Brief Exercise 14–1
face annual fraction of the cash
amount rate
annual period interest
Brief Exercise 14–2
¥ [5 ÷ 2] % x $80,000,000
Brief Exercise 14–3
The price will be the present value of the periodic cash interest payments (face
amount times stated rate) plus the present value of the principal payable at
Note: The result differs from $75,000,000 only because the present value factors in any
present value table are rounded. Because the stated rate and the market rate are
Brief Exercise 14–4
*Present value of an ordinary annuity of $1: n = 40, i = 2%. (Table 4)
** Present value of $1: n = 40, i = 2%. (Table 2)
Brief Exercise 14–5
Interest will be the effective rate times the outstanding (book value) balance:
Brief Exercise 14–6
June 30
December 31
Brief Exercise 14–7
Interest will be a plug figure:
June 30
December 31
Brief Exercise 14–8
Interest will be the effective rate times the outstanding balance:
June 30
December 31
Brief Exercise 14–9
December 31, 2018
Nantucket Ferry (Borrower)
BankOne (Lender)
Brief Exercise 14–10
Interest $6,000¥x 2.72325 * = $ 16,340
¥ 2% x $300,000
*Present value of an ordinary annuity of $1: n = 3, i = 5%. (Table 4)
** Present value of $1: n = 3, i = 5%. (Table 2)
………………………….….……..Notes payable (face amount)
Brief Exercise 14–11
$300,000 ÷ 2.72325 = $110,162
amount (from Table 4)
of loan n = 3, i = 5% payment
Helpful, but not required:
Cash Effective Decrease in Outstanding
Payment Interest Balance Balance
5% x Outstanding Balance Balance Reduction
300,000
* rounded
Brief Exercise 14–12
($ in millions)
Bonds payable (face amount)…………………..…………... 60.0
Brief Exercise 14–13
The issue price of bonds with detachable warrants is allocated between the two
different securities on the basis of their market values.
($ in millions)
Cash (102% x $60 million)……………………………………………... 61.2
Brief Exercise 14–14
GAAP requires that the entire issue price of convertible bonds be recorded
as debt, precisely the same way, in fact, as for nonconvertible bonds.
($ in millions)
Brief Exercise 14–15
AI will report a gain when adjusting the bonds to fair value. A decrease in the
If the change in fair value is attributable to a change in the interest rate, the rate
AI will report the gain on the change in the fair value of the bonds in net
income if the entire change is due to the change in general interest rates. But any
change in the fair value caused by a change in the credit risk associated with the
Exercise 14–1
The DD Corp. bonds are appropriately priced to yield the market rate of
interest. The GG Corp. bonds are slightly underpriced at the stated price and,
BB Corp. bonds:
Interest $ 5,500,000 ¥
DD Corp. bonds:
Interest $ 5,000,000 ¥
Note: The result differs from $100,000,000 only because the present value factors in any
present value table are rounded. Because the stated rate and the market rate are
the same, the true present value is $100,000,000.
GG Corp. bonds:
Interest $ 4,500,000 ¥
¥ [9÷ 2] % x $100,000,000
*Present value of an ordinary annuity of $1: n = 40, i = 5% (Table 4)
** Present value of $1: n = 40, i = 5% (Table 2)
Exercise 14–2
1. Maturity Interest paid Stated rate Effective (market) rate
10 years annually 10% 12%
¥ 10% x $1,000,000
2. Maturity Interest paid Stated rate Effective (market) rate
10 years semiannually 10% 12%
¥ 5% x $1,000,000
3. Maturity Interest paid Stated rate Effective (market) rate
10 years semiannually 12% 10%
¥6% x $1,000,000
Exercise 14–2 (concluded)
4. Maturity Interest paid Stated rate Effective (market) rate
20 years semiannually 12% 10%
¥ 6% x $1,000,000
5. Maturity Interest paid Stated rate Effective (market) rate
20 years semiannually 12% 12%
actually, $1,000,000 if PV table factors were not rounded
¥ 6% x $1,000,000