978-1111823450 Chapter 11 Solution Manual Part 1

CHAPTER

11

NOTES, BONDS, AND L

EASES

Questions, Exercises, and Problems: Answers and

S

ol

u

tio

ns

11.1 See the text or the glossary at the end of the book.

11.2 Generally, accountants initially record assets at acquisition cost

11.3 Applying the efective interest method using the historical market

interest rate gives a constant amount of interest expense only if a

11.4 Firms repay a portion of the principal on serial bonds each period

11.5 The initial issue prices will difer. Although the present value of

t

h

e

11.6 This statement is correct. Over the life of the bonds, the efect

on net income before taxes is the diference between the cash

received when the firm issued the bonds and the cash disbursed for

11.7 The statement is still correct. Instead of repaying the bonds at

11.8 First, we give an example. Imagine the borrowing firm issues $1

The borrowing firm has enjoyed a gain from its borrowing activity.

The

gain results because it locked in for a 10-year period a borrowing of

about

11.9 Old/current rules: The retailer will likely treat it as an operating

lease.

The minimum contractual lease payments do not include the rental

based on sales. If sales are zero, the lease payment will be zero.

11.10 New/proposed rules: The present value of the minimum lease

payments is the initial amount recorded in the capital lease. The

11.11 Under the current rules, the distinction depends upon which criteria

of the lease made it a capital lease. The major diference is that at

the end of a lease term the asset reverts to the lessor in a capital

lease, whereas at the end of the installment payments, the asset

belongs to the purchaser. The criteria for capitalizing a lease are

11.12 Disagree. Operating Lease: Rent revenue for the lessor will

equal rent expense for the lessee on an operating lease, but lessor

also has depreciation expense on leased assets. Capital Lease:

Disagree. Operating Lease: On an operating lease, compared to rent expense

Capital Lease: On a capital lease, Interest revenue for the lessor and interest

11.13 Using the operating lease method for financial reporting permits

the lessee to keep the lease liability off the balance sheet and

report less cumulative expenses than the capital lease method.

11.14 Using the capital lease method for financial reporting permits the

lessor to report a gross margin from the “sale” of the leased asset

11.15 (Hagar Company; amortization schedule for note where stated

interest rate difers from historical market rate of interest.)

(amounts in US$)

a. Amortization Schedule for a Three-Year Note with a

Maturity

Value of $40,000, Calling for 6%

A

nnu

a

l

Interest Payments, Yield of 8% per

Ye

a

r

Carrying Interest Interest

Ca

rr

y

in

g

Va

lue Expense Added to

Va

lue

Start of for Carrying

End

o

f

Year Year Period Payment Value Ye

a

r

(1) (2) (3)a(4) (5) (6)

a(3) = (2) X 0.08.

b. Computer………………………………………………………… 37,938

Annual Journal Entry for Interest and Principal

Interest

Expense…………

Amount in Col. (3)

Cash ……………………

..

Amount in Col.

(4)*

Note

Payable

………….

Amount in Col.

(5)*

*In third year, the firm also debits Note Payable and credits Cash

for

11.16 (Computing the issue price of bonds.) (amounts in US$)

a. $10,000,000 X 0

.

20829a ……………………………………………… $

11.17 (Computing the issue price of bonds.) (amounts in US$)

a. $1,000,000 X 0

.

14205a ………………………………………………… $

c. $50,000 X 19

.

79277a …………………………………………………… $

d. $30,000 X 12

.

46221a …………………………………………………… $

11.18 (Womack Company; amortization schedule for bonds.) (amounts in

US$)

a. $100,000 X 0

.

67556a

……………………………………………………

$

67,556

$5,000 X

8.11090b

……………………………………………………….

4

0

, 55

Issue Price

………………………………………………………………

$

10

8

, 11

1

aTable 2, 4% column and 10-period

row. bTable 4, 4% column and

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

aDoes not equal 0.04 X $100,960 due to

rounding. c. Carrying Value of Bonds: $10,363.

Bonds

Payable………………………………………………….

10,363

Gain on Bond

Retirement……………………………..

63

Cash ……………………………………………………

10,30

11.19 (Seward Corporation; amortization schedule for bonds.) (amounts in

US$)

a. $100,000 X 0

.

74622a

…………………………………………………….

$

74,622

$4,000 X

5.07569b

………………………………………………………..

2

0

, 30

3

Issue Price

……………………………………………………………….

$

9

4

, 92

5

aTable 2, 5% column and 6-period

row. bTable 4, 5% column and

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

1 $94,925 $ 4,746 $ 4,000 $ 746 $

95,671

2 95,671 4,784 4,000 784

96,45

8

98,14

8

98,14

a

.

a

.

June 30,

2012

Interest Expense……………………………………………….

11Solutions

11.19 c. continued.

December 31, 2012

Interest Expense………………………………………………. 4,784

Cash ………………………………………………………….. 4,000

d. Bonds Payable (= 0.20 X $98,142) ……………………… 19,628

11.20 (O’Brien Corporation; accounting for bonds using amortized cost

measurement based on the historical market interest rate.)

(amounts in US$)

a. $8,000,000 X 0

.

30656a ……………………………………………….. $

b. 0.03 X $9,849,206 = $295,476.

e. $8,000,000 X 0

.

32523a ……………………………………………….. $

Solutions11-8

11.21 (Robinson Company; accounting for bonds using amortized cost

measurement based on the historical market interest rate.)

(amounts in US$)

b. 0.05 X $4,376,892 = $218,845.

11.22 (Huergo Dooley Corporation; accounting for bonds using amortized

a

.

$2,000,000 X 0

.

61391a ………………………………………………… $ 1

,

227

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