10–41 Solutions
10.31 continued.
g. Carrying Value of Liability: $1,000,000 X 107.1062% ……… $ 1,071,062
h. Interest expense for first six months is $39,535 (= .078/2 X $1,013,711).
Unrealized Gain:
Carrying Value before Unrealized Gain ………………………. $ 1,013,246
i. Interest expense for the second six months is $40,692 (= .083/2 X
Unrealized Gain:
Carrying Value before Unrealized Gain ………………………. $ 981,240
10.32 (Lowe’s; interpreting disclosures of long-term debt.)
a. The likely explanation is that Lowe’s issued these notes and bonds at face
Solutions 10–42
10.32 continued.
b.
Term to Coupon Historical
Issue Face Maturity at Issue Interest Market
Date Value Issue Date Price Rate Interest Rate
October $500 $496
2005 Million 10 Years Million5% 5.1%a
a= PV(.0255,20,12500000, 500000000,0). 5.1% = 2.55% X 2.
b= PV(.02805,60,13750000,500000000,0). 5.61% = 2.805% X 2.
c. Lowe’s has amortized some of the initial issue discount, so that the
carrying value on February 2, 2007 exceeds the issue price by the amount
d. Holders of the convertible notes receive a portion of their return in the
e. The weighted average historical market interest rate is higher than the
10–43 Solutions
f. Excess of Fair Value over Carrying Value on February 2, 2007:
$4,301 – $4,013 ……………………………………………………………… $ 288
Solutions 10–44
10.33 (IBM and Adair Corporation; accounting for lease by lessor and lessee.)
a. January 1, 2008
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+10,000
+10,000
Computer …………………………………………………………. 10,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+10,000
–10,000
December 31, 2008
Depreciation Expense ……………………………………….. 3,333
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–3,333
–3,333
IncSt → RE
Interest Expense (.08 X $10,000) ………………………… 800
Cash ($10,000/2.57710) …………………………………. 3,880
Assets
=
Liabilities
+
Shareholders‘
Equity
(Class.)
–3,880
–3,080
–800
IncSt → RE
December 31, 2009
Depreciation Expense ……………………………………….. 3,333
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–3,333
–3,333
IncSt → RE
10–45 Solutions
10.33 a. continued.
Interest Expense [.08 X ($10,000 – $3,080)] ………….. 554
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–3,880
–3,326
–554
IncSt → RE
b. January 1, 2008
December 31, 2008
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–3,810
–3,810
IncSt → RE
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–3,810
–3,810
IncSt → RE
c. January 1, 2008
Leased Asset ……………………………………………………. 10,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+10,000
+10,000
Solutions 10–46
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–3,333
–3,333
IncSt → RE
10–47 Solutions
10.33 c. continued.
Interest Expense (.07 X $10,000) ………………………… 700
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–3,810
–3,110
–700
IncSt → RE
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–3,333
–3,333
IncSt → RE
Interest Expense [.07 X ($10,000 – $3,110)] ………….. 482
Lease Liability (Plug) …………………………………………. 3,328
Cash ……………………………………………………………. 3,810
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–3,810
–3,328
–482
IncSt → RE
d. January 1, 2008
Cash ……………………………………………………………….. 10,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+10,000
+10,000
IncSt → RE
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–6,000
–6,000
IncSt → RE
December 31, 2008 and 2009
Solutions 10–48
10.33 continued.
e. January 1, 2008
Computer Equipment …………………………………………. 6,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+6,000
–6,000
December 31, 2008
Depreciation Expense ……………………………………….. 2,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–2,000
–2,000
IncSt → RE
Cash ……………………………………………………………….. 3,810
+3,810
IncSt → RE
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–2,000
–2,000
IncSt → RE
Shareholders’
+3,810
IncSt → RE
10.33 continued.
f. January 1, 2008
Lease Receivable ……………………………………………… 10,000
Sales Revenue ……………………………………………… 10,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+10,000
+10,000
IncSt → RE
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–6,000
–6,000
IncSt → RE
Shareholders’
Assets
=
Liabilities
+
(Class.)
IncSt → RE
10–51 Solutions
10.33 continued.
g. Lessee 2008 2009 2010 Total
$ 4,133 $ 3,887 $ 3,620 $ 11,640
Operating Lease
h. Lessor 2008 2009 2010 Total
Sale
Sales Revenue …………… $ 10,000 $ — $ — $ 10,000
Cost of Goods Sold ……… (6,000) — — (6,000)
$ 4,000 $ — $ — $ 4,000
10.34 (Carom Sports Collectibles Shop; comparison of borrow/buy with operating
and capital leases.)
a. $100,000/3.79079 = $26,379.725 = $26,380.
Solutions 10–52
of Year Interest Year
Year Balance (10%) Payment Reduction Balance