Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 10
649
Chapter 10
Accounting for Long-Term Liabilities
QUICK STUDIES
Quick Study 10–1 (5 minutes)
a.
Advantage
d.
Disadvantage
c.
Advantage
f.
Disadvantage
Quick Study 10-2 (10 minutes)
a.
Jan. 1
Cash ……………………………………………………………
10,000
b.
June 30
Quick Study 10-3 (10 minutes)
a.
Assets
=
Liabilities
+
Equity
Jan. 1
Cash
+10,000
Bonds Payable
+10,000
Assets
=
Liabilities
+
Equity
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 10
Quick Study 10-4 (10 minutes)
1.
Bond Interest Expense ………………………………….
Cash ………………………………………………………..
Paid semiannual interest. ($3,600,000 x 8% x ½)
2.
July 1
Cash ……………………………………………………………..
400,000
Bonds payable …………………………………………
Sold $400,000 of bonds at par.
Quick Study 10-5 (10 minutes)
1.
a. Jan. 1
Cash* …………………………………………………………..
19,800
Discount on Bonds Payable………………………….
200
Bonds Payable ……………………………………….
Sold bonds at 99. *$20,000 x 0.99
b. Jan. 1
Cash* …………………………………………………………..
20,700
Premium on Bonds Payable…………………….
Bonds Payable ……………………………………….
Sold bonds at 103½. *$20,000 x 1.035
Quick Study 10-6 (5 minutes)
1. Premium This is because contract rate > market rate.
Quick Study 10-7 (10 minutes)
Jan. 1
Cash* …………………………………………………………..
218,750
Discount on Bonds Payable………………………….
31,250
Bonds Payable ……………………………………….
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 10
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Quick Study 10-8 (10 minutes)
Jan. 1
Cash* …………………………………………………………..
281,400
Bonds Payable ……………………………………….
Premium on Bonds Payable…………………….
Quick Study 10-9 (10 minutes)
1. Bond’s cash proceeds: $250,000 x 0.875 = $218,750
2.
Twenty semiannual interest payments of $10,000* ….
$200,000
Quick Study 10–10 (15 minutes)
a.
Jan. 1
Cash ……………………………………………………………
92,640
Discount on Bonds Payable………………………….
7,360
Bonds Payable ……………………………………….
Sold bonds at discount.
b.
June 30
Bond Interest Expense …………………………………
5,736
Discount on Bonds Payable* …………………..
Cash** …………………………………………………….
c.
Dec. 31
Bond Interest Expense …………………………………
5,736
Discount on Bonds Payable* …………………..
Cash** …………………………………………………….
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 10
Quick Study 10–11 (10 minutes)
2.
Twenty semiannual interest payments of $10,000* …………
$200,000
3. Bond interest expense on first payment date:
$141,562 / 20 semiannual periods = $7,078 (rounded to whole dollars)
Quick Study 10-12 (10 minutes)
1.
Liabilities Section of Balance Sheet
December 31
Liabilities
Long-term liabilities
2.
Liabilities Section of Balance Sheet
December 31
Liabilities
Long-term liabilities
Quick Study 10-13 (10 minutes)
July 1
Bonds Payable ………………………………………………
400,000
Premium on Bonds Payable …………………………..
16,000
408,000
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 10
653
Quick Study 10–14 (10 minutes)
1.
2. Interest expense = Beginning balance x Annual interest rate
Quick Study 10–15 (10 minutes)
1.
Assets
=
Liabilities
+
Equity
Jan. 1
Cash
+340,000
Notes
Payable
+340,000
Assets
=
Liabilities
+
Equity
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 10
Quick Study 10–16 (10 minutes)
1.
2.
Payments
Period
Ending
(A)
Beginning
Balance
(B)
Debit
Interest
Expense [6%
+
(C)
Debit
Notes
Payable
=
(D)
Credit
Cash
(E)
Ending
Balance
Quick Study 10-17 (10 minutes)
1.
A
Registered bond
5.
E
Convertible bond
2.
C
6.
D
Bond Indenture
3.
H
Secured bond
7.
G
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 10
Quick Study 10-18 (10 minutes)
Ratio of debt to equity
Atlanta Company
Spokane Company
Total liabilities ……………………
$429,000
$ 549,000
Total equity ………………………..
$572,000
Quick Study 10-19A (10 minutes)
Cash Flow
Table
Table Value*
Amount
Present Value
Par (maturity) value .
B.1
0.3769
$250,000
$ 94,225
B.3
Quick Study 10–20A (10 minutes)
Cash Flow
Table
Table Value*
Amount
Present Value
Par (maturity) value .
