Chapter 10 – Reporting and Interpreting Bonds
P10–13.
When a bond is sold for a premium, the amount of cash collected is greater than the
P10–14.
Req. 1
P10–15.
2. It is reported as an operating activity.
4. It is reported as an operating activity.
6. No effect
ALTERNATE PROBLEMS
AP10–1.
Req. 1
Interest:
$2,000,000 x 10%
=
$ 200,000 ÷ 2 = $100,000
Present value
$ 2,000,000 x .6139
=
=
The exact present value is $2,000,000. The $30 difference is due to rounding the
present value factors at four digits.
Req. 2
June 30
Dec. 31
Chapter 10 – Reporting and Interpreting Bonds
AP10–2.
(000’s):
At
End
of 2011
At
End
of 2012
At
End
of 2013
At
End
of 2014
Case A: Sold at Par
Interest expense on the
income statement
10
10
10
10
Net liability on balance sheet
100
100
100
100
Case B: Sold at a discount
Interest expense on the
income statement
11
11
11
11
Net liability on balance sheet
96
97
98
99
Net liability on balance sheet
108
106
104
102
AP10–3.
Req. 1
Computations:
Interest:
$1,000,000 x 7%
=
$ 70,000
=
=
Req. 2
2011
2012
Interest expense ……………………………….
$85,564
*
$85,564
*
2011
2012
Cash paid ………………………………………..
Req. 4
2011
2012
Bonds payable …………………………………
$937,743
*
$953,307*
*
Chapter 10 – Reporting and Interpreting Bonds
AP10–4.
Req. 1
Computations:
Interest:
$2,000,000 x 6%
=
$ 120,000
=
=
Req. 2
2011
2012
Interest expense ……………………………….
$134,262
*
$135,260
**
2011
2012
Cash paid ………………………………………..
$120,000
$120,000
Req. 4
Bonds payable …………………………………
$1,932,286*
$1,947,546*
*
AP10–5.
Req. 1
Computations:
Interest:
$900,000 x 10%
=
$ 90,000
$ 900,000 x 0.6499
=
=
Req. 2
2011
2012
Interest expense ……………………………….
$83,003
*
$83,003
*
Req. 3
2011
2012
Cash paid ………………………………………..
$90,000
$90,000
Req. 4
Bonds payable …………………………………
$927,986*
*
Chapter 10 – Reporting and Interpreting Bonds
AP10–6.
Req. 1
Computations:
Interest:
$4,000,000 x 9%
=
$ 360,000
=
=
Req. 2
2011
2012
Interest expense ……………………………….
$270,340
*
$264,960
**
Req. 3
2011
2012
Cash paid ………………………………………..
$360,000
$360,000
Req. 4
2012
Bonds payable …………………………………
$4,416,004
*
AP10–7.
Req. 1
Cash (+A) ……………………………………………………………………
52,720,000
Bonds payable (11 7/8%) (+L) …………………………………….
52,720,000
Bonds payable (13.6%) (-L) …………………………………………..
50,000,000
Loss on bond retirement (+Loss, –SE)……………………………..
Cash (-A) …………………………………………………………………
52,720,000
Req. 2
The loss on this transaction would be reported on the income statement as a loss.
Req. 3
There are a number of reasons why a bond may be retired early. For example, the bond
Chapter 10 – Reporting and Interpreting Bonds
CASES AND PROJECTS
FINANCIAL REPORTING AND ANALYSIS CASES
CP10–1.
Req. 1
The company paid $1,947,000 for interest. See “Supplemental Disclosures of Cash
Flow Information” in the notes for the answer to this question.
.
Req. 2
CP10–2.
Req. 1
Companies are not required to report immaterial amounts. Most likely, the amount of
cash interest paid by Urban Outfitters was immaterial. This question is related to the
next one.
Req. 2
CP10–3.
Req. 1
The primary source of cash flow for both companies is from their operating activities.
From examining the financing activities section of the statement of cash flows, it is
apparent that neither company relies on borrowed funds to a significant degree.
Req. 2
CP10–4.
Req. 1
Most bond indentures specify two types of cash outflows during the life of a bond issue:
(1) periodic interest payments, and (2) payment of par value at maturity. When the
stated interest rate is less than the effective-interest rate, bonds will sell at a discount.
Principal: $1,000 x.3269 = $326.90
Req. 2
Chapter 10 – Reporting and Interpreting Bonds
CRITICAL THINKING CASES
CP10–5.
People invest in different securities for a variety of reasons. Bondholders are
CP10–6.
Obviously, there is no right answer to this question. 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 dependent on income from the corporation in order
FINANCIAL REPORTING AND ANALYSIS PROJECTS
CP10–7.
The response to this case will depend on the companies selected by the
students.