Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 10
581
Chapter 10
Accounting for Long-Term Liabilities
QUESTIONS
1. Notes payable generally involve borrowing from a single creditor, whereas bonds
payable are usually sold to many different lenders (bondholders).
3. Bonds can allow a company’s owners to increase their return on equity without investing
additional amounts. This result occurs as long as the rate of return on the assets
4. A bond indenture is a legal contract between the issuing company and the bondholders
5. The contract rate (also known as the coupon rate, stated rate, or nominal rate) is the rate
6. In general, the supply of and demand for bonds affect market rates. The market rate for
a particular bond issue is also affected by risks unique to the issuer (e.g., financial
performance and condition) and the length of time until the bonds mature.
7.B The effective interest method creates a constant rate of interest over a bond’s life
because the market rate at the time of issuance is multiplied by the beginning balance
8. A company’s accounting period and its bond interest payment dates might not always
9. The price of bonds can be computed by finding the present value of both the par value at
maturity and the periodic cash interest payments discounted at the market rate of
interest.
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 10
10. The issue price of a $2,000 bond sold at 98 ¼ is 98.25% of $2,000, or $1,965. The issue
price of a $6,000 bond priced at 101 ½ is 101.5% of $6,000, or $6,090.
11. The debt-to-equity ratio is calculated by dividing total liabilities by total equity. The
higher a company’s debt–to–equity ratio, the higher proportion of a company’s assets
12. An entrepreneur (owner) must repay the bondholders the principal (par value) according
13. Apple reports long-term debt of $97,207 million on its balance sheet. Apple also reports
$2,323 million of interest expense on its income statement (included in the line item
titled: Other Income/(Expense), Net).
15. Per Samsung’s statement of cash flows (financing section), the company made
16. The balance sheet of Google indicates the company’s debt–to-equity ratio is 0.29,
computed as $44,793 million divided by $152,502 million. In simple terms this means
that for each $1.00 contributed by equity holders, $0.29 is contributed by debt holders.
17.C If a lease is a long-term lease, then a right-of-use asset account for the lease asset is
18.C A finance lease is a long-term lease in which the lessor transfers substantially all the
risks and rewards of ownership to the lessee—see one or more of five criteria that must
19.C Pension plans can be designed as defined benefit plans or defined contribution plans. In
a defined benefit plan the employer estimates the contribution necessary to pay a pre–
defined benefit amount to its retirees. For example, an employee’s monthly pension
benefit may be set at $1,000 per month. The employer must contribute the amount
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 10
QUICK STUDIES
Quick Study 10–1 (5 minutes)
a.
A
d.
D
Quick Study 10-2 (10 minutes)
(a)
Jan. 1
Cash ……………………………………………………………………..
10,000
June 30
Quick Study 10-3 (10 minutes)
(1)
June 30
(2)
July 1
Cash ……………………………………………………………………………
400,000
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 10
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Quick Study 10-4 (10 minutes)
1.
(a)
Jan. 1
Cash* …………………………………………………………………….
Discount on Bonds Payable …………………………………..
20,000
Jan. 1
Cash* …………………………………………………………………….
2. Semiannual cash interest payment
= $20,000 par x 12% interest x 1/2 year = $1,200
Quick Study 10-5 (10 minutes)
Jan. 1
Cash* …………………………………………………………………….
Discount on Bonds Payable …………………………………..
Quick Study 10-6 (10 minutes)
Jan. 1
Cash* …………………………………………………………………….
Quick Study 10-7 (10 minutes)
1. Bond’s cash proceeds: $250,000 x 0.875 = $218,750
2.
Twenty semiannual interest payments of $10,000* ……………
$200,000
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 10
585
Quick Study 10-8 (15 minutes)
(a)
Jan. 1
Cash ……………………………………………………………………..
Discount on Bonds Payable …………………………………..
Bonds Payable …………………………………………………
100,000
Sold bonds at discount.
June 30
Bond Interest Expense …………………………………………..
Discount on Bonds Payable* …………………………..
Cash** ……………………………………………………….
5,000
(c)
Dec. 31
Bond Interest Expense …………………………………………..
Discount on Bonds Payable* …………………………..
Cash** ……………………………………………………….
5,000
Quick Study 10-9 (10 minutes)
1. Bond’s cash proceeds: $250,000 x 1.23375 = $308,437.5 or $308,438 rounded
2.
Twenty semiannual interest payments of $10,000* ……………
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 10
Quick Study 10–10 (10 minutes)
July 1
Bonds Payable ………………………………………………………
Premium on Bonds Payable …………………………………..
Quick Study 10-11 (10 minutes)
Jan. 1
Bonds Payable …………………………..…………………………..
3,000,000
1,000,000
2,000,000
Quick Study 10-12 (10 minutes)
1.
Jan. 1
Cash ……………………………………………………………………..
Quick Study 10-13 (10 minutes)
1.
A
Registered bond
5.
E
Convertible bond
4.
Bearer bond
8.
Debenture
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 10
Quick Study 10-14 (10 minutes)
Ratio of debt to equity
Atlanta Company
Spokane Company
Total liabilities ……………………..
$429,000
$ 549,000
Total equity ………………………….
$572,000
Quick Study 10–15A (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 10–16A (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 & Managerial Accounting, 8e Solutions Manual: Chapter 10
Quick Study 10-17B (10 minutes)
1. Bond’s cash proceeds: $240,000 x .7525 = $180,600
Thirty semiannual interest payments of $12,000* ………………
Quick Study 10-18B (10 minutes)
1. Bond’s cash proceeds: $240,000 x 1.1725 = $281,400
Thirty semiannual interest payments of $12,000* ………………
Less premium ($281,400 – $240,000) …………………………………
Quick Study 10-19C (10 minutes)
Quick Study 10–20C (10 minutes)
Right–of-Use Asset…………………………………………………
15,499
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 10
589
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.
