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.
Dec. 31
Bond Interest Expense …………………………..
13,276
Premium on Bonds Payable ………………….……….
1,124
Cash ……………………………………………….………
14,400
To record six months’ interest and
premium amortization.
Part 4
As of December 31, 2017
Cash Flow
Table
Table Value*
Present Value
Par value ……………..
B.1
0.8548
$273,536
Interest (annuity) ….
B.3
3.6299
52,271
Price of bonds ……..
$325,807
* 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
Premium on Bonds Payable …………….…………….
43,608
Bonds Payable ………………………………..……………….
450,000
Sold bonds on stated issue date.
Part 2
Eight payments of $29,250* ………………….
$ 234,000
Par value at maturity ……………………..……
450,000
Total repaid ………………………………………….
684,000
Less amount borrowed ………………….…….
(493,608)
Total bond interest expense …………..…….
$ 190,392
*$450,000 x 0.13 x ½ = $29,250
or:
Eight payments of $29,250 ……………..…….
$ 234,000
Less premium………………………………..…….
(43,608)
Total bond interest expense …………..…….
$ 190,392
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
12/31/2015
29,250
24,452
4,798
34,240
484,240
6/30/2016
29,250
24,212
5,038
29,202
479,202
12/31/2016
29,250
23,960
5,290
23,912
473,912
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).
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:
Long-term debt, excluding current installments ………….
$14,691 million
Other long-term liabilities …………………………………………..
2,042 million
Deferred income taxes ……………………………………………….
514 million
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
12/31/2015
4,500
4,151
349
3,415
103,415
6/30/2016
4,500
4,137
363
3,052
103,052
12/31/2016
4,500
4,122
378
2,674
102,674
6/30/2017
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.
12/31/2017
4,500
4,091
409
1,872
101,872
6/30/2018
4,500
4,075
425
1,447
101,447
12/31/2018
4,500
4,058
442
1,005
101,005
6/30/2019
4,500
4,040
460
545
100,545
12/31/2019
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%).
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
columns (A), (B), and (E).
a. Column (C) will be Discount Amortization and
Column (D) will be Unamortized Discount.
b. Dates in the period
column and interest paid in
column (A).
c. Computations in
Columns (A), (B), and (D)
will follow the same format.
b. Bond interest expense is higher (lower) than the
interest paid and will increase (decrease) as we
amortize a discount (premium).
c. Carrying value (E) will increase as we amortize a
discount.
d. Ending unamortized
premium and discount (D)
will both be zero.
d. Carrying value (E) will decrease as we amortize a
premium.
e. Carrying value at
12/31/2019 will be $100,000
in both cases.
f. Unamortized discount
and premium (D) decreases
each period
e. Computation of Column (C) will be (B) – (A),
and not (A) – (B).
f. Computation of Column (E) will be previous Column
(E) plus discount amortization whereas with a
premium we subtract to find the new carrying value.
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