March 26, 2020

Problem 10-9BB (Concluded)

Part 3

2015

June 30

Bond Interest Expense ................................

13,320

Premium on Bonds Payable ................................

1,080

Cash ................................................................

14,400

To record six months’ interest and

premium amortization.

Part 4

As of December 31, 2017

Cash Flow

Table

Table Value*

Amount

Present Value

* Table values are based on a discount rate of 4% (half the annual original market

rate) and 4 periods (semiannual payments).

Comparison to Part 2 Table

Except for a small rounding difference, this present value ($325,807) equals

Problem 10-10BB (70 minutes)

Part 1

2015

Jan. 1

Cash ................................................................

493,608

Part 2

Eight payments of $29,250* ......................

$ 234,000

Par value at maturity ................................

450,000

Part 3

Semiannual

Interest

Period-End

(A)

Cash Interest

Paid

[6.5% x $450,000]

(B)

Bond Interest

Expense

[5% x Prior (E)]

(C)

Premium

Amortization

[(A) - (B)]

(D)

Unamortized

Premium

[Prior (D) - (C)]

(E)

Carrying

Value

[$450,000 + (D)]

1/01/2015

$43,608

$493,608

6/30/2015

$29,250

$24,680

$4,570

39,038

489,038

Problem 10-10BB (Concluded)

Part 4

2015

June 30

Bond Interest Expense ................................

24,680

2015

Dec. 31

Bond Interest Expense ................................

24,452

Part 5

2017

Jan. 1

Bonds Payable ..............................................................

450,000

Premium on Bonds Payable ................................

23,912

Part 6

If the market rate on the issue date had been 14% instead of 10%, the bonds

would have sold at a discount because the contract rate of 13% would have been

lower than the market rate.

Problem 10-11BD (35 minutes)

Part 1

Part 2

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

* Rounded to nearest dollar.

** Adjusted for prior period rounding errors.

Part 4

SERIAL PROBLEM — SP 10

Serial Problem — SP 10, Business Solutions (75 minutes)

Part 1

Total equity = $119,393

Part 2

Assume the secured loan is taken, then the percent of assets financed by:

a. Debt

b. Equity

Part 3

Santana Rey 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. Apple reported long-term debt of $16,960 million as of September 28,

2013.

3. Assuming that Apple had $100 million carrying value of convertible

bonds that convert into 20,000 shares of stock, the following entry

4. Answer depends on the financial statement information obtained.

Comparative Analysis — BTN 10-2

1. Apple’s current year debt-to-equity ratio = $83,451 / $123,549 = 0.68

2. For both years, Apple’s debt-to-equity ratio is above that of the industry

average of 0.44. This implies that its debt levels are more risky than that

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

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

Taking It to the Net — BTN 10-5

1. Home Depot’s long-term liabilities as of February 2, 2014, follow:

2 a. These Home Depot notes offer a 5.875% interest rate. If the interest

a discount.

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

1/01/2015

$ 4,100

$ 104,100

6/30/2015

$ 4,500

$ 4,164

$ 336

3,764

103,764

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.

12/31/2017

4,500

4,091

409

1,872

101,872

6/30/2018

4,500

4,075

425

1,447

101,447

*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%).

Column (B) Bond interest expense = Bonds’ prior period carrying value x

Semiannual market rate (4%).

Teamwork in Action (Concluded)

Part 3

Without completing the table, team members should be able to project the

final number in the first column and for each of the columns (A), (D), and

(E). Specifically:

(Col. 1) Last interest period date is 12/31/2019 because this is a five-year

bond, issued 1/1/2015, with semiannual interest payments made

on 6/30 and 12/31 of each year.

(Col. A) Interest paid of $4,500 (every interest period has the same amount

recorded).

Part 4

Total Bond interest expense = Interest Paid - Premium

= ($4,500 x 10 periods) - $4,100

= $45,000 - $4,100 = $40,900

Part 5 List likely includes:

Similarities

Differences

a. Table column headings

for the period and for

a. Column (C) will be Discount Amortization and

Column (D) will be Unamortized Discount.

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

Income before

interest ............. $ 40,000 $ 56,000 $ 56,000 $ 56,000 $ 56,000 $ 56,000

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

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. Samsung’s current year debt-to-equity ratio (in KRW millions):

2. Samsung’s debt-to-equity ratio decreased slightly from the prior year to

the current year. For the current year, Samsung’s debt-to-equity ratio is