(10-15 min.) E 9-24A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
a.
Jan.
31
Cash ($6,000,000 × 0.96) …………………..
5,760,000
Discount on Bonds Payable …………….
240,000
Bonds Payable ………………………….
6,000,000
To issue bonds at a discount.
b.
July
31
Interest Expense ……………………………..
129,000
Cash ($6,000,000 × .035 × 6/12) …..
105,000
Discount on Bonds Payable
($240,000 / 10) ……………………….
24,000
To pay interest and amortize bond
discount.
c.
Dec.
31
Interest Expense ……………………………..
107,500
Interest Payable
($6,000,000 × .035 × 5/12) ……….
87,500
Discount on Bonds Payable
($240,000 / 10 × 5/6) ……………….
20,000
To accrue interest and amortize bond
discount.
(10-15 min.) E 9-25A
1.
Cash received = $200,000 × 1.06 =
$212,000
2.
Principal ……………………………………………………………..
$200,000
Interest ($200,000 × .04 × 20) ………………………………..
160,000
Total cash paid ……………………………………………………
$360,000
3.
Total cash paid ……………………………………………………
$360,000
Less: Cash received …………………………………………..
(212,000)
Difference = Total interest expense ………………………
$148,000
4.
Annual interest expense by the straight-line amortization method:
$200,000 × .04
$200,000 × (1.06 − 1.00)
20
$8,000
−
$600
=
$ 7,400
Cash interest payment
Premium amortization
× 20 years
Total interest expense over the life of the bonds
$148,000
same
(15-20 min.) E 9-26A
Req. 1 Using the PV function in EXCEL, the issue price of the bonds is
$3,688,217.
Req. 2 (amortization table)
A
B
C
D
E
Semiannual
Interest Date
Interest
Payment
(2% of
Maturity
Value)
Interest
Expense
(2.5% of
Preceding
Bond
Carrying
Amount)
Discount
Amortization
(B – A)
Discount
Account
Balance
(Preceding
D – C)
Bond
Carrying
Amount
($4,000,000
– D)
Dec. 31, 2014
311,783
3,688,217
June 30, 2015
80,000
92,205
12,205
299,578
3,700,422
Dec. 31, 2015
80,000
92,511
12,511
287,067
3,712,933
June 30, 2016
80,000
92,823
12,823
274,244
3,725,756
Dec. 31, 2016
80,000
93,144
13,144
261,100
3,738,900
June 30, 2017
80,000
93,473
13,473
247,627
3,752,373
Dec. 31, 2017
80,000
93,809
13,809
233,818
3,766,182
June 30, 2018
80,000
94,155
14,155
219,663
3,780,337
Dec. 31, 2018
80,000
94,508
14,508
205,155
3,794,845
June 30, 2019
80,000
94,871
14,871
190,284
3,809,716
Dec. 31, 2019
80,000
95,243
15,243
175,041
3,824,959
June 30, 2020
80,000
95,624
15,624
159,417
3,840,583
Dec. 31, 2020
80,000
96,015
16,015
143,402
3,856,598
June 30, 2021
80,000
96,415
16,415
126,987
3,873,013
Dec. 31, 2021
80,000
96,825
16,825
110,162
3,889,838
June 30, 2022
80,000
97,246
17,246
92,916
3,907,084
Dec. 31, 2022
80,000
97,677
17,677
75,239
3,924,761
June 30, 2023
80,000
98,119
18,119
57,120
3,942,880
Dec. 31, 2023
80,000
98,572
18,572
38,548
3,961,452
June 30, 2024
80,000
99,036
19,036
19,512
3,980,488
Dec. 31, 2024
80,000
99,512
19,512
0
4,000,000
(continued) E 9-26A
Req. 3
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
Dec.
31
Cash ……………………………………………..
3,688,217
Discount on Bonds Payable ……………
311,783
Bonds Payable ………………………….
4,000,000
To issue bonds at a discount.
2015
June
30
Interest Expense …………………………...
92,205
Cash …………………………………………
80,000
Discount on Bonds Payable ……….
12,205
To pay semiannual interest and
amortize bond discount.
2015
Dec.
31
Interest Expense …………………………...
92,511
Cash …………………………………………
80,000
Discount on Bonds Payable ……….
12,511
To pay semiannual interest and
amortize bond discount.
