Exercise 10–14 (20 minutes)
WOOHOO CO.
Liabilities Section of Balance Sheet
December 31
Liabilities
Current liabilities
Accounts payable ………………………………………… $ 500
Wages payable …………………………………………….. 200
Interest payable ……………………………………………. 100
Sales tax payable …………………………………………. 50
Total current liabilities ………………………………….. 850
Exercise 10-15 (15 minutes)
1a. Current debt–to–equity ratio = $220,000 / $400,000* = 0.55
*Total equity = $620,000 – $220,000 = $400,000
1b. Potential debt–to-equity ratio = $720,000* / $400,000 = 1.80
*Total liabilities = $220,000 + $500,000 = $720,000
2. More risky.
Exercise 10–16A (25 minutes)
1. Estimation of the market price at the issue date
Cash Flow
Table
Table Value*
Amount
Present Value
Par (maturity) value ……..
B.1
$800,000
$365,120
Interest (annuity) ………….
B.3
**24,000
326,167
Price of bonds ……………..
$691,287
2.
Cash ……………………………………………………………………..
691,287
Discount on Bonds Payable……………………………………
108,713
Bonds Payable …………………………………………………
800,000
Sold bonds at a discount on the stated issue date.
Exercise 10–17A (25 minutes)
1. Estimation of the market price at the issue date
Cash Flow
Table
Table Value*
Amount
Present Value
Par (maturity) value ……..
B.1
0.6756
$150,000
$101,340
Interest (annuity) ………….
B.3
8.1109
**7,500
60,832
$162,172
2.
Cash ……………………………………………………………………..
162,172
Premium on Bonds Payable…………………………..
12,172
Bonds Payable …………………………………………………
150,000
Sold bonds at a premium on the stated issue date.
Exercise 10-18B (30 minutes)
1. Discount = Par value – Issue price = $500,000 – $463,140 = $36,860
2. Total bond interest expense over the life of the bonds
Six payments of $22,500 ………………………
$135,000
Plus discount ………………………………………
36,860
Total bond interest expense …………………
$171,860
$135,000
500,000
Less amount borrowed ………………………..
3. Effective interest amortization table
Semiannual
Interest
Period-End
(A)
Cash Interest
Paid
[4.5% x $500,000]
(B)
Bond Interest
Expense
[6% x Prior (E)]
(C)
Discount
Amortization
[(B) – (A)]
(D)
Unamortized
Discount
[Prior (D) – (C)]
(E)
Carrying
Value
[$500,000 – (D)]
1/01/2019
$36,860
$463,140
6/30/2019
$ 22,500
$ 27,788
$ 5,288
31,572
468,428
12/31/2019
22,500
28,106
5,606
25,966
474,034
6/30/2020
22,500
28,442
5,942
20,024
479,976
12/31/2021
7,049
0
500,000
$135,000
$171,860
$36,860
Exercise 10-19B (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)
Total bond interest expense …………………
$ 146,150
400,000
Less amount borrowed ………………………..
(409,850)
3. Effective interest amortization table
Semiannual
Interest
Period-End
(A)
Cash Interest
Paid
[6.5% x $400,000]
(B)
Bond Interest
Expense
[6% x Prior (E)]
(C)
Premium
Amortization
[(A) – (B)]
(D)
Unamortized
Premium
[Prior (D) – (C)]
(E)
Carrying
Value
[400,000 + (D)]
1/01/2019
$9,850
$409,850
6/30/2019
$ 26,000
$ 24,591
$1,409
8,441
408,441
12/31/2019
26,000
24,506
1,494
6,947
406,947
6/30/2020
5,364
405,364
403,686
6/30/2021
401,907
400,000
Exercise 10–20C (10 minutes)
Exercise 10–21C (20 minutes)
1.
Jan. 1
Right–of-Use Asset ……………………………………………………….
41,000
Lease Liability ……………………………………………………….
41,000
Record right-of-use lease asset.
2.
Jan. 1
Lease Liability ……………………………………………………….
