
0
$75,816
$100,000
* Rounded to nearest dollar.
** Adjusted for prior period rounding errors.
Part 4
Depreciation Expense—Office Equipment …………..….
15,163
Accum. Depreciation—Office Equipment ……….….
15,163
To record depreciation ($75,816 / 5 years).
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SERIAL PROBLEM — SP 14
Serial Problem — SP 14, Success Systems (75 minutes)
Part 1
Total equity = $129,034
Thus, total liabilities can be no more than its total equity x 0.8, or
$129,034 x 0.8 = $103,227
Part 2
Assume the secured loan is taken, then the percent of assets financed by:
a. Debt
($875 + $102,352) / ($129,909 + $102,352) = 44.4%
Part 3
Adria Lopez should understand the risks she is taking by borrowing funds
from the bank. She currently has no interest-bearing debt (per prior chapter
serial problems), but the loan will require her to pay interest. The interest
Reporting in Action — BTN 14-1
1. Polaris’s Long-Term Debt consists of:
$100,000,000 on its December 31, 2011, balance sheet.
2. The interest that Polaris must pay on $100,000 thousand of 4.25%
3. From the statement of cash flows for the year ended December 31,
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Comparative Analysis — BTN 14-2
1. Polaris’s current year debt-to-equity ratio = $ 727,968 / $ 500,056 = 1.46
2. For both years, Polaris’s debt–to-equity ratio is above that of the
industry average of 0.64. This implies that its debt levels are more risky
Ethics Challenge — BTN 14-3
1. The ethics of the Traverse County officials are questionable. The
financial impact of the leasing arrangement is the same as bond
financing in that the county has a debt obligation requiring the
repayment of principal and interest over time. Taxes may need to be
2. Because the lease requires payments of a non-binding nature, investors
Communicating in Practice — BTN 14-4
MEMORANDUM
TO:
FROM:
SUBJECT:
The body of the memorandum should make the following points:
The associate is confused about the concept of a bond premium. Bonds
that sell at a premium provide the issuing company more cash than they
are required to pay the bondholders at their maturity date. When a bond is
issued at a premium, the face amount is less than the amount the associate
interest is lower than the contract rate of interest for premium bonds.
The bottom line is that the market prices the bonds according to their
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Taking It to the Net — BTN 14-5
1. Home Depot’s long-term liabilities include:
Long-Term Debt, excluding current installments…………
$10,758 million
Other Long-Term Liabilities ………………………………………..
2,146 million
Deferred Income Taxes ………………………………………………
340 million
2 a. These Home Depot notes offer a 5.875% interest rate. If the interest
rate for similar notes from companies with similar risk was 5.875%,
b. Cash interest that must be paid:
Teamwork in Action — BTN 14-6
Parts 1 and 2
Effective Interest Amortization of Bond Premium
Semi-
annual
Period-end
(A)
Cash
Interest
Paid
(B)
Bond
Interest
Expense
(C)
Premium
Amortization
(D)
Unamortized
Premium
(E)
Carrying
Value
1/01/2013
$ 4,100
$ 104,100
6/30/2013
$ 4,500
$ 4,164
$ 336
3,764
103,764
12/31/2013
4,500
4,151
349
3,415
103,415
6/30/2014
4,500
4,137
363
3,052
103,052
12/31/2014
4,500
4,122
378
2,674
102,674
6/30/2015
4,500
4,107
393
2,281
102,281
Since teams generally have 4 or 5 members, the team solution will likely end about
here. The remainder of the table is shown for help in answering part 3.
12/31/2015
4,500
4,091
409
1,872
101,872
6/30/2016
4,500
4,075
425
1,447
101,447
12/31/2016
4,500
4,058
442
1,005
101,005
6/30/2017
4,500
4,040
460
545
100,545
12/31/2017
4,500
3,955*
545
0
100,000
$45,000
$40,900
$4,100
*Discrepancy due to rounding.
The following computations should be articulated by team members as
each line is explained and prepared:
Column (A) Cash Interest Paid = Bonds’ par value ($100,000) x Semiannual
contract rate (4.5%).
Column (B) Bond interest expense = Bonds’ prior period carrying value x
Semiannual market rate (4%).
Teamwork in Action (Concluded)
Part 3
Without completing the table, team members should be able to project the
final number in the first column and for each of the columns (A), (D), and
(E). Specifically:
(Col. 1) Last interest period date is 12/31/2017 because this is a five-year
bond, issued 1/1/2013, with semiannual interest payments made
on 6/30 and 12/31 of each year.
Part 4
Total Bond interest expense = Interest Paid – Premium
Part 5 List likely includes:
Similarities
Differences
a. Table column headings
for the period and for
columns (A), (B), and (E).
a. Column (C) will be Discount Amortization and
Column (D) will be Unamortized Discount.
b. Dates in the period
column and interest paid in
column (A).
c. Computations in
Columns (A), (B), and (D)
will follow the same format.
b. Bond interest expense is higher (lower) than the
interest paid and will increase (decrease) as we
amortize a discount (premium).
c. Carrying value (E) will increase (decrease) as we
amortize a discount (premium).
d. Ending unamortized
premium and discount (D)
will both be zero.
d. Amount of discount and premium amortization (C)
will increase each period.
e. Carrying value at
12/31/2017 will be $100,000
in both cases.
f. Unamortized discount
and premium (D) decreases
each period
e. Computation of Column (C) will be (B) – (A),
and not (A) – (B).
f. Computation of Column (E) will be previous Column
(E) plus discount amortization whereas with a
premium we subtract to find the new carrying value.
Entrepreneurial Decision — BTN 14-7
Part 1
The table below reveals how the five alternative interest-bearing notes
would affect this company’s interest expense, net income, equity, and
return on equity (net income/equity):
Alternative Notes for Expansion
Current 10% Note 15% Note 16% Note 17% Note 20% Note
Income before
interest …………. $ 40,000 $ 56,000 $ 56,000 $ 56,000 $ 56,000 $ 56,000
Return on equity … 12% 14.4% 12.4% 12% 11.6% 10.4%
Part 2
The analysis in Part 1 illustrates the general rule (called “financial
leverage” or “trading on the equity”): When a company earns a higher
return with borrowed funds than it is paying in interest, it increases its
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Hitting the Road — BTN 14-8
Students’ answers will depend on the municipality and time period chosen
for analysis. Students often find this assignment interesting as it
reinforces the relevance of their accounting studies.
Global Decision — BTN 14-9
1. Piaggio’s current year debt–to-equity ratio (in Euro thousands):
€1,073,966 / €446,218 = 2.41
2. Piaggio’s debt–to–equity ratio decreased slightly from the prior year to