Financial & Managerial Accounting, 5th Edition
570
Exercise 10-10 (25 minutes)
1. Semiannual cash interest payment = $150,000 x 10% x ½ year = $7,500
4. Estimation of the market price at the issue date
Cash Flow
Table
Table Value*
Amount
Present Value
Par (maturity) value …..…
B.1
$150,000
$101,340
Interest (annuity) ……….…
B.3
7,500
60,832
Price of bonds …………..…
$162,172
* Table values are based on a discount rate of 4% (half the annual market rate) and
10 periods (semiannual payments).
5.
Cash ………………………………………………………………..……
162,172
Premium on Bonds Payable…………………………..
12,172
Bonds Payable …………………………..……………….……
150,000
Sold bonds at a premium on the stated issue date.
Exercise 10-11 (20 minutes)
1. Cash proceeds from sale of bonds at issuance
2. Discount at issuance
Par value ………………………………………...
$700,000
Cash issue price (from part 1) ………....
(684,250)
Discount at issuance ……………………....
$ 15,750
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–
4. Carrying value of the bonds at 12/31/2018
Discount at issuance (from part 2) …...
$ 15,750
Less amortization (from part 3) ………..
(6,300)
Remaining discount ………………………..
$ 9,450
Entire Group
Retired 20%
Par value ……………………………………….…
$700,000
$140,000
Remaining discount …………………………
(9,450)
(1,890)
Carrying value ……………………………….…
$690,550
$138,110
5. Cash purchase price
6. Loss on retirement
Cash paid (from part 5) ………………….
$ 146,300
Carrying value (from part 4) ……………
(138,110)
Loss on retirement ………………………...
$ 8,190
7. Journal entry at retirement for 20% of bonds
2019
Jan. 1
Bonds Payable ………………………………………………………
140,000
Loss on Retirement of Bonds Payable ……………………
8,190
Discount on Bonds Payable ……………..……………
1,890
Cash ………………………………………………..……..
146,300
To record the retirement of bonds.
Exercise 10–12C (20 minutes)
1. Semiannual cash interest payment = $3,400,000 x 9% x ½ year = $153,000
2. Journal entries
2013
May 1
Cash ………………………………………………………..……………
3,502,000
Interest Payable …………………………..……..……………
102,000
Bonds Payable …………………………………………………
3,400,000
Sold bonds with 4 months’ accrued interest.
June 30
Interest Payable ……………………………………….……………
102,000
Bond Interest Expense ……………………………..……………
51,000
Cash …………………………………………………..…..
153,000
Paid semiannual interest on the bonds.
Dec. 31
Bond Interest Expense ……………………………..……………
153,000
Cash …………………………………………………..…..
153,000
Paid semiannual interest on the bonds.
Exercise 10-13 (40 minutes)
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
5/31/2014 ……………..….
3,040
96,960
11/30/2014 ……………..….
2,534
97,466
5/31/2015 ……………..….
2,028
97,972
11/30/2015 ……………..….
1,522
98,478
5/31/2016 ……………..….
1,016
98,984
11/30/2016 ……………..….
506*
99,494
5/31/2017 ……………..….
0
100,000
* Adjusted for rounding difference.
Exercise 10-13 (Concluded)
† Supporting computations
Eight payments of $3,500** ……………..…
$ 28,000
Par value at maturity ……………………….…
100,000
Total repaid ………………………………………
128,000
Less amount borrowed …………………..…
(95,948)
Total bond interest expense ………………
$ 32,052
**$100,000 x 0.07 x ½ = $3,500
or
Eight payments of $3,500 ………………..…
$ 28,000
Plus discount ……………………………………
4,052
Total bond interest expense ………………
$ 32,052
Semiannual straight-line interest expense = $32,052 / 8 = $4,006 (rounded)
Semiannual bond discount amortization = $4,052 / 8 = $506 (rounded)
2.
2013
Nov. 30
Bond Interest Expense …………………………………………..
4,006
Discount on Bonds Payable …………………………..
506
Cash ………………………………………………………………..
3,500
To record 6 months’ interest and discount amortization.
Dec. 31
Bond Interest Expense …………………………………………..
668
Discount on Bonds Payable …………………………..
84
Interest Payable …………………………..…………………..
584
To record one month’s accrued interest
($4,006 x 1/6) and amortization ($506 x 1/6).
2014
May 31
Interest Payable ………………………………………………..…..
584
Bond Interest Expense …………………………………………..
