11–1
CHAPTER 11
LIABILITIES: BONDS PAYABLE
DISCUSSION QUESTIONS
1. (1) To pay the face (maturity) amount of the bonds at a specified date. (2) To pay periodic interest at a
specified percentage of the face amount.
3. Less than face amount. Because comparable bonds provide a market interest rate (12%) that is greater than
4. a. Greater than $26,000,000
6. a. Premium
(1) interest payments made periodically over the life of the bond and (2) the face amount that must be repaid
at maturity. The periodic payments consist entirely of interest, and the final payment at maturity consists
9. a. As a current liability on the balance sheet.
b. As a long-term liability on the balance sheet.
CHAPTER 11 Liabilities: Bonds Payable
BASIC EXERCISES
BE 11–1
a.
Cash
3,000,000
Bonds Payable
3,000,000
b.
Interest Expense
Cash
120,000
c.
Bonds Payable
Cash
3,000,000
BE 11–2
Cash
Discount on Bonds Payable
Bonds Payable
3,500,000
BE 11–3
Interest Expense
Discount on Bonds Payable
15,000
Cash
105,000
Discount on bonds payable = $150,000 ÷ 10 semiannual payments
BE 11–4
Cash
Premium on Bonds Payable
400,000
Bonds Payable
5,000,000
BE 11–5
Interest Expense
Premium on Bonds Payable
Cash
175,000
Premium on bonds payable = $400,000 ÷ 10 semiannual payments
BE 11–6
Bonds Payable
Premium on Bonds Payable
Gain on Redemption of Bonds
72,000
Cash
785,000
11–3
BE 11–7
a.
ExpenseInterest
ExpenseInterest Expense Tax Income Before Income
EarnedInterest Times +
=
12.0
$400,000
$400,000 $4,400,000
:20Y8 =
+
13.6
$440,000
$440,000 $5,544,000
:20Y9 =
+
b. The times interest earned ratio has increased from 12.0 in 20Y8 to 13.6 in 20Y9. The
CHAPTER 11 Liabilities: Bonds Payable
EXERCISES
Ex. 11–1
The bonds were selling at a premium. This is indicated by the selling price of 103.2, which is
Ex. 11–2
May
1
Cash
800,000
Bonds Payable
800,000
Nov.
1
Interest Expense ($800,000 6% 6/12)
24,000
Cash
24,000
Dec.
31
Interest Expense ($800,000 6% 2/12)
8,000
Interest Payable
8,000
Ex. 11–3
a. 1.
Cash
9,594,415
Discount on Bonds Payable
405,585
Bonds Payable
10,000,000
2.
Interest Expense
390,559
Discount on Bonds Payable
40,559
Cash
350,000
3.
Interest Expense
390,559
Discount on Bonds Payable
40,559
Cash
350,000
CHAPTER 11 Liabilities: Bonds Payable
Ex.11–3 (Concluded)
b. Annual interest paid ($10,000,000 7%) ………………………………………. $700,000
Ex. 11–4
a.
20Y1
Apr.
1
Cash
20,811,010
Premium on Bonds Payable
811,010
Bonds Payable
20,000,000
Oct.
1
Interest Expense
818,899
Premium on Bonds Payable
Cash
900,000
CHAPTER 11 Liabilities: Bonds Payable
11–6
Ex. 11–6
20Y5
May
1
Cash
22,000,000
Bonds Payable
22,000,000
Nov.
1
Interest Expense ($22,000,000 4% 6/12)
440,000
Cash
440,000
20Y9
Nov.
1
Bonds Payable
22,000,000
Gain on Redemption of Bonds
660,000
Cash
21,340,000
Ex. 11–7
1. The significant loss on redemption of the Simmons Industries bonds should be reported
Appendix 1 Ex. 11–8
Appendix 1 Ex. 11–9
a. First Year:
$200,000 0.93458 =
$186,916
Second Year:
$200,000 0.87344 =
174,688
Third Year:
$200,000 0.81630 =
163,260
Fourth Year:
$200,000 0.76290 =
52,580
Total present value
$677,444
b. $200,000 3.38721 = $677,442*
*$2 difference between (a) and (b) is due to rounding.
c. Cash on hand today can be invested to earn income. If each of the $200,000 of cash
receipts is invested at 7%, it will be worth $800,000 at the end of four years.
