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10-21 Solutions
10.23 d. continued.
June 30, 2008
Interest Expense ....................................................... 300,000
Cash ..................................................................... 300,000
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–300,000
–300,000
IncSt → RE
To record interest expense for the first six months.
June 30, 2008
Bonds Payable .......................................................... 141,978
Unrealized Gain from Revaluation of Bonds .......... 141,978
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–141,978
+141,978
IncSt → RE
To revalue bonds to current fair value.
December 31, 2008
Interest Expense ....................................................... 303,599
Cash ..................................................................... 300,000
Bonds Payable ...................................................... 3,599
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–300,000
+3,599
–303,599
IncSt → RE
To record interest expense for the second six months.
December 31, 2008
Bonds Payable .......................................................... 263,953
Solutions 10-22
10.24 (Restin Corporation; accounting for bonds using the fair value option based on
the current market interest rate.)
a. January 1, 2008:
$20,000,000 X .5025659a ...................................................... $ 10,051,318
June 30, 2008:
$20,000,000 X .5297973a ...................................................... $ 10,595,946
December 31, 2008:
b. Interest Expense: .035 X $21,421,241 = $749,743. The carrying value
c. Interest Expense: .034 X $21,659,538 = $736,424. The carrying value of
10-23 Solutions
10.24 continued.
d. January 1, 2008:
Cash .................................................................. 21,421,241
Bonds Payable ............................................. 21,421,241
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+21,421,241
+21,421,241
To record issue of $20 million, 8% semiannual bonds
priced to yield 7% compounded semiannually.
June 30, 2008:
Interest Expense ....................................................... 749,743
Bonds Payable .......................................................... 50,257
Cash ..................................................................... 800,000
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–800,000
–50,257
–749,743
IncSt → RE
June 30, 2008:
Unrealized Loss from Revaluation of Bonds .............. 288,554
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+288,554
–288,554
IncSt → RE
To revalue bonds to current fair value.
December 31, 2008:
Solutions 10-24
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–800,000
–63,576
–736,424
IncSt → RE
To record interest expense for the second six months,
the cash payment, and the reduction in the liability.
10-25 Solutions
10.24 d. continued.
December 31, 2008:
Unrealized Loss on Revaluation of Bonds ................. 567,847
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+567,847
–567,847
IncSt → RE
To revalue bonds to current fair value.
10.25 (Boeing and American; applying the capital lease criteria.)
a. This lease is a capital lease because the lease period of 20 years exceeds
b. This lease is a capital lease because the present value of the lease
c. The lease is not a capital lease. The present value of the required lease
d. This lease is not a capital lease. The present value of the minimum
10.26 (FedUp Delivery Services; preparing lessee’s journal entries for an operating
and a capital lease.)
a. This lease is a capital lease because the present value of the lease
payments of $24,653 (= $750 X 32.87102) exceeds 90% of the fair value
b. Time of Signing Lease
No Entry.
End of Each Month
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–750
–750
IncSt → RE
c. Time of Signing Lease
Leased Asset ............................................................. 24,653
10-27 Solutions
10.26 c. continued.
Depreciation Expense ............................................... 684.80
Accumulated Depreciation ..................................... 684.80
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–684.80
–684.80
IncSt → RE
To record depreciation expense for the first month of
End of Second Month
10.27 continued.
b. Beginning of Each Year
Cash .......................................................................... 4,386.70
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+4,386.70
+4,386.70
To record cash received in advance from lessee.
End of Each Year
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–4,386.70
+4,386.70
IncSt → RE
To record rent revenue for each year.
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–2,400.00
–2,400.00
IncSt → RE
To record annual depreciation (= $7,200/3).
c. January 1, 2008
Cash .......................................................................... 4,386.70
Lease Receivable (= $4,386.70 X 1.73554) ............... 7,613.30
10.27 c. continued.
Cost of Goods Sold ................................................... 7,200.00
December 31, 2008
10-31 Solutions
Solutions 10-32
10.27 c. continued.
January 1, 2010
Cash .......................................................................... 4,386.70
Lease Receivable .................................................. 4,386.70
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+4,386.70
–4,386.70
To record cash received for 2010.