3,338
Discount on Bonds Payable …………………………..
422
Cash ………………………………………………………………..
3,500
To record five months’ interest ($4,006 – $668)
and amortization ($506 – $84) and eliminate
the accrued interest liability.
Financial & Managerial Accounting, 5th Edition
574
Exercise 10-14 (20 minutes)
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
2014 …….
77,477
5,423
24,100
29,523
53,377
2015 …….
53,377
3,736
25,787
29,523
27,590
2016 …….
27,590
1,933*
27,590
29,523
0
$18,092
$100,000
$118,092
*Adjusted for rounding.
Exercise 10-15 (20 minutes)
2013
Jan. 1
Cash ……………………………………………………………………..
100,000
Notes Payable …………………………..……………………..
100,000
Borrowed $100,000 by signing a 7%
installment note.
2013
Dec. 31
Interest Expense …………………………………………….……..
7,000
Notes Payable …………………………..…………………………..
22,523
Cash ………………………………………………………………..
29,523
To record first installment payment.
2014
Dec. 31
Interest Expense …………………………………………….……..
5,423
Notes Payable …………………………..…………………………..
24,100
Cash ………………………………………………………………..
29,523
To record second installment payment.
2015
Dec. 31
Interest Expense …………………………………………….……..
3,736
Notes Payable …………………………..…………………………..
25,787
Cash ………………………………………………………………..
29,523
To record third installment payment.
2016
Dec. 31
Interest Expense …………………………………………….……..
1,933
Notes Payable …………………………..…………………………..
27,590
Cash ………………………………………………………………..
29,523
To record fourth installment payment.
Exercise 10-16 (15 minutes)
1a. Current debt-to-equity ratio = $220,000 / $390,000* = 0.564
2. Montclair’s risk will increase because it will have more debt. That debt
(plus interest) must be repaid even if the project does not work out as
Financial & Managerial Accounting, 5th Edition
576
Exercise 10–17D (10 minutes)
Exercise 10–18D (20 minutes)
1.
Leased Asset—Office Equipment ……………………………………….
41,000
Lease Liability ………………………………………………………..…….
41,000
To record capital lease of office equipment.
2.
Depreciation Expense—Leased Asset, Office Equip ……..…….
8,200
Accum. Depreciation—Leased Asset, Office Equip ….…….
8,200
To record depreciation ($41,000 / 5 years).
Exercise 10–19D (15 minutes)
[Note: 12% / 12 months = 1% per month as the relevant interest rate.]
Option 1: $1,750 per month for 25 months = $1,750 x 22.0232 = $38,541
Exercise 10-20 (20 minutes)
1.
Cash………………………………………………………………………
1,920
Discount on Loans and Borrowings …………………….…
80
Loans and Borrowings …………………………..…………
2,000
Issued liabilities at discount.
2.
Loans and Borrowings …………………………..………………
3,000
Premium on Loans and Borrowings …………………….…
32
Loss on Loans and Borrowings Retirement………….…
95
Cash ……………………………………………………………..…
3,127
Retirement of loans and borrowings pre-maturity.
3. Heineken’s Loans and Borrowings carried a premium of € 78 as of
4. The contract rate was higher than the market rate at issuance. This is
implied from the higher carrying value of its loans and borrowings
PROBLEM SET A
Problem 10-1A (50 minutes)
Part 1
Instructor note: The first printing of the textbook has an erroneous marginal
Problem 10-1A (Concluded)
Part 3
a.
Cash Flow
Table
Table Value*
Amount
Present Value
Par value ………………..
B.1
$40,000
$12,472
Interest (annuity) …....
B.3
2,000
22,940
Price of bonds ………..
$35,412
Bond discount ………..
$ 4,588
* Table values are based on a discount rate of 6% (half the annual market rate) and 20
periods (semiannual payments).
b.
2013
Jan. 1
Cash ……………………………………………………....
35,412
Discount on Bonds Payable …………………..………
4,588
Bonds Payable …………………………………………………
40,000
Sold bonds on stated issue date.
Problem 10-2A (40 minutes)
Part 1
2013
Jan. 1
Cash ……………………………………………………....
3,456,448
Discount on Bonds Payable …………………..………
543,552
Bonds Payable …………………………………………………
4,000,000
Sold bonds on stated issue date.
Part 2
[Note: The semiannual amounts for (a), (b), and (c) below are the same throughout the bonds’
life because this company uses straight-line amortization.]
