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CHAPTER 10
SOLUTIONS TO PROBLEMS—SET C
PROBLEM 10-1C
(a) Jan. 1 Cash ........................................................... 18,000
Notes Payable ................................... 18,000
5 Cash ........................................................... 18,480
Sales Revenue ($18,480 ÷ 105%) ..... 17,600
Sales Taxes Payable
($18,480 – $17,600) ........................ 880
(b) Jan. 31 Interest Expense ....................................... 105
Interest Payable
($18,000 X 7% X 1/12 = $105) ....... 105
PROBLEM 10-1C (Continued)
(c) Current liabilities
Notes payable ................................................................. $ 18,000
Accounts payable ........................................................... 52,000
Salaries and wages payable .......................................... 44,769
PROBLEM 10-2C
(a) Mar. 1 Equipment ................................................. 9,000
Notes Payable .................................... 9,000
31 Interest Expense
($9,000 X .06 X 1/12) .............................. 45
Interest Payable ................................. 45
31 Interest Expense
[($12,000 X .06 X 1/12) + $45 + $300] ......... 405
Interest Payable ................................. 405
PROBLEM 10-2C (Continued)
Interest Expense
3/31 45
4/30 345
PROBLEM 10-3C
(a) Jan. 1 Interest Payable ...................................... 84,000
Cash .................................................. 84,000
PROBLEM 10-4C
(a) 2016 Cash .......................................................... 600,000
April 1 Bonds Payable ................................. 600,000
(b) Dec. 31 Interest Expense ...................................... 36,000
Interest Payable
($600,000 X 8% X 9/12) ................. 36,000
PROBLEM 10-5C
(a) 2017
Jan. 1 Cash ($5,000,000 X 103%) ................. 5,150,000*
Bonds Payable ........................... 5,000,000
Premium on Bonds
Payable ................................... 150,000
PROBLEM 10-6C
(a)
2017
2016
1. Current ratio
$59,223 ÷ $37,673
$75,806 ÷ $39,616
2. Free cash flow
$19,827 – $7,967
= $11,860
$16,593 – $4,694
= $11,899
3. Debt to assets ratio
$102,509 ÷ $165,276
= 62%
$137,171 ÷ $194,926
= 70%
(b) In terms of liquidity Krispy Kreme was less liquid in 2017 than 2016. Its
current ratio and free cash flow deteriorated. In contrast, its debt to
*PROBLEM 10-7C
2017
(a) Jan. 1 Interest Payable .............................. 216,000
Cash ......................................... 216,000
(b) Dec. 31 Interest Expense ............................. 188,000
Premium on Bonds Payable
(d) Dec. 31 Interest Expense ............................. 94,000**
Premium on Bonds Payable .......... 14,000**
*PROBLEM 10-8C
2017
(a) Jan. 1 Cash ($2,500,000 X 102%) ............... 2,550,000
2017
(b) Jan. 1 Cash ($2,500,000 X 96%) ................. 2,400,000
Discount on Bonds Payable ........... 100,000
Bonds Payable ......................... 2,500,000
(c) Premium
Current Liabilities
Interest payable ........................................ $ 200,000
Discount
Current Liabilities
Interest payable ........................................ $ 200,000
Long-term Liabilities
*PROBLEM 10-9C
(a) 1. 12/31/16 Cash ($2,600,000 X 98%) ...... 2,548,000
2. 12/31/16 Cash ($2,600,000 X 104%) .... 2,704,000
Bonds Payable ............... 2,600,000
Premium on Bonds
Payable ....................... 104,000
2. 12/31/17 Interest Expense ................... 228,800
Premium on Bonds
Payable............................... 5,200
Cash ................................ 234,000
2. Long-term Liabilities:
*PROBLEM 10-9C (Continued)
(b), (1)
Annual
Interest
Periods
(A)
Interest to
Be Paid
(9% X $2,600,000)
(B)
Interest Expense
to Be Recorded
(A) + (C)
(C)
Discount
Amortization
($52,000 ÷ 20)
(D)
Unamortized
Discount
(D) – (C)
(E)
Bond
Carrying Value
[$2,600,000 – (D)]
Issue date
1
$234,000
$236,600
$2,600
$52,000
49,400
$2,548,000
2,550,600
(2)
Annual
Interest
Periods
(A)
Interest to
Be Paid
(9% X $2,600,000)
(B)
Interest Expense
to Be Recorded
(A) – (C)
(C)
Premium
Amortization
($104,000 ÷ 20)
(D)
Unamortized
Premium
(D) – (C)
(E)
Bond
Carrying Value
[$2,600,000 + (D)]
Issue date
$104,000
$2,704,000
*PROBLEM 10-10C
2017
(a) Jan. 1 Cash .................................................. 1,077,217
(b) PEDRAZA CORPORATION
Bond Premium Amortization
Effective-Interest Method—Annual Interest Payments
6% Bonds Issued at 5%
Annual
Interest
Periods
(A)
Interest
to Be
Paid
(B)
Interest
Expense
(C)
Premium
Amor-
tization
(A) – (B)
(D)
Unamor-
tized
Premium
(D) – (C)
(E)
Bond
Carrying
Value
($1,000,000 + D)
Issue date
1
$60,000
$53,861
$6,139
$77,217
71,078
$1,077,217
1,071,078
(c) Dec. 31 Interest Expense
($1,077,217 X 5%) .................................. 53,861
Premium on Bonds Payable .................... 6,139
(d) 2018
Jan. 1 Interest Payable ........................................ 60,000
Cash ................................................... 60,000
(e) Dec. 31 Interest Expense
[($1,077,217 – $6,139) X 5%] ................ 53,554
*PROBLEM 10-11C
(a) 1. 2017
Jan. 1 Cash .......................................... 3,391,514
2. Dec. 31 Interest Expense
($3,391,514 X 10%) ............... 339,151
3. 2018
4. Dec. 31 Interest Expense ...................... 341,067
[($3,391,514 + $19,151) X 10%]
(b) Bonds Payable .................................................. $4,000,000*
(c) 1. Total bond interest expense—2018, $341,067.
2. The effective-interest method will result in less interest expense
reported than the straight-line method in 2018 when the bonds
*PROBLEM 10-11C (Continued)
3. Annual interest payments
($4,000,000 X 8%) = $320,000; $320,000 X 15 ........ $4,800,000
*PROBLEM 10-12C
(a)
Quarterly
Interest Period
(A)
Cash
Payment
(B)
Interest
Expense
(D) X 1.5%
(C)
Reduction
of Principal
(A) – (B)
(D)
Principal
Balance
(D) – (C)
Issue Date
1
$23,298
$6,000
$17,298
$400,000
382,702
(c) Current liabilities
Mortgage payable ......................................................... $ 71,825*
*PROBLEM 10-13C
(a)
Period
Cash
Payment
(A)
Interest
Expense
(B) = (D) X
1.5%
Principal
Reduction
(C) = (A) – (B)
Balance
(D) = (D) – (C)
May 1, 2017
$90,000
May 31, 2017
$4,493
$1,350
$3,143
86,857
(b) May 1 Cash ....................................................... 90,000
Notes Payable ................................ 90,000