Cash ……………………………………………………………………………
Record beginning-year lease payment.
3.
Dec. 31
Amortization Expense—Right-of-Use Asset ………………………..
8,200
Accum. Amortization—Right-of–Use Asset …………………….
8,200
Record amortization ($41,000 / 5 years).
Exercise 10–22C (15 minutes)
[Note: 12% / 12 months = 1% per month as the relevant interest rate.]
Option 1: $1,750 per month for 25 months = $1,750 x 22.0232 = $38,541
PROBLEM SET A
Problem 10-1A (40 minutes)
Part 1
Jan. 1
Cash ……………………………………………………….
3,456,448
Discount on Bonds Payable …………………………..
543,552
Bonds Payable …………………………………………………
4,000,000
Sold bonds on stated issue date.
Part 2
[Note: The semiannual amounts for (a), (b), and (c) below are the same throughout
the bonds’ life because this company uses straight-line amortization.]
Part 3
Thirty payments of $120,000 ……………………..
$ 3,600,000
Plus discount ……………………………………………
543,552
Total bond interest expense ………………………
$ 4,143,552
or:
Thirty payments of $120,000 ………………..
$3,600,000
Par value at maturity …………………………..
4,000,000
Total repaid ………………………………………….
7,600,000
Less amount borrowed ………………………..
(3,456,448)
Total bond interest expense …………………
$4,143,552
Part 4 (Semiannual amortization: $543,552/30 = $18,118.4)
Semiannual
Period-End
Unamortized
Discount
Carrying
Value
1/01/2019 …………………
$543,552
$3,456,448
6/30/2019 …………………
525,434
6/30/2020 …………………
489,198
Problem 10-1A (Concluded)
Part 5
June 30
Bond Interest Expense …………………………………………..
138,118
Discount on Bonds Payable …………………………..
18,118
Cash ……………………………………………………….
120,000
Record six months’ interest and
discount amortization.
Dec. 31
Bond Interest Expense …………………………………………..
138,118
Discount on Bonds Payable …………………………..
18,118
Cash ……………………………………………………….
120,000
Problem 10-2A (40 minutes)
Part 1
Jan. 1
Cash ……………………………………………………….…………….
4,895,980
Premium on Bonds Payable …………………………..
895,980
Bonds Payable …………………………………………………
4,000,000
Sold bonds on issue date at a premium.
Part 3
Thirty payments of $120,000 ……………………..
$ 3,600,000
Less premium …………………………………………..
(895,980)
Total bond interest expense ………………………
$ 2,704,020
Thirty payments of $120,000 ………………..
Par value at maturity …………………………..
Total repaid ………………………………………….
Less amount borrowed ………………………..
Problem 10-2A (Concluded)
Part 4
Semiannual
Period-End
Unamortized
Premium
Carrying
Value
1/01/2019 …………………
$895,980
$4,895,980
6/30/2019 …………………
866,114
4,866,114
6/30/2020 …………………
Part 5
June 30
Bond Interest Expense …………………………..
90,134
Premium on Bonds Payable …………………………..
29,866
Cash ……………………………………………………….
120,000
Record six months’ interest and
premium amortization.
Dec. 31
Bond Interest Expense …………………………..
90,134
Premium on Bonds Payable …………………………..
29,866
Cash ……………………………………………………….
120,000
Record six months’ interest and
premium amortization.
Problem 10-3A (45 minutes)
Part 1
Ten payments of $8,125 ……………………….
$ 81,250
Less premium………………………………………
(5,333)
Total bond interest expense …………………
$ 75,917
Ten payments of $8,125* ……………………..
$ 81,250
Par value at maturity …………………………..
Total repaid ………………………………………….
Less amount borrowed ………………………..
