Problem 10–10BB (Concluded)
Part 4
2015
June 30
Bond Interest Expense …………………………..
24,680
Premium on Bonds Payable ………………….……….
4,570
Cash ……………………………………………….………
29,250
To record six months’ interest and
premium amortization.
2015
Dec. 31
Bond Interest Expense …………………………..
24,452
Premium on Bonds Payable ………………….……….
4,798
Cash ……………………………………………….………
29,250
To record six months’ interest and
premium amortization.
Jan. 1
Bonds Payable …………………………………….……………….
450,000
Premium on Bonds Payable ………………….……….
23,912
Loss on Retirement of Bonds ……………….………….
3,088
Cash*…………………………..………………….……….
477,000
To record the retirement of bonds.
*($450,000 x 106%)
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
Present Value of the Lease Payments
$20,000 x 3.7908 (from Table B.3) = $75,816
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).
b. Equity
$119,393 / ($120,268 + $94,639) = 55.6%
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
is a fixed cost that must be paid, no matter what her profits are. She must
due.
1. Apple reported long-term debt of $16,960 million as of September 28,
2013.
2. The interest that Apple must pay on $100 million of 4.25% convertible
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.
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
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
who purchased the tax-exempt securities from the bank are holding an
investment that is more risky than the conventional municipal bonds of
Traverse County.
Communicating in Practice — BTN 10-4