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S12-10 Retiring bonds payable before maturity
Learning Objectives 3, 4
On January 1, 2018, Powell Company issued $350,000 of 10%, five-year bonds payable at 102.
Powell Company has extra cash and wishes to retire the bonds payable on January 1, 2019,
immediately after making the second semiannual interest payment. To retire the bonds, Powell
Company pays the market price of 98.
Requirements
1. What is Powell Company’s carrying amount of the bonds payable on the retirement date?
2. How much cash must Powell Company pay to retire the bonds payable?
3. Compute Powell Company’s gain or loss on the retirement of the bonds payable.
SOLUTION
Requirement 1
S12-11 Preparing the liabilities section of the balance sheet
Learning Objective 5
Luxury Suites Hotels includes the following selected accounts in its general ledger at December
31, 2018:
Notes Payable (long-term) $ Accounts Payable $ 33,000
200,000
Bonds Payable (due 2022) 450,000 Discount on Bonds
Payable
13,500
Interest Payable (due next
year)
1,000 Salaries Payable 2,600
Estimated Warranty
Payable
1,300 Sales Tax Payable 400
Prepare the liabilities section of Luxury Suites’s balance sheet at December 31, 2018.
SOLUTION
S12-12 Computing the debt to equity ratio
Learning Objective 6
Jackson Corporation has the following amounts as of December 31, 2018.
Total assets $ 55,250
Total liabilities 22,750
Total equity 32,500
Compute the debt to equity ratio at December 31, 2018.
SOLUTION
S12A-13 Determining present value
Learning Objective 7
Appendix 12A
Your grandfather would like to share some of his fortune with you. He offers to give you money
under one of the following scenarios (you get to choose):
1. $8,750 per year at the end of each of the next six years
2. $49,650 (lump sum) now
3. $100,450 (lump sum) six years from now
Requirements
1. Calculate the present value of each scenario using a 6% discount rate. Which scenario yields
the highest present value? Round to the nearest dollar.
2. Would your preference change if you used a 12% discount rate?
S12A-13, cont.
SOLUTION
S12A-14 Determining the present value of bond at issuance
Learning Objective 7
Appendix 12A
On December 31, 2018, when the market interest rate is 12%, Benson Realty issues $600,000 of
9.25%, 10-year bonds payable. The bonds pay interest semiannually. Determine the present value
of the bonds at issuance.
SOLUTION
S12A-15 Determining future value
Learning Objective 7
Appendix 12A
David is entering high school and is determined to save money for college. David feels he can
save $5,000 each year for the next four years from his part-time job. If David is able to invest at
6%, how much will he have when he starts college?
SOLUTION
S12B-16 Using the effective-interest amortization method
Learning Objective 8
Appendix 12B
On December 31, 2018, when the market interest rate is 8%, Biggs Realty issues $450,000 of
5.25%, 10-year bonds payable. The bonds pay interest semiannually. The present value of the
bonds at issuance is $365,732.
Requirements
1. Prepare an amortization table using the effective interest amortization method for the first two
semiannual interest periods. (Round to the nearest dollar.)
2. Using the amortization table prepared in Requirement 1, journalize issuance of the bonds and
the first two interest payments.
S12B-16, cont.
SOLUTION
Requirement 1
S12B-17 Using the effective-interest amortization method
Learning Objective 8
Appendix 12B
. On December 31, 2018, when the market interest rate is 6%, Benson Realty issues $700,000 of
6.25%, 10-year bonds payable. The bonds pay interest semiannually. Benson Realty received
$713,234 in cash at issuance.
Requirements
1. Prepare an amortization table using the effective interest amortization method for the first two
semiannual interest periods. (Round to the nearest dollar.)
2. Using the amortization table prepared in Requirement 1, journalize issuance of the bonds and
the first two interest payments.
SOLUTION
Exercises
Assume bonds payable are amortized using the straight-line amortization method unless stated
otherwise.
E12-18 Accounting for long-term notes payable transactions
Learning Objective 1
2. Total Liabilities $65,280
Consider the following note payable transactions of Caleb Video Productions.
2018
Oct. 1 Purchased equipment costing $80,000 by issuing a five-year, 8%
note payable. The note requires annual principal payments of
$16,000 plus interest each October 1.
Dec. 31 Accrued interest on the note payable.
2019
Oct. 1 Paid the first installment on the note.
Dec. 31 Accrued interest on the note payable.
Requirements
1. Journalize the transactions for the company.
2. Considering the given transactions only, what are Caleb Video Productions’ total liabilities on
December 31, 2019?
E12-18, cont.
SOLUTION