Part 2
Straight-line amortization table ($5,333/10 = $533*)
Semiannual
Interest Period–End
Unamortized
Premium
Carrying
Value
1/01/2019
$5,333
$255,333
6/30/2019
4,800
254,800
12/31/2019
4,267
254,267
6/30/2020
3,734
253,734
3,201
253,201
6/30/2021
2,668
252,668
12/31/2021
2,135
252,135
6/30/2022
1,602
251,602
6/30/2023
12/31/2023
Problem 10-3A (Concluded)
Part 3
June 30
Bond Interest Expense …………………………..
7,592
Premium on Bonds Payable …………………………..
533
Cash ……………………………………………………….
8,125
Record six months’ interest and
premium amortization.
Dec. 31
Bond Interest Expense …………………………..
7,592
Premium on Bonds Payable …………………………..
533
Cash ……………………………………………………….
8,125
Record six months’ interest and
premium amortization.
Problem 10-4A (60 minutes)
Part 1
Jan. 1
Cash ……………………………………………………….
292,181
Discount on Bonds Payable …………………………..
32,819
Bonds Payable …………………………………………………
325,000
Sold bonds on stated issue date.
Part 2
Eight payments of $8,125 …………………
$ 65,000
Plus discount ………………………………….
32,819
Total bond interest expense …………….
$ 97,819
$ 65,000
Par value at maturity ……………………….
325,000
Total repaid ……………………………………..
Less amount borrowed ……………………
(292,181)
Part 3 Straight-line amortization table ($32,819/8 =$4,102*)
Semiannual
Interest Period-End
Unamortized
Discount
Carrying
Value
1/01/2019
$32,819
$292,181
6/30/2019
28,717
296,283
300,385
308,589
Problem 10-4A (Concluded)
Part 4
June 30
Bond Interest Expense …………………………..
12,227
Discount on Bonds Payable …………………………..
4,102
Cash ……………………………………………………….
8,125
Record six months’ interest and
discount amortization.
Dec. 31
Bond Interest Expense …………………………..
12,227
Discount on Bonds Payable …………………………..
4,102
Cash ……………………………………………………….
8,125
Problem 10-5A (45 minutes)
Background: Amount of Payment (given in the problem)
Note balance
$200,000
Number of periods
5
Interest rate
8%
Value from Table B.3
3.9927
Payment ($200,000 / 3.9927)
$ 50,091
rounded to nearest dollar
Part 1
Payments
Period
Ending
Date
(A)
Beginning
Balance
[Prior (E)]
(B)
Debit
Interest
Expense
[8% x (A)]
+
(C)
Debit
Notes
Payable
[(D) – (B)]
=
(D)
Credit
Cash
[computed]
(E)
Ending
Balance
[(A) – (C)]
10/31/2020 …………
$200,000
$ 16,000
$ 34,091
$ 50,091
$165,909
10/31/2021 …………
165,909
13,273
36,818
50,091
129,091
$ 50,455
$200,000
$250,455
* Adjusted for rounding
Part 2
2019
Dec. 31
Interest Expense ……………………………………………………
2,667
Interest Payable …………………………..…………………..
2,667
Accrued interest on the installment
note payable ($16,000 x 2/12) (rounded).
Oct. 31
Interest Expense ……………………………………………………
Interest Payable …………………………………………………….
2,667
Notes Payable ……………………………………………………….
Cash ……………………………………………………….……….
Record first payment on installment note
(interest expense = $16,000 – $2,667).
Problem 10-6A (20 minutes)
Part 1
Pulaski Company debt-to-equity = $360,000 / $500,000 = 0.72
Scott Company debt–to-equity = $240,000 / $200,000 = 1.20
Part 2
Problem 10–7AA (50 minutes)
Part 1
a.
Cash Flow
Table
Amount
Present Value
Par value …………………
B.1
$40,000
$18,256
Interest (annuity) ……..
B.3
2,000**
27,181
Price of bonds …………
$45,437
Bond premium …………
$ 5,437
* Table values are based on a discount rate of 4% (half the annual market rate) and 20
periods (semiannual payments).
** $40,000 x 0.10 x ½ = $2,000
Premium on Bonds Payable …………………………..
