(15-20 min.) E 9-41B
Req. 1 Using the PV function in EXCEL, the issue price of the bonds is
$3,072,290.
Req. 2 (amortization table)
A
B
C
D
E
Semiannual
Interest Date
Interest
Payment
(2% of
Maturity
Value)
Interest
Expense
(2.25% of
Preceding
Bond
Carrying
Amount)
Discount
Amortization
(B – A)
Discount
Account
Balance
(Preceding
D – C)
Bond
Carrying
Amount
($3,200,000
– D)
Dec. 31, 2014
127,710
3,072,290
June 30, 2015
64,000
69,127
5,127
122,583
3,077,417
Dec. 31, 2015
64,000
69,242
5,242
117,342
3,082,658
June 30, 2016
64,000
69,360
5,360
111,982
3,088,018
Dec. 31, 2016
64,000
69,480
5,480
106,501
3,093,499
June 30, 2017
64,000
69,604
5,604
100,898
3,099,102
Dec. 31, 2017
64,000
69,730
5,730
95,168
3,104,832
June 30, 2018
64,000
69,859
5,859
89,309
3,110,691
Dec. 31, 2018
64,000
69,991
5,991
83,319
3,116,681
June 30, 2019
64,000
70,125
6,125
77,193
3,122,807
Dec. 31, 2019
64,000
70,263
6,263
70,930
3,129,070
June 30, 2020
64,000
70,404
6,404
64,526
3,135,474
Dec. 31, 2020
64,000
70,548
6,548
57,978
3,142,022
June 30, 2021
64,000
70,695
6,695
51,282
3,148,718
Dec. 31, 2021
64,000
70,846
6,846
44,436
3,155,564
June 30, 2022
64,000
71,000
7,000
37,436
3,162,564
Dec. 31, 2022
64,000
71,158
7,158
30,278
3,169,722
June 30, 2023
64,000
71,319
7,319
22,960
3,177,040
Dec. 31, 2023
64,000
71,483
7,483
15,476
3,184,524
June 30, 2024
64,000
71,652
7,652
7,824
3,192,176
Dec. 31, 2024
64,000
71,824
7,824
0
3,200,000
(continued) E 9-41B
Req. 3 (journal entries)
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
Dec.
31
Cash ……………………………………………..
3,072,290
Discount on Bonds Payable ……………
127,710
Bonds Payable ………………………….
3,200,000
To issue bonds at a discount.
2015
June
30
Interest Expense …………………………...
69,127
Cash …………………………………………
64,000
Discount on Bonds Payable ……….
5,127
To pay semiannual interest and
amortize bond discount.
2015
Dec.
31
Interest Expense …………………………...
69,242
Cash …………………………………………
64,000
Discount on Bonds Payable ……….
5,242
To pay semiannual interest and
amortize bond discount.
(15-20 min.) E 9-42B
Req. 1 Using the PV function in EXCEL, the issue price of the bonds is
$1,792,127.
