10–93
PROBLEM 10-29B
White Co.
Event
No.
Type of
Event
Assets
=
Liabilities
+
Common
Stock
+
Retained
Earnings
Net
Income
Cash Flow
1.
AS
+
NA
+
NA
NA
+ FA
2.
AS
+
+
NA
NA
NA
+ FA
3.
AE
+−
NA
NA
NA
NA
− IA
4.
AS
+
NA
NA
+
+
+ OA
5.
AU/CE
−
+
NA
−
−
− OA
6.
Closing
NA
NA
NA
NA
NA
NA
7.
Closing
NA
NA
NA
NA
NA
NA
8.
AS
+
NA
NA
+
+
+ OA
9.
AU/CE
−
+
NA
−
−
− OA
10.
Closing
NA
NA
NA
NA
NA
NA
11.
Closing
NA
NA
NA
NA
NA
NA
12.
AS/AE
+
NA
NA
+
+
+ IA
13.
AU
−
−
NA
NA
NA
− FA
PROBLEM 10-30B
a. The market rate of interest was greater than the stated rate of
interest. Consequently, the bonds sold at a discount. If the bonds had
sold at face value, Cook would have received $200,000.
b.
General Journal
Date
Account Titles
Debit
Credit
2016
Mar. 1
Cash
194,000
Discount on Bonds Payable
6,000
Bonds Payable
200,000
Sept. 1
Interest Expense
6,375
Discount on Bonds Payable ($6,000 8
x 6/12)
375
Cash ($200,000 x 6% x 6/12)
6,000
Dec. 31
Interest Expense
4,250
Discount on Bonds Payable ($6,000 8
x 4/12)
250
Interest Payable ($200,000 x 6% x 4/12)
4,000
Dec. 31
Retained Earnings
10,625
Interest Expense
10,625
2017
Mar. 1
Interest Expense ($2,000 + $125)
2,125
Interest Payable
4,000
Discount on Bonds Payable ($6,000 8
x 2/12)
125
Cash
6,000
Sept. 1
Interest Expense
6,375
Discount on Bonds Payable
375
Cash
6,000
Dec. 31
Interest Expense
4,250
Discount on Bonds Payable
250
Interest Payable
4,000
Dec. 31
Retained Earnings
12,750
Interest Expense
12,750
PROBLEM 10-30B (cont.)
c.
2016
2017
Liabilities
Interest Payable
$ 4,000
$ 4,000
Bonds Payable
200,000
200,000
Less: Discount on Bonds Payable
(5,375)
1
(4,625)
2
Carrying Value of Bonds Payable
194,625
195,375
Total Liabilities
$194,625
$195,375
d.
2016
2017
Interest Expense Reported on Income
Statement
$10,625
$12,750
e.
2016
2017
Interest Paid in Cash to Bondholders
$6,000
$12,000
PROBLEM 10-31B
1. Issued bonds at 103. Cash proceeds = $309,000; Premium = $9,000,
1/1/16.
2. Purchased land for $309,000, 1/1/16.
3. Land rental, $36,000 per year, 2016, 2017, 2018.
4. Interest payments per year, ($300,000 x 6%), $18,000 (years 2016, 2017,
2018).
5. Amortized premium per year, $600 ($9,000 15), 2016, 2017, 2018.
6. Sold the land for $310,000, 1/1/19. (Gain = $1,000)
7. Paid off bonds at 104, cash payment of ($300,000 x 104%) $312,000,
PROBLEM 10-31B (cont.) T-Accounts Provided for Instructor’s Use:
Cash
Bonds Payable
Retained Earnings
2016
2016
2016
1. 309,000
2. 309,000
1. 300,000
cl 18,600
3. 36,000
4. 18,000
Bal. 300,000
Bal. 18,600
Bal. 18,000
2019
2017
2017
7. 300,000
cl. 18,600
3. 36,000
4. 18,000
Bal. -0-
Bal. 37,200
Bal. 36,000
2018
2018
Premium on Bonds Pay.