(a) Cash Payment = $4,000,000 x 6% x 6/12 year = $120,000
(b) Discount = $4,000,000 – $3,456,448 = $543,552
Straight-line discount amortization= $543,552 / 30 semiannual periods
= $18,118 rounded
(c) Bond interest expense = $120,000 + $18,118 = $138,118
Part 3
Thirty payments of $120,000 ………….…….
$3,600,000
Par value at maturity ……………………..……
4,000,000
Total repaid ………………………………………….
7,600,000
Less amount borrowed ………………….…….
(3,456,448)
Total bond interest expense …………..…….
$4,143,552
or:
Thirty payments of $120,000 ……………………..
$ 3,600,000
Plus discount …………………………………….……..
543,552
Total bond interest expense ……………….……..
$ 4,143,552
Part 4 (Semiannual amortization: $543,552/30 = $18,118.4)
Semiannual
Period-End
Unamortized
Discount
Carrying
Value
1/01/2013 …………………
$543,552
$3,456,448
6/30/2013 …………………
525,434
3,474,566
12/31/2013 …………………
507,316
3,492,684
6/30/2014 …………………
489,198
3,510,802
12/31/2014 …………………
471,080
3,528,920
Problem 10-2A (Concluded)
Part 5
2013
June 30
Bond Interest Expense ………………………………..…………
138,118
Discount on Bonds Payable …………………..………
18,118
Cash ……………………………………………………....
120,000
To record six months’ interest and
discount amortization.
2013
Dec. 31
Bond Interest Expense ………………………………..…………
138,118
Discount on Bonds Payable …………………..………
18,118
Cash ……………………………………………………....
120,000
To record six months’ interest and
discount amortization.
Problem 10-3A (40 minutes)
Part 1
2013
Jan. 1
Cash ……………………………………………………………………..
4,895,980
Premium on Bonds Payable …………………………..
895,980
Bonds Payable …………………………………….…………..
4,000,000
Sold bonds on issue date at a premium.
Part 2
(a) Cash Payment = $4,000,000 x 6% x 6/12 = $120,000
(b) Premium = $4,895,980 – $4,000,000 = $895,980
Straight-line premium amortization = $895,980 / 30 semiannual periods
= $29,866
(c) Bond interest expense = $120,000 – $29,866 = $90,134
Part 3
Thirty payments of $120,000 ………….…….
$3,600,000
Par value at maturity ……………………..……
4,000,000
Total repaid ………………………………………….
7,600,000
Less amount borrowed ………………….…….
(4,895,980)
Total bond interest expense …………..…….
$2,704,020
or:
Thirty payments of $120,000 ……………………..
$ 3,600,000
Less premium …………………………………………..
(895,980)
Total bond interest expense ……………….……..
$ 2,704,020
Problem 10–3A (Concluded)
Problem 10-4A (45 minutes)
Part 1
Ten payments of $8,125* ……………….…….
$ 81,250
Par value at maturity ……………………..……
250,000
Total repaid ………………………………………….
331,250
Less amount borrowed ………………….…….
(255,333)
Total bond interest expense …………..…….
$ 75,917
*$250,000 x 0.065 x ½ = $8,125
or:
Ten payments of $8,125 ……………………….
$ 81,250
Less premium………………………………..…….
(5,333)
Total bond interest expense …………..…….
$ 75,917
Part 2
Straight-line amortization table ($5,333/10 = $533*)
Semiannual
Interest Period–End
Unamortized
Premium
Carrying
Value
1/01/2013
$5,333
$255,333
6/30/2013
4,800
254,800
12/31/2013
4,267
254,267
6/30/2014
3,734
253,734
12/31/2014
3,201
253,201
6/30/2015
2,668
252,668
12/31/2015
2,135
252,135
6/30/2016
1,602
251,602
12/31/2016
1,069
261,069
6/30/2017
533**
250,533
12/31/2017
0
250,000
* Rounded to nearest dollar. ** Adjusted for rounding.
Problem 10–4A (Concluded)
Part 3
2013
June 30
Bond Interest Expense …………………………..
7,592
Premium on Bonds Payable ………………….……….
533
Cash ……………………………………………….………
8,125
To record six months’ interest and
premium amortization.
2013
Dec. 31
Bond Interest Expense …………………………..
7,592
Premium on Bonds Payable ………………….……….
533
Cash ……………………………………………….………
8,125
To record six months’ interest and
premium amortization.