Req. 2 (amortization table)
A
B
C
D
E
Semiannual
Interest Date
Interest
Payment
(2% of
Maturity
Value)
Interest
Expense
(1.5% of
Preceding
Bond
Carrying
Amount)
Premium
Amortization (A –
B)
Premium
Account
Balance
(Preceding D –
C)
Bond Carrying
Amount
($1,600,000 +
D)
June 30, 2014
192,127
1,792,127
Dec. 31, 2014
32,000
26,882
5,118
187,009
1,787,009
June 30, 2015
32,000
26,805
5,195
181,814
1,781,814
Dec. 31, 2015
32,000
26,727
5,273
176,541
1,776,541
June 30, 2016
32,000
26,648
5,352
171,189
1,771,189
Dec. 31, 2016
32,000
26,568
5,432
165,757
1,765,757
June 30, 2017
32,000
26,486
5,514
160,244
1,760,244
Dec. 31, 2017
32,000
26,404
5,596
154,647
1,754,647
June 30, 2018
32,000
26,320
5,680
148,967
1,748,967
Dec. 31, 2018
32,000
26,235
5,765
143,201
1,743,201
June 30, 2019
32,000
26,148
5,852
137,349
1,737,349
Dec. 31, 2019
32,000
26,060
5,940
131,410
1,731,410
June 30, 2020
32,000
25,971
6,029
125,381
1,725,381
Dec. 31, 2020
32,000
25,881
6,119
119,262
1,719,262
June 30, 2021
32,000
25,789
6,211
113,050
1,713,050
Dec. 31, 2021
32,000
25,696
6,304
106,746
1,706,746
June 30, 2022
32,000
25,601
6,399
100,347
1,700,347
Dec. 31, 2022
32,000
25,505
6,495
93,853
1,693,853
June 30, 2023
32,000
25,408
6,592
87,260
1,687,260
Dec. 31, 2023
32,000
25,309
6,691
80,569
1,680,569
June 30, 2024
32,000
25,209
6,791
73,778
1,673,778
Dec. 31, 2024
32,000
25,107
6,893
66,885
1,666,885
June 30, 2025
32,000
25,003
6,997
59,888
1,659,888
Dec. 31, 2025
32,000
24,898
7,102
52,786
1,652,786
June 30, 2026
32,000
24,792
7,208
45,578
1,645,578
Dec. 31, 2026
32,000
24,684
7,316
38,262
1,638,262
June 30, 2027
32,000
24,574
7,426
30,836
1,630,836
Dec. 31, 2027
32,000
24,463
7,537
23,298
1,623,298
June 30, 2028
32,000
24,349
7,651
15,648
1,615,648
Dec. 31, 2028
32,000
24,235
7,765
7,882
1,607,882
June 30, 2029
32,000
24,118
7,882
0
1,600,000
(continued) E 9-42B
Req. 3 (journal entries)
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
June
30
Cash ……………………………………………….
1,792,127
Bonds Payable …………………………...
1,600,000
Premium on Bonds Payable …………
192,127
To issue bonds at a premium.
Dec.
31
Interest Expense ……………………………..
26,882
Premium on Bonds Payable ……………..
5,118
Cash …………………………………………..
32,000
To pay semiannual interest and amortize
bond premium.
2015
June
30
Interest Expense ……………………………..
26,805
Premium on Bonds Payable ……………..
5,195
Cash …………………………………………..
32,000
To pay semiannual interest and amortize
bond premium.
(15-20 min.) E 9-43B
Req. 1
The company has the right to occupy space and operate out of leased
stores for several years to come. In return, the company is obligated to
Req. 2
The rights and obligations discussed in Req. 1 are classified as
Req. 3
In the future, the FASB and IASB are proposing to eliminate the current
accounting treatment of most operating leases. If this rule change
(20-25 min.) E 9-44B
Amounts in millions or billions
Company
Company
Company
Ratio
F
K
R
Current
=
Total current assets
=
$434
¥5,383
€148,526
ratio
Total current liabilities
$207
¥2,197
€72,600
= 2.10
= 2.45
= 2.05
F
K
R
Debt
=
Total liabilities
=
$207 + $116
¥2,197 + ¥2,318
€72,600 + €110,107
ratio
Total assets
$434 + $114
¥5,383 + ¥405
€148,526 + €49,525
= 0.59
= 0.78
= 0.92
F
K
R
Leverage
ratio
=
Total assets
=
$548
¥5,788
€198,051
Tot. stockholders’
equity
$225
¥1,273
€15,344
= 2.44
= 4.55
= 12.91
F
K
R
Times-
interest-
=
Operating income
=
$239
¥224
€5,692
earned
Interest expense
$46
¥33
€736
ratio
= 5.2 times
= 6.8 times
= 7.7 times
(15-20 min.) E 9-45B
Req. 1
PLAN A
BORROW
$900,000
AT 5%
PLAN B
ISSUE
$900,000
OF COMMON
STOCK
Net income before expansion …………………………..
