EXERCISE 10-16B
Files Co.
General Journal
Date
Account Titles
Debit
Credit
2016
Jan. 1
Cash1
388,000
Discount on Bonds Payable
12,000
Bonds Payable
400,000
Dec. 31
Interest Expense
26,400
Discount on Bonds Payable2
2,400
Cash3
24,000
2017
Dec. 31
Interest Expense
26,400
Discount on Bonds Payable
2,400
Cash
24,000
EXERCISE 10-17B
a.
Balance Sheet
Income Statement
No
.
Assets
=
Liab.
+
S. Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
1.
+
+
NA
NA
NA
NA
+ FA
2a.
−
−
−
NA
+
−
− OA
b. Bond Premium: $300,000 x 1.5% = $4,500
Amortization of bond premium: $4,500 10 = $450 per year
Carrying Value, December 31, 2016:
Bonds Payable $300,000
EXERCISE 10-18B
Chen Company
General Journal
Date
Account Titles
Debit
Credit
2016
Jan. 1
Cash1
303,000
Premium on Bonds Payable
3,000
Bonds Payable
300,000
Dec. 31
Premium on Bonds Payable2
600
Interest Expense3
17,400
Cash4
18,000
2017
Dec. 31
Premium on Bonds Payable
600
Interest Expense
17,400
Cash
18,000
EXERCISE 10-19B
a.
Face Value
−
Bond Price
=
Discount
$250,000
−
$219,277
=
$30,723
b.
Carrying Value
x
Effective Rate
=
Interest Expense
$219,277
x
.10
=
$21,928
c. Compute the Ending Balance in the Discount Account
Face Value
x
Stated Rate
=
Cash Payment
$250,000
x
.08
=
$20,000
Interest Expense
−
Cash Payment
=
Amortization
$21,928
−
$20,000
=
$1,928
Beginning Discount
−
Amortization
=
Ending Discount
$30,723
−
$1,928
=
$28,795
Bond Carrying Value as of December 31, 2016
Bond Payable (Face Value)
$250,000
Discount on Bonds Payable
28,795
Carrying Value
$221,205
d.
Account Titles
Debit
Credit
Interest Expense
21,928
Bond Discount
1,928
Cash
20,000
EXERCISE 10-20B
a.
Date
Cash
Payment
Interest
Expense
Discount
Amortization
Carrying
Value
January 1, 2016
57,666
December 31, 2016
4,800
5,190*
390
58,056
December 31, 2017
4,800
5,225
425
58,481
December 31, 2018
4,800
5,263
463
58,944
December 31, 2019
4,800
5,305
505
59,449
December 31, 2020
4,800
5,351**
551**
60,000
Totals
24,000
26,334
2,334
Bond liability
$60,000
Less: Bond discount
1,519*
Carrying value
$58,481
*Total discount, $2,334
Amortized 2016 (390)
Amortized 2017 __(425)
Balance $1,519
c. The income statement would show $5,225 of interest expense.
d. The statement of cash flows would show a $4,800 cash outflow for
interest in the operating activities section.
EXERCISE 10-21B
a.
Bond Price
−
Face Value
=
Premium
$215,443
−
$200,000
=
$15,443
b.
Carrying Value
x
Effective Rate
=
Interest Expense
$215,443
x
.05
=
$10,772
c. Compute the Ending Balance in the Premium Account
Face Value
x
Stated Rate
=
Cash Payment
$200,000
x
.06
=
$12,000
Cash Payment
−
Interest Expense
=
Amortization
$12,000
−
$10,772
=
$1,228
Beginning Premium
−
Amortization
=
Ending Premium
$15,443
−
$1,228
=
$14,215
Bond Carrying Value as of December 31, 20163
Bond Payable (Face Value)
$200,000
Premium on Bonds Payable
14,215
Carrying Value
$214,215
d.
Account Titles
Debit
Credit
Interest Expense
10,772
Bond Premium
1,228
Cash
12,000
EXERCISE 10-22B
a.
Date
Cash
Payment
Interest
Expense
Premium
Amortization
Carrying
Value
January 1, 2016
124,920
December 31, 2016
9,600
8,744
856
124,064
December 31, 2017
9,600
8,684
916
123,148
December 31, 2018
9,600
8,620
980
122,168
December 31, 2019
9,600
8,552
1,048
121,120
December 31, 2020
9,600
8,480*
1,120*
120,000
Totals
48,000
43,080
4,920
*rounded
b. The balance sheet would show the carrying value of the bond liability.