10.28 (Baldwin Products; preparing lessee’s journal entries for an operating lease
and a capital lease.)
a. This lease does not satisfy any of the criteria for a capital lease, so it is an
operating lease. The leased asset reverts to the lessor at the end of the
b. December 31, of Each Year
Rent Expense ............................................................ 10,000
Cash ...................................................................... 10,000
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–10,000
–10,000
IncSt → RE
To record annual rent expense and cash payment.
c. January 2, 2008
Leased Asset ............................................................. 25,771
Lease Liability ........................................................ 25,771
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+25,771
+25,771
To record capital lease.
10-33 Solutions
Solutions 10-34
10.28 c. continued.
December 31, 2008
Interest Expense (= .08 X $25,771) ........................... 2,062
Lease Liability ............................................................ 7,938
Cash ...................................................................... 10,000
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–10,000
–7,938
–2,062
IncSt → RE
To record interest expense and cash payment for 2008.
The carrying value of the lease liability is now $17,833
(= $25,771 – $7,938).
Depreciation Expense or Work-in-Process
Inventory ($25,771/3) ............................................ 8,590
Accumulated Depreciation ................................. 8,590
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–8,590
–8,590
IncSt → RE
To record depreciation expense for 2008.
December 31, 2009
Interest Expense (= .08 X $17,833) ........................... 1,427
Lease Liability ............................................................ 8,573
Cash ...................................................................... 10,000
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–10,000
–8,573
–1,427
IncSt → RE
To record interest expense and cash payment for 2009.
The carrying value of the lease liability is now $9,260
(= $17,833 – $8,573).
Depreciation Expense or Work-in-Process
Inventory ................................................................ 8,590
Accumulated Depreciation ................................. 8,590
10-35 Solutions
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–8,590
–8,590
IncSt → RE
To record depreciation expense for 2009.
Solutions 10-36
10.28 c. continued.
December 31, 2010
Interest Expense (= .08 X $9,260) .............................. 740
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–10,000
–9,260
–740
IncSt → RE
To record interest expense and cash payment for 2010.
Interest expense does not precisely equal .08 X $9,260
due to rounding. Carrying value of the liability is now
zero.
Depreciation Expense or Work-in-Process
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–8,591
–8,591
IncSt → RE
To record depreciation expense for 2010.
d. Operating Lease Method: Rent Expense (= $10,000 X 3) ..... $ 30,000
10.29 (Aggarwal Corporation; accounting for long-term bonds.)
a. Interest Expense
First Six Months: .05 X $301,512 = $15,076.
10-37 Solutions
10.29 continued.
b. Carrying Value of Bonds on December 31, 2007
Interest:
Principal:
Carrying Value of Bonds, December 31, 2007 ....................... $ 959,442
Add Interest Expense for 2008 ...............................................
x
c. Carrying Value of Bonds on July 1, 2008
Carrying Value of Bonds, July 1, 2008 ................................ $ 1,300,007
July 1, 2008
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–526,720
–650,004
+123,284
IncSt → RE
d. Interest Expense for Second Six Months
10.30 (Time Warner, Inc.; accounting for zero-coupon debt; see
The Wall Street
Journal
for December 8, 1992.)
Solutions 10-38
10-39 Solutions
10.30 continued.
b. 5.82% = ($1,550/$500)1/20 – 1 = 3.101/20 – 1. That is, for each dollar of the
initial issue proceeds (of the $500 million), Time Warner must pay $3.10 (=
d. $101.4 million. Ask, first, what must the carrying value of the notes be at
the end of 2026. Then, compute interest for the year on that amount. The
e. The carrying value of the $700 million face value of zero coupon bonds is
$391 million (= $700 X .55839; see table 2, 6% column and 10-period
December 31, 2017
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–324
–391
+67
IncSt → RE
To record the repurchase and retirement of $700 mil-
lion face value bonds.
Solutions 10-40
10.31 (Understanding and using bond tables.)
a. The coupon rate on these bonds of 8% compounded semiannually equals
the historical market interest rate of 8% compounded semiannually. The
b. The coupon rate on these bonds is 8% compounded semiannually. When
c. Firms amortize any initial issue premium as a reduction in interest
f. Cash Payment for Interest ................................................... $ 80,000
Decrease in Carrying Value of Liability during 2013:
Interest Expense, First Six Months: .035 X ($1,000,000 X
110.6775%) ...................................................................... $ 38,737