$650,000
$650,000
Project income before interest and income tax ….
$800,000
$800,000
Less: interest expense ($900,000 × .05) …………….
(45,000)
-0-
Project income before income tax …………………….
755,000
800,000
Less: income tax expense (40%) ………………………
(302,000)
(320,000)
Project net income …………………………………………..
453,000
480,000
Total company net income …………………………..
$1,103,000
$1,130,000
Earnings per share including new project:
Plan A ($1,103,000 / 225,000 shares) …………….
$4.90
Plan B ($1,130,000 / 525,000 shares) …………….
$2.15
(continued) E 9-45B
Req. 2
MEMORANDUM
TO: Board of Directors of RRS 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
Quiz
Q9–46
b
Q9–47
c
Q9–48
a
Q9–49
d
Q9-50
c
Q9-51
d
[($650,000 + $850,000) × .07] – $5,200 − $42,500 = $57,300
Q9-52
a
Q9-53
b
Q9-54
f
Q9–55
a
Q9–56
c
Q9–57
c
($400,000 × .05) + [($400,000 − $388,000) / 10] = $21,200
Q9–58
Interest Expense…………………………………………
15,900
Discount on Bonds Payable
($12,000 / 10 × 9/12) ……………………………….
900
Interest Payable ($400,000 × .05 × 9/12) ……
15,000
Q9–59
Interest Payable ………………………………………….
15,000
Interest Expense…………………………………………
5,300
Discount on Bonds Payable
($12,000 / 10 × 3/12) ………………………………
300
Cash ($400,000 × .05) ……………………………..
20,000
Q9-60
b
($367,297 x .02) = $7,346
Q9-61
d
Q9-62
b
Q9-63
a
Q9-64
c
Problems
(15-20 min.) P 9-65A
a. Sales tax payable ($180,000 × .06) ………………………………….
$10,800
b. Note payable, short-term ……………………………………………….
$78,000
Interest payable ($78,000 × .04 × 4/12) …………………………….
1,040
c. Unearned service revenue ($5,000 × 2/6) ………………………..
$1,667
d. Estimated warranty payable
($9,600 + $32,000 − $29,900) ………………………………………
$11,700
e. Portion of long-term note payable due
within one year …………………………………………………………
$20,000
Interest payable ($100,000 × .035) …………………………………..
3,500
(30-40 min.) P 9-66A
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
Mar.
3
Inventory ………………………………………………..
52,000
Note Payable, Short-term …………………….
52,000
May
31
Cash ………………………………………………………
96,000
Note Payable, Short-term …………………….
16,000
Note Payable, Long-term …………………….
80,000
Sept.
3
Note Payable, Short-term …………………………
52,000
Interest Expense ($52,000 × .04 × 6/12) ……..
1,040
Cash ………………………………………………….
53,040
Dec.
31
Warranty Expense ($216,000 × .025) …………
5,400
Estimated Warranty Payable ……………….
5,400
31
Interest Expense ($96,000 × .035 × 7/12) ……
1,960
Interest Payable ………………………………….
1,960
2015
May
31
Note Payable, Short-term …………………………
16,000
Interest Payable …………………………..………….
1,960
Interest Expense ($96,000 × .035 × 5/12) ……
1,400
Cash ………………………………………………….
19,360
(20-25 min.) P 9-67A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
a.
May
31
Cash ($6,000,000 × 1/2) ………………..
3,000,000
Bonds Payable ………………………..
3,000,000
To issue bonds at par.
b.
Nov.
30
Interest Expense ………………………….
75,000
Cash ($3,000,000 × .05 × 6/12) ….
75,000
To pay interest on bonds.
c.
Dec.
31
Interest Expense
($3,000,000 × .05 × 1/12) ……………….
12,500
Interest Payable ………………………
12,500
To accrue interest.
2015
d.
May
31
Interest Payable …………………………..
