Exercise 10-13B (30 minutes)
1. Discount = Par value – Issue price = $500,000 – $463,140 = $36,860
2. Total bond interest expense over the life of the bonds
Amount repaid
Six payments of $22,500* …………….…….
$135,000
Par value at maturity………………………….
500,000
Total repaid ……………………………………….
635,000
Less amount borrowed ………………….…….
(463,140)
Total bond interest expense …………..…….
$171,860
*$500,000 x 0.09 x ½ = $22,500
or
Six payments of $22,500 ………………..…….
$135,000
Plus discount ………………………………..…….
36,860
Total bond interest expense …………..…….
$171,860
3. Effective interest amortization table
Interest
Period-End
(A)
Cash Interest
Paid
[4.5% x $500,000]
(B)
Bond Interest
Expense
[6% x Prior (E)]
(C)
Discount
Amortization
[(B) – (A)]
(D)
Unamortized
Discount
[Prior (D) – (C)]
(E)
Carrying
Value
[$500,000 – (D)]
1/01/2015
$36,860
$463,140
6/30/2015
$ 22,500
$ 27,788
$ 5,288
31,572
468,428
12/31/2015
22,500
28,106
5,606
25,966
474,034
6/30/2016
22,500
28,442
5,942
20,024
479,976
12/31/2016
22,500
28,799
6,299
13,725
486,275
6/30/2017
22,500
29,176
6,676
7,049
492,951
12/31/2017
22,500
29,549 *
7,049
0
500,000
$135,000
$171,860
$36,860
*Adjusted for rounding.
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
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.
Exercise 10-15 (40 minutes)
1. Straight-line amortization table (($100,000–$95,948)/8 = $506.5)
Semiannual
Period–End
Unamortized
Discount †
Carrying
Value
6/01/2015 ……………..….
$4,052
$95,948
11/30/2015 ……………..….
3,546
96,454
5/31/2016 ……………..….
3,040
96,960
11/30/2016 ……………..….
2,534
97,466
5/31/2017 ……………..….
2,028
97,972
11/30/2017 ……………..….
1,522
98,478
5/31/2018 ……………..….
1,016
98,984
11/30/2018 ……………..….
506*
99,494
5/31/2019 ……………..….
0
100,000
* Adjusted for rounding difference.
† Supporting computations
Eight payments of $3,500** …………………
$ 28,000
Par value at maturity ………………………..…
100,000
Total repaid ……………………………………..…
128,000
Less amount borrowed …………………….…
(95,948)
Total bond interest expense …………….…
$ 32,052
**$100,000 x 0.07 x ½ = $3,500
or
Eight payments of $3,500 ……………………
$ 28,000
Plus discount …………………………………..…
4,052
Total bond interest expense …………….…
$ 32,052
Semiannual straight-line interest expense = $32,052 / 8 = $4,006 (rounded)
Semiannual bond discount amortization = $4,052 / 8 = $506 (rounded)
Exercise 10-15 (Concluded)
2.
2015
Nov. 30
Bond Interest Expense …………………………………………..
4,006
Discount on Bonds Payable …………………………..
506
Cash ………………………………………………………………..
3,500
To record 6 months’ interest and discount amortization.
Dec. 31
Bond Interest Expense …………………………………………..
668
Discount on Bonds Payable …………………………..
84
Interest Payable …………………………..…………………..
584
To record one month’s accrued interest
($4,006 x 1/6) and amortization ($506 x 1/6).
2016
May 31
Interest Payable ………………………………………………..…..
584
Bond Interest Expense …………………………………………..
3,338
Discount on Bonds Payable …………………………..
422
Cash ………………………………………………………………..
3,500
To record five months’ interest ($4,006 – $668)
and amortization ($506 – $84) and eliminate
the accrued interest liability.
Exercise 10–16C (20 minutes)
1. Semiannual cash interest payment = $3,400,000 x 9% x ½ year = $153,000
2. Journal entries
2015
May 1
Cash ……………………………………………………………………..
3,502,000
Interest Payable …………………………..…………………..
102,000
Bonds Payable …………………………………….…………..
3,400,000
Sold bonds with 4 months’ accrued interest.
June 30
Interest Payable ………………………………………..…………..
102,000
Bond Interest Expense …………………………………………..
51,000
Cash ……………………………………………………….