cl. 18,600
3. 36,000
4. 18,000
2016
Bal. 55,800
Bal. 54,000
5. 600
1. 9,000
2019
2019
Bal. 8,400
cl 3,800
6. 310,000
7. 312,000
2017
Bal. 52,000
Bal. 52,000
5. 600
Bal. 7,800
Lease Revenue
Land
2018
2016
2016
5. 600
cl 36,000
3. 36,000
2. 309,000
Bal. 7,200
2017
Bal. 309,000
2019
cl 36,000
3. 36,000
2019
7. 7,200
2018
6. 309,000
Bal. -0-
cl 36,000
3. 36,000
Bal. -0-
Bal. -0-
Interest Expense
2016
4. 18,000
5. 600
cl 17,400
2017
4. 18,000
5. 600
cl 17,400
2018
4. 18,000
5. 600
cl 17,400
Bal. -0-
Gain on Sale of Land
2019
cl 1,000
6. 1,000
Bal. -0-
Loss on Bond Redempt.
2019
7. 4,800
cl 4,800
Bal. -0-
PROBLEM 10-31B (cont.)
Whitten Company
Financial Statements
For the Year Ended December 31
Income Statements
2016
2017
2018
2019
Lease Revenue
$36,000
$36,000
$36,000
$ -0-
Interest Expense
(17,400)
(17,400)
(17,400)
-0-
Operating Income
18,600
18,600
18,600
-0-
Non-Operating Items
Gain on Sale of Land
-0-
-0-
-0-
1,000
Loss on Bond Redemption
-0-
-0-
-0-
(4,800)
Net Income
$18,600
$18,600
$18,600
$(3,800)
Statement of Changes in Stockholders’ Equity
Common Stock
$ -0-
$ -0-
$ -0-
$ -0-
Beginning Retained
Earnings
-0-
18,600
37,200
$55,800
Plus Net Income (Loss)
18,600
18,600
18,600
(3,800)
Ending Retained Earnings
18,600
37,200
55,800
52,000
Total Stockholders’ Equity
$18,600
$37,200
$55,800
$52,000
PROBLEM 10-31B (cont.)
Whitten Company Financial Statements
Balance Sheets as of December
31,
2016
2017
2018
2019
Assets
Cash
$ 18,000
$ 36,000
$ 54,000
$52,000
Land
309,000
309,000
309,000
-0-
Total Assets
$327,000
$345,000
$363,000
$52,000
Liabilities
Bonds Payable
$300,000
$300,000
$300,000
$ -0-
Premium on Bonds Pay.
8,400
7,800
7,200
-0-
Total Liabilities
308,400
307,800
307,200
-0-
Stockholders’ Equity
Retained Earnings
18,600
37,200
55,800
52,000
Total Liab. and Stk. Equity
$327,000
$345,000
$363,000
$52,000
Statements of Cash Flows for the Year Ended December 31
Cash Flow From Oper. Act.:
Receipts from Lease
$ 36,000
$36,000
$36,000
$ -0-
Paid for Interest
(18,000)
(18,000)
(18,000)
-0-
Net Cash Flow fm. Oper. Act.
18,000
18,000
18,000
-0-
Cash Flow From Inv. Act.:
Received from Sale of Land
-0-
-0-
-0-
310,000
Paid to Purchase Land
(309,000)
-0-
-0-
-0-
Net Cash Flow from Inv. Act.
(309,000)
-0-
-0-
310,000
Cash Flow Financing Act.:
Proceeds from Bond Issue
309,000
-0-
-0-
-0-
Repayment of Bond
-0-
-0-
-0-
(312,000)
Net Cash Flow fm. Fin. Act.
309,000
-0-
-0-
(312,000)
Net Change in Cash
18,000
18,000
18,000
(2,000)
Plus Beginning Cash Balance
-0-
18,000
36,000
54,000
Ending Cash Balance
$18,000
$ 36,000
$54,000
$52,000
PROBLEM 10-32B
Effect of Transactions on Financial Statements
No
.
Assets
=
Liab.
+
S. Equity
Rev./
Gain
−
Exp./
Loss
=
Net Inc.
Cash Flow
a.
+
+
NA
NA
NA
NA
+ FA
b.
−
−
−
NA
+
−
− OA
c.
+
+
NA
NA
NA
NA
+ FA
d.
−
NA
−
NA
+
−
− OA
e.