12,500
Interest Expense
($3,000,000 × .05 × 5/12) ……………….
62,500
Cash ($3,000,000 × .05 × 6/12) ….
75,000
To pay interest on bonds.
30-40 min.) P 9-68A
Req. 1
Req. 2
(continued) P 9-68A
Req. 3
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
a.
Feb.
28
Cash ($900,000 × .95) ………………………….
855,000
Discount on Bonds Payable ………………..
45,000
Bonds Payable ……………………………….
900,000
To issue bonds at a discount.
b.
Aug.
31
Interest Expense …………………………………
24,750
Cash ($900,000 × .05 × 6/12) ……………
22,500
Discount on Bonds Payable
($45,000 / 20) ……………………………….
2,250
To pay interest and amortize bond
discount.
c.
Dec.
31
Interest Expense …………………………………
16,500
Interest Payable ($22,500 × 4/6) ……….
15,000
Discount on Bonds Payable
($2,250 × 4/6) ……………………………….
1,500
To accrue interest and amortize bond
discount.
2015
d.
Feb.
28
Interest Payable (from Dec. 31) ……………
15,000
Interest Expense …………………………………
8,250
Cash ($900,000 × .05 × 6/12) ……………
22,500
Discount on Bonds Payable
($2,250 × 2/6) ……………………………….
750
To pay interest and amortize bond
discount.
Req. 4 (reporting the liabilities on the balance sheet at Dec. 31, 2014)
Current liabilities:
Interest payable ……………………………………
$ 15,000
Long-term liabilities:
Bonds payable ……………………………………..
$900,000
Less: Discount on bonds payable
($45,000 − $2,250 − $1,500) …………
(41,250)
858,750
(30-40 min.) P 9-69A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
Jan.
1
Cash ($3,000,000 × .95) …………………………
2,850,000
Discount on Bonds Payable ………………….
150,000
Bonds Payable …………………………………
3,000,000
To issue bonds at a discount.
July
1
Interest Expense …………………………………..
67,500
Cash ($3,000,000 × .04 × 6/12) ……………
60,000
Discount on Bonds Payable
($150,000 / 20) ……………………………….
7,500
To pay interest and amortize bond discount.
Dec.
31
Interest Expense …………………………………..
67,500
Interest Payable
($3,000,000 × .04 × 6/12) …………………
60,000
Discount on Bonds Payable ……………
7,500
To accrue interest and amortize bond discount.
2015
Jan.
1
Interest Payable …………………………………..
60,000
Cash ……………………………………………….
60,000
To pay interest.
2024
Jan.
1
Bonds Payable ……………………………………..
3,000,000
Cash ………………………………………………..
3,000,000
To pay bonds at maturity.
(continued) P 9-69A
Req. 2
Carrying amount at Dec. 31, 2014:
Bonds payable, net
($3,000,000 − $150,000 + $7,500 + $7,500) ………………………
$2,865,000
Req. 3
(30-45 min.) P 9-70A
Req. 1
a. Using the PV function in EXCEL, the issue price of the bonds is
$4,943,165.
Req. 2 (amortization table)
A
B
C
D
E
Semiannual
Interest Date
Interest
Payment
(3% of
Maturity
Value)
Interest
Expense
(4% of
Preceding
Bond
Carrying
Amount)
Discount
Amortization
(B – A)
Discount
Account
Balance
(Preceding
D – C)
Bond
Carrying
Amount
($5,300,000
– D)
Jan. 1, Yr. 1
356,835
4,943,165
Dec. 31, Yr. 1
159,000
197,727
38,727
318,108
4,981,892
Dec. 31, Yr. 2
159,000
199,276
40,276
277,833
5,022,167
Dec. 31, Yr. 3
159,000
200,887
41,887
235,946
5,064,054
Dec. 31, Yr. 4
159,000
202,562
43,562
192,384
5,107,616
Dec. 31, Yr. 5
159,000
204,305
45,305
147,079
5,152,921
Dec. 31, Yr. 6
159,000
206,117
47,117
99,962
5,200,038
Dec. 31, Yr. 7
159,000
208,002
49,002
50,961
5,249,039
Dec. 31, Yr. 8
159,000
209,962
50,961
0
5,300,000
(continued) P 9-70A
Req. 3 (reporting the liabilities at Dec. 31, Year 4)
Current liabilities:
Current installment of notes payable …………
$ 55,000
Long-term liabilities:
Bonds payable …………………………………………
$5,300,000
Less: Discount on bonds payable …………..