CHAPTER 11 Liabilities: Bonds Payable
11–7
Appendix 1 Ex. 11–10
Appendix 1 Ex. 11–11
No. The present value of your winnings using an interest rate of 12% is $31,047,750
higher interest rate.
Appendix 1 Ex. 11–12
Present value of $1 for 10 semiannual
periods at 4.5% semiannual rate………………………
0.64393
Face amount of bonds ……………………………………….
$25,000,000
$16,098,250
Present value of an annuity of $1
for 10 periods at 4.5% ……………………………………..
7.91272
Semiannual interest payment ……………………………..
$875,000
6,923,630
Total present value (proceeds) …………………………...
$23,021,880
Semiannual interest payment = $25,000,000 7% ÷ 2
Appendix 1 Ex. 11–13
Present value of $1 for 10 semiannual
periods at 4.5% semiannual rate………………………
0.64393
Face amount of bonds ……………………………………….
$42,000,000
$27,045,060
Present value of an annuity of $1
for 10 periods at 4.5% ……………………………………..
7.91272
Semiannual interest payment ……………………………..
$2,310,000
18,278,383
Total present value (proceeds) …………………………..
$45,323,443
Semiannual interest payment = $42,000,000 5.5%
Appendix 2 Ex. 11–14
a. 1.
Cash
43,495,895
Discount on Bonds Payable
6,504,105
Bonds Payable
50,000,000
2.
Interest Expense
1,957,315
Discount on Bonds Payable
207,315
Cash
1,750,000
Semiannual interest expense = $43,495,895 9% 6/12
Semiannual cash payout = $50,000,000 3.5%
CHAPTER 11 Liabilities: Bonds Payable
11–8
Appendix 2 Ex. 11–14 (Concluded)
3.
Interest Expense
1,966,644
Discount on Bonds Payable
216,644
Cash
1,750,000
Semiannual interest expense = ($43,495,895 + $207,315) 9% 6/12
Note: The following data in support of the proceeds of the bond issue stated in the
exercise are presented for the instructor’s information. Students are not required to make
the computations.
Present value of $1 for 20 semiannual
periods at 4.5% semiannual rate …………………………….
0.41464
Face amount of bonds ……………………………………………..
$50,000,000
$20,732,000
Present value of annuity of $1
for 20 periods at 4.5% ……………………………………………
13.00794
Semiannual interest payment ……………………………………
$1,750,000
22,763,895
Total present value (proceeds) ………………………………….
$43,495,895
Semiannual interest payment = $50,000,000 3.5%
b.
Annual interest paid ………………………………………………………………………….
$3,500,000
Discount amortized …………………………………………………………………………..
423,959
Interest expense for first year…………………………………………………………….
$3,923,959
Appendix 2 Ex. 11–15
a. 1.
Cash
32,433,150
Premium on Bonds Payable
2,433,150
Bonds Payable
30,000,000
2.
Interest Expense
1,297,326
Premium on Bonds Payable
202,674
Cash
1,500,000
Semiannual interest expense = $32,433,150 8.0% 6/12
Semiannual cash payout = $30,000,000 5.0%
3.
Interest Expense
1,289,219
Premium on Bonds Payable
210,781
Cash
1,500,000
Semiannual interest expense = ($32,433,150 – $202,674) 8.0% 6/12
CHAPTER 11 Liabilities: Bonds Payable
11–9
Appendix 2 Ex. 11–15 (Concluded)
b. Annual interest paid ($1,500,000 + $1,500,000) …………………………………. $3,000,000
Appendix 1 and 2 Ex. 11–16
a.
Present value of $1 for 10 semiannual
periods at 5% semiannual rate ………………………………
0.61391
Face amount of bonds ………………………………………………
$35,000,000
$21,486,850
Present value of an annuity of $1 for 10
periods at 5% ……………………………………………………….
