© 2016 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
PB10–4
January 1, 2015—Financial statements:
Case A
Case B
Case C
At 100
At 98
At 102
a.
Bonds payable ………………………………….
$500,000
$500,000
$500,000
b.
Unamortized premium (discount) …………
(10,000
)
10,000
c.
Carrying value …………………………………..
$500,000
$ 490,000
$510,000
Note: The bonds in Case B were issued at 98, implying an issue price of $490,000 ( =
98% x $500,000). The bonds in Case C were issued at 102, implying an issue
price of $510,000 ( = 102% x $500,000). When the bond issue price is greater
(less) than the face value, the bonds have issued at a premium (discount).
PB10–5
Req. 1
53,000,000
53,000,000
50,000,000
3,000,000
53,000,000
PB10–6
Req. 1
Changes During the Period
Ending Bond Liability Balances
Period
Ended
(A)
Cash
Paid
(B)
Premium
Amortized
(C) (=A–B)
Interest
Expense
(D)
Bonds
Payable
(E)
Premium on
Bonds Payable
(F) (=D+E)
Carrying Value
01/01/15
–
–
–
100,000
2,070
102,070
12/31/15
5,000
690*
4,310
100,000
1,380
101,380
12/31/16
5,000
690
4,310
100,000
690
100,690
12/31/17
5,000
690
4,310
100,000
0
100,000
* Straight-line amortization of discount = $2,070 ÷ 3 periods = $690 per year.
Req. 2
January 1, 2015:
Cash ……………………………………………………….………………..
102,070
Bonds Payable ………………………………………………………
100,000
Premium on Bonds Payable …………………………………….
2,070
Req. 3
December 31, 2015:
Interest Expense ………………………………………………………..
4,310
Premium on Bonds Payable …………………………..…………….
690
Cash …………………………………………………………………….
5,000
December 31, 2016:
Interest Expense ………………………………………………………..
4,310
Premium on Bonds Payable …………………………..…………….
690
Cash …………………………………………………………………….
5,000
Interest Expense ………………………………………………………..
4,310
Bonds Payable …………………………………………………………..
100,000
Premium on Bonds Payable …………………………..…………….
690
Cash …………………………………………………………………….
105,000
Req. 5
January 1, 2017:
Bonds Payable …………………………………………………………..
100,000
Premium on Bonds Payable …………………………..…………….
690
Loss on Bond Retirement …………………………………………….
1,310
Cash ($100,000 x 102%) …………………………..……………..
102,000
© 2016 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
PB10–7
Req. 1
Changes During the Period
Ending Bond Liability Balances
Period
Ended
(A)
Interest
Expense
(B)
Cash
Paid
(C) (=B–A)
Premium
Amortized
(D)
Bonds
Payable
(E)
Premium on
Bonds Payable
(F) (=D+E)
Carrying Value
01/01/15
–
–
–
100,000
2,070
102,070
12/31/15
4,338
5,000
662
100,000
1,408
101,408
12/31/16
4,310
5,000
690
100,000
718
100,718
12/31/17
4,282*
5,000
718
100,000
0
100,000
* Interest in 2017 calculates as $100,718 x .0425 = $4,281. To accommodate rounding, we
show one dollar more, which brings the Premium on Bonds Payable to zero.
Req. 2
January 1, 2015:
Cash ……………………………………………………….………………..
102,070
Bonds Payable ………………………………………………………
100,000
Premium on Bonds Payable …………………………………….
2,070
Req. 3
December 31, 2015:
Interest Expense ………………………………………………………..
4,338
Premium on Bonds Payable …………………………………………
662
Cash …………………………………………………………………….
5,000
December 31, 2016:
Interest Expense ………………………………………………………..
4,310
Premium on Bonds Payable …………………………..…………….
690
Cash …………………………………………………………………….
5,000
Interest Expense ………………………………………………………..
4,282
Bonds Payable ……………………………………………………. ……
100,000
Premium on Bonds Payable …………………………………………
718
Cash ……………………………………………………………… ……
105,000
Req. 5
January 1, 2017:
Bonds Payable ……………………………………………………. ……
100,000
Premium on Bonds Payable …………………………..…………….
718
Loss on Bond Retirement ……………………………………… ……
282
Cash ($100,000 x 101%) …………………………..………. ……
101,000
PB10–8
Req. 1
Beginning of
Year
Changes During the Period
End of Year
Period
(A)
Bonds
Payable, Net
(B)
Interest
Expense
(C)
Cash
Paid
(D) (=C–B)
Reduction in Bonds
Payable, Net
(E) (=A–D)
Bonds Payable,
Net
01/01/15-12/31/15
102,070
4,338
5,000
662
101,408
01/01/16-12/31/16
101,408
4,310
5,000
690
100,718
01/01/17-12/31/17
100,718
4,282*
5,000
718
100,000
* Interest in 2017 calculates as $100,718 x .0425 = $4,281. To accommodate rounding, we
show one dollar more, which brings the Premium on Bonds Payable to zero.