B.1
0.3083
$240,000
$ 73,992
B.3
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 10
Quick Study 10-21B (10 minutes)
1. Bond’s cash proceeds: $240,000 x .7525 = $180,600
2.
Thirty semiannual interest payments of $12,000* …………..
$360,000
Quick Study 10-22B (10 minutes)
1. Bond’s cash proceeds: $240,000 x 1.1725 = $281,400
2.
Thirty semiannual interest payments of $12,000* …………..
$360,000
Less premium ($281,400 – $240,000) ………………………………
3. Bond interest expense on first payment date:
$281,400 x 4% = $11,256
Quick Study 10-23C (10 minutes)
Quick Study 10-24C (10 minutes)
Right–of-Use Asset ……………………………………….
15,499
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 10
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EXERCISES
Exercise 10-1 (20 minutes)
1
Don’t Expand
2
Debt Financing
3
Equity Financing
Income before interest expense …..
$ 50,000
$ 75,000
$ 75,000
$ 50,000
$ 68,600
$ 75,000
Exercise 10-2 (20 minutes)
1.
Jan. 1
Cash ……………………………………………………….
3,400,000
Bonds Payable …………………………………..
3,400,000
Sold bonds at par.
2.
June 30
Bond Interest Expense …………………………….
153,000
Cash ………………………………………………….
153,000
Paid semiannual interest. $3,400,000 x 0.09 x ½
Dec. 31
Bond Interest Expense …………………………….
Cash ………………………………………………….
153,000
Dec. 31
Bonds Payable ………………………………………..
3,400,000
Cash ………………………………………………….
3,400,000
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 10
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Exercise 10-3 (15 minutes)
2. Journal entries
(a)
Jan. 1
Cash …………………………………………………..
3,400,000
Bonds Payable ………………………………
3,400,000
Sold bonds at par.
Bond Interest Expense ………………………..
Cash ……………………………………………..
Paid semiannual interest on bonds.
(c)
Dec. 31
Bond Interest Expense ………………………..
Cash ……………………………………………..
Paid semiannual interest on bonds.
3.
(a)
Jan. 1
Cash* ………………………………………………….
3,332,000
Discount on Bonds Payable…………………
68,000
Bonds Payable ………………………………
3,400,000
Sold bonds at 98. *($3,400,000 x 0.98)
Jan. 1
Cash* ………………………………………………….
3,468,000
Premium on Bonds Payable……………
Bonds Payable ………………………………
3,400,000
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 10
Exercise 10-4 (30 minutes)
2. Total bond interest expense over the life of the bonds
Six payments of $7,200* ………………
$ 43,200
Plus discount …………………………..….
9,138
3. Straight-line amortization table ($9,138/6 = $1,523)
Semiannual
Period-End
Unamortized
Discount
Carrying
Value
(0)
1/01/2021 …
$9,138
$170,862
(1)
6/30/2021 …
(3)
6/30/2022 …
(5)
6/30/2023 …
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 10
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Exercise 10-5 (20 minutes)
(a)
Jan. 1
Cash ………………………………………………………
186,534
Discount on Bonds Payable…………………….
13,466
Bonds Payable ………………………………….
200,000
Sold bonds at discount.
June 30
Bond Interest Expense …………………………...
Discount on Bonds Payable** …………….
Dec. 31
Bond Interest Expense …………………………...
Discount on Bonds Payable** …………….
Cash* ………………………………………………..
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 10
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Exercise 10-6 (35 minutes)
2021
(a)
Dec. 31
Cash ……………………………………………………..
188,000
Discount on Bonds Payable……………………
12,000
Bonds Payable …………………………………
200,000
Sold bonds at discount.
2022
Bond Interest Expense …………………………..
8,000
Discount on Bonds Payable* …………….
3,000
Cash** ………………………………………………
5,000
Paid semiannual interest and record amor-
tization. *$12,000-$9,000 **$200,000x 5% x ½
Dec. 31
Bond Interest Expense …………………………..
8,000
Discount on Bonds Payable* …………….
3,000
Cash** ………………………………………………
5,000
Paid semiannual interest and record amor-
tization. *$9,000- $6,000 **$200,000x 5% x ½
2023
June 30
Bond Interest Expense …………………………...
8,000
Discount on Bonds Payable* ……………..
3,000
Cash** ……………………………………………….
5,000
Paid semiannual interest and record amor-
tization. *$6,000-$3,000 **$200,000 x 5% x ½
Dec. 31
Bond Interest Expense …………………………...
