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Financial & Managerial Accounting, 5th Edition
612
Problem 10-10B (30 minutes)
Part 1
Atlas Company
Part 2
Problem 10-11BD (35 minutes)
Part 1
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
Interest on
Lease
Liability
(10%)
Reduction
of Lease
Liability
Cash
Lease
Payment
Ending
Balance of
Lease
Liability
Year 1
$75,816
$ 7,582*
$12,418
$ 20,000
$63,398
Year 2
63,398
6,340
13,660
20,000
49,738
Year 3
49,738
4,974
15,026
20,000
34,712
Year 4
34,712
3,471
16,529
20,000
18,183
Year 5
18,183
1,817**
18,183
20,000
0
$24,184
$75,816
$100,000
* Rounded to nearest dollar.
** Adjusted for prior period rounding errors.
Part 4
Depreciation Expense—Leased Asset, Off. Equip ...................
15,163
Accum. Depreciation—Leased Asset, Off. Equip ...............
15,163
To record depreciation ($75,816 / 5 years).
Financial & Managerial Accounting, 5th Edition
614
SERIAL PROBLEM — SP 10
Serial Problem — SP 10, Success Systems (75 minutes)
Part 1
Total equity = $129,034
Part 2
Assume the secured loan is taken, then the percent of assets financed by:
a. Debt
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 10-1
1. Polaris’s Long-Term Debt consists of:
Comparative Analysis — BTN 10-2
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 10-3
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
who purchased the tax-exempt securities from the bank are holding an
Communicating in Practice — BTN 10-4
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
will invest to acquire the bond. As a result, the investment will yield the
investor (and cost the issuing corporation) less than the contract rate of
interest. This means that selling/buying at a premium incurs/yields an
effective rate of interest equivalent to the market rate for the risk assessed
for that bond at the time of issuance. In addition, this market rate of
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
perceived risks and returns. What your associate needs to focus on is the
level of risk she is willing to accept and then invest accordingly.
A cordial closing that indicates willingness to discuss the issue further
would be appropriate.
Taking It to the Net — BTN 10-5
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%,
then Home Depot would have issued these notes at their par value
Teamwork in Action — BTN 10-6
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%).
premium, or [$100,000 + (D)] or Previous book value - Period’s amortization.
Teamwork in Action (Concluded)
Part 3
on 6/30 and 12/31 of each year.
(Col. A) Interest paid of $4,500 (every interest period has the same amount
of interest paid).
(Col. D) Zero unamortized premium (by the last interest period the
Entrepreneurial Decision — BTN 10-7
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
Equity .................... $250,000 $250,000 $250,000 $250,000 $250,000 $250,000
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
return on equity. In the case of this company, it is predicting a return of
16% on its investment, computed as its expected $16,000 additional annual
Hitting the Road — BTN 10-8
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 10-9
1. Piaggio’s current year debt-to-equity ratio (in Euro thousands):
2. Piaggio’s debt-to-equity ratio decreased slightly from the prior year to
the current year. However, for both years, Piaggio’s debt-to-equity ratio
