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DQ1.
DQ2.
DQ3.
DQ4.
DQ5.
DQ6.
DQ7.
DQ8.
amount paid on a lease is tax-deductible and provides greater liquidity. This is
debt to equity and interest coverage ratios. The analysis may also include a his-
can then judge how well the company has met its past debt obligations.
materially different from that produced by the effective interest method.
of repayment.
in relation to the stated rate of interest on the face of the bond.
A company may choose to lease rather than buy a long-term asset because the
torical comparison that reflects both good and poor economic times. The lender
The relationship between the prevailing market rate of interest and the stated rate
The straight-line method is acceptable only when it does not produce a result
The company would most likely issue a secured bond because rather than being
of interest on the face of the bond are the determining factors.
issued on the company's general credit, certain assets are pledged as a guarantee
refinance or call the bonds if interest rates change.
The market price of a bond varies over time because the market interest rate varies
CHAPTER 14—Solutions
LONG-TERM LIABILITIES
Discussion Questions
Callable and convertible bonds are considered to add to management's future
The lender reviews the enterprise's current earnings and cash flows as well as its
Bond interest expense must be accrued at the close of each accounting period to
sometimes referred to as off-balance-sheet financing.
flexibility in financing a business because they offer options for management to
ensure proper matching of all the borrowing costs associated with bonds payable.
Interest payment dates rarely coincide with the end of the accounting period.
14-1
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1. 5.
2. 6.
3. 7.
4.
Reduction
in Debt
1. 4.
2. 5.
3. 6.
Unpaid Balance
** Rounded
at End of Period
SE1. Types of Long-Term Liabilities
Month
Interest for 1
Short Exercises
SE2. Mortgage Payable
b
d
Payment
Monthly Month at 0.6667%*
on Unpaid Balance
e
SE3. Bond Characteristics
bc
f
a
d
a
cg
ef
14-2
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
SE4. Valuing Bonds Using Present Value
(from Table 2*)
Present value of 40 periodic payments at 6%
Choice A
*From Appendix B
14-3
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
2014
×=
2015
=
=
2014
(××6/12
‒ (××6/12
=– =
$8,000,000 0.98 $7,840,000
Issued 8.5%, 5-year bonds at 98
SE5. Straight-Line Method
$16,000
To record accrued semiannual interest and
amortize premium on 9.5%, 20-year bonds
$66$9,434
Paid semiannual interest
$200,000
$212,000
$9,500
0.089
0.095 )
)
SE6. Effective Interest Method
$340,000
14-4
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
To record accrued bond interest expense
2014
SE7. Year-End Accrual of Bond Interest
2015
Made semiannual interest payment and
amortized bond discount
and amortize bond discount
$400,000 $6,300
$240,000 × $10,500 =
14-5
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
=
×4 /12=
×6 /12=
2.
1. 4.
2. 5.
3.
1. 4.
2. 5.
3.
=
$2,000,000
SE9. Bond Conversion
$40,000
2014
SE10. Bond Issue Between Interest Dates
1.
The bond interest expense for the year ended December 31, 2014, is 8 months' inter-
est minus 4 months' interest, or $24,000 – $12,000 = $12,000. The interest expense
can also be calculated using the formula $400,000 × 0.09 × 4/12, the time the bonds
were actually outstanding.
$400,000
$936,000
Made semiannual interest payment
2014
Disadvantage
Disadvantage
$400,000
d
b
c
SE11. Leases and Pensions Definitions
e
0.09
×
value plus accrued interest
×
a
SE12. Bond Versus Common Stock Financing
Advantage Advantage
Advantage
0.09 $18,000
$12,000
× $24,000
Sold $400,000 of 9%, 10-year bonds at face
14-6
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1.
Reduction
in Debt
1. 6.
2. 7.
3. 8.
4. 9.
5.
Made second monthly payment on
mortgage
at End of Period
Unpaid Balance
Month
Month at 1% onMonthly Unpaid Balance
Payment
Interest for 1
Exercises: Set A
E1A. Mortgage Payable
i
cd
E2A. Bond Issue Features and Bond Characteristics
a
h
f
e
b
g
14-7
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
