Problem 10-8BB (Concluded)
Part 4
June 30
Bond Interest Expense …………………………..
7,940
Discount on Bonds Payable …………………………..
740
Cash ……………………………………………………….
7,200
Record six months’ interest and
discount amortization.
Dec. 31
Bond Interest Expense …………………………..
7,969
Discount on Bonds Payable …………………………..
769
Cash ……………………………………………………….
7,200
Record six months’ interest and
discount amortization.
Problem 10-9BB (45 minutes)
Part 1
Ten payments of $14,400 ……………………..
$144,000
Less premium………………………………………
(12,988)
Total bond interest expense …………………
$131,012
Ten payments of $14,400 ……………………..
$144,000
Par value at maturity …………………………..
Total repaid ………………………………………….
Less amount borrowed ………………………..
Part 2
Semiannual
Interest
Period-End
(B)
Bond Interest
Expense
[4% x Prior (E)]
(C)
Premium
Amortization
[(A) – (B)]
(D)
Unamortized
Premium
[Prior (D) – (C)]
(E)
Carrying
Value
[$320,000 + (D)]
1/01/2019
$12,988
$332,988
6/30/2019
$ 13,320
$ 1,080
11,908
331,908
12/31/2019
13,276
1,124
10,784
330,784
6/30/2020
13,231
1,169
9,615
329,615
12/31/2020
13,185
1,215
8,400
328,400
6/30/2021
13,136
1,264
7,136
327,136
6/30/2022
14,400
13,033
4,454
324,454
12/31/2022
14,400
12,978
1,422
3,032
323,032
6/30/2023
12,921
1,479
1,553
321,553
12/31/2023
1,553
0
320,000
$131,012
Problem 10-9BB (Concluded)
Part 3
2019
June 30
Bond Interest Expense …………………………..
13,320
Premium on Bonds Payable …………………………..
1,080
Cash ……………………………………………………….
14,400
Record six months’ interest and
premium amortization.
Dec. 31
Bond Interest Expense …………………………..
13,276
Premium on Bonds Payable …………………………..
1,124
Cash ……………………………………………………….
14,400
Record six months’ interest and
premium amortization.
Problem 10–10BB (70 minutes)
Part 1
Jan. 1
Cash ……………………………………………………….
493,608
Premium on Bonds Payable …………………………..
43,608
Bonds Payable …………………………………………………
450,000
Sold bonds on stated issue date.
Less premium………………………………………
Par value at maturity …………………………..
Total repaid ………………………………………….
Less amount borrowed ………………………..
Part 3
Semiannual
Interest
Period-End
(B)
Bond Interest
Expense
[5% x Prior (E)]
(C)
Premium
Amortization
[(A) – (B)]
(D)
Unamortized
Premium
[Prior (D) – (C)]
(E)
Carrying
Value
[$450,000 + (D)]
1/01/2019
$43,608
$493,608
6/30/2019
$24,680
$4,570
39,038
489,038
6/30/2020
5,290
23,912
473,912
Problem 10–10BB (Concluded)
Part 4
June 30
Bond Interest Expense …………………………..
24,680
Premium on Bonds Payable …………………………..
4,570
Cash ……………………………………………………….
29,250
Record six months’ interest and
premium amortization.
Dec. 31
Bond Interest Expense …………………………..
24,452
Premium on Bonds Payable …………………………..
4,798
Cash ……………………………………………………….
29,250
Part 5
If the market rate on the issue date had been 14% instead of 10%, the bonds
would have sold at a discount because the contract rate of 13% would have been
lower than the market rate.
This change would affect the balance sheet because the bond liability would be
smaller (par value minus a discount instead of par value plus a premium). As the
years passed, the bond liability would increase with amortization of the discount
instead of decreasing with amortization of the premium.
Problem 10–11BC (35 minutes)
Part 1
Year 1
Jan. 1
Right–of-Use Asset…………………………………………………
39,000
Lease Liability ………………………………………………….
39,000
Record right-of-use asset and lease liability.
Jan. 1
14,000
Cash ………………………………………………………………..
14,000
Record beginning-year cash lease payment.
Part 3
Year 1 and Year 2 and Year 3
Dec. 31
Amortization Expense ……………………………………………
13,000
Accum. Amortization—Right-of–Use Asset ………..
13,000
Record amortization on right-of-use asset.
($39,000 – $0) / 3 years
Dec. 31
Interest Expense ……………………………………………………
12,025
Cash ………………………………………………………………..
14,000
Dec. 31
Interest Expense ……………………………………………………
12,975
Cash ………………………………………………………………..
14,000
Problem 10-12BC (35 minutes)
Part 1
Year 1
Jan. 1
Right–of-Use Asset…………………………………………………
39,000
Lease Liability ………………………………………………….
39,000
Record right-of-use asset and lease liability.
Part 2
Year 1
Jan. 1
Lease Liability ……………………………………………………….
14,000
Cash ………………………………………………………………..
14,000
Record beginning-year cash lease payment.
Dec. 31
Amortization Expense ……………………………………………
12,025
Accum. Amortization—Right-of–Use Asset ………..
