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P12AB-44B Determining the present value of bonds payable and journalizing using the
effective-interest amortization method
Learning Objectives 7, 8
Appendixes 12A, 12B
3. Jan. 1, 2018, Cash $311,613
Ari Goldstein issued $300,000 of 11%, five-year bonds payable on January 1, 2018. The market interest
rate at the date of issuance was 10%, and the bonds pay interest semiannually.
Requirements
1. How much cash did the company receive upon issuance of the bonds payable? (Round to the nearest
dollar.)
2. Prepare an amortization table for the bond using the effective-interest method, through the first two
interest payments. (Round to the nearest dollar.)
3. Journalize the issuance of the bonds on January 1, 2018, and the first second payments of the
semiannual interest amount and amortization of the bonds on June 30, 2018, and December 31, 2018.
Explanations are not required.
SOLUTION
Requirement 1
P12AB-44B, cont.
Requirement 2
Requirement 3
P12AB-45B Determining the present value of bonds payable and journalizing using the
effective-interest amortization method
Learning Objectives 7, 8
Appendixes 12A, 12B
3. Jan. 1, 2018, Cash $468,895
Sleep Well, Inc. is authorized to issue 9%, 10-year bonds payable. On January 1, 2018, when the market
interest rate is 10%, the company issues $500,000 of the bonds. The bonds pay interest semiannually.
Requirements
1. How much cash did the company receive upon issuance of the bonds payable? (Round to the nearest
dollar.)
2. Prepare an amortization table for the bond using the effective-interest method, through the first two
interest payments. (Round to the nearest dollar.)
3. Journalize the issuance of the bonds on January 1, 2018, and the first and second payment of the
semiannual interest amount and amortization of the bonds on June 30, 2018, and December 31, 2018.
Explanations are not required.
SOLUTION
Requirement 1
P12AB-45B, cont.
Requirement 2
Requirement 3
Using Excel
P12-46 Using Excel for long-term notes payable amortization schedule
Patrick’s Delivery Services is buying a van to help with deliveries. The cost of the vehicle is $35,000,
the interest rate is 6%, and the loan is for three years. The van is to be repaid in three equal installment
payments. Payments are due at the end of each year.
Requirements
1. Complete the data table.
2. Using the present value of an ordinary annuity table, calculate the payment amount and complete the
amortization schedule.
a. Calculate the loan payment by dividing the loan amount by the appropriate present value factor.
b. Round values to two decimal places and ignore rounding errors on the last payment.
c. Use absolute cell references and relative cell references in formulas.
3. Using the Excel PMT function, calculate the payment amount and complete the amortization
schedule.
a. The PMT function calculates a payment amount that results in a negative number. Reverse this to a
positive number for calculations in the amortization schedule.
b. Round values to two decimal places and ignore rounding errors on the last payment.
c. Use absolute cell references and relative cell references in formulas.
SOLUTION
Continuing Problem
P12-47 Describing bonds, journalizing transactions for bonds payable using the straight-line
amortization method, and journalizing transactions for a mortgage payable
This problem continues the Canyon Canoe Company situation from Chapter 11. Canyon Canoe
Company is considering raising additional capital for further expansion. The company wants to finance a
new business venture into guided trips down the Amazon River in South America. Additionally, the
company wants to add another building on their land to offer more services for local customers.
Canyon Canoe Company plans to raise the capital by issuing $210,000 of 7.5%, six-year bonds on
January 2, 2020. The bonds pay interest semiannually on June 30 and December 31. The company
receives $208,476 when the bonds are issued.
The company also issues a mortgage payable for $450,000 on January 2, 2020. The proceeds from
the mortgage will be used to construct the new building. The mortgage requires annual payments of
$45,000 plus interest for ten years, payable on December 31. The mortgage interest rate is 8%.
