10-1 Solutions
CHAPTER 10
NOTES, BONDS, AND LEASES
Questions, Exercises, and Problems: Answers and Solutions
10.2 Generally, accountants initially record assets at acquisition cost and then
allocate this amount to future periods as an expense. Changes in the fair
value of most assets (except for use of the lower-of-cost-or-market method for
10.3 Applying the effective interest method using the historical market interest rate
gives a constant amount of interest expense only if a firm initially issued bonds
10.4 Firms repay a portion of the principal on serial bonds each period but repay all
10.5 The initial issue prices will differ. Although the present value of the $1,000,000
face amount of these bonds will be the same for the two issues, the present
Solutions 10-2
10-3 Solutions
10.6 This statement is correct. Over the life of the bonds, the effect on net income
before taxes is the difference between the cash received when the firm issued
10.7 The statement is still correct. Instead of repaying the bonds at maturity, the
firm repurchases them in the market. The amount paid to repurchase the
10.8 The party with the risks and rewards of ownership effectively owns the asset,
10.9 The minimum contractual lease payments do not include the rental based on
sales. If sales are zero, the lease payment will be zero. Thus, the “minimum”
10.10 The present value of the minimum lease payments includes both the monthly
rental and the minimum guaranteed resale. Thus, the lessee bears the risk of
10.11 The distinction depends upon which criteria of the lease made it a capital
lease. The major difference is that at the end of a lease term the asset reverts
Solutions 10-4
10.12 Disagree. Operating Lease: Rent revenue for the lessor will equal rent
expense for the lessee on an operating lease, but lessor also has depreciation
10-5 Solutions
10.13 Using the operating lease method for financial reporting permits the lessee to
keep the lease liability off the balance sheet and report less cumulative
10.14 Using the capital lease method for financial reporting permits the lessor to
report a gross margin from the “sale” of the leased asset in the year the
10.15 (Hagar Company; amortization schedule for note where stated interest rate
differs from historical market rate of interest.)
a. Amortization Schedule for a Three-Year Note with a Maturity
Carrying Interest Interest Carrying
Value Expense Added to Value
Start of for Carrying End of
Year Year Period Payment Value Year
b. Computer …………………………………………………………. 37,938
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+37,938
+37,938
Solutions 10-6
10-7 Solutions
10.15 b. continued.
Annual Journal Entry for Interest and Principal
Interest Expense …………. Amount in Col. (3)
Note Payable ………….. Amount in Col. (5)*
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–Amt (4)
+Amt (5)
–Amt (3)
IncSt → RE
*In third year, the firm also debits Note Payable and credits Cash for
$40,000.
10.16 (Computing the issue price of bonds.)
10.17 (Computing the issue price of bonds.)
a. $1,000,000 X .14205a …………………………………………………… $ 142,050
$1,000,000 X .20829b …………………………………………………… 208,290
$ 1,197,929
Solutions 10-8
10-9 Solutions
10.17 continued.
d. $30,000 X 12.46221a ……………………………………………………. $ 373,866
aPresent value of annuity for 20 periods at 5%.
cPresent value of $1 for 40 periods at 5%.
10.18 (Womack Company; amortization schedule for bonds.)
a. $100,000 X .67556a ……………………………………………………… $ 67,556
b. Decrease in
Six- Liability Interest Carrying Liability
Month at Start at 4% Cash Value of at End of
Period of Period for Period Payment Liability Period
0 $ 108,111
1 $ 108,111 $ 4,324 $ 5,000 $ (676) 107,435
2 107,435 4,297 5,000 (703) 106,732
3 106,732 4,269 5,000 (731) 106,001
Solutions 10–10
10–11 Solutions
10.18 continued.
c. Carrying Value of Bonds: $10,363.
Bonds Payable …………………………………………………. 10,363
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–10,300
–10,363
+63
IncSt → RE
To record retirement of bonds.
10.19 (Seward Corporation; amortization schedule for bonds.)
a. $100,000 X .74622a ………………………………………………………. $ 74,622
b. Increase in
Six- Liability Interest Carrying Liability
Month at Start at 5% Cash Value of at End of
Period of Period for Period Payment Liability Period
c. January 2, 2008
Cash ……………………………………………………………….. 94,925
Solutions 10–12
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–94,925
+94,925
To record issue of bonds.
10–13 Solutions
10.19 c. continued.
June 30, 2008
Interest Expense ……………………………………………….. 4,746
Bonds Payable …………………………………………….. 746
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–4,000
+746
–4,746
IncSt → RE
To record interest expense for first six months, the
cash payment, and the increase in the liability for
the difference.
December 31, 2008
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–4,000
+784
–4,784
IncSt → RE
To record interest expense for the second six months,
the cash payment, and the increase in the liability for
the difference.
d. Bonds Payable (.20 X $98,142) …………………………... 19,628
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–20,400
–19,628
–772
IncSt → RE
10.20 (O’Brien Corporation; accounting for bonds using amortized cost measurement
based on the historical market interest rate.)
Solutions 10–14
10–15 Solutions
10.20 continued.
c. .03($9,849,206 + $295,476 – $320,000) = $294,740.
d. Carrying Value: ($9,849,206 + $295,476 – $320,000 +
e. $8,000,000 X .32523a …………………………………………………. $ 2,601,840
10.21 (Robinson Company; accounting for bonds using amortized cost measurement
based on the historical market interest rate.)
a. $5,000,000 X .37689a …………………………………………………… $ 1,884,450
d. $4,376,892 + $218,845 – $200,000 + $219,787 – $200,000 = $4,415,524.
e. $5,000,000 X .41552a …………………………………………………… $ 2,077,600
Solutions 10–16
10–17 Solutions
10.22 (Huergo Dooley Corporation; accounting for bonds using amortized cost
measurement based on the historical market interest rate.)
a. $2,000,000 X .61391a …………………………………………………… $ 1,227,820
b. Interest Expense (.05 X $1,845,558) ……………………. 92,278
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–80,000
+12,278
–92,278
IncSt → RE
c. Interest Expense [.05 X ($1,845,558 + $12,278)] …… 92,892
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–80,000
+12,892
–92,892
IncSt → RE
d. Bonds Payable [.20 X ($1,845,558 + $12,278 +
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–428,079
–374,146
–53,933
IncSt → RE
$80,000 X 7.01969b …………………………………………………… 561,575
Solutions 10–18
10–19 Solutions
10.23 (Stroud Corporation; accounting for bonds using the fair value option based on
the current market interest rate.)
a. January 1, 2008: The carrying value of these bonds is $10,000,000, their
aPresent value of $1 for 19 periods at 3.1%.
December 31, 2008:
$ 9,597,668
aPresent value of $1 for 18 periods at 3.3%.
b. Interest Expense: .03 X $10,000,000 = $300,000.
c. Interest Expense: .031 X $9,858,022 = $303,599. The carrying value of
d. January 1, 2008
Cash ……………………………………………………………… 10,000,000
Solutions 10–20
Assets
=
+
Shareholders’
Equity
(Class.)
+10,000,000
To record issue of $10 million bonds at face value.