(192,384)
5,107,616
Notes payable…………………………………………..
($330,000 – $55,000)
275,000
(40-50 min.) P 9-71A
Req. 1 Using the PV function in EXCEL, the issue price of the bonds is
$3,851,225.
Req. 2 (amortization table)
A
B
C
D
E
Semiannual
Interest Date
Interest
Payment
(2.75%
of
Maturity
Value)
Interest
Expense
(3% 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
148,775
3,851,225
June 30, 2015
110,000
115,537
5,537
143,238
3,856,762
Dec. 31, 2015
110,000
115,703
5,703
137,535
3,862,465
June 30, 2016
110,000
115,874
5,874
131,661
3,868,339
Dec. 31, 2016
110,000
116,050
6,050
125,611
3,874,389
June 30, 2017
110,000
116,232
6,232
119,380
3,880,620
Dec. 31, 2017
110,000
116,419
6,419
112,961
3,887,039
June 30, 2018
110,000
116,611
6,611
106,350
3,893,650
Dec. 31, 2018
110,000
116,810
6,810
99,540
3,900,460
June 30, 2019
110,000
117,014
7,014
92,527
3,907,473
Dec. 31, 2019
110,000
117,224
7,224
85,302
3,914,698
June 30, 2020
110,000
117,441
7,441
77,861
3,922,139
Dec. 31, 2020
110,000
117,664
7,664
70,197
3,929,803
June 30, 2021
110,000
117,894
7,894
62,303
3,937,697
Dec. 31, 2021
110,000
118,131
8,131
54,172
3,945,828
June 30, 2022
110,000
118,375
8,375
45,797
3,954,203
Dec. 31, 2022
110,000
118,626
8,626
37,171
3,962,829
June 30, 2023
110,000
118,885
8,885
28,287
3,971,713
Dec. 31, 2023
110,000
119,151
9,151
19,135
3,980,865
June 30, 2024
110,000
119,426
9,426
9,709
3,990,291
Dec. 31, 2024
110,000
119,709
9,709
0
4,000,000
(continued) P 9-71A
Req. 3
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
a.
Dec.
31
Cash ……………………………………………..
3,851,225
Discount on Bonds Payable ……………
148,775
Convertible Bonds Payable ………..
4,000,000
To issue bonds at a discount.
2015
b.
June
30
Interest Expense …………………………….
115,537
Cash …………………………………………
110,000
Discount on Bonds Payable ……….
5,537
To pay interest and amortize bond
discount.
c.
Dec.
31
Interest Expense …………………………….
115,703
Cash …………………………………………
110,000
Discount on Bonds Payable ……….
5,703
To pay interest and amortize bond
discount.
2016
d.
July
1
Convertible Bonds Payable …………….
1,600,000
Discount on Bonds Payable
($131,661 × 2/5) ……………………..
52,664
Common Stock (120,000 × $1) …….
120,000
Paid-in Capital in Excess of
Par — Common ……………………..
1,427,336
To record conversion of bonds.
Req. 4 (balance sheet presentation of bonds payable at
Dec. 31, 2016)
Convertible bonds payable
($4,000,000 − $1,600,000) ………………………
$2,400,000
Less: Discount on bonds payable
($125,611 × 3/5*) ……………………………………
(75,367)
2,324,633
_____
*3/5 of the bonds are outstanding, so 3/5 of the discount remains.