8,000
Discount on Bonds Payable* ……………..
3,000
Cash** ……………………………………………….
5,000
(c)
Dec. 31
Bonds Payable ……………………………………….
200,000
Cash …………………………………………………
200,000
Record maturity and payment of bonds.
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 10
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Exercise 10-7 (40 minutes)
1. Straight-line amortization table ([$100,000-$95,952]/8 = $506)
Semiannual
Period-End
Unamortized
Discount †
Carrying
Value
1/01/2021(issuance) …..
$4,048
$95,952
6/30/2021 …………….
3,542
96,458
96,964
6/30/2022 …………….
2,530
97,470
97,976
6/30/2023 …………….
98,482
1,012
98,988
6/30/2024 …………….
99,494
† Supporting computations
Eight payments of $3,500* …………….
$ 28,000
Plus discount ……………………………….
4,048
Total bond interest expense ………….
$ 32,048
*$100,000 x 0.07 x ½ = $3,500
or
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 10
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Exercise 10-7 (Concluded)
2.
2021
June 30
Bond Interest Expense ……………………………………
4,006
Discount on Bonds Payable……………………….
Cash …………………………………………………………
Bond Interest Expense ……………………………………
Discount on Bonds Payable……………………….
Cash …………………………………………………………
3.
2024
Dec. 31
Bonds Payable ……………………………………………….
100,000
Cash …………………………………………………………
100,000
Paid par value at maturity.
(Assume interest was already recorded.)
Exercise 10-8 (20 minutes)
(a)
Jan. 1
Cash ……………………………………………………..
216,222
Premium on Bonds Payable………………
16,222
Bonds Payable …………………………………
200,000
Sold bonds at premium.
June 30
Bond Interest Expense …………………………..
Premium on Bonds Payable* ………………….
Cash** ………………………………………………
10,000
(c)
Dec. 31
Bond Interest Expense ………………………………..
Premium on Bonds Payable* ……………………….
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 10
Exercise 10-9 (30 minutes)
2. Total bond interest expense over the life of the bonds
Six payments of $26,000* …………….
$156,000
Less premium ……………………………..
(9,850)
3. Straight-line amortization table ($9,850/6 = $1,642)
Semiannual
Interest Period–End
Unamortized
Premium
Carrying
Value
1/01/2021
$9,850
$409,850
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 10
Exercise 10–10 (15 minutes)
1.
July 1
Bonds Payable ………………………………………….
10,000
2.
July 1
Bonds Payable ………………………………………….
10,000
Premium on Bonds Payable ………………………
1,000
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 10
Exercise 10–11 (20 minutes)
1. Discount at issuance
Par value …………………………………….
$700,000
Cash issue price ………………………….
2. Amortization for the first 6 years of the 15-year bonds.
$15,750 x (6/15) = $6,300.
3. Carrying value of the bonds at 12/31/2026
Discount at issuance (from part 1) .
$ 15,750
Less amortization (from part 2) …….
Par value …………………………………….
4. Journal entry at retirement of bonds
Jan. 1
Bonds Payable ………………………………………
700,000
Loss on Retirement of Bonds Payable* …..
40,950
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 10
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Exercise 10-12 (20 minutes)
Background (given): Amount of each payment = Initial note balance / Table B.3 PV factor
= $100,000 / 3.3872 = $29,523
Amortization table for the loan
Payments
Period
Ending
Date
(A)
Beginning
Balance
[Prior (E)]
(B)
Debit
Interest
Expense
[7% x (A)]
+
(C)
Debit
Notes
Payable
[(D) – (B)]
=
(D)
Credit
Cash
[computed]
(E)
Ending
Balance
[(A) – (C)]
2021 …..
$100,000
$ 7,000
$ 22,523
$ 29,523
$77,477
2023 …..
$18,092
$100,000
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 10
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Exercise 10-13 (20 minutes)
2021
Jan. 1
Cash ……………………………………………………………
100,000
Notes Payable …………………………………………
100,000
Borrowed $100,000 by signing a 7%
installment note.
Dec. 31
Interest Expense ………………………………………….
Notes Payable ………………………………………………
Cash ………………………………………………………
Record first installment payment.
Dec. 31
Interest Expense ………………………………………….
Notes Payable ………………………………………………
Cash ………………………………………………………
Record second installment payment.
Dec. 31
Interest Expense ………………………………………….
Notes Payable ………………………………………………
Cash ………………………………………………………
Record third installment payment.
Dec. 31
Interest Expense ………………………………………….
Notes Payable ………………………………………………
Cash ………………………………………………………
Record fourth installment payment.