7.72173
Semiannual interest payment …………………………………….
$2,100,000
16,215,633
Proceeds of bond sale ………………………………………………
$37,702,483
b. First semiannual interest payment ……………………………………………………. $ 2,100,000
Less 5% of carrying amount of $37,702,483 ………………………………………. (1,885,124)
Premium amortized …………………………………………………………………………. $ 214,876
c. Second semiannual interest payment ……………………………………………….. $ 2,100,000
CHAPTER 11 Liabilities: Bonds Payable
11–10
Appendix 1 and 2 Ex. 11–17
a.
Present value of $1 for 10 semiannual
periods at 6.0% semiannual rate ……………………………..
0.55839
Face amount of bonds ………………………………………………..
$80,000,000
$44,671,200
Present value of an annuity of $1 for 10
periods at 6.0% ………………………………………………………
7.36009
Semiannual interest payment …………………………………….
$3,600,000
26,496,324
Proceeds of bond sale ………………………………………………..
$71,167,524
First semiannual interest payment = $80,000,000 4.5%
b. 6.0% of carrying amount of $71,167,524 ……………………………………………… $ 4,270,051
c. 6.0% of carrying amount of $71,837,575 ……………………………………………… $ 4,310,255
CHAPTER 11 Liabilities: Bonds Payable
PROBLEMS
Prob. 11–1A
1.
20Y1
July
1
Cash
43,768,920
Discount on Bonds Payable
6,231,080
Bonds Payable
50,000,000
2. a.
20Y1
Dec.
31
Interest Expense
2,311,554
Discount on Bonds Payable
311,554
Cash
2,000,000
20Y2
Interest Expense
2,311,554
Discount on Bonds Payable
311,554
Cash
2,000,000
CHAPTER 11 Liabilities: Bonds Payable
11–12
Prob. 11–2A
1.
20Y1
July
1
Cash
31,951,110
Premium on Bonds Payable
1,951,110
Bonds Payable
30,000,000
2. a.
20Y1
Dec.
31
Interest Expense
1,402,444
Premium on Bonds Payable
97,556
Cash ($30,000,000 10% 6/12)
1,500,000
Premium amortization = $1,951,110 ÷ 20 seminannual payments (rounded)
b.
20Y2
June
30
Interest Expense
1,402,444
Premium on Bonds Payable
97,556
Cash
1,500,000
Premium amortization = $1,951,110 ÷ 20 semiannual payments (rounded)
3. $1,402,444
4. Yes. Investors will be willing to pay more than the face amount of the bonds when the
5.
Present value of $1 for 20 semiannual
periods at 4.5% semiannual rate ……………………………..
0.41464
Face amount of bonds ………………………………………………
$30,000,000
$12,439,200
Present value of annuity of $1
for 20 periods at 4.5% …………………………………………….
13.00794
Semiannual interest payment …………………………………….
$1,500,000
19,511,910
Proceeds of bond issue …………………………………………….
$31,951,110
CHAPTER 11 Liabilities: Bonds Payable
11–13
Prob. 11–3A
1.
20Y1
July
1
Cash
63,532,267
Discount on Bonds Payable
10,467,733
Bonds Payable
74,000,000
Dec.
31
Interest Expense
4,331,693
Discount on Bonds Payable
261,693
Cash ($74,000,000 11% 6/12)
4,070,000
20Y2
June
30
Interest Expense
4,331,693
Discount on Bonds Payable
261,693
Cash
4,070,000
Dec.
31
Interest Expense
4,331,693
Discount on Bonds Payable
261,693
Cash
4,070,000
20Y3
June
30
Bonds Payable
74,000,000
Loss on Redemption of Bonds
7,940,961
Discount on Bonds Payable
9,420,961
Cash
72,520,000*
* Cash payout for bond redemption = $74,000,000 0.98
2. a. 20Y1: $4,331,693
b. 20Y2: $8,663,386
3. Initial carrying amount of bonds ………………………………………………….. $63,532,267
Discount amortized on December 31, 20Y1 …………………………………… 261,693