4. a.
b.
c.
current shareholders’ share of the business would be diluted or reduced.
A disadvantage of this approach is that it would increase the number of shares out-
standing and increase the amount of stockholders’ equity. The result would have the
effect of reducing the key ratios of earnings per share and return on equity. Also, the
No gain or loss occurs in a bond conversion because the issued stock is re-
P6. Bond Basics—Straight-Line Method, Retirement, and Conversion (Concluded)
Effects of liabilities and stockholders’ equity shown:
Decrease in liabilities
Numbers of shares of common stock computed:
stockholders’ equity.
14-30
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(××6/12)
– ( × × 6 / 12 )
(××6/12)
– ( × × 6 / 12 )
2015
2014
Paid semiannual interest and amortized
0.095
$8,200,000
$8,000,000
$8,197,200
0.095
0.092
the premium on 9.5%, 25-year bonds
0.092
P7. Bond Transactions—Effective Interest Method
Paid semiannual interest and amortized
1.
$8,000,000
the premium on 9.5%, 25-year bonds
*
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(××6/12)
3.
example. When market rates are above the face interest rate, buyers are not willing
0.098
P7. Bond Transactions—Effective Interest Method (Concluded)
Paid semiannual interest and amortized
the discount on 9.5%, 25-year bonds
$7,800,000
2.
Market interest rates play a role in creating the premium and discount in the previous
2014
*
**
$7,800,000 + $2,200 = $7,802,200
Rounded
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(××6/12
(××6/12
=‒=
(××6/12
(××6/12
=‒=
(××6/12
(××6/12
P8. Bonds Issued at a Discount and a Premium—Effective Interest Method
$6,000,000
1.
2014
Paid semiannual interest on 9.9%, 10-year
bonds and amortized the premium
0.095
0.092
$297,000 $289,332
$3,928,000
0.099
0.094
) –
$4,000,000
0.094
$7,668
)
$186,580 $184,000
$6,156,000 )
) –
Paid semiannual interest on 9.2%, 10-year
bonds and amortized the discount
$6,148,332
Paid semiannual interest on 9.9%, 10-year
$2,580
$6,000,000
) –
bonds and amortized the premium
0.099
)
*
14-33
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(××4/12
(××4/12
=–=
( × × 2 / 12 ) –
(××2/12
2.
30 $297,000
* Rounded
$3,930,580
$4,000,000
remainder of the interest period
expense and amortization of the discount
$122,667
2014
0.095
0.092
) –
)
P8. Bonds Issued at a Discount and a Premium—Effective Interest Method (Concluded)
2015
bonds and amortized the discount for the
Paid semiannual interest on 9.2%, 10-year
on 9.2%, 10-year bonds
June
$124,468
0.095
0.092
$4,000,000
$3,930,580
To record accrual of 4 months’ interest
a.
Bond interest expense in 2014:
b.
Cash paid for interest:
Total cash paid for 2014 bond issues:
$3,928,000 + $2,580 = $3,930,580
$1,801
)
**
**
**
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1. a.
/=
×=
2. a.
at End of Period
Reduction
in DebtUnpaid Balance
Present value calculated.
PaymentMonth
Unpaid Balance
Interest for 1
Month at 0.75% onMonthly
P9. Lease Versus Purchase
= Present Value of Lease
Periodic Payment × Factor (Table 2 in Appendix B: 9%, 12 periods)
To record depreciation on leased
equipment for first year
$343,728 12
0.09
Made lease payment for first year
$30,936$343,728
0
2
4,000
2,388
*Rounded
1,612
$320,000
316,788
years $28,644
14-35
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3.
financial considerations.
responsibilities of ownership, which can include repairs, taxes, and other costs.
In conclusion, the decision to lease or purchase depends both on financial and non-
parking facilities, which could be re-leasing the current facility, if it is still used. Also,
the owner of the facility may want to use the space for other purposes. An advantage
of purchasing the building is that Martha has control over the property and can reno-
vate, rebuild, or sell it, as the need arises. A disadvantage is that Martha assumes the
Based on the calculation, it appears that the purchase is best because the cost of
$320,000 is less than the net present value of the lease, which is $343,728. Both op-
mortgage
P9. Lease Versus Purchase (Concluded)
Made second monthly payment on
14-36
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