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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:
Six payments of $7,200 .............................
$ 43,200
Plus discount .............................................
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
Par value ................................................
$700,000
Cash issue price (from part 1) .............
(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
Discount at issuance (from part 2) ......
$ 15,750
Less amortization (from part 3) ...........
(6,300)
Remaining discount .............................
$ 9,450
Entire Group
Retired 20%
Par value .................................................
$700,000
$140,000
Remaining discount ..............................
(9,450)
(1,890)
Carrying value ........................................
$690,550
$138,110
5. Cash purchase price
6. Loss on retirement
Cash paid (from part 5).......................
$ 146,300
Carrying value (from part 4) ...............
(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
