Type
Solution Manual
Book Title
Financial Accounting Fundamentals 5th Edition
ISBN 13
978-0078025754

978-0078025754 Chapter 10 Lecture Note Part 2

March 26, 2020
Chapter Outline
Notes
VIII. Issuing Bonds Between Interest Dates (Appendix 10C)
A. Procedure used to simplify recordkeeping:
1. Buyers pay the purchase price plus any interest accrued since the
prior interest payment date.
2. This accrued interest is repaid to these buyers on the next
interest date.
3. Entry to record issuance of bonds between interest dates: debit
Cash, credit Interest Payable (for any interest accrued since the
prior interest payment date), credit Bonds Payable.
4. Entry to record first semiannual interest payment for bonds
issued between interest dates: debit Interest Payable (for amount
accrued in entry above), debit Interest Expense (for interest
accrued since issuance date), credit Cash.
B. Accruing Bond Interest Expense
1. Necessary when bond’s interest period does not coincide with
issuer's accounting period.
2. Adjusting entry is necessary to record bond interest expense
accrued since the most recent interest payment and requires
amortization of the premium or discount for this period.
3. Affects the subsequent interest payment date entry.
IX. Leases and Pensions (Appendix 10D)
a. Lease Liabilities
A lease is a contractual agreement between a lessor (asset owner)
and a lessee (asset renter or tenant) that grants the lessee the right to
use the asset for a period of time in return for cash (rent) payments.
Lease accounting will change over the next few years, whereby
operating leases are likely to be accounted for similar to capital
leases.
1. Operating leases are short-term (or cancelable) leases in which
the lessor retains the risks and rewards of ownership.
a. Lessee records lease payments as expenses.
b. Lessor records lease payments as revenues.
2. Capital leases are long-term (or noncancelable) leases in which
the lessor transfers substantially all risks and rewards of
ownership to the lessee.
a. The lease must meet any one of the four following criteria:
i. Transfer title of leased asset to lessee.
ii. Contain a bargain purchase option.
iii. Have lease term of 75% or more of leased asset's useful
life.
iv. Have present value of lease payment of 90% or more of
leased asset’s market value.
Chapter Outline
Notes
b. Failure to meet one of the criteria results in off-balance-
sheet financing (not recorded on the balance sheet)
c. Capital leases are recorded as assets and liabilities. The asset
is depreciated. At each lease payment date, the liability is
amortized to record interest expense incurred.
B. Pension Liabilities
A pension plan is a contractual agreement between an employer and
its employees for the employer to provided benefits (payments) to
employees after they have retired.
1. Employer records their payment into pension plan as a debit to
Pension Expense and a credit to Cash.
2. Based on contracted benefits, pension plans can be overfunded
(resulting in plan assets) or underfunded (resulting in plan
liabilities).
Alternate Demonstration Problem
Chapter 10
Note: Instructor can choose the interest amortization method. Solution
one demonstrates the straight line method and solution two
demonstrates the effective interest method.
ABC Company issued $200,000 face value bonds on January 1, 2015,
with semiannual interest payments to be made on June 30 and December
31 at a contract rate of 10%. The bonds were scheduled to mature five
years after they were issued. On January 1, 2018, three years after the
bonds were issued, the company repurchased 40% of the outstanding
bonds for $79,000.
Required:
Part A
1. Assume that the bonds were issued when the market rate of interest
was 9%. Show calculation of issue price. If using the effective
interest method of amortization, prepare a schedule showing the
bond interest expense and amounts of amortization for the life of the
