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
Par value at maturity…………………..
180,000
Total repaid ………………………………..
223,200
Less amount borrowed …………………
(170,862)
Total bond interest expense ………….
$ 52,338
*180,000 x 0.08 x ½ = $7,200
or:
$ 43,200
9,138
Total bond interest expense …………..…….
$ 52,338
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
(2)
12/31/2015 ……………..……..
6,092
173,908
(3)
6/30/2016 ……………..……..
4,569
175,431
(4)
12/31/2016 ……………..……..
3,046
176,954
(5)
6/30/2017 ……………..……..
1,523
178,477
(6)
12/31/2017 ……………..……..
0
180,000
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
3. The 6% contract rate is less than the 8% market rate; therefore, the
4. Estimation of the market price at the issue date
Cash Flow
Table
Table Value*
Amount
Present Value
Par (maturity) value ……..
B.1
0.4564
$800,000
$365,120
Interest (annuity) ……..…..
B.3
13.5903
24,000
326,167
Price of bonds ……………..
$691,287
* Table values are based on a discount rate of 4% (half the annual market rate) and
20 periods (semiannual payments).
5.
Cash ………………………………………………………………..……
691,287
Discount on Bonds Payable……………………………………
108,713
Bonds Payable …………………………………………………
800,000
Sold bonds at a discount on the stated issue date.
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
(b)
June 30
Bond Interest Expense ……………………………..……………
7,684
Discount on Bonds Payable** ……………..……………
1,684
Cash*…………………………..……………………..……
6,000
Paid semiannual interest and record amor-
tization. *$200,000 x6% x1/2 **13,466 – $11,782
(c)
Dec. 31
Bond Interest Expense ……………………………..……………
7,684
Discount on Bonds Payable** ……………..……………
1,684
Cash*…………………………..……………………..……
6,000
Paid semiannual interest and record amor-
tization. *$200,000 x6% x1/2 **$11,782 – $10,098
Exercise 10-5 (35 minutes)
2015
(a)
Dec. 31
Cash ……………………………………………………....
188,000
Discount on Bonds Payable …………………..………
12,000
Bonds Payable …………………………………………………
200,000
Sold bonds at discount.
(b)
2016
June 30
Bond Interest Expense …………………………..
8,000
Discount on Bonds Payable* …………….…………….
3,000
Cash** ……………………………………………..………..
5,000
Paid semiannual interest and record amor-
tization. *$12,000-$9,000 **$200,000x 5% x ½
Dec. 31
Bond Interest Expense …………………………..
8,000
Discount on Bonds Payable* …………….…………….
3,000
Cash** ……………………………………………..………..
5,000
Paid semiannual interest and record amor-
tization. *$9,000– $6,000 **$200,000x 5% x ½
2017
June 30
Bond Interest Expense …………………………..
8,000
Discount on Bonds Payable* …………….…………….
3,000
Cash** ……………………………………………..………..
5,000
Paid semiannual interest and record amor-
tization. *$6,000-$3,000 **$200,000 x 5% x ½
Dec. 31
Bond Interest Expense …………………………..
8,000
Discount on Bonds Payable* …………….…………….
3,000
Cash** ……………………………………………..………..
5,000
Paid semiannual interest and record amor-
tization. *$3,000 – $0 **$200,000 x 5% x ½
(c)
Dec. 31
Bonds Payable ………………………………………………………
200,000
Cash ………………………………………………..……..
200,000
Record maturity and payment of bonds.
Exercise 10-6 (20 minutes)
2014
(a)
Dec. 31
Cash ………………………………………………………..……………
216,222
Premium on Bonds Payable ………………..…………
16,222
Bonds Payable …………………………………………………
200,000
Sold bonds at premium.
2015
(b)
June 30
Bond Interest Expense ……………………………..……………
8,378
Premium on Bonds Payable* …………………….…….
1,622
Cash** ………………………………………………..……..
10,000
Paid semiannual interest and record amor-
tization. *$16,222- $14,600 **$200,000x 10% x ½
(c)
Dec. 31
Bond Interest Expense ………………………………….…………….
8,378
Premium on Bonds Payable* …………………………..
1,622
Cash** …………………………..…………………………..
10,000
Paid semiannual interest and record amor-
tization. *$14,600-$12,978 **$200,000x 10% x ½
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
*Adjusted for rounding.
Exercise 10-8 (25 minutes)
1. Semiannual cash interest payment = $150,000 x 10% x ½ year = $7,500
2. Number of payments = 5 years x 2 per year = 10 semiannual payments
3. The 10% contract rate is greater than the 8% market rate; therefore, the
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 10-9 (20 minutes)
1. Cash proceeds from sale of bonds at issuance
2. Discount at issuance
$700,000
(684,250)
Discount at issuance ……………………....
$ 15,750
3. Total amortization for first 6 years
The first six years (from 1/1/15 to 12/31/20) equals 40% of the bonds’ 15–
4. Carrying value of the bonds at 12/31/2020
$ 15,750
(6,300)
Remaining discount ………………………..
$ 9,450
Entire Group
Retired 20%
$700,000
$140,000
Remaining discount …………………………
(9,450)
(1,890)
Carrying value ……………………………….…
$690,550
$138,110
5. Cash purchase price
6. Loss on retirement
$ 146,300
(138,110)
Loss on retirement ………………………...
$ 8,190
7. Journal entry at retirement for 20% of bonds
2021
Jan. 1
Bonds Payable ………………………………………………………
140,000
Loss on Retirement of Bonds Payable ……………………
8,190
Discount on Bonds Payable ……………..……………
1,890
Cash ………………………………………………..……..
146,300
To record the retirement of bonds.
Exercise 10-10 (20 minutes)
1. Amount of each payment = Initial note balance / Table B.3 value
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