EXERCISE 10-18A
Sayers Company
General Journal
Date
Account Titles
Debit
Credit
2016
Jan. 1
Cash1
285,600
Premium on Bonds Payable
5,600
Bonds Payable
280,000
June 30
Premium on Bonds Payable2
560
Interest Expense
7,840
Cash3
8,400
Dec. 31
Premium on Bonds Payable
560
Interest Expense
7,840
Cash
8,400
2017
June 30
Premium on Bonds Payable
560
Interest Expense
7,840
Cash
8,400
Dec. 31
Premium on Bonds Payable
560
Interest Expense
7,840
Cash
8,400
EXERCISE 10-19A
a.
Face Value
−
Bond Price
=
Discount
$300,000
−
$278,932
=
$21,068
b.
Carrying Value
x
Effective Rate
=
Interest Expense
$278,932
x
.07
=
$19,525
c. Compute the Ending Balance in the Discount Account
Face Value
x
Stated Rate
=
Cash Payment
$300,000
x
.06
=
$18,000
Interest Expense
−
Cash Payment
=
Amortization
$19,525
−
$18,000
=
$1,525
Beginning Discount
−
Amortization
=
Ending Discount
$21,068
−
$1,525
=
$19,543
Bond Carrying Value as of December 31, 2016
Bond Payable (Face Value)
$300,000
Discount on Bonds Payable
19,543
Carrying Value
$280,457
d.
Account Titles
Debit
Credit
Interest Expense
19,525
Bond Discount
1,525
Cash
18,000
EXERCISE 10-20A
a.
Date
Cash
Payment
Interest
Expense
Discount
Amortization
Carrying
Value
January 1, 2016
76,888
December 31, 2016
6,400
6,920
520
77,408
December 31, 2017
6,400
6,967
567
77,975
December 31, 2018
6,400
7,018
618
78,593
December 31, 2019
6,400
7,073
673
79,266
December 31, 2020
6,400
7,134*
734
80,000
Totals
32,000
35,112
3,112
Bond liability
$80,000
Less: Bond discount
734
Carrying value
$79,266
c. The income statement would show $7,073 of interest expense.
d. The statement of cash flows would show a $6,400 cash outflow for
interest in the operating activities section.
EXERCISE 10-21A
a.
Bond Price
−
Face Value
=
Premium
$323,165
−
$300,000
=
$23,165
b.
Carry Value
x
Effective Rate
=
Interest Expense
$323,165
x
.06
=
$19,390
c. Compute the Ending Balance in the Premium Account
Face Value
x
Stated Rate
=
Cash Payment
$300,000
x
.07
=
$21,000
Cash Payment
−
Interest Expense
=
Amortization
$21,000
−
$19,390
=
$1,610
Beginning Premium
−
Amortization
=
Ending Premium
$23,165
−
$1,610
=
$21,555
Bond Carrying Value as of December 31, 2016
Bond Payable (Face Value)
$300,000
Premium on Bonds Payable
21,555
Carrying Value
$321,555
d.
Account Titles
Debit
Credit
Interest Expense
19,390
Bond Premium
1,610
Cash
21,000
EXERCISE 10-22A
a.
Date
Cash
Payment
Interest
Expense
Premium
Amortization
Carrying
Value
January 1, 2016
156,150
December 31, 2016
12,000
10,931
1,069
155,081
December 31, 2017
12,000
10,856
1,144
153,937
December 31, 2018
12,000
10,776
1,224
152,713
December 31, 2019
12,000
10,690
1,310
151,403
December 31, 2020
12,000
10,597*
1,403
150,000
Totals
60,000
53,850
6,150
EXERCISE 10-23A
Since the stated rate of interest is higher than the effective interest rate
the bonds will sell at a premium. Because the effective interest rate
EXERCISE 10-24A
a.
Crow
Robin
Sparrow
Bonds Payable
$300,000
$600,000
$500,000
Interest Rate
8%
7%
6%
Before Tax Interest Cost
$ 24,000
$ 42,000
$ 30,000
b.
Crow
Robin
Sparrow
Before Tax Interest Cost
$ 24,000
$ 42,000
$ 30,000
x (1 − Tax Rate)
65%
80%
75%
After Tax Interest Cost
$15,600
$33,600
$22,500
1.