Bonds Payable …………………………………………………
Part 2
a.
Cash Flow
Table
Amount
Present Value
Par value …………………
B.1
$40,000
$15,076
Interest (annuity) ……..
B.3
2,000
24,924
Bonds Payable …………………………………………………
Problem 10–7AA (Concluded)
Part 3
a.
Cash Flow
Table
Table Value*
Amount
Present Value
Par value ………………..
B.1
$40,000
$12,472
Interest (annuity) …….
B.3
2,000
22,940
$35,412
Bond discount ………..
b.
Jan. 1
Cash ……………………………………………………….
35,412
Discount on Bonds Payable …………………………..
4,588
Bonds Payable …………………………………………………
40,000
Sold bonds on stated issue date.
Problem 10–8AB (60 minutes)
Part 1
Jan. 1
Cash ……………………………………………………….
292,181
Discount on Bonds Payable …………………………..
32,819
Bonds Payable …………………………………………………
325,000
Sold bonds on stated issue date.
Part 2
Eight payments of $8,125 …………………
$ 65,000
Plus discount ………………………………….
32,819
Total bond interest expense …………….
$ 97,819
Par value at maturity ……………………….
Total repaid ……………………………………..
Less amount borrowed ……………………
Part 3
Semiannual
Interest
Period-End
(A)
Cash Interest
Paid
[2.5% x $325,000]
(B)
Bond Interest
Expense
[4% x Prior (E)]
(C)
Discount
Amortization
[(B) – (A)]
(D)
Unamortized
Discount
[Prior (D) – (C)]
(E)
Carrying
Value
[$325,000 – (D)]
1/01/2019
$32,819
$292,181
6/30/2019
$8,125
$11,687
$3,562
29,257
295,743
25,552
299,448
17,692
307,308
Problem 10–8AB (Concluded)
Part 4
June 30
Bond Interest Expense …………………………..
11,687
Discount on Bonds Payable …………………………..
3,562
Cash ……………………………………………………….
8,125
Record six months’ interest and
discount amortization.
Dec. 31
Bond Interest Expense …………………………..
11,830
Discount on Bonds Payable …………………………..
3,705
Cash ……………………………………………………….
8,125
Record six months’ interest and
discount amortization.
Problem 10–9AB (45 minutes)
Part 1
Ten payments of $8,125 ……………………….
$ 81,250
Less premium………………………………………
(5,333)
Total bond interest expense …………………
$ 75,917
Ten payments of $8,125* ………………………
$ 81,250
Total repaid …………………………………………..
Less amount borrowed …………………………
Part 2
Semiannual
Interest
Period-End
(A)
Cash Interest
Paid
[3.25% x $250,000]
(B)
Bond Interest
Expense
[3% x Prior (E)]
(C)
Premium
Amortization
[(A) – (B)]
(D)
Unamortized
Premium
[Prior (D) – (C)]
(E)
Carrying
Value
[$250,000 + (D)]
1/01/2019
$5,333
$255,333
6/30/2019
$ 8,125
$ 7,660
$ 465
4,868
254,868
12/31/2019
8,125
7,646
479
4,389
254,389
6/30/2020
8,125
7,632
493
3,896
253,896
7,617
508
3,388
253,388
6/30/2021
7,602
523
2,865
252,865
12/31/2021
8,125
7,586
539
2,326
252,326
6/30/2022
8,125
7,570
555
1,771
251,771
12/31/2022
8,125
7,553
572
1,199
251,199
6/30/2023
8,125
7,536
589
610
250,610
8,125
0
250,000
Problem 10–9AB (Concluded)
Part 3
2019
June 30
Bond Interest Expense ………………………….
7,660
Premium on Bonds Payable ………………….
465
Cash ……………………………………………….
8,125
Record six months’ interest and
premium amortization.
Dec. 31
Bond Interest Expense ………………………….
7,646
Premium on Bonds Payable ………………….
479
Cash ……………………………………………….
8,125
Record six months’ interest and
premium amortization.