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Exercise 10-7 (30 minutes)
1. Premium = Issue price - Par value = $409,850 - $400,000 = $9,850
2. Total bond interest expense over the life of the bonds
Amount repaid
Six payments of $26,000* ...............
$156,000
Par value at maturity ......................
400,000
Total repaid ......................................
556,000
Less amount borrowed .....................
(409,850)
Total bond interest expense .............
$146,150
*$400,000 x 0.13 x ½ = $26,000
or
Six payments of $26,000 ...................
$156,000
Less premium.....................................
(9,850)
Total bond interest expense .............
$146,150
3. Straight-line amortization table ($9,850/6 = $1,642)
Semiannual
Interest Period-End
Unamortized
Premium
Carrying
Value
1/01/2015
$9,850
$409,850
6/30/2015
8,208
408,208
12/31/2015
6,566
406,566
6/30/2016
4,924
404,924
12/31/2016
3,282
403,282
6/30/2017
1,640*
401,640
12/31/2017
0
400,000
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Solutions Manual, Chapter 10
575
Exercise 10-8 (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
0.6756
$150,000
$101,340
Interest (annuity) .............
B.3
8.1109
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 10-10 (20 minutes)
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)]
2015 .......
$100,000
$ 7,000
$ 22,523
$ 29,523
$77,477
2016 .......
77,477
5,423
24,100
29,523
53,377
2017 .......
53,377
3,736
25,787
29,523
27,590
2018 .......
27,590
1,933*
27,590
29,523
0
$18,092
$100,000
$118,092
*Adjusted for rounding.
Exercise 10-11 (20 minutes)
2015
Jan. 1
Cash ................................................................................
100,000
Notes Payable ..........................................................
100,000
Borrowed $100,000 by signing a 7%
installment note.
2015
Dec. 31
Interest Expense ............................................................
7,000
Notes Payable ................................................................
22,523
Cash ..........................................................................
29,523
To record first installment payment.
2016
Dec. 31
Interest Expense ............................................................
5,423
Notes Payable ................................................................
24,100
Cash ..........................................................................
29,523
To record second installment payment.
2017
Dec. 31
Interest Expense ............................................................
3,736
Notes Payable ................................................................
25,787
Cash ..........................................................................
29,523
To record third installment payment.
2018
Dec. 31
Interest Expense ............................................................
1,933
Notes Payable ................................................................
27,590
Cash ..........................................................................
29,523
To record fourth installment payment.
Exercise 10-12 (15 minutes)
1a. Current debt-to-equity ratio = $220,000 / $400,000* = 0.55
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
Exercise 10-14B (30 minutes)
1. Premium = Issue price - Par value = $409,850 - $400,000 = $9,850
2. Total bond interest expense over the life of the bonds
Amount repaid
Six payments of $26,000* .......................
$ 156,000
Par value at maturity ..............................
400,000
Total repaid ..............................................
556,000
Less amount borrowed .............................
(409,850)
Total bond interest expense .....................
$ 146,150
*$400,000 x 0.13 x ½ = $26,000
or
Six payments of $26,000 ...........................
$ 156,000
Less premium.............................................
(9,850)
Total bond interest expense .....................
$ 146,150
3. Effective interest amortization table
Semiannual
Interest
Period-End
(A)
Cash Interest
Paid
[6.5% x $400,000]
(B)
Bond Interest
Expense
[6% x Prior (E)]
(C)
Premium
Amortization
[(A) - (B)]
(D)
Unamortized
Premium
[Prior (D) - (C)]
(E)
Carrying
Value
[400,000 + (D)]
1/01/2015
$9,850
$409,850
6/30/2015
$ 26,000
$ 24,591
$1,409
8,441
408,441
12/31/2015
26,000
24,506
1,494
6,947
406,947
6/30/2016
26,000
24,417
1,583
5,364
405,364
12/31/2016
26,000
24,322
1,678
3,686
403,686
6/30/2017
26,000
24,221
1,779
1,907
401,907
12/31/2017
26,000
24,093*
1,907
0
400,000
$156,000
$146,150
$9,850
*Adjusted for rounding.
PROBLEM SET A
Problem 10-1A (50 minutes)
Part 1
a.
Cash Flow
Table
Table Value*
Amount
Present Value
Par value .....................
B.1
0.4564
$40,000
$18,256
Interest (annuity) ........
B.3
13.5903
2,000**
27,181
Price of bonds ............
$45,437
Bond premium ............
$ 5,437
* Table values are based on a discount rate of 4% (half the annual market rate) and 20
periods (semiannual payments).
** $40,000 x 0.10 x ½ = $2,000
b.
Problem 10-1A (Concluded)
Part 3
a.
Cash Flow
Table
Table Value*
Amount
Present Value
Par value ....................
B.1
0.3118
$40,000
$12,472
Interest (annuity) .......
B.3
11.4699
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.
2015
Jan. 1
Cash ................................................................
35,412
Discount on Bonds Payable ................................
4,588
Bonds Payable .........................................................
40,000
Sold bonds on stated issue date.
