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
Assets
=
Liabilities
+
Equity
(Class.)
–263,953
+263,953
IncSt → RE
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
Shareholders’
Assets
=
Liabilities
+
Shareholders’
(Class.)
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
–750.00
–120.13
IncSt → RE
Assets
=
Liabilities
+
(Class.)
–684.80
–684.80
IncSt → RE
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
Shareholders’
+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