−
−
−
NA
+
−
− FA/OA
f.
+
+
NA
NA
NA
NA
+ FA
g.
−
NA
−
NA
+
−
− OA
h.
+
+
NA
NA
NA
NA
+ FA
i.
−
+
−
NA
+
−
− OA
PROBLEM 10-33B
a.
Date
Account Title
Debit
Credit
1/1/16
Cash
104,330
Premium on Bonds Payable
4,330
Bonds Payable
100,000
Date
Account Title
Debit
Credit
12/31/18
Interest Expense
5,136
Premium on Bonds Payable
864
Cash
6,000
PROBLEM 10-33B (cont.)
c. Calculation of Interest Expense and Premium Amortization (Straight–
line method):
PROBLEM 10-34B
a. First, compute EBIT for each company:
Tacoma
Olympia
Net Income
$145,000
$155,000
Interest Expense
60,000
45,000
Tax Expense
95,000
100,000
EBIT
$300,000
$300,000
Problem 10-34B part b. (cont.)
Even though the return-on-assets ratios of Tacoma and Olympia are
1. Short-term notes mature within one year or one operating cycle,
whichever is longer. Long-term notes payable are used to satisfy
2.
I. Princ
ipal
II. Pay
men
t
III. Inter
est
IV. Red
ucti
on
Period
V. Bal.
1/1
12/31
VI. Exp.
8%
of Prin.
1
$ 72,000
$16,246
$5,760
$10,486
2
61,514
16,246
4,921
11,325
3
50,189
Interest expense in year 1 and 2 is $5,760 and $4,921, respectively.
The principal balance at the end of year 2 is $50,189.
3. A line of credit is a preapproved amount of credit that is available to
a business to use as needed. It eliminates the need to get loan
4. A business may need to borrow funds for a short period of time or a
longer period. Most short-term financing is in the form of loans
5. One of the primary advantages of bond financing is that the
6. One of the primary disadvantages of a bond issue is the restrictions that may be placed on management. These
7. One reason that a company may be able to borrow money at a lower
interest rate if bonds are issued rather than borrowing the money
from a financial institution is the way financial institutions make
their money. Banks receive money from customers through
8. Tax rules seem to encourage borrowing (debt financing) over
stockholder financing (equity financing) because interest paid on
9. Financial leverage is the concept of acquiring additional funds
10. The secured bond will usually have the lower interest rate because
asset. The unsecured bond is issued based on the general credit of
11. Restrictive covenants are limitations placed on a company that will
12. Term bonds mature on a specific date in the future. For example, a
$1,000,000, 10-year term bond issued on Jan. 1, 2015 would mature
13. A sinking fund is a fund into which a company makes annual or
14. Callable bonds allow the company to pay off the debt prior to the
maturity date at a specified amount called the call price. The call
15. The issuance of $100,000, 5%, 10-year bonds at face will result in an
increase to assets and liabilities on the balance sheet. The income
statement is not affected by the issuance of the bonds. The cash
16. Bonds can be issued at a premium or discount (an amount above or
rate with the market interest rate. The difference in cash proceeds
17. When the effective interest rate is higher than the stated interest
18. The issuance of bonds by a company is an asset source transaction.
19. The passage of time is usually the cause of the effective interest rate
and the stated interest rate being different. When bonds are issued,
20. The cash received for the bond will be $975 ($1,000 x .975).
21. The carrying value of a bond is the face value of the bond less any
22. The carrying value of the bonds is $19,800 ($25,000 face minus
$5,200 discount). The carrying value of the bond represents the
23. When the effective interest rate is higher than the stated interest
rate, interest expense will be higher than the amount of interest
24. The issuer of a bond would prefer to pay interest annually rather
than semiannually because of the timing of the cash outflow.
25. Any loss from the redemption of bonds is reported on the income
26. Debt financing has a tax advantage over equity financing because
not.
27. The after-tax cost of the debt is $7,000, computed as follows:
Interest Expense $10,000
28. Debt financing increases the risk factor of a business. This risk
arises due to the definite liability to pay interest on the debt and
risk.
29. The times interest earned ratio (EBIT/Interest Expense) assesses the