b
Oc
tob
er
2012
$550
Million 10 Years
$545.6
Million 5.4% 5.48
%
c
Oc
tob
er
2012
$450
Million 30 Years
$445.6
Million 5.8% 5.87
%
d
11.32 (Home Supply Company; interpreting disclosures of long-term
debt.) (amounts in millions of US$)
a. The likely explanation is that Home Supply Company issued
these notes and bonds at face value and therefore has no
discount or premium to amortize. Another possible explanation
is that Home Supply Company issued these bonds for such a
small discount or premium that the amount of any discount or
premium disappears when rounding to the nearest million.
Solutions11-20
2
d= PV(.02935,60,13050000,450000000,0). 5.87% = 2.935% X 2.
c. Home Supply Company has amortized some of the initial
issue discount, so that the carrying value on February 1, 2013,
exceeds the issue price by the amount of discount amortized.
The initial discounts are so small because the historical market
interest rates are only slightly higher than the coupon rates.
d. Holders of the convertible notes receive a portion of their return
in the value of the option to convert the notes into common
stock. Thus, even though they bear more risk than more senior
debt and require a higher return to compensate for the higher
risk, they do not demand that return to be in the form of
periodic cash payments.
e. The weighted-average historical market interest rate is higher
than the weighted-average current market interest rate at each
date because the carrying, or book, value is less than the current
fair value.
11-21Solutions
11.33 (IBM and Adair Corporation; accounting for lease by lessor and
lessee.) (amounts in US$)
%
Interest
Revenue…………
70
0
48
2
24
8
1
,
43
0
$
4
, 70
0 $ 48
2 $ 24
8 $
5
, 43
0
11.34 (Carom Sports Collectibles Shop; comparison of borrow/buy with
operating and capital leases.) (amounts in US$)
a. $100,000/3.79079 = $26,379.725 = $26,380.
C a r o
m S p o r t s C o l l
ec
t i
b l
e
s S h o p A m o r t i z a t i o n S c
h e
d u l
e
Start End of
of Year Interest Year
Year Balance (10%) Payment Reduction Balance
1 $ 100,000 $10,000 $26,380 $16,380 $83,620
2 83,620 8,362 26,380 18,018 65,602
3 65,602 6,560 26,380 19,820 45,782
4 45,782 4,578 26,380 21,802 23,980
5 23,980 2,398 26,380 23,982 (2)
11-25Solutions
11.34 continued.
b. Plan (1): Asset—Cash.
Asset—Computer
System.
Asset Contra—Accumulated Depreciation on Computer
System. Liability—Bonds Payable and Interest Payable.
Plan (2): Operating Lease Method: None.
Plan (2): Capital Lease Method
Asset—Cash.
Asset—Leased Computer System.
Asset Contra—Accumulated
Depreciation. Liability—Lease
Liability.
c.
$150,000 = $100,000 Depreciation + (0.10 X $100,000 X 5)
Interest. d. (1) Operating Lease Method: $131,900 =
$26,380 X 5.
(2) Capital Lease Method: $131,900.
e. The method of accounting for a lease afects only the timing of
expenses, not their total. Expenses under plan (1) are larger
because the firm borrows $100,000 for the entire five years,
1
leases, the cash payment, and decrease in
the capital lease liability for the diference.
December 31, 2013
Depreciation Expense………………………………………..
154
Depreciation
Expense
……….. $20,000 $20,000 $20,000 $20,000 $20,000
$ 100
,
000
Interest
Expense
………..
1
0
, 00
0
1
0
, 00
0
1
0
, 00
0
1
0
, 00
0
1
0
, 00
0
5
0
,
00
0
Total
…………. $
3
0
, 00
0 $3
0
, 00
0 $3
0
, 00
0 $
3
0
, 00
0 $
3
0
, 00
0 $
15
0
,
00
0
Plan 2
(Operating)
Lease Expense… $
2
6
, 38
0 $2
6
, 38
0 $2
6
, 38
0 $
2
6
, 38
0 $
2
6
, 38
0 $
13
1
, 90
0
Plan 2
(Financing)
Depreciation
Expense
……….. $20,000 $20,000 $20,000 $20,000 $20,000
$ 100
,
000
Interest
Expense
………..
1
0
, 00
0 8
, 36
2 6
, 56
0 4
, 57
8
2
, 40
0
* 3
1
,
90
0
Total
…………. $
3
0
,00
0 $2
8
,36
2 $2
6
,56
0 $
2
4
,57
8 $
2
2
,40
0 $
13
1
,
90
0
*Plug to correct for rounding. By computation, this number is
$2,398 = [$26,380 – ($26,380/1.10)].
