Financial Accounting, 9/e 10–35
$2,717))
Req. 3
P10–12.
Present value:
$300,000 x 0.85349
=
256,047
$ 9,000* x 7.32548
=
65,929
Issue price
=
$321,976
Req. 1
January 1:
Cash …………………………………………………………………………..
321,976
Bond payable (+L) …………………………………………………….
321,976
Req. 2
March 31:
Interest Expense (+E, -SE) ($321,976 x .02) …………………..
6,440
Bonds Payable (-L) ………………………………………………………
2,560
Cash (-A) ($300,000 x .12 x ¼) …………………………………..
9,000
Book value of bond: $319,416 ($321,976 – $2,560)
Interest Expense (+E, -SE) ($319,416 x .02) …………………..
6,388
Bonds Payable (-L) ………………………………………………………
2,612
Cash (-A) ($300,000 x .12 x ¼) …………………………………..
9,000
Long-term Liabilities
Bonds payable
Bonds Payable (-L) ………………………………………………………
2,664
Cash (-A) ($300,000 x .12 x ¼) …………………………………..
9,000
Book value of bond: $314,140 ($316,804 – $2,664)
Interest Expense (+E, -SE) ($314,140 x .02) …………………..
6,283
Bonds Payable (-L) ………………………………………………………
2,717
Cash (-A) ($300,000 x .12 x ¼) …………………………………..
9,000
Req. 3
December 31:
Balance sheet:
Long-term Liabilities
Bonds payable
$311,423
P10–13.
Bonds payable (-L) ……………………………………………………….
1,000,000
Loss on bond call (+Loss, –SE) ………………………………………
40,000
Bond premium (-L) ……………………………………………………….
10,000
Cash (-A) …………………………………………………………………
P10–14.
Bonds payable (-L) ……………………………………………………….
1,000,000
Loss on bond call (+Loss, –SE) ………………………………………
40,000
Bond Payable (-L) ………………………………………………………..
10,000
Cash (-A) …………………………………………………………………
P10–15.
Financial Accounting, 9/e 10–37
Req. 1
Present value:
$800,000 x 0.56743
=
453,944
$ 64,000* x 3.60478
=
230,706
Issue price
=
$684,650
Req. 2—Straight-line amortization:
Year 1
Year 2
Year 3
Year 4
Year 5
a.
Cash interest payment
($800,000 x .08) ……………….
$64,000
$64,000
$64,000
$64,000
$64,000
c.
Bond interest expense ………….
$87,070
$87,070
$87,070
$87,070
$87,070
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
64,000
702,808
x
.12
=
84,337
20,337
723,145
End of Year 3
64,000
723,145
x
.12
=
86,777
22,777
745,922
End of Year 4
64,000
745,922
x
.12
=
89,511
25,511
771,433
End of Year 5
64,000
771,433
x
.12
=
92,567*
*
800,000
P10–16.
1. Yes. Cash received from issuing bonds is a financing cash inflow.
2. No. Cash payments for interest are an operating cash outflow.
4. No effect
Financial Accounting, 9/e 10–39
ALTERNATE PROBLEMS
AP10–1.
Req. 1
Present value
$ 2,000,000 x .61391
=
1,227,820
$ 100,000* x 7.72173
=
772,173
Issue price
$1,999,993**
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
Next Year
Bonds payable …………………………………
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
Case C: Sold at a premium (8%)
Interest expense for the year
Net liability on balance sheet
106,732
105,242
103,630
$8,621
$108,111 x .08 x ½
$8,509
$106,732 x .08 x ½
$8,388
$105,242 x .08 x ½
Financial Accounting, 9/e 10–41
AP10–3.
Req. 1
Present value
$ 2,000,000 x 0.71299
=
1,425,980
$ 120,000* x 4.10020
=
492,024
Issue Price
$1,918,004**
Req. 2
This Year
Next Year
Interest expense ……………………………….
$134,260
*
$135,258
**
$1,918,004 x .07 = $134,260
**[$1,918,004 + ($134,260- $120,000)] x .07 = $135,258
Req. 3
This Year
Cash paid ………………………………………..
Bonds payable …………………………………
$1,932,286*
$1,947,546*
*
AP10–6.
Req. 1 Present value
$ 4,000,000 x 0.74726
=
2,989,040
$ 360,000* x 4.21236
=
1,516,450
Issue Price
$4,505,490**
Req. 2
This Year
Next Year
Interest expense ……………………………….
$270,329
*
$264,949
**
$4,505,490 x .06 = $270,329
Req. 3
This Year
Next Year
Cash paid ………………………………………..
$360,000
$360,000
Req. 4
This Year
Bonds payable …………………………………
$4,415,819
*
Financial Accounting, 9/e 10–43
AP10–7.
Present value:
$200,000 x 0.77901
=
155,802
$ 10,000* x 5.19974
=
51,997
Issue price
=
$207,799
Req. 1
January 1:
Cash …………………………………………………………………………..
207,799
Bond premium (+L) …………………………………………………..
7,799
Bond payable (+L) …………………………………………………….
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) …………………………………
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
$205,412
AP10–8.
Present value:
$200,000 x 0.77901
=
155,802
$ 10,000* x 5.19974
=
51,997
Issue price
=
$207,799
Req. 1
January 1:
Cash …………………………………………………………………………..
207,799
Bonds Payable (+L) …………………………………………………..
7,799
Bond payable (+L) …………………………………………………….
200,000
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) …………………………………
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) …………………………………
Book value of bond: $205,412 ($206,630 – $1,218)
Req. 3
December 31:
Long-term Liabilities
Bonds payable
Financial Accounting, 9/e 10–45
CASES AND PROJECTS
CONTINUING CASE
CON10–1.
Req. 1
Present value
$750,000,000 x .67297
=
504,727,500
$ 18,750,000* x 16.35143
=
306,589,313
Issue price
$811,316,813**
Req. 2
June 30
This Year
Dec. 31
This Year
Interest expense ……………………………….
$16,226,336
*
$16,175,863**
Req. 3
June 30
This Year
Dec. 31
This Year
Cash paid ………………………………………..
$18,750,000
*
$18,750,000*
*750,000,000 x .05 x 1/2
CON10–1 (continued).
Req. 4
June 30
This Year
Dec. 31
This Year
Book value of bonds ………………………….
$808,793,149*
$806,219,012**
FINANCIAL REPORTING AND ANALYSIS CASES
CP10–1.
Req. 1
Near the end of footnote 2, American Eagle reports paying interest of $638,000.
Req. 2
CP10–2.
Req. 1
The company would report the amount of cash paid for interest in its cash flow
statement or in its footnotes.
Req. 2
Req. 3 0.42 = $560,772 / $1,327,969
CP10–3.
Financial Accounting, 9/e 10–47
Req. 1
The three ratios are quite similar. American Eagle’s debt–to-equity ratio is 0.49. Urban
Outfitters’ debt-to-equity ratio is 0.42. The industry average debt-to-equity ratio is 0.43.
Req. 2
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
plus the principle they contributed.
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 471,297,955 euros
(rounded).
Principal:
$500,000,000 x 0.74409 =
372,045,000* euros
CRITICAL THINKING CASES
CP10–5.
People invest in different securities for a variety of reasons. Bondholders are
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 out that both the current workers and the retired investors are
FINANCIAL REPORTING AND ANALYSIS PROJECTS
CP10–7.
The response to this case will depend on the companies selected by the
students.