PROBLEM 10-31A
1. Issued bonds at 96. Cash proceeds = $480,000; Discount = $20,000,
1/1/16.
2. Purchased land for $480,000, 1/1/16.
3. Land rental, $60,000 per year, for 2016, 2017, 2018.
4. Interest payments per year, ($500,000 x 8%) $40,000, for 2016, 2017,
2018.
5. Amortized discount per year, ($20,000 20) $1,000,for 2016, 2017, 2018.
6. Sold the land for $500,000, 1/1/19. (Gain = $20,000)
7. Paid off bonds at 98, Cash payment of ($500,000 x 98%) $490,000,
10–63
PROBLEM 10-31A (cont.) T-Accounts Provided for Instructor’s Use:
Cash
Bonds Payable
Retained Earnings
2016
2016
2016
1. 480,000
1. 500,000
cl 19,000
3. 60,000
Bal. 500,000
Bal. 19,000
Bal. 20,000
2019
2017
2017
7. 500,000
cl. 19,000
3. 60,000
Bal. -0-
Bal. 38,000
Bal. 40,000
2018
2018
Discount on Bonds Pay.
cl. 19,000
3. 60,000
2016
Bal. 57,000
Bal. 60,000
1. 20,000
5. 1,000
2019
2019
Bal. 19,000
cl 13,000
6. 500,000
2017
Bal. 70,000
Bal. 70,000
5. 1,000
Bal. 18,000
Lease Revenue
Land
2018
2016
2016
5. 1,000
cl 60,000
3. 60,000
2. 480,000
Bal. 17,000
2074
Bal. 480,000
2019
cl 60,000
3. 60,000
2019
7. 17,000
2018
Bal. -0-
cl 60,000
3. 60,000
Bal. -0-
Bal. -0-
Interest Expense
2016
4. 40,000
5. 1,000
cl 41,000
2017
4. 40,000
5. 1,000
cl 41,000
2018
4. 40,000
5. 1,000
cl 41,000
Bal. -0-
Gain on Sale of Land
2019
cl 20,000
6. 20,000
Bal. -0-
Loss on Bond Redempt.
2019
7. 7,000
cl 7,000
10–64
Bal. -0-
10–65
PROBLEM 10-31A (cont.)
OZ Company
Financial Statements
For the Year Ended December 31
Income Statements
2016
2017
2018
2019
Lease Revenue
$60,000
$60,000
$60,000
$ -0-
Interest Expense
(41,000)
(41,000)
(41,000)
-0-
Operating Income
19,000
19,000
19,000
-0-
Non-Operating
Income/Expense
Gain on Sale of Land
-0-
-0-
-0-
20,000
Loss on Bond Redemption
-0-
-0-
-0-
(7,000)
Net Income
$19,000
$19,000
$19,000
$13,000
Statement of Changes in Stockholders’ Equity
Common Stock
$ -0-
$ -0-
$ -0-
$ -0-
Beginning Retained Earnings
-0-
19,000
38,000
57,000
Plus: Net Income
19,000
19,000
19,000
13,000
Ending Retained Earnings
19,000
38,000
57,000
70,000
Total Stockholders’ Equity
$19,000
$38,000
$57,000
$70,000
10–66
PROBLEM 10-31A (cont.)
OZ Company Financial Statements
Balance Sheets as of
December 31
2016
2017
2018
2019
Assets
Cash
$ 20,000
$ 40,000
$ 60,000
$70,000
Land
480,000
480,000
480,000
-0-
Total Assets
$500,000
$520,000
$540,000
$70,000
Liabilities
Bonds Payable
$500,000
$500,000
$500,000
$ -0-
Discount on Bonds Payable
(19,000)
(18,000)
(17,000)
-0-
Total Liabilities
481,000
482,000
483,000
-0-
Stockholders’ Equity
Retained Earnings
19,000
38,000
57,000
70,000
Total Liab. and Stk. Equity
$500,000
$520,000
$540,000
$70,000
Statements of Cash Flows for the Year Ended December 31
Cash Flows From Oper. Act.:
Receipts from Lease
$ 60,000
$60,000
$60,000
$ -0-
Paid for Interest
(40,000)
(40,000)
(40,000)
-0-
Net Cash Flow from Opr. Act.
20,000
20,000
20,000
-0-
Cash Flows From Inv. Act.:
Receipt from Sale of Land
-0-
-0-
-0-
500,000
Paid to Purchase Land
(480,000)
-0-
-0-
-0-
Net Cash Flow from Inv. Act.
(480,000)
-0-
-0-
500,000
Cash Flows From Fin. Act.:
Proceeds from Bond Issue
480,000
-0-
-0-
-0-
Redemption of Bond
-0-
-0-
-0-
(490,000)
Net Cash Flow from Fin. Act.
480,000
-0-
-0-
(490,000)
Net Change in Cash
20,000
20,000
20,000
10,000
Plus: Beg. Cash Balance
-0-
20,000
40,000
60,000
Ending Cash Balance
$ 20,000
$40,000
$60,000
$70,000
10–67
PROBLEM 10-32A
a.
Bonds Issued at Face Value
Effect of Transactions on Financial Statements
No
.
Assets
=
Liab.
+
S. Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
1.
+
=
+
+
NA
NA
−
NA
=
NA
+ FA
2.
−
=
NA
+
−
NA
−
+
=
−
− OA
3.
−
=
−
+
NA
NA
−
NA
=
NA
− FA
b.
Bonds Issued at a Discount
Effect of Transactions on Financial Statements
No
.
Assets
=
Liab.
+
S. Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
1.
+
=
+
+
NA
NA
−
NA
=
NA
+ FA
2.
−
=
+
+
−
NA
−
+
=
−
− OA
3.
−
=
−
+
NA
NA
−
NA
=
NA
− FA
c.
Bonds Issued at a Premium
Effect of Transactions on Financial Statements
No
.
Assets
=
Liab.
+
S. Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
1.
+
=
+
+
NA
NA
−
NA
=
NA
+ FA
2.
−
=
−
+
−
NA
−
+
=
−
− OA
3.
−
=
−
+
NA
NA
−
NA
=
NA
− FA
10–68
PROBLEM 10-33A
a.
Date
Account Titles
Debit
Credit
1/1/16
Cash
477,422
Discount on Bonds Payable
22,578
Bonds Payable
500,000
Date
Account Titles
Debit
Credit
12/31/16
Interest Expense
38,194
Discount on Bonds Payable
3,194
Cash
35,000
10–69
EXERCISE 10-33A (cont.)
c. Calculation of Interest Expense and Discount Amortization (Straight-
line method).
10–70
PROBLEM 10-34A
a. First, compute EBIT for each company:
Bob’s Pest
Services
Sarah’s
Critter
Control
Net Income
$105,000
$115,000
Interest Expense
62,000
45,000
Tax Expense
69,000
75,500
EBIT
$236,000
$235,500
10–71
PROBLEM 10–34A part b. (cont.)
Even though the return-on-assets ratios of Bob’s Pest Services and
10–72
SOLUTIONS TO ANALYZE, THINK, COMMUNICATE – CHAPTER 10
ATC 10-1
All dollar amounts are in millions.
of $2.25 billion that expires in 2018. None of this had been used as
of February 1, 2014.