Financial Accounting, 10/e 10–37
P10–15.
Req. 1
Present value:
$800,000 x 0.56743
=
$453,944
$64,000* x 3.60478
=
=
$684,650
Req. 2—Straight-line amortization:
Year 1
Year 2
Year 3
Year 4
Year 5
a.
($800,000 x .08) ……………….
c.
Bond interest expense ………….
Cash interest payment
Req. 3 —Effective-interest amortization:
Bond Amortization Schedule
Date
Cash
Payment
Interest Expense
Amortization of
Discount
Net
Liability
Issuance
$684,650
End of Year 1
$64,000
$684,650
x
.12
=
$82,158
$18,158
702,808
End of Year 2
x
.12
=
84,337
723,145
End of Year 3
x
.12
=
86,777
745,922
End of Year 4
x
.12
=
89,511
771,433
End of Year 5
x
.12
=
92,567*
*
800,000
P10–16.
1. Yes. Cash received from issuing bonds is a financing cash inflow.
ALTERNATE PROBLEMS
AP10–1.
Req. 1
Present value
$2,000,000 x .61391
=
$1,227,820
=
Req. 2
June 30
Dec. 31
Interest expense ($2,000,000 x .10 x ½)
$100,000
$100,000
Req. 3
June 30
Dec. 31
Cash paid ($2,000,000 x .10 x ½) ……….
$100,000
$100,000
This Year
Bonds payable …………………………………
Financial Accounting, 10/e 10–39
AP10–2.
At End
of Year 1
At End
of Year 2
At End
of Year 3
Case A: Sold at Par (10%)
Interest expense for the year
$ 10,000
$ 10,000
$ 10,000
Net liability on balance sheet
$100,000
$100,000
$100,000
Net liability on balance sheet
$ 93,790
$ 95,082
$ 96,534
Net liability on balance sheet
$106,732
$105,242
$103,630
AP10–3.
Req. 1
Present value
$ 2,000,000 x 0.71299
=
$1,425,980
=
$1,918,004
**
Req. 2
This Year
Next Year
Interest expense ……………………………….
$134,260
*
$135,258
**
This Year
Cash paid ………………………………………..
Req. 4
This Year
Next Year
Bonds payable …………………………………
$1,932,264*
$1,947,522*
*
Financial Accounting, 10/e 10–41
AP10–4.
Present value:
$800,000 x 0.88849
$ 16,000* x 3.71710
Req. 1
January 1:
Cash (+A) ……………………………………………………………………
770,266
Bond discount (-L) ………………………………………………………..
29,734
Bonds payable (+L) …………………………………………………..
800,000
Req. 2
June 30:
Interest expense (+E, -SE) ($770,266 x .06 x 1/2) ……………
23,108
16,000
December 31:
Interest expense (+E, -SE) ($777,374 x .06 x 1/2) ……………
23,321
16,000
Req. 3
December 31:
Long-term Liabilities
Bonds payable
AP10–5.
Present value:
$800,000 x 0.88849
$ 16,000* x 3.71710
Req. 1
January 1:
Cash (+A) ……………………………………………………………………
770,266
Bonds payable (+L) …………………………………………………..
770,266
Req. 2
June 30:
Interest expense (+E, -SE) ($770,266 x .06 x 1/2) ……………
23,108
December 31:
Interest expense (+E, -SE) ($777,374 x .06 x 1/2) ……………
23,321
16,000
Req. 3
December 31:
Long-term Liabilities
Bonds payable
Financial Accounting, 10/e 10–43
AP10–6.
Req. 1
Present value
Req. 2
This Year
Next Year
Interest expense ……………………………….
$270,329
*
$264,949**
Req. 3
This Year
Next Year
Cash paid ………………………………………..
$360,000
$360,000
Req. 4
This Year
Next Year
Bonds payable …………………………………
$4,415,819
*
$4,320,768*
*
AP10–7.