The carrying value could be shown net of the premium, $122,168, with
further disclosure in the notes to the financial statements.
Alternatively, the face value plus the premium could be shown as
follows:
Bond liability
$120,000
Plus: Bond premium
2,168*
Carrying value
$122,168
*Total Premium $4,920
Less, amortization, 2016 (856)
Less, amortization, 2017 (916)
Less, amortization, 2018 __(980)
Balance $2,168
c. The income statement would show $8,620 of interest expense.
d. The statement of cash flows would show a $9,600 cash outflow for
interest in the operating activities section.
EXERCISE 10-23B
Since the stated rate of interest is lower than the effective interest rate the
bonds will sell at a discount. Because the effective interest rate method
EXERCISE 10-24B
a.
Bass
Carp
Perch
Bonds Payable
$300,000
$600,000
$500,000
Interest Rate
10%
9%
8%
Before Tax Interest Cost
$ 30,000
$ 54,000
$ 40,000
b.
Bass
Carp
Perch
Before Tax Interest Cost
$30,000
$54,000
$40,000
x (1 − Tax Rate)
60%
70%
65%
After Tax Interest Cost
$18,000
$37,800
$26,000
1.
Bass
Carp
Perch
After Tax Interest Cost
$ 18,000
$ 37,800
$ 26,000
Bonds Payable
$300,000
$600,000
$500,000
= After Tax Interest Rate
6.0%
6.3%
5.2%
OR
2.
Interest Rate x (1 − Tax Rate)
.10 x ( 1−.4)
.09 x (1 − .3)
.08 x (1 − .35)
= After Tax Interest Rate
= 6.0%
= 6.3%
= 5.2%
EXERCISE 10-25B
a. Note to Instructor: Students may be able to solve this problem more
easily if they first prepare a table showing the balances in current
assets, total assets, current liabilities, and total liabilities for each
situation. Then, they can more easily compute the new ratios and
SOLUTIONS TO PROBLEMS – SERIES B – CHAPTER 10
PROBLEM 10-26B
a.
Kramer Co.
Amortization Schedule
$90,000, 3-Yr. Term Note, 7% Interest Rate
Year
Prin. Bal.
on Jan 1
Cash Pay.
Dec. 31
Applied to
Interest
Applied
to
Principal
Prin. Bal.
End of Period
2016
$90,000
$34,295
$6,300
$27,995
$62,005
2017
62,005
34,295
4,340
29,955
32,050
2018
32,050
34,295
2,245*
32,050
-0-
*rounded for final year
PROBLEM 10-26B (cont.)
b. Provided for the use of the Instructor:
Cash
Notes Payable
Retained Earnings
2016
2016
2016
1/1 90,000
1/1 90,000
1/1 90,000
cl 38,700
12/31 45,000
12/31 34,295
12/31 27,995
Bal. 38,700
Bal. 10,705
Bal. 62,005
2017
2017
2017
cl 40,660
12/31 45,000
12/31 34,295
12/31 29,955
Bal. 79,360
Bal. 21,410
Bal. 32,050
2018
2018
2018
cl 42,755
12/31 45,000
12/31 34,295
12/31 32,050
Bal. 122,115
Bal. 32,115
Bal. -0-
Lease Revenue
Land
2016
2016
cl 45,000
12/31 45,000
1/1 90,000
Bal. -0-
Bal. 90,000
2017
cl 45,000
12/31 45,000
Bal. -0-
2018
cl 45,000
12/31 45,000
Bal. -0-
Interest Expense
2016
12/31 6,300
cl 6,300
Bal. -0-
2017
12/31 4,340
cl 4,340
Bal. -0-
2018
12/31 2,245
cl 2,245
Bal. -0-
PROBLEM 10-26B b. (cont.)
Kramer Co.