(15-20 min.) E 9-27A
Req. 1 Using the PV function in EXCEL, the issue price of the bonds is
$4,571,885.
Req. 2 (amortization table on next page)
Req. 3 (journal entries)
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
June
30
Cash ………………………………………………….
4,571,885
Bonds Payable ……………………………….
4,000,000
Premium on Bonds Payable ……………
571,885
To issue bonds at a premium.
Dec.
31
Interest Expense …………………………………
80,008
Premium on Bonds Payable ………………..
9,992
Cash ……………………………………………..
90,000
To pay semiannual interest and amortize
bond premium.
2015
June
30
Interest Expense …………………………………
79,833
Premium on Bonds Payable ………………..
10,167
Cash ……………………………………………..
90,000
To pay semiannual interest and amortize
bond premium.
A
B
C
D
E
Semiannual
Interest Date
Interest
Payment
(2.25% of
Maturity Value)
Interest Expense
(1.75% of Preceding
Bond Carrying
Amount)
Premium
Amortization
(A – B)
Premium
Account Balance
(Preceding D – C)
Bond Carrying
Amount
($4,000,000 + D)
June 30, 2014
571,885
4,571,885
Dec. 31, 2014
90,000
80,008
9,992
561,893
4,561,893
June 30, 2015
90,000
79,833
10,167
551,726
4,551,726
Dec. 31, 2015
90,000
79,655
10,345
541,381
4,541,381
June 30, 2016
90,000
79,474
10,526
530,855
4,530,855
Dec. 31, 2016
90,000
79,290
10,710
520,145
4,520,145
June 30, 2017
90,000
79,103
10,897
509,248
4,509,248
Dec. 31, 2017
90,000
78,912
11,088
498,160
4,498,160
June 30, 2018
90,000
78,718
11,282
486,878
4,486,878
Dec. 31, 2018
90,000
78,520
11,480
475,398
4,475,398
June 30, 2019
90,000
78,319
11,681
463,717
4,463,717
Dec. 31, 2019
90,000
78,115
11,885
451,833
4,451,833
June 30, 2020
90,000
77,907
12,093
439,740
4,439,740
Dec. 31, 2020
90,000
77,695
12,305
427,435
4,427,435
June 30, 2021
90,000
77,480
12,520
414,915
4,414,915
Dec. 31, 2021
90,000
77,261
12,739
402,176
4,402,176
June 30, 2022
90,000
77,038
12,962
389,214
4,389,214
Dec. 31, 2022
90,000
76,811
13,189
376,026
4,376,026
June 30, 2023
90,000
76,580
13,420
362,606
4,362,606
Dec. 31, 2023
90,000
76,346
13,654
348,952
4,348,952
June 30, 2024
90,000
76,107
13,893
335,058
4,335,058
Dec. 31, 2024
90,000
75,864
14,136
320,922
4,320,922
June 30, 2025
90,000
75,616
14,384
306,538
4,306,538
Dec. 31, 2025
90,000
75,364
14,636
291,902
4,291,902
June 30, 2026
90,000
75,108
14,892
277,011
4,277,011
Dec. 31, 2026
90,000
74,848
15,152
261,858
4,261,858
June 30, 2027
90,000
74,583
15,417
246,441
4,246,441
Dec. 31, 2027
90,000
74,313
15,687
230,753
4,230,753
June 30, 2028
90,000
74,038
15,962
214,792
4,214,792
Dec. 31, 2028
90,000
73,759
16,241
198,551
4,198,551
June 30, 2029
90,000
73,475
16,525
182,025
4,182,025
Dec. 31, 2029
90,000
73,185
16,815
165,211
4,165,211
June 30, 2030
90,000
72,891
17,109
148,102
4,148,102
Dec. 31, 2030
90,000
72,592
17,408
130,694
4,130,694
June 30, 2031
90,000
72,287
17,713
112,981
4,112,981
Dec. 31, 2031
90,000
71,977
18,023
94,958
4,094,958
June 30, 2032
90,000
71,662
18,338
76,620
4,076,620
Dec. 31, 2032
90,000
71,341
18,659
57,960
4,057,960
June 30, 2033
90,000
71,014
18,986
38,975
4,038,975
Dec. 31, 2033
90,000
70,682
19,318
19,657
4,019,657
June 30, 2034
90,000
70,344
19,657
0
4,000,000
(15-20 min.) E 9-28A
Req. 1
The company has the right to occupy space and operate out of leased
(20-25 min.) E 9-29A
Amounts in millions or billions
Company
Company
Company
Ratio
B
N
V
Current
=
Total current assets
=
$429
¥5,321
€144,720
ratio
Total current liabilities
$227
¥2,217
€ 72,500
= 1.89
= 2.40
= 2.00
B
N
V
Debt
= =
Total liabilities
=
$227 + $86
¥2,217 + ¥2,277
€72,500 + €111,177
ratio
Total assets
$429 + $99
¥5,321 + ¥592
€144,720 + €65,828
= 0.59
= 0.76
= 0.87
B
N
V
Leverage
ratio
=
Total assets
=
$528
¥5,913
€210,548
Tot. stockholders’
equity
$215
¥1,419
€26,871
= 2.46
= 4.17
= 7.84
B
N
V
Times-
interest-
=
Operating income
=
$259
¥230
€5,746
earned
Interest expense
$41
¥27
€655
ratio
= 6.3 times
= 8.5 times
= 8.8 times
Student responses may vary, but based on the information given,
company B looks the least risky, with relatively high current ratio and
times-interest earned coverage, and relatively low debt ratio.