Req. 2
January 1, 2015:
Cash ……………………………………………………….………………..
102,070
Bonds Payable, Net ………………………………………………..
102,070
Req. 3
December 31, 2015:
Interest Expense ………………………………………………………..
4,338
Bonds Payable, Net …………………………..……………………….
662
Cash …………………………………………………………………….
5,000
December 31, 2016:
Interest Expense ………………………………………………………..
4,310
Bonds Payable, Net …………………………..……………………….
690
Cash …………………………………………………………………….
5,000
Interest Expense ………………………………………………………..
4,282
Bonds Payable, Net …………………………..……………………….
100,718
Cash ……………………………………………………………… ……
105,000
Req. 5
January 1, 2017:
Bonds Payable, Net …………………………..………………… ……
100,718
Loss on Bond Retirement ……………………………………… ……
282
Cash ($100,000 x 101%) …………………………………… ……
101,000
© 2016 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
C10–1
Req. 1
Interest Expense = Principal x Interest Rate x Time
= $1,800,000 x 6% x 12/12
= $108,000
Req. 2
Total cost of vehicles = $2,000,000 purchase price + ($2,000,000 x 11% sales tax)
= $2,220,000
C10–1 (continued)
Req. 2 (continued)
c) Units-of-production = (Cost – Residual Value) x Actual Production
Estimated Total Production
= ($2,220,000 – 420,000) x (Actual Production/60,000*)
* 5.93 = ($532 Net Income + $108 Interest + $0 Income Tax) / $108 Interest
(in 000s)
2016
2017
2018
2019
2020
Income before depreciation & interest
$1,000
$1,200
$1,400
$1,500
$1,600
Depreciation
360
360
360
360
360
Interest
108
108
108
108
108
Net Income
$ 532
$ 732
$ 932
$1,032
$1,132
Times Interest Earned Ratio
5.93*
7.78
9.63
10.56
11.48
Fixed Asset Turnover Ratio
0.98**
1.49
2.12
3.02
5.00
C10–1 (continued)
Req. 3 (continued)
(b) Double-declining depreciation calculations
** 1.13 = $2,000 Sales / [($2,220 Beginning Vehicles, Net + $1,332*** Ending, Net)/2]
*** $1,332 = $2,220 Beginning book value – $888 Depreciation for the current year
(c) Units-of–production depreciation calculations
* 5.09 = ($442 Net Income + $108 Interest + $0 Income Tax) / $108 Interest
** 1.00 = $2,000 Sales / [($2,220 Beginning Vehicles, Net + $1,770*** Ending, Net)/2]
3.00 Times Interest Earned and 1.00 Fixed Asset Turnover ratios. Straight-line
depreciation violates the Fixed Asset Turnover covenant in 2016 (at 0.98) and double-
(in 000s)
2016
2017
2018
2019
2020
Income before depreciation & interest
$1,000
$1,200
$1,400
$1,500
$1,600
Depreciation
888
532.8
319.7
59.5
0
Interest
108
108
108
108
108
Net Income
$ 4
$ 559.2
$ 972.3
$1,332.5
$1,492
Times Interest Earned Ratio
1.04*
6.18
10.00
13.34
14.81
Fixed Asset Turnover Ratio
1.13**
2.35
4.38
6.45
7.14
(in 000s)
2016
2017
2018
2019
2020
Income before depreciation & interest
$1,000
$1,200
$1,400
$1,500
$1,600
Depreciation
450
600
300
300
150
Interest
108
108
108
108
108
Net Income
$ 442
$ 492
$ 992
$1,092
$1,342
Times Interest Earned Ratio
5.09*
5.56
10.19
11.11
13.43
Fixed Asset Turnover Ratio
1.00**
1.70
2.75
4.03
6.06
10-58 Solutions Manual
© 2016 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
ANSWERS TO SKILLS DEVELOPMENT CASES
S10–1
1. A
2. C
Calculations:
Req. 1
Debt-to–Assets
=
Total Liabilities
Total Assets
February 2,
2014
=
$27,996
=
0.691 or 69.1%
$40,518
February 3,
=
$23,307
=
0.567 or 56.7%
2013
$41,084
Req. 2
Times Interest Earned
Ratio
=
Net Income + Interest Expense + Income Tax Expense
Interest Expense
= $5,385 + $711 + $3,082
$711
= 12.91