Financial Statements
2016
2017
2018
Income Statements for the Year Ended December 31
Lease Revenue
$45,000
$45,000
$45,000
Interest Expense
(6,300)
(4,340)
(2,245)
Net Income
$38,700
$40,660
$42,755
Balance Sheets as of December 31
Assets
Cash
$ 10,705
$ 21,410
$ 32,115
Land
90,000
90,000
90,000
Total Assets
$100,705
$111,410
$122,115
Liabilities
Notes Payable
$ 62,005
$ 32,050
$ -0-
Stockholders’ Equity
Retained Earnings
38,700
79,360
122,115
Total Liab. and Stockholders’
Equity
$100,705
$111,410
$122,115
Statements of Cash Flows for the Year Ended December 31
Cash Flows From Operating Act.:
Receipts from Rental
$45,000
$45,000
$45,000
Paid for Interest
(6,300)
(4,340)
(2,245)
Net Cash Flow from Operating Act.
38,700
40,660
42,755
Cash Flow From Investing Act.:
Paid to Purchase Land
(90,000)
-0-
-0-
Cash Flow From Financing Act.:
Proceeds from Loan
90,000
-0-
-0-
Repayment of Loan
(27,995)
(29,955)
(32,050)
Net Cash Flow from Financing Act.
62,005
(29,955)
(32,050)
Net Change in Cash
10,705
10,705
10,705
Plus: Beginning Cash Balance
-0-
10,705
21,410
Ending Cash Balance
$10,705
$21,410
$32,115
PROBLEM 10-26B (cont.)
c. Because the company is making both principal and interest
payments on the loan each year, the amount paid on the principal
PROBLEM 10-27B
Computation of Interest Expense
Month
Amount
Borrowed (Repaid)
End of Month
Balance
x
Interest Rate
per Month
=
Interest
Expense
January
$60,000
$ 60,000
.06/12
$ 300
February
40,000
100,000
.06/12
500
March
(30,000)
70,000
.07/12
408
April
-0-
70,000
.07/12
408
May
-0-
70,000
.07/12
408
June
-0-
70,000
.07/12
408
July
-0-
70,000
.07/12
408
August
-0-
70,000
.07/12
408
Septembe
r
-0-
70,000
.07/12
408
October
-0-
70,000
.07/12
408
November
(20,000)
50,000
.07/12
292
December
(10,000)
40,000
.06/12
200
Total
$4,556
a.
Mott Company
Income Statement
For the Year Ended December 31, 2016
Service Revenue
$25,000
Expenses
Interest Expense
(4,556)
Net Income
$20,444
PROBLEM 10-27B a. (cont.)
Mott Company
Financial Statements
Balance Sheet
As of December 31, 2016
Assets
Cash ($40,000 + $20,444)
$60,444
Total Assets
$60,444
Liabilities
Loan Payable
$40,000
Total Liabilities
40,000
Stockholders’ Equity
Common Stock
$ -0-
Retained Earnings
20,444
Total Stockholders’ Equity
20,444
Total Liabilities and Stockholders’ Equity
$60,444
Statement of Cash Flows
For the Year Ended December 31, 2016
Cash Flows From Operating Activities:
Recipts from Revenue
$25,000
Paid for Interest
(4,556)
Net Cash Flow from Operating Activities
$20,444
Cash Flows From Investing Activities:
-0-
Cash Flows From Financing Activities:
Proceeds from Loan
100,000
Repayment of Loan
(60,000)
Net Cash Flow from Financing Activities
40,000
Net Change in Cash
60,444
Plus: Beginning Cash Balance
-0-
Ending Cash Balance
$60,444
PROBLEM 10-27B (cont.)
PROBLEM 10-28B
a.
Effect of Transactions on Financial Statements
No
.
Assets
=
Liab.
+
S.
Equity
Rev.
Gain
−
Exp./
Loss
=
Net Inc.
Cash Flow
1
250,000
=
250,000
+
NA
NA
−
NA
=
NA
250,000 FA
2.
(15,000)
=
NA
+
(15,000)
NA
−
15,000
=
(15,000)
(15,000) OA
3.
(253,750)
=
(250,000)
+
(3,750)
NA
−
3,750
=
(3,750)
(253,750) FA
b.
Date
Account Titles
Debit
Credit
1.
Cash
250,000
Bonds Payable
250,000
2.
Interest Expense1
15,000
Cash
15,000
3.
Bonds Payable
250,000
Loss on Redemption of Bonds
3,750
Cash2
253,750