Chapter 10 – Reporting and Analyzing Long-Term Liabilities
© 2015 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Solutions Manual, Chapter 10
1
Chapter 10
Reporting and Analyzing
Long-Term Liabilities
QUESTIONS
1. Notes payable generally involve borrowing from a single creditor, whereas bonds
2. A bond is a liability of the issuing company. A share of stock represents an ownership
3. Bonds can allow a company’s owners to increase their return on equity without investing
additional amounts. This result occurs as long as the rate of return on the assets
4. A bond indenture is a legal contract between the issuing company and the bondholders
that identifies the obligations and rights of both parties. It specifies such items as the
5. A trustee for bondholders has the responsibility of monitoring the issuer’s actions,
6. The contract rate (also known as the coupon rate, stated rate, or nominal rate) is the rate
7. In general, the supply of and demand for bonds affect market rates. The market rate for
8.B The effective interest method creates a constant rate of interest over a bond’s life
because the market rate at the time of issuance is multiplied by the beginning balance
9.C When issuing bonds between interest dates, a company collects accrued interest from
the purchasers to avoid keeping detailed records of bond purchasers and the dates
© 2015 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Solutions Manual, Chapter 10
3
Quick Study 10-1 (10 minutes)
1. Bond’s cash proceeds: $250,000 x 0.875 = $218,750
2.
Twenty semiannual interest payments of $10,000* …………...
$200,000
Plus bond discount ($250,000 – $218,750) ………………………...
31,250
Total bond interest expense …………………………………………….
$231,250
*$250,000 x 0.08 x ½ = $10,000
3. Bond interest expense on first payment date:
Quick Study 10-2B (10 minutes)
1. Bond’s cash proceeds: $240,000 x 1.1725 = $281,400
2.
Thirty semiannual interest payments of $12,000* ……………...
$360,000
Less premium ($281,400 – $240,000) ………………………………...
(41,400)
Total bond interest expense …………………………………………….
$318,600
*$240,000 x 0.10 x ½ = $12,000
3. Bond interest expense on first payment date:
Quick Study 10-3 (10 minutes)
2013
Jan. 1
Cash ……………………………………………………………………..
218,750
Discount on Bonds Payable …………………………………..
31,250
Bonds Payable ………………………………………….……..
250,000
To record issuing bonds at a discount.
Jan. 1
Cash ……………………………………………………………………..
281,400
Bonds Payable ………………………………………….……..
240,000
Premium on Bonds Payable …………………………..
41,400
To record issuing bonds at a premium.