Crow
Robin
Sparrow
After Tax Interest Cost
$ 15,600
$ 33,600
$ 22,500
Bonds Payable
$300,000
$600,000
$500,000
= After Tax Interest Rate
5.2%
5.6%
4.5%
OR
2.
Interest Rate x (1 − Tax Rate)
.08 x ( 1−.35)
.07 x (1 − .2)
.06 x (1 − .25)
= After Tax Interest Rate
= 5.2%
= 5.6%
= 4.5%
EXERCISE 10-25A
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
10–VI–50
SOLUTIONS TO PROBLEMS – SERIES A – CHAPTER 10
PROBLEM 10-26A
a.
Brown Co.
Amortization Schedule
$100,000, 4-Yr. Term Note, 8% Interest Rate
Year
Prin. Bal.
on Jan 1
Cash Pay.
Dec. 31
Applied to
Interest
Applied to
Principal
Prin. Bal.
End of Period
2016
$100,000
$30,192
$8,000
$22,192
$77,808
2017
77,808
30,192
6,225
23,967
53,841
2018
53,841
30,192
4,307
25,885
27,956
2019
27,956
30,192
2,236
27,956
-0-
PROBLEM 10-26A (cont.)
b. Provided for the use of the Instructor:
Cash
Notes Payable
Retained Earnings
2016
2016
2016
1/1 100,000
1/1 100,000
1/1 100,000
cl 44,000
12/31 52,000
12/31 30,192
12/31 22,192
Bal. 44,000
Bal. 21,808
Bal. 77,808
2017
2017
2017
cl 45,775
12/31 52,000
12/31 30,192
12/31 23,967
Bal. 89,775
Bal. 43,616
Bal. 53,841
2018
2018
2018
cl 47,693
12/31 52,000
12/31 30,192
12/31 25,885
Bal. 137,468
Bal. 65,424
Bal. 27,956
2019
2019
2019
cl 49,764
12/31 52,000
12/31 30,192
12/31 27,956
Bal. 187,232
Bal. 87,232
Bal. -0-
Rent Revenue
Land
2016
2016
cl 52,000
12/31 52,000
1/1 100,000
Bal. -0–
Bal. 100,000
2017
cl 52,000
12/31 52,000
Bal. -0–
2018
cl 52,000
12/31 52,000
Bal. -0–
2019
cl 52,000
12/31 52,000
Bal. -0–
Interest Expense
2016
12/31 8,000
cl 8,000
Bal. -0-
2017
12/31 6,225
cl 6,225
Bal. -0-
2018
12/31 4,307
cl 4,307
Bal. -0-
2019
12/31 2,236
cl 2,236
Bal. -0-
10–VI–51
PROBLEM 10-26A b. (cont.)
Brown Co.
Financial Statements
2016
2017
2018
2019
Income Statements for the Year Ended December 31
Rent Revenue
$52,000
$52,000
$52,000
$52,000
Interest Expense
(8,000)
(6,225)
(4,307)
(2,236)
Net Income
$44,000
$45,775
$47,693
$49,764
Balance Sheets as of December 31
Assets
Cash
$ 21,808
$ 43,616
$ 65,424
$ 87,232
Land
100,000
100,000
100,000
100,000
Total Assets
$121,808
$143,616
$165,424
$187,232
Liabilities
Notes Payable
$ 77,808
$53,841
$ 27,956
$ -0-
Stockholders’ Equity
Retained Earnings
44,000
89,775
137,468
187,232
Total Liab. and Stk. Equity
$121,808
$143,616
$165,424
$187,232
Statements of Cash Flows for the Year Ended December 31
Cash Flows From Oper. Act.:
Receipts from Rental
$52,000
$52,000
$52,000
$52,000
Paid for Interest
(8,000)
(6,225)
(4,307)
(2,236)
Net Cash Flow fm. Op. Act.:
44,000
45,775
47,693
49,764
Cash Flows From Inv. Act.:
Paid to Purchase Land
(100,000)
-0-
-0-
-0-
Cash Flows From Fin. Act.:
Proceeds from Loan
100,000
-0-
-0-
-0-
Repayment of Loan
(22,192)
(23,967)
(25,885)
(27,956)
Net Cash Flow from Fin. Act.