$200,000 x 0.77901
$10,000* x 5.19974
Req. 1
January 1:
Cash (+A) ……………………………………………………………………
207,799
7,799
200,000
Req. 2
June 30:
Interest expense (+E, -SE) ($207,799 x .085 x 1/2) ………….
8,831
Bond premium (-L) ……………………………………………………….
1,169
Cash (-A) ($200,000 x .10 x 1/2) …………………………………
10,000
Book value of bonds: $206,630 ($200,000 + ($7,799 – $1,169))
Interest expense (+E, -SE) ($206,630 x .085 x 1/2) ………….
8,782
Bond premium (-L) ……………………………………………………….
1,218
Cash (-A) ($200,000 x .10 x 1/2) …………………………………
Req. 3
December 31:
Balance sheet:
Long-term Liabilities
Bonds payable
Financial Accounting, 10/e 10–45
AP10–8.
Present value:
$200,000 x 0.77901
=
$155,802
$10,000* x 5.19974
=
=
$207,799
Req. 1
January 1:
Cash (+A) ……………………………………………………………………
207,799
Bonds payable (+L) …………………………………………………..
207,799
Req. 2
Interest expense (+E, -SE) ($207,799 x .085 x 1/2) ………….
8,831
Bonds payable (-L) …………………………..…………………………..
1,169
Cash (-A) ($200,000 x .10 x 1/2) …………………………………
10,000
Book value of bonds: $206,630 ($207,799 – $1,169)
December 31:
Interest expense (+E, -SE) ($206,630 x .085 x 1/2) ………….
8,782
Bonds payable (-L) …………………………..…………………………..
1,218
Cash (-A) ($200,000 x .10 x 1/2) …………………………………
10,000
Long-term Liabilities
Bonds payable
CONTINUING PROBLEM
CON10–1.
Req. 1
Present value
$750,000,000 x .67297
=
$504,727,500
=
$811,316,813
Req. 2
June 30
This Year
Dec. 31
This Year
Req. 3
June 30
This Year
Dec. 31
This Year
$18,750,000
Financial Accounting, 10/e 10–47
CON10–1. (continued)
Req. 4
June 30
This Year
Dec. 31
This Year
Book value of bonds ………………………….
$808,793,149*
$806,219,012**
CASES AND PROJECTS
ANNUAL REPORT CASES
CP10–1. (Dollar amounts in thousands)
Req. 1
Near the end of Note 2 under Supplemental Disclosures of Cash Flow Information,
Req. 2
Note 9 describes the company’s “Credit Agreement.” Under the agreement, the
CP10–2. (Dollar amounts in thousands)
Req. 1
At the bottom of its Statement of Cash Flows, Express discloses that it paid $0 cash for
Req. 2
Note 8 describes the company’s “Revolving Credit Facility.” Under the agreement, the
Req. 3 0.82 = $533,607 / $654,000
CP10–3. (Dollar amounts in thousands)
Req. 1
Financial Accounting, 10/e 10–49
Industry Average: 0.70
A high debt-to-equity ratio indicates that a company relies more on debt financing than
equity financing. Heavy reliance on debt financing increases the risk that a company
Req. 2
Neither American Eagle or Express have issued bonds, and American Eagle has very
CP10–4.
Req. 1
A zero coupon bond simply means that no periodic interest payments will be made over
the bond’s life. It does not mean that investors will not earn interest. Investors will simply
Req. 2
Principal:
$500,000,000 x 0.94260 =
471,300,000* euros
*Using Excel or a financial calculator results in a present value of 471,298 euros
(rounded).
Principal:
$500,000,000 x 0.74409 =
372,045,000* euros
Financial Accounting, 10/e 10–51
CRITICAL THINKING CASES
CP10–5.
People invest in different securities for a variety of reasons. Bondholders are interested
CP10–6.
As with most difficult decisions that people face, this dilemma does not have an obvious
right answer. We have found that some students approach this question from the
perspective that people’s jobs are more important than people’s money. We try to point
FINANCIAL REPORTING AND ANALYSIS TEAM PROJECT
CP10–7.
The response to this case will depend on the companies selected by the
students.