Cash ……………………………………………………….
Cash ……………………………………………………….
Bonds Payable ………………………………………………………
3,400,000
Cash ……………………………………………………….
3,400,000
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 10
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Exercise 10-3 (15 minutes)
1. Semiannual cash interest payment = $3,400,000 x 9% x 1/2 = $153,000
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 & Managerial Accounting, 8e Solutions Manual: Chapter 10
Exercise 10-4 (30 minutes)
1. Discount = Par value – Issue price = $180,000 – $170,862 = $9,138
2. Total bond interest expense over the life of the bonds
Six payments of $7,200 ………………………..
$ 43,200
Plus discount …………………………..………….
9,138
Less amount borrowed …………………
3. Straight-line amortization table ($9,138/6 = $1,523)
Semiannual
Period-End
Unamortized
Discount
Carrying
Value
(0)
1/01/2019 …………………….
$9,138
$170,862
(1)
6/30/2019 …………………….
7,615
172,385
(2)
(3)
6/30/2020 …………………….
4,569
175,431
(5)
6/30/2021 …………………….
1,523
178,477
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 10
Exercise 10-5 (20 minutes)
(a)
Jan. 1
Cash ……………………………………………………………………..
186,534
Discount on Bonds Payable …………………………..
13,466
Bonds Payable …………………………………………………
200,000
June 30
Bond Interest Expense …………………………………………..
Discount on Bonds Payable** …………………………..
Cash*……………………………………………………….
(c)
Dec. 31
Bond Interest Expense …………………………………………..
Discount on Bonds Payable** …………………………..
Cash*……………………………………………………….
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 10
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Exercise 10-6 (35 minutes)
2019
(a)
Dec. 31
Cash ……………………………………………………………………..
188,000
Discount on Bonds Payable …………………………..
12,000
Bonds Payable …………………………………………………
200,000
Sold bonds at discount.
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
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
5,000
Paid semiannual interest and record amor-
(c)
Dec. 31
Bonds Payable ………………………………………………………
200,000
Cash ……………………………………………………….
200,000
Record maturity and payment of bonds.
Wild and Shaw, Financial & Managerial Accounting, 8e 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
1/01/2019(issuance) ……
$4,048
$95,952
6/30/2019 ……………..
3,542
96,458
96,964
6/30/2020 ……………..
2,530
97,470
97,976
6/30/2021 ……………..
98,482
1,012
98,988
6/30/2022 ……………..
99,494
† Supporting computations
Eight payments of $3,500 …………………..
$ 28,000
Plus discount ……………………………………
4,048
Total bond interest expense ………………
$ 32,048
Eight payments of $3,500** ………………..
Par value at maturity ………………………….
Total repaid ………………………………………
Less amount borrowed ……………………..
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 10
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Exercise 10-7 (Concluded)
2.
2019
June 30
Bond Interest Expense …………………………………………..
4,006
Discount on Bonds Payable …………………………..
Cash ………………………………………………………………..
Dec. 31
Bond Interest Expense …………………………………………..
Discount on Bonds Payable …………………………..
Cash ………………………………………………………………..
3.
2022
Dec. 31
Bonds Payable ………………………………………………………
Cash ………………………………………………………………..
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.
(b)
June 30
Bond Interest Expense …………………………………………..
Premium on Bonds Payable* …………………………..
Cash** ……………………………………………………….
(c)
Dec. 31
Bond Interest Expense ………………………………………………..
Premium on Bonds Payable* …………………………..
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 10
Exercise 10-9 (30 minutes)
1. Premium = Issue price – Par value = $409,850 – $400,000 = $9,850
2. Total bond interest expense over the life of the bonds
Six payments of $26,000 ……………….
$156,000
Less premium……………………………….
(9,850)
$156,000
Less amount borrowed …………………
3. Straight-line amortization table ($9,850/6 = $1,642)
Semiannual
Interest Period–End
Unamortized
Premium
Carrying
Value
1/01/2019
$9,850
$409,850
Wild and Shaw, Financial & Managerial Accounting, 8e 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 & Managerial Accounting, 8e Solutions Manual: Chapter 10
Exercise 10–11 (20 minutes)
1. Discount at issuance
Par value …………………………………………
$700,000
Cash issue price ……………………………..
3. Carrying value of the bonds at 12/31/2024
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 & Managerial Accounting, 8e Solutions Manual: Chapter 10
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Exercise 10-12 (20 minutes)
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)]
2019 …….
$100,000
$ 7,000
$ 22,523
$ 29,523
$77,477
2021 …….
$18,092
$100,000
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 10
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Exercise 10-13 (20 minutes)
2019
Jan. 1
Cash ……………………………………………………………………..
Notes Payable ………………………………………………….
100,000
Borrowed $100,000 by signing a 7%
installment note.
2019
Dec. 31
Interest Expense ……………………………………………………
Notes Payable ……………………………………………………….
Cash ………………………………………………………………..
29,523
Record first installment payment.
2020
Dec. 31
Interest Expense ……………………………………………………
Notes Payable ……………………………………………………….
Cash ………………………………………………………………..
29,523
Record second installment payment.
2021
Dec. 31
Interest Expense ……………………………………………………
Notes Payable ……………………………………………………….
Cash ………………………………………………………………..
29,523
Record third installment payment.
2022
Dec. 31
Interest Expense ……………………………………………………
Notes Payable ……………………………………………………….
Cash ………………………………………………………………..
29,523
Record fourth installment payment.