77,808
(23,967)
(25,885)
(27,956)
Net Change in Cash
21,808
21,808
21,808
21,808
Plus: Beginning Cash Balance
-0-
21,808
43,616
65,424
Ending Cash Balance
$ 21,808
$43,616
$65,424
$87,232
PROBLEM 10-26A (cont.)
c. Because the company is making both principal and interest payments
PROBLEM 10-27A
Computation of Interest Expense
Month
Amount
Borrowed (Repaid)
End of Month
Balance
x
Interest Rate
per Month
=
Interest
Expense
January
$100,000
$100,000
.07/12
$ 583
February
70,000
170,000
.08/12
1,133
March
(30,000)
140,000
.09/12
1,050
April
-0-
140,000
.09/12
1,050
May
-0-
140,000
.09/12
1,050
June
-0-
140,000
.09/12
1,050
July
-0-
140,000
.09/12
1,050
August
-0-
140,000
.09/12
1,050
September
-0-
140,000
.09/12
1,050
October
-0-
140,000
.09/12
1,050
November
(50,000)
90,000
.08/12
600
December
(40,000)
50,000
.07/12
292
Total
$11,008
a.
Boyd Company
Income Statement
For the Year Ended December 31, 2016
Service Revenue
$45,000
Expenses
Interest Expense
(11,008)
Net Income
$33,992
PROBLEM 10-27A a. (cont.)
Boyd Company
Financial Statements
Balance Sheet
As of December 31, 2016
Assets
Cash ($50,000 + $33,992)
$83,992
Total Assets
$83,992
Liabilities
$50,000
Stockholders’ Equity
Common Stock
$ -0-
Retained Earnings
33,992
Total Stockholders’ Equity
33,992
Total Liabilities and Stockholders’ Equity
$83,992
Statement of Cash Flows
For the Year Ended December 31, 2016
Cash Flows From Operating Activities:
Receipts from Revenue
$45,000
Paid for Interest
(11,008)
Net Cash Flow from Operating Activities
$33,992
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Proceeds from Loan
170,000
Repayment of Loan
(120,000)
Net Cash Flow from Financing Activities
50,000
Net Change in Cash
83,992
Plus: Beginning Cash Balance
-0-
Ending Cash Balance
$83,992
PROBLEM 10-27A (cont.)
b. Boyd used debt financing instead of equity financing. Boyd borrowed
PROBLEM 10-28A
a.
Effect of Transactions on Financial Statements
No.
Assets
=
Liab.
+
S. Equity
Rev./
Gain
−
Exp./
Loss
=
Net Inc.
Cash Flow
1.
600,000
=
600,000
+
NA
NA
−
NA
=
NA
600,000 FA
2.
(48,000)
=
NA
+
(48,000)
NA
−
48,000
=
(48,000)
(48,000) OA
3.
(624,000)
=
(600,000)
+
(24,000)
NA
−
24,000
=
(24,000)
(624,000) FA
b.
General Journal
Date
Account Titles
Debit
Credit
1.
Cash
600,000
Bonds Payable
600,000
2.
Interest Expense1
48,000
Cash
48,000
3.
Bonds Payable
600,000
Loss on Redemption of Bonds
24,000
Cash2
624,000
10–VI–58
10–VI–59
PROBLEM 10-29A
Pine Land Co.
2016
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
5a.
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
9a.
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
10–60
PROBLEM 10-30A
a. The bonds sold for less than the face amount; therefore, the bonds
were sold at a discount. This means that the stated rate of interest is
less than the market rate of interest. The amount of the discount acts
to equate the two interest rates. If the bonds had been sold at the face
10–61
PROBLEM 10-30A (cont.)
c.
2016
2017
Liabilities
Bonds Payable
$300,000
$300,000
Less: Discount on Bonds Payable
(5,400)1
(4,800)2
Carrying Value of Bonds Payable
$294,600
$295,200
2016
2017
d.
Interest Expense Reported on Income Statement:
$18,600
$18,600
2016
2017
e.
Interest Paid in Cash to Bondholders:
$18,000
$18,000