11.35 (Northern Airlines; financial statement effects of capital and
operating leases.) (amounts in millions of US$)
a. Capital Lease Liability, December 31, 2012
…………………..
$ 1,088
Plus Interest Expense
(Plug)………………………………………….
102
Plus New Capital Leases
Signeda
…………………………………
0
Less Cash Payment on Capital Leases
Plus New Capital Leases
Signeda
…………………………………
Less Depreciation on Capital Leases (
Capital Leased Asset, December 31, 2013
Capital Lease Liability, December 31, 2013
Plus New Capital Leases
Signeda
…………………………………
Less Depreciation on Capital Leases (
Capital Leased Asset, December 31, 2013
Capital Lease Liability, December 31, 2013
Interest
Revenue…………
70
0
48
2
24
8
1
,
43
0
$
4
, 70
0 $ 48
2 $ 24
8 $
5
, 43
0
11.34 (Carom Sports Collectibles Shop; comparison of borrow/buy with
operating and capital leases.) (amounts in US$)
a. $100,000/3.79079 = $26,379.725 = $26,380.
C a r o
m S p o r t s C o l l
ec
t i
b l
e
s S h o p A m o r t i z a t i o n S c
h e
d u l
e
Start End of
of Year Interest Year
Year Balance (10%) Payment Reduction Balance
1 $ 100,000 $10,000 $26,380 $16,380 $83,620
2 83,620 8,362 26,380 18,018 65,602
3 65,602 6,560 26,380 19,820 45,782
4 45,782 4,578 26,380 21,802 23,980
5 23,980 2,398 26,380 23,982 (2)
11-25Solutions
11.34 continued.
b. Plan (1): Asset—Cash.
Asset—Computer
System.
Asset Contra—Accumulated Depreciation on Computer
System. Liability—Bonds Payable and Interest Payable.
Plan (2): Operating Lease Method: None.
Plan (2): Capital Lease Method
Asset—Cash.
Asset—Leased Computer System.
Asset Contra—Accumulated
Depreciation. Liability—Lease
Liability.
c.
$150,000 = $100,000 Depreciation + (0.10 X $100,000 X 5)
Interest. d. (1) Operating Lease Method: $131,900 =
$26,380 X 5.
(2) Capital Lease Method: $131,900.
e. The method of accounting for a lease afects only the timing of
expenses, not their total. Expenses under plan (1) are larger
because the firm borrows $100,000 for the entire five years,
1
leases, the cash payment, and decrease in
the capital lease liability for the diference.
December 31, 2013
Depreciation Expense………………………………………..
154
Depreciation
Expense
……….. $20,000 $20,000 $20,000 $20,000 $20,000
$ 100
,
000
Interest
Expense
………..
1
0
, 00
0
1
0
, 00
0
1
0
, 00
0
1
0
, 00
0
1
0
, 00
0
5
0
,
00
0
Total
…………. $
3
0
, 00
0 $3
0
, 00
0 $3
0
, 00
0 $
3
0
, 00
0 $
3
0
, 00
0 $
15
0
,
00
0
Plan 2
(Operating)
Lease Expense… $
2
6
, 38
0 $2
6
, 38
0 $2
6
, 38
0 $
2
6
, 38
0 $
2
6
, 38
0 $
13
1
, 90
0
Plan 2
(Financing)
Depreciation
Expense
……….. $20,000 $20,000 $20,000 $20,000 $20,000
$ 100
,
000
Interest
Expense
………..
1
0
, 00
0 8
, 36
2 6
, 56
0 4
, 57
8
2
, 40
0
* 3
1
,
90
0
Total
…………. $
3
0
,00
0 $2
8
,36
2 $2
6
,56
0 $
2
4
,57
8 $
2
2
,40
0 $
13
1
,
90
0
*Plug to correct for rounding. By computation, this number is
$2,398 = [$26,380 – ($26,380/1.10)].
11.35 (Northern Airlines; financial statement effects of capital and
operating leases.) (amounts in millions of US$)
a. Capital Lease Liability, December 31, 2012
…………………..
$ 1,088
Plus Interest Expense
(Plug)………………………………………….
102
Plus New Capital Leases
Signeda
…………………………………
0
Less Cash Payment on Capital Leases