(15-20 min.) E 9-30A
Req. 1
PLAN A
BORROW
$600,000
AT 4%
PLAN B
ISSUE
$600,000
OF COMMON
STOCK
Net income before expansion ……………………
$350,000
$350,000
Project income before interest and income tax
$500,000
$500,000
Less interest expense ($600,000 × .04) ………
24,000
-0-
Project income before income tax……………..
476,000
500,000
Less: income tax expense (25%) ……………….
(119,000)
(125,000)
Project net income …………………………………..
357,000
375,000
Total company net income ……………………
$707,000
$725,000
Earnings per share including new project:
Plan A ($707,000 / 120,000 shares) ………..
$5.89
Plan B ($725,000 / 320,000 shares) ………..
$2.27
(continued) E 9-30A
Req. 2
MEMORANDUM
TO: Board of Directors of BBS Financial Services
FROM: Student Name
SUBJECT: Financing plan to expand operations
Plan A (borrowing) results in much higher earnings per share. Plan A
also allows the existing stockholders to retain control of the company
(5-15 min.) E 9-31B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Warranty Expense ($147,000 × .09) …………
13,230
Estimated Warranty Payable ………………
13,230
Estimated Warranty Payable …………………..
9,200
Cash …………………………………………………
9,200
Req. 2
INCOME STATEMENT
Sales revenue ……………………………………………………
$147,000
Warranty expense ……………………………………………..
13,230
BALANCE SHEET
Current liabilities
Estimated warranty payable
($2,800 + $13,230 − $9,200) …………………………..
$ 6,830
Req. 3
(10-15 min.) E 9-32B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
Oct.
1
Cash ……………………………………………………….
2,354
Unearned Subscription Revenue…………..
2,200
Sales Tax Payable ($2,200 × .07) …………..
154
Nov.
15
Sales Tax Payable ……………………………………
154
Cash……………………………………………………
154
Dec.
31
Unearned Subscription Revenue ………………
550
Subscription Revenue ($2,200 × 3/12) ……
550
BALANCE SHEET
Current liabilities:
Unearned subscription revenue ($2,200 − $550) ………………
$1,650
(10 min.) E 9-33B
INCOME STATEMENT
Expenses:
Payroll expense ………………………………………………………
$168,000
Payroll tax expense ($168,000 × .08) …………………………
13,440
BALANCE SHEET
Current liabilities:
Salary payable ………………………………………………………..
$ 7,900
Payroll tax payable ………………………………………………….
915
(5-10 min.) E 9-34B
Req. 1
Interest to
accrue at
=
$54,000 × .03 × 3/12
=
$405
Dec. 31, 2014
Req. 2
Final payment
=
$54,000 + ($54,000 × .03)
=
$55,620
on October 1, 2015
Req. 3
Interest expense for:
2014
=
$54,000 × .03 × 3/12
=
$ 405
2015
=
$54,000 × .03 × 9/12
=
$1,215
(10-15 min.) E 9-35B
Branson’s balance sheet at Dec. 31, 2015 reported:
Income tax payable ………………………………………………..