153,000
Paid semiannual interest on the bonds.
Dec. 31
Bond Interest Expense …………………………………………..
153,000
Cash ……………………………………………………….
153,000
Paid semiannual interest on the bonds.
Exercise 10–17D (10 minutes)
1. Operating 2. Capital 3. Capital
Exercise 10–18D (20 minutes)
1.
Leased Asset—Office Equipment ……………………………………….
41,000
Lease Liability ………………………………………………………..…….
41,000
To record capital lease of office equipment.
2.
Depreciation Expense—Leased Asset, Office Equip ……..…….
8,200
Accum. Depreciation—Leased Asset, Office Equip ….…….
8,200
To record depreciation ($41,000 / 5 years).
Exercise 10–19D (15 minutes)
[Note: 12% / 12 months = 1% per month as the relevant interest rate.]
Exercise 10-20 (20 minutes)
1.
Cash ………………………………………………………………………
1,663
Discount on Loans and Borrowings …………………….…
37
Loans and Borrowings …………………………………..…
1,700
Issued liabilities at discount.
2.
Loans and Borrowings ………………………………………..…
2,400
Premium on Loans and Borrowings …………………….…
24
Loss on Loans and Borrowings Retirement ………….…
50
Cash…………………………..………………………………….…
2,474
Retirement of loans and borrowings pre-maturity.
3. Heineken’s Loans and Borrowings carried a premium of €112 as of
4. The contract rate was higher than the market rate at issuance. This is
implied from the higher carrying value of its loans and borrowings
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.
2015
Jan. 1
Cash ……………………………………………………....
45,437
Premium on Bonds Payable ……………..……………
5,437
Bonds Payable …………………………………………………
40,000
Sold bonds on stated issue date.
Part 2
a.
Cash Flow
Table
Table Value*
Amount
Present Value
Par value …………………
B.1
0.3769
$40,000
$15,076
Interest (annuity) …..…
B.3
12.4622
2,000
24,924
Price of bonds …………
$40,000
* Table values are based on a discount rate of 5% (half the annual market rate) and 20
periods (semiannual payments). (Note: When the contract rate and market rate are the
same, the bonds sell at par and there is no discount or premium.)
b.
2015
Jan. 1
Cash ……………………………………………………....
40,000
Bonds Payable …………………………………………………
40,000
Sold bonds on stated issue date.
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.
Problem 10-2A (40 minutes)
Part 1
2015
Jan. 1
Cash ……………………………………………………....
3,456,448
Discount on Bonds Payable …………………..………
543,552
Bonds Payable …………………………………………………
4,000,000
Sold bonds on stated issue date.
Part 2
Total repaid ………………………………………….
Less amount borrowed ………………….…….
Thirty payments of $120,000 ……………………..
Problem 10-2A (Concluded)
Part 5
2015
June 30
Bond Interest Expense ………………………………..…………
138,118
Discount on Bonds Payable …………………..………
18,118
Cash ……………………………………………………....
120,000
To record six months’ interest and
discount amortization.
2015
Dec. 31
Bond Interest Expense ………………………………..…………
138,118
Discount on Bonds Payable …………………..………
18,118
Cash ……………………………………………………....
120,000
To record six months’ interest and
discount amortization.
Problem 10-3A (40 minutes)
Part 1
2015
Jan. 1
Cash ……………………………………………………………………..
4,895,980
Premium on Bonds Payable …………………………..
895,980
Bonds Payable …………………………………….…………..
4,000,000
Sold bonds on issue date at a premium.
Part 2
(a) Cash Payment = $4,000,000 x 6% x 6/12 = $120,000
(b) Premium = $4,895,980 – $4,000,000 = $895,980
Straight–line premium amortization = $895,980 / 30 semiannual periods
= $29,866
(c) Bond interest expense = $120,000 – $29,866 = $90,134
Part 3
Thirty payments of $120,000 ………….…….
$3,600,000
Par value at maturity…………………………..
4,000,000
Total repaid ………………………………………….
7,600,000
Less amount borrowed ………………….…….
(4,895,980)
Total bond interest expense …………..…….
$2,704,020
or:
Thirty payments of $120,000 ……………………..
$ 3,600,000
Less premium …………………………………………..
(895,980)
Total bond interest expense ……………….……..
$ 2,704,020