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

978-0078025754 Chapter 10 Solution Manual Part 1

March 26, 2020
Chapter 10
Accounting for Long-Term Liabilities
QUESTIONS
1. Notes payable generally involve borrowing from a single creditor, whereas bonds
payable are usually sold to many different lenders (bondholders).
3. Bonds can allow a company’s owners to increase their return on equity without investing
additional amounts. This result occurs as long as the rate of return on the assets
4. A bond indenture is a legal contract between the issuing company and the bondholders
that identifies the obligations and rights of both parties. It specifies such items as the
5. A trustee for bondholders has the responsibility of monitoring the issuer’s actions,
6. The contract rate (also known as the coupon rate, stated rate, or nominal rate) is the rate
7. In general, the supply of and demand for bonds affect market rates. The market rate for
8.B The effective interest method creates a constant rate of interest over a bond’s life
because the market rate at the time of issuance is multiplied by the beginning balance
9.C When issuing bonds between interest dates, a company collects accrued interest from
the purchasers to avoid keeping detailed records of bond purchasers and the dates
10. The price of bonds can be computed by finding the present value of both the par value at
11. The issue price of a $2,000 bond sold at 98 ¼ is 98.25% of $2,000, or $1,965. The issue
price of a $6,000 bond priced at 101 ½ is 101.5% of $6,000, or $6,090.
12. The debt-to-equity ratio is calculated by dividing total liabilities by total equity. The
higher a company’s debt-to-equity ratio, the higher proportion of a company’s assets
13. An entrepreneur (owner) must repay the bondholders the principal (par value) according
14. Apple reports long-term debt of $16,960 million on its balance sheet. Apple also reports
15. Samsung’s long-term borrowings decreased by 2,637,911 million (computed as
₩3,623,028 million - ₩985,117 million) during the year ended December 31, 2013.
16. Per Samsung’s statement of cash flows (financing section), the company made
17. The balance sheet of Google indicates that for the year ended December 31, 2013, the
$0.27 is contributed by debt holders.
18.D If a lease qualifies to be recorded as a capital lease, an asset account for the leased
19.D An operating lease is a short-term or cancelable lease in which the lessor retains the
risks and rewards of ownership. The lessee expenses operating lease payments when
20.D Pension plans can be designed as defined benefit plans or defined contribution plans. In
a defined benefit plan the employer estimates the contribution necessary to pay a pre-
defined benefit amount to its retirees. For example, an employee’s monthly pension
QUICK STUDIES
Quick Study 10-1 (5 minutes)
Quick Study 10-2 (10 minutes)
2015
Jan. 1
218,750
Quick Study 10-3 (10 minutes)
Using facts in QS 10-2, the bond’s cash proceeds for the bond selling at
a discount are computed as follows
Quick Study 10-4 (10 minutes)
2015
Jan. 1
281,400
Quick Study 10-5 (10 minutes)
Using facts in QS 10-4, the bond’s cash proceeds for the bond selling at
a premium are computed as
Quick Study 10-6 (10 minutes)
1. Bond’s cash proceeds: $250,000 x 0.875 = $218,750
2.
Twenty semiannual interest payments of $10,000* ...............
$200,000
3. Bond interest expense on first payment date:
$231,250 / 20 semiannual periods = $11,563 (rounded to whole dollars)
Quick Study 10-7 (15 minutes)
2014
(a)
Dec. 31
Cash ................................................................................
92,640
Discount on Bonds Payable ................................
7,360
Quick Study 10-8 (10 minutes)
1. Bond’s cash proceeds: $250,000 x 1.23375 = $308,437.5 or $308,438 rounded
2.
Twenty semiannual interest payments of $10,000* ...............
$200,000
3. Bond interest expense on first payment date:
$141,562 / 20 semiannual periods = $7,078 (rounded to whole dollars)
Quick Study 10-9 (10 minutes)
2015
July 1
Bonds Payable ...............................................................
400,000
Quick Study 10-10 (10 minutes)
2015
Jan. 1
Bonds Payable ................................................................
2,000,000
Quick Study 10-11 (10 minutes)
Quick Study 10-12 (10 minutes)
1.
A
Registered bond
5.
E
Convertible bond
Initial cash proceeds from note
Quick Study 10-13 (10 minutes)
Ratio of debt to equity
Atlanta Company
Spokane Company
Quick Study 10-14B (10 minutes)
1. Bond’s cash proceeds: $240,000 x .7525 = $180,600
2.
Thirty semiannual interest payments of $12,000* ..................
$360,000
3. Bond interest expense on first payment date:
$180,600 x 7% = $12,642
Quick Study 10-15B (10 minutes)
1. Bond’s cash proceeds: $240,000 x 1.1725 = $281,400
2.
Thirty semiannual interest payments of $12,000* ..................
$360,000
3. Bond interest expense on first payment date:
$281,400 x 4% = $11,256
Quick Study 10-16C (10 minutes)
2015
Mar. 1
Cash ................................................................................
405,333
Quick Study 10-17D (10 minutes)
Quick Study 10-18D (10 minutes)
Quick Study 10-19 (10 minutes)
a. The par value of the 4.625% bond issuance is £ 313 million. The
Quick Study 10-20 (10 minutes)
a. There is an inverse relation between market rates and bond prices (to
see this, look at the decreasing discount rate as the yield rate increases
in present value tables of Appendix A). Given that the 4.625%
EXERCISES
Exercise 10-1 (15 minutes)
1. Semiannual cash interest payment = $3,400,000 x 9% x 1/2 = $153,000
2. Journal entries
2015
(a)
Jan. 1
Cash ................................................................
3,400,000
Bonds Payable .........................................................
3,400,000
3.
2015
(a)
Jan. 1
Cash* ................................................................
3,332,000
Discount on Bonds Payable ................................
68,000
Exercise 10-2 (30 minutes)
1. Discount = Par value - Issue price = $180,000 - $170,862 = $9,138
2. Total bond interest expense over the life of the bonds
Amount repaid
Six payments of $7,200* .................
$ 43,200
3. Straight-line amortization table ($9,138/6 = $1,523)
Semiannual
Period-End
Unamortized
Discount
Carrying
Value
(0)
1/01/2015 .........................
$9,138
$170,862
(1)
6/30/2015 .........................
7,615
172,385
Exercise 10-3 (25 minutes)
1. Semiannual cash interest payment = $800,000 x 6% x ½ year = $24,000
2. Number of payments = 10 years x 2 per year = 20 semiannual payments
Exercise 10-4 (20 minutes)
2015
(a)
Dec. 31
Cash ................................................................................
186,534
Discount on Bonds Payable ................................
13,466
Bonds Payable .........................................................
200,000
Sold bonds at discount.
2016
Exercise 10-5 (35 minutes)
2015
(a)
Dec. 31
Cash ................................................................
188,000
(b)
2016
June 30
Bond Interest Expense ................................
8,000
Dec. 31
Bond Interest Expense ................................
8,000
Discount on Bonds Payable* ................................
3,000
2017
June 30
Bond Interest Expense ................................
8,000
Discount on Bonds Payable* ................................
3,000
Exercise 10-6 (20 minutes)
2014
(a)
Dec. 31
Cash ................................................................................
216,222
Premium on Bonds Payable ................................
16,222

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