Requirements
1. Will the bonds issue at face value, a premium, or a discount?
2. Record the following transactions. Include dates and round to the nearest dollar. Omit explanations.
a. Cash received from the bond issue.
b. Cash received from the mortgage payable.
c. Semiannual bond interest payments for 2020. Amortize the premium or discount using the
straight-line amortization method.
d. Payment on the mortgage payable for 2020.
3. Calculate the total interest expense incurred in 2020.
SOLUTION
Requirement 1
Critical Thinking
Tying It All Together Case 12-1
The Walt Disney Company is a diversified entertainment company that is comprised of five different
business segments. Walt Disney began as a cartoon studio in 1920 and today is known as a leading
worldwide entertainment provider.
Requirements
1. On The Walt Disney Company’s balance sheet dated October 3, 2015, the company reports
borrowings of $12,773 million. Review Note 8 (Borrowings) of the company’s annual report. What
are the different types of borrowings the company holds?
2. Perform a web search for the terms commercial paper and U.S. medium-term notes. What do each of
these terms mean?
3. Review the information included in Note 8. What are the maturity dates for The Walt Disney
Company’s U.S. medium-term notes?
SOLUTION
Decision Case 12-1
The following questions are not related.
Requirements
1. Duncan Brooks needs to borrow $500,000 to open new stores. Brooks can borrow $500,000 by
issuing 5%, 10-year bonds at 96. How much will Brooks actually receive in cash under this
arrangement? How much must Brooks pay back at maturity? How will Brooks account for the
difference between the cash received on the issue date and the amount paid back?
2. Brooks prefers to borrow for longer periods when interest rates are low and for shorter periods when interest
rates are high. Why is this a good business strategy?
SOLUTION
Ethical Issues 12-1
Raffie’s Kids, a nonprofit organization that provides aid to victims of domestic violence, low-income
families, and special-needs children, has a 30-year, 5% mortgage on the existing building. The mortgage
requires monthly payments of $3,000. Raffie’s bookkeeper is preparing financial statements for the
board and, in doing so, lists the mortgage balance of $287,000 under current liabilities because the board
hopes to be able to pay the mortgage off in full next year. Of the mortgage principal, $20,000 will be
paid next year if Raffie’s pays according to the mortgage agreement. The board members call you, their
trusted CPA, to advise them on how Raffie’s Kids should report the mortgage on its balance sheet. What
is the ethical issue? Provide and discuss the reason for your recommendation.
SOLUTION
Fraud Case 12-1
Bill and Edna had been married two years and had just reached the point where they had enough savings to start
investing. Bill’s uncle Dave told them that he had recently inherited some very rare railroad bonds from
his grandmother’s estate. He wanted to help Bill and Edna get a start in the world and would sell them
50 of the bonds at $100 each. The bonds were dated 1873, beautifully engraved, showing a face value of
$1,000 each. Uncle Dave pointed out that “United States of America” was printed prominently at the top
and that the U.S. government had established a sinking fund to retire the old railroad bonds. A sinking
fund is a fund established for the purpose of repaying the debt. It allows the organization (the U.S.
government, in this example) to set aside money over time to retire the bonds. All Bill and Edna needed
to do was hold on to them until the government contacted them, and they would eventually get the full
$1,000 for each bond. Bill and Edna were overjoyed—until a year later when they saw the exact same
bonds for sale at a coin and stamp shop priced as “collectors’ items” for $9.95 each!
Requirements
1. If a company goes bankrupt, what happens to the bonds it issued and the investors who bought the
bonds?
2. When investing in bonds, how can you tell whether the bond issue is a legitimate transaction?
3. Is there a way to determine the relative risk of corporate bonds?
SOLUTION
Requirement 1
Financial Statement Case 12-1
Use the Target Corporation financial statements to answer the following questions. Visit
Requirements
1. How much was Target Corporation’s long-term debt at January 30, 2016?
2. Compute Target Corporation’s debt to equity ratio at January 30, 2016. How does it compare to
Kohl’s Corporation’s ratio?
SOLUTION
Requirement 1
