E12-29 Computing the debt to equity ratio
Learning Objective 6
Ludwig Corporation has the following data as of December 31, 2018:
Total Current
Liabilities
$ 36,210 Total Stockholders’ Equity $ ?
Total Current Assets 58,200 Other Assets 36,800
Long-term
Liabilities
139,630 Property, Plant, and Equipment,
Net
206,440
Compute the debt to equity ratio at December 31, 2018.
Assets: Liabilities:
Current assets $ 58,200 Current liabilities $ 36,210
Other assets 36,800 Long-term liabilities 139,630
Property, plant and equipment 206,440 Total Liabilities 175,840
Stockholder’s Equity 125,600
Total Assets
$301,440
Total Liabilities &
Stockholder’s Equity $ 301,440
Debt to equity ratio = Total liabilities / Total equity
= $175,840 / $125,600
= 1.40
E12A-30 Determining the present value of bonds payable
Learning Objective 7
Appendix 12A
2. Present Value $77,594
Interest rates determine the present value of future amounts. (Round to the nearest dollar.)
Requirements
1. Determine the present value of 10-year bonds payable with face value of $86,000 and stated
interest rate of 14%, paid semiannually. The market rate of interest is 14% at issuance.
2. Same bonds payable as in Requirement 1, but the market interest rate is 16%.
3. Same bonds payable as in Requirement 1, but the market interest rate is 12%.
SOLUTION
E12B-31 Journalizing bond transactions using the effective-interest amortization method
Learning Objective 8
Appendix 12B
2. Interest Expense $4,995
Journalize issuance of the bond and the first semiannual interest payment under each of the
following three assumptions. The company amortizes bond premium and discount by the
effective-interest amortization method. Explanations are not required.
1. Seven-year bonds payable with face value of $83,000 and stated interest rate of 10%, paid
semiannually. The market rate of interest is 10% at issuance. The present value of the bonds at
issuance is $83,000.
2. Same bonds payable as in assumption 1, but the market interest rate is 16%. The present value
of the bonds at issuance is $62,433.
3. Same bonds payable as in assumption 1, but the market interest rate is 8%. The present value
of the bonds at issuance is $91,727.
SOLUTION
Requirement 1
Problems (Group A)
P12-32A Journalizing liability transactions and reporting them on the balance sheet
Learning Objectives 1, 5
2. Total Liabilities $653,334
The following transactions of Johnson Pharmacies occurred during 2018 and 2019:
2018
Mar. 1 Borrowed $450,000 from Coconut Creek Bank. The 15-year, 5% note
requires payments due annually, on March 1. Each payment consists of
$30,000 principal plus one year’s interest.
Dec. 1 Mortgaged the warehouse for $250,000 cash with Saputo Bank. The
mortgage requires monthly payments of $8,000. The interest rate on the
note is 12% and accrues monthly. The first payment is due on January 1,
2019.
31 Recorded interest accrued on the Saputo Bank note.
31 Recorded interest accrued on the Coconut Creek Bank note.
2019
Jan. 1 Paid Saputo Bank monthly mortgage payment.
Feb. 1 Paid Saputo Bank monthly mortgage payment.
Mar. 1 Paid Saputo Bank monthly mortgage payment.
1 Paid first installment on note due to Coconut Creek Bank.
Requirements
1. Journalize the transactions in the Johnson Pharmacies general journal. Round to the nearest
dollar. Explanations are not required.
2. Prepare the liabilities section of the balance sheet for Johnson Pharmacies on March 1, 2019
after all the journal entries are recorded.
E12-32A, cont.
SOLUTION
Requirement 1
P12-32A, cont.
Requirement 1, cont.
Requirement 2
P12-32A, cont.
Requirement 2, cont.
P12-33A Analyzing, journalizing, and reporting bond transactions
Learning Objectives 2, 3
2. Discount $3,000
Danny’s Hamburgers issued 6%, 10-year bonds payable at 90 on December 31, 2018. At
December 31, 2020, Danny reported the bonds payable as follows:
Long-term Liabilities:
Bonds Payable $
600,000
Less: Discount on Bonds
Payable
(48,00
0)
$
552,000
Danny’s pays semiannual interest each June 30 and December 31.
Requirements
1. Answer the following questions about Danny’s bonds payable:
a. What is the maturity value of the bonds?
b. What is the carrying amount of the bonds at December 31, 2020?
c. What is the semiannual cash interest payment on the bonds?
d. How much interest expense should the company record each year?
2. Record the June 30, 2020, semiannual interest payment and amortization of discount.
SOLUTION
Requirement 1