$146,200*
Branson’s 2015 income statement reported:
Income tax expense ($1,040,000 × .36) …………………….
$374,400
_____
* Beginning income tax payable ………………………………………
$105,000
+ Income tax expense (and payable) for the year
($1,040,000 × .36) …………………………………………………………
374,400
− Income tax payments during the year …………………………...
(333,200)
= Ending income tax payable …………………………………………..
$146,200
(10-20 min.) E 9-36B
Req. 1
Accounts payable are amounts owed to suppliers for products or
services that have been purchased on account.
(continued) E 9-36B
Req. 2
Total assets = $4,037 million, the sum of total liabilities and
stockholders’ equity.
(in millions) 2014
Leverage
ratio
=
Total assets ($4,037)
Total stockholders’ equity ($2,027)
=
1.99
Debt ratio
=
Total liabilities ($4,037 − $2,027)*
=
0.50
Total assets ($4,037)
For 2013, the leverage ratio was 2.24 and the debt ratio was .55.
____
*Or, $365 + $1,487 + $138 + $20 = $2,010
Req. 3
2014 2013
Accounts
payable
turnover
Cost of goods sold
$1,765
= 11.4
$2,046
= 11.0
Average accounts
payable
$155*
$186**
*($134 + $176) / 2
**($176 + $195) / 2
Days
payable
outstanding
365
365
= 32.0
365
= 33.2
Accts. payable
turnover
11.4
11.0
Current
ratio
Current assets
$638
= 1.75
$604
= 1.63
Current liabilities
$365
$371
(5-10 min.) E 9-37B
Req. 1
Nguyen Security Systems should report this situation in a note to the
financial statements. It is the company’s policy to disclose legal
Req. 2
Nguyen would report:
INCOME STATEMENT
Estimated loss (or expense) due to lawsuit
contingency …………………………………….
$1,700,000
BALANCE SHEET
Estimated liability due to lawsuit contingency
$1,700,000
The note disclosure would be similar to Requirement 1.
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
Estimated Loss from Lawsuit Contingency ………
1,700,000
Estimated Liability from Lawsuit Contingency
1,700,000
(15-20 min.) E 9-38B
Pippin Electronics
Balance Sheet (partial)
June 30, 2014
Current liabilities:
a. Estimated warranty payable
[$29,000 + ($1,900,000 × .06) − $46,000] ………………..
$97,000
b. Current portion of long-term note payable ………………..
10,500
Interest payable ($42,000 × .04 × 1/12) ………………………
140
c. Unearned sales revenue ($125,000 − $85,000) ……………
40,000
d. Employee withheld income tax payable ……………………
28,300
FICA tax payable ($270,000 × .0765) ………………………….
20,655
Total current liabilities ………………………………………..
$196,595
Long-term liabilities:
Note payable ($42,000 − $10,500) ……………………………..
$ 31,500
(10-15 min.) E 9-39B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
a.
Jan.
31
Cash ($8,000,000 × 0.93) ………………..
7,440,000
Discount on Bonds Payable …………..
560,000
Bonds Payable …………………………
8,000,000
To issue bonds at a discount.
b.
July
31
Interest Expense …………………………..
228,000
Cash ($8,000,000 × .05 × 6/12) ……
200,000
Discount on Bonds Payable
($560,000 / 20) ………………………
28,000
To pay interest and amortize bond
discount.
c.
Dec.
31
Interest Expense …………………………..
190,000
Interest Payable
($8,000,000 × .05 × 5/12) ………..
166,667
Discount on Bonds Payable
($28,000 × 5/6) ………………………
23,333
To accrue interest and amortize bond
discount.
(10-15 min.) E 9-40B
1.
Cash received = $400,000 × 1.02 =
$408,000
2.
Principal ……………………………………………………………..
$400,000
Interest ($400,000 × .03 × 20) ………………………………..
240,000
Total cash paid ……………………………………………………
$640,000
3.
Total cash paid ……………………………………………………
$640,000
Less: Cash received …………………………………………..
(408,000)
Difference = Total interest expense ………………………
$232,000
4.
Annual interest expense by the straight-line amortization method:
$400,000 × .03
$400,000 × (1.02 − 1.00)
20
$12,000
−
$400
=
$ 11,600
Cash interest payment
Premium amortization
× 20 years
Total interest expense over the life of the bonds
$232,000
same