bonds. If using straight line, show the calculation of the periodic
amortization within the appropriate journal entries explanations.
2. Prepare the journal entry to record the bond issuance.
3. Prepare journal entries for the first two interest payments.
4. Prepare the journal entry to recognize the partial repurchase of the
bonds.
Part B
Redo Part A under the assumption that the market rate on the bonds
when issued was 16%.
Solution One: Alternate Demonstration Problem
Using Straight Line Interest Method of Amortization
Chapter 10
1. Calculation of cash received upon issuance of bonds (issue price):
Present value of $200,000 to be
received in 10 periods, discounted
at 4.5% per period
$200,000 x .6439 =
$128,780
Present value of $10,000 to be
received periodically for 10 periods,
discounted at 4.5% per period
$10,000 x 7.9127 =
79,127
$207,907
2.
207,907
200,000
7,907
3.
9,309.30
790.70
10,000.00
9,309.70
790.70
10,000.00
4.
80,000.00
1265.12*
79,000.00
2,265.12**
*($7,9074,744 [6 periods amortization]
=$3,162.80 unamortized premium x 40% =
1265.12)
** $80,000 + 1265.12 = 81265.12 Carrying Value
Redemption Price $79,000 = Gain $2,265.12
Part B
1. * Calculation of cash received upon issuance of bonds (issue price):
Present value of $200,000 to be
received in 10 periods, discounted
at 8% per period
$200,000 x .4632 =
$ 92,640
Present value of $10,000 to be
received periodically for 10 periods,
discounted at 8% per period
$10,000 x 6.7101 =
67,101
$159,741
2.
159,741
40,259
200,000
3.
14,025.90
4,025.90
10,000.00
4.
14,025.90
4,025.90
10,000.00
80,000.00
5,441.44
6,441.44
79,000.00
Solution Two: Alternate Demonstration Problem
Using Effective Interest Method of Amortization
Chapter 10
1.
Period
Beginning
of Period
Carrying
Amount
Interest
Expense
to be
Recorded
Interest
to be Paid
to Bond-
holders
Premium
to be
Amortized
Unamortized
Premium end
of Period
End-of-
Period
Carrying
Amount
0
$7,907
$207,907
*
1
$207,907
$9,356
$10,000
$644
7,263
207,263
2
207,263
9,327
10,000
673
6,590
206,590
3
206,590
9,297
10,000
703
5,887
205,887
4
205,887
9,265
10,000
735
5,152
205,152
5
205,152
9,232
10,000
768
4,384
204,384
6
204,384
9,197
10,000
803
3,581
203,581
7
203,581
9,161
10,000
839
2,742
202,742
8
202,742
9,123
10,000
877
1,865
201,865
9
201,865
9,084
10,000
916
949
200,949
10
200,949
9,051
10,000
949
0
200,000
* Calculation of cash received upon issuance of bonds:
Present value of $200,000 to be
received in 10 periods, discounted
at 4.5% per period
$200,000 x .6439 =
$128,780
Present value of $10,000 to be
received periodically for 10 periods,
discounted at 4.5% per period
$10,000 x 7.9127 =
79,127
$207,907
2.
207,907
200,000
7,907
3.
9,356
644
10,000
9,327
673
10,000
4.
80,000
1,432
79,000
2,432
Part B
1.
Period
Beginning
of-Period
Carrying
Amount
Interest
Expense
to be
Recorded
Interest to
be Paid
to Bond-
holders
Discount
to be
Amortized
Unamortized
Discount end
of Period
End-of-
Period
Carrying
Amount
0
$40,259
$159,741
*
1
$159,741
$12,779
$10,000
$2,779
37,480
162,520
2
162,520
13,002
10,000
3,002
34,478
165,522
3
165,522
13,242
10,000
3,242
31,236
168,764
4
168,764
13,501
10,000
3,501
27,735
172,265
5
172,265
13,781
10,000
3,781
23,954
176,046
6
176,046
14,084
10,000
4,084
19,870
180,130
7
180,130
14,410
10,000
4,410
15,460
184,540
8
184,540
14,763
10,000
4,763
10,697
189,303
9
189,303
15,144
10,000
5,144
5,553
194,447
10
194,447
15,553
10,000
5,553
0
200,000
* Calculation of cash received upon issuance of bonds:
Present value of $200,000 to be
received in 10 periods, discounted
at 8% per period
$200,000 x .4632 =
$ 92,640
Present value of $10,000 to be
received periodically for 10 periods,
discounted at 8% per period
$10,000 x 6.7101 =
67,101
$159,741
2.
159,741
40,259
200,000
3.
12,779
2,779
10,000
4.
13,002
3,002
10,000
80,000
6,948
7,948
79,000

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