Financial Reporting and Analysis (7th Ed.)
Chapter 11 Solutions
Financial Instruments and Liabilities
Problems/Discussion Questions
Problems
P11-1. Imputing interest (LO 11-3)
Requirement 1:
To verify that the imputed interest rate on the dealer’s loan is 6%,
compute the present value of the payment stream using a 6%
Present
value
Down payment Payment factor
Requirement 2:
Greg has the funds needed to make the down payment, but must
borrow the remaining amount of purchase price. The dealer has
P11-2. Reporting bonds issued at a discount (LO 11-2)
Requirement 1:
The issuance price of the bonds on July 1, 2017 is equal to the
present value of the principal repayment plus the present value of
the semi-annual interest payments. Since the bonds pay interest
semi-annually, the present value calculations are based on a
Present value of the interest payments:
Requirement 2:
The amortization schedule appears below:
Effective Amortization of Bond Discount for McVay Corp.
[Market Interest Rate of 5% (semi-annual)]
(a) (b) (c) (d) (e)
Date
Interest
Expense
(0.05 x e)
Cash Payment
(Fixed)
Amortization
of Bond
Discount
(a – b)
Discount on B/P
(Beginning Balance
minus c)
Carrying Amount
($15,000,000
minus d)
Requirement 3:
The journal entries for the first four interest payments are:
12/31/17:
12/31/18:
6/30/19:
Requirement 4:
The balance sheet presentation at 12/31/17 would be:
The balance sheet presentation at 12/31/18 would be:
P11-3. Reporting bonds issued at a premium (LO 11-2)
Requirement 1:
The issuance price of the bonds on January 1, 2017, is equal to the
present value of the principal repayment plus the present value of
the semi-annual interest payments. Since the bonds pay interest
Present value of the interest payments:
Issue price of the bonds:
Requirement 2:
The amortization schedule appears below:
Effective Amortization of Bond Premium for Fleetwood Inc.
[Market interest rate of 3% (semi-annual)]
(a) (b) (c) (d) (e)
Date
Interest
Expense
(0.03 x e)
Cash Payment
(Fixed)
Amortization
of Bond
Premium
(b – a)
Premium on B/P
(Beginning
Balance
minus c)
Carrying
Amount
($25,000,000
plus d)
Requirement 3:
The journal entries for the first four interest payments are:
6/30/17:
CR Cash
$1,000,000.00
12/31/17:
CR Cash
$1,000,000.00
6/30/18:
CR Cash
$1,000,000.00
12/31/18:
CR Cash
$1,000,000.00
Requirement 4:
The balance sheet presentation at 12/31/17 would be:
The balance sheet presentation at 12/31/18 would be:
P11-4. Analyzing installment note and imputed interest (LO 11-3)
Requirement 1:
To verify that the imputed interest rate on the installment note is
10%, we compute the present value of the payment stream using a
Present value
Down payment Payment factor
Requirement 2:
The following journal entry would be made on January 1, 2017 to
record the purchase:
Requirements 3 and 4:
The following schedule shows interest expense and the loan
balance for each year:
Balance at
start of year
Interest
at 10%
Loan
payment
Balance at
end of year
Interest expense for 2017 would be $634 and the loan balance at
year-end would be $4,974. Interest expense for 2018 would be
P11-5. Understanding the Fair Value Option (LO 11-5)
Requirement 1:
Mason would make the following entry to record the borrowing and
initial purchase of its corporate bond investment:
January 1, 2017:
DR Cash
As described in more detail in Chapter 16, Mason Manufacturing
would make the following entries to record the fair value of its
corporate bond investment at the end of each quarter. Unrealized
March 31, 2017:
June 30, 2017:
September 30, 2017:
December 31, 2017:
Requirement 2:
Ignoring interest, the carrying value of the loan under conventional
Requirement 3:
If Mason elects to use the fair value option for debt permitted by
March 31, 2017:
June 30, 2017:
September 30, 2017:
December 31, 2017:
As before, unrealized holding gains and losses flow to the income
statement. The Market adjustment account flows to the balance
Requirement 4:
Proponents of the fair value option for debt argue that this offset
feature (described in Requirement 3) helps to insulate the income
statement from artificial volatility when inter-corporate investments