Chapter 10 – Reporting and Analyzing Long-Term Liabilities
Exercise 10-15 (20 minutes)
2013
Jan. 1
Cash ……………………………………………………………………..
100,000
Notes Payable …………………………………………..……..
100,000
Borrowed $100,000 by signing a 7%
installment note.
2013
Dec. 31
Interest Expense …………………………………………….……..
7,000
Notes Payable ………………………………………………..……..
22,523
Cash ………………………………………………………………..
29,523
To record first installment payment.
2014
Dec. 31
Interest Expense …………………………………………….……..
5,423
Notes Payable ………………………………………………..……..
24,100
Cash ………………………………………………………………..
29,523
To record second installment payment.
2015
Dec. 31
Interest Expense …………………………………………….……..
3,736
Notes Payable ………………………………………………..……..
25,787
Cash ………………………………………………………………..
29,523
To record third installment payment.
2016
Dec. 31
Interest Expense …………………………………………….……..
1,933
Notes Payable ………………………………………………..……..
27,590
Cash ………………………………………………………………..
29,523
To record fourth installment payment.
Exercise 10-16 (15 minutes)
1a. Current debt–to–equity ratio = $220,000 / $390,000* = 0.564
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
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Financial Accounting, 7th Edition
24
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.
2013
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.
2013
Jan. 1
Cash ……………………………………………………....
40,000
Bonds Payable …………………………………………………
40,000
Sold bonds on stated issue date.
