CHAPTER 11 Liabilities: Bonds Payable
Appendix 1 and 2 Prob. 11–4A
1.
20Y1
July
1
Cash
37,282,062
Discount on Bonds Payable
2,717,938
Bonds Payable
40,000,000
2. a.
20Y1
Dec.
Interest Expense
1,491,282*
Discount on Bonds Payable
91,282
Cash
1,400,000
b.
20Y2
30
Interest Expense
Discount on Bonds Payable
Cash
1.
Cash
Premium on Bonds Payable
Bonds Payable
30,000,000
2. a.
20Y1
Dec.
Interest Expense
1,437,800*
Premium on Bonds Payable
Cash
Cash
CHAPTER 11 Liabilities: Bonds Payable
Prob. 11–15B
1.
20Y1
July
1
Cash
42,309,236
Discount on Bonds Payable
3,690,764
Bonds Payable
46,000,000
2. a.
20Y1
Dec.
31
Interest Expense
2,392,269
Discount on Bonds Payable
92,269
Cash ($46,000,000 10% 6/12)
2,300,000
20Y2
30
Interest Expense
Discount on Bonds Payable
Cash
CHAPTER 11 Liabilities: Bonds Payable
Prob. 11–2B
1.
20Y1
July
1
Cash
73,100,469
Premium on Bonds Payable
8,100,469
Bonds Payable
65,000,000
2. a.
20Y1
Dec.
31
Interest Expense
3,494,977
Premium on Bonds Payable
405,023
Cash ($65,000,000 12% 6/12)
3,900,000
b.
20Y2
30
Interest Expense
3,494,977
Premium on Bonds Payable
Cash
3,900,000
12.46221
CHAPTER 11 Liabilities: Bonds Payable
11–17
Prob. 11–3B
1.
20Y1
July
1
Cash
62,817,040
Premium on Bonds Payable
7,817,040
Bonds Payable
55,000,000
Dec.
31
Interest Expense
2,084,148
Premium on Bonds Payable
390,852
Cash ($55,000,000 9% 6/12)
2,475,000
20Y2
June
30
Interest Expense
2,084,148
Premium on Bonds Payable
390,852
Cash
2,475,000
Dec.
31
Interest Expense
2,084,148
Premium on Bonds Payable
390,852
Cash
2,475,000
20Y3
June
30
Bonds Payable
55,000,000
Premium on Bonds Payable
6,253,632
Gain on Redemption of Bonds
4,603,632
Cash
56,650,000
CHAPTER 11 Liabilities: Bonds Payable
Appendix 1 and 2 Prob. 11–4B
1.
20Y1
July
1
Cash
42,309,236
Discount on Bonds Payable
3,690,764
Bonds Payable
46,000,000
2. a.
20Y1
Dec.
31
Interest Expense
2,327,008
Premium on Bonds Payable
27,008
Cash
2,300,000
20Y2
30
Interest Expense
Discount on Bonds Payable
28,493
Cash
2,300,000
1.
20Y1
July
Cash
73,100,469
Premium on Bonds Payable
Bonds Payable
65,000,000
2. a.
20Y1
Dec.
31
Interest Expense
3,655,023
Premium on Bonds Payable
Cash
3,900,000
20Y2
Premium on Bonds Payable
Cash
3,900,000
CHAPTER 11 Liabilities: Bonds Payable
MAKE A DECISION
MAD 11–1
a.
Expense Interest
ExpenseInterest Expense Tax Income Before Income
EarnedInterest Times +
=
9.0
$484
$484 $3,892
:2 Year
4.4
$459
$459 $1,568
:1 Year
:Amazon
=
+
=
+
11–20
MAD 11–2
a.
ExpenseInterest
ExpenseInterest Expense Tax Income Before Income
EarnedInterest Times +
=
12.2
$88
$88 $983
:Clorox =
+
24.1
$579
$579 $13,369
:Gamble & Procter =
+
b. Procter & Gamble has a times interest earned ratio of 24.1, which is almost twice as large
MAD 11–3
a.
ExpenseInterest
ExpenseInterest Expense Tax Income Before Income
EarnedInterest Times +
=
(9.3)
$12.9
$12.9 $(132.3)
:4 Year
(24.2)
$8.8
$8.8 $(221.9)
:3 Year
(205.8)
$0.9
$0.9 $(186.1)
:2 Year
119.0
$0.5
$0.5 $59.0
:1 Year
=
+
=
+
=
+
=
+
CHAPTER 11 Liabilities: Bonds Payable
MAD 11–3 (Concluded)
b.
c. While the times interest earned ratio is unfavorable, there is a positive trend. In Year 1, the
ratio is over 100 and indicates exceptional interest coverage. Interest expense is very
small in this year while the company is also profitable. In Years 2, 3, and 4, the interest
d. The interest expense increased from $8.8 million in Year 3 to $12.9 million in Year 4. This is
11–22
MAD 11–4
a.
ExpenseInterest
Expense Interest Expense Tax Income Before Income
EarnedInterest Times +
=
6.1
$234
$234 $1,184
:Marriott
3.1
$587
$587 $1,255
:Hilton
=
+
=
+
b. The times interest earned ratio is 3.1 for Hilton and 6.1 for Marriott. Using this ratio, we can
conclude that Marriott’s earnings provide its creditors greater protection of their interest
CHAPTER 11 Liabilities: Bonds Payable
TAKE IT FURTHER
TIF 11–1
CEG’s actions were technically legal; it did not violate any laws. However, this action could
damage the company’s reputation. If investors perceive that the company is not acting fairly
in its dealings with them, then the company may find it difficult to issue additional debt in the
future.
This case is based on a real-world situation, where GE Capital, a division of General Electric,
announced a follow-up long-term bond issue within days of an initial debt issue. The
actions.
TIF 11–2
A sample solution based on Nike Inc.’s Form 10-K for the fiscal year ended May 31, 2016,
follows:
1. a. $2,010 million (balance sheet)
11–24
TIF 11–3
To: Liz Nolan
From: A+ Student
Re: Bond Redemption
I have reviewed the proposed redemption of the company’s 7% bonds and the subsequent
7% Bonds
5% Bonds
Interest
Savings
Face amount ………………………………………………..
$1,000,000
$1,000,000
Contract rate of interest ……………………………..
7.0%
5.0%
Term …………………………………………………………
0.5
0.5
Semiannual interest payment ………………………..
$ 35,000
$ 25,000
$ 10,000
Number of interest periods remaining ………………………………………………………….
10
Total interest savings …………………………………………………………………………………….
$100,000
The interest savings of $100,000 are significantly larger than the $30,000 redemption
premium, resulting in a $70,000 savings to the company. However, the company must also
consider the impact of the time value of money on these savings. The $70,000 in interest
savings occurs over the next five years, with the company saving $10,000 on every
semiannual interest payment. Because these savings are in the future, they must be
discounted back to today to determine their present value. Using the market rate of interest of
5%, the present value of these savings is calculated as follows:
Semiannual interest savings ………………………………………………………………………… $10,000.00
CHAPTER 11 Liabilities: Bonds Payable
TIF 11–4
Receive $100,000,000 today:
Present value of $100,000,000 today = $100,000,000
Receive $25,000,000 today, plus $9,000,000 per year for 8 years:
Present value of $25,000,000 today …………………………………………………………. $25,000,000