12,025
Record amortization on right-of-use asset.1
Year 2
Dec. 31
Amortization Expense ……………………………………………
12,975
Accum. Amortization—Right-of–Use Asset ………..
12,975
Record amortization on right-of-use asset.2
Year 3
Dec. 31
Amortization Expense ……………………………………………
14,000
Accum. Amortization—Right-of–Use Asset ………..
14,000
Record amortization on right-of-use asset.3
1 $14,000-$1,975 2 $14,000-$1,025 3 $14,000-$0
Dec. 31
Interest Expense ……………………………………………………
1,975
Lease Liability ……………………………………………………….
12,025
Cash ………………………………………………………………..
14,000
Record lease payment for interest and lease liability.
Year 2
Dec. 31
Interest Expense ……………………………………………………
1,025
Lease Liability ……………………………………………………….
12,975
Cash ………………………………………………………………..
14,000
Record lease payment for interest and lease liability.
SERIAL PROBLEM — SP 10
Serial Problem — SP 10, Business Solutions (75 minutes)
Part 1
Part 2
Assume the secured loan is taken, then the percent of assets financed by:
a. Debt
($875 + $94,639) / ($120,268 + $94,639) = 44.4%
b. Equity
$119,393 / ($120,268 + $94,639) = 55.6%
Part 3
Santana Rey should understand the risks she is taking by borrowing funds
from the bank. She currently has no interest-bearing debt (per prior chapter
Company Analysis — AA 10-1 (15 minutes)
$ millions
1. a. $97,207
b. $75,427
3. Increase
Explanation: Considering Apple’s long-term debt is trending upwards,
we would expect its interest expense to increase as well.
Comparative Analysis — AA 10-2 (25 minutes)
$ millions
1. Apple’s current year debt–to-equity ratio = $241,272 / $134,047= 1.80
Apple’s prior year debt–to-equity ratio = $193,437 / $128,249= 1.51
2. Google
Explanation: Of the two companies, Google has the lesser risk level
based on the debt to equity ratio.
3. a. More Risky
Explanation: Apple’s debt to equity ratio is larger than the assumed
industry average ratio of 0.5.
Global Analysis — AA 10-3 (20 minutes)
In millions
1. Samsung’s current year debt–to-equity ratio:
₩87,260,662 / ₩214,491,428 = 0.41
Samsung’s prior year debt–to-equity ratio:
₩69,211,291 / ₩192,963,033 = 0.36
3. a. Less Risky
Explanation: Apple’s debt ratio in the current year is 1.80
(Computations in AA 10-2). Samsung’s debt–to-equity ratio is lower than
Ethics Challenge — BTN 10-1
1. The ethics of the Traverse County officials are questionable. The
financial impact of the leasing arrangement is the same as bond
financing in that the county has a debt obligation requiring the
repayment of principal and interest over time. Taxes may need to be
raised to repay the lease just as they would have if bonds were issued.
Yet, the voters had no say in the financing arrangement the officials
agreed to.
2. Because the lease requires payments of a non-binding nature, investors
who purchased the tax-exempt securities from the bank are holding an
investment that is more risky than the conventional municipal bonds of
Traverse County.
Communicating in Practice — BTN 10-2
MEMORANDUM
TO:
FROM:
SUBJECT:
The body of the memorandum should make the following points:
The associate is confused about the concept of a bond premium. Bonds
that sell at a premium provide the issuing company more cash than they
are required to pay the bondholders at their maturity date. When a bond is
issued at a premium, the face amount is less than the amount the associate
will invest to acquire the bond. As a result, the investment will yield the
investor (and cost the issuing corporation) less than the contract rate of
interest. This means that selling/buying at a premium incurs/yields an
effective rate of interest equivalent to the market rate for the risk assessed
for that bond at the time of issuance. In addition, this market rate of
interest is lower than the contract rate of interest for premium bonds.
Taking It to the Net — BTN 10-3
1. Home Depot’s long-term liabilities as of January 29, 2017, follow:
Long-term debt, excluding current installments ………..
$22,349 million
2. a. These Home Depot notes offer a 5.875% interest rate. If the interest
rate for similar notes from companies with similar risk was 5.875%,
then Home Depot would have issued these notes at their par value
of $3.0 billion. However, since these notes were issued at a
Teamwork in Action — BTN 10-4
Parts 1 and 2
Effective Interest Amortization of Bond Premium
Semi-
annual
Period-end
(A)
Cash
Interest
Paid
(B)
Bond
Interest
Expense
(C)
Premium
Amortization
(D)
Unamortized
Premium
(E)
Carrying
Value
1/01/2019
$ 4,100
$ 104,100
6/30/2019
$ 4,500
$ 4,164
$ 336
3,764
103,764
12/31/2019
4,500
4,151
349
3,415
103,415
6/30/2020
4,500
4,137
363
3,052
103,052
4,500
4,122
378
2,674
102,674
6/30/2021
4,500
4,107
393
2,281
102,281
Since teams generally have 4 or 5 members, the team solution will likely end about
here. The remainder of the table is shown for help in answering part 3.
12/31/2021
4,500
4,091
409
1,872
101,872
6/30/2022
4,500
4,075
425
1,447
101,447
12/31/2022
4,500
4,058
442
1,005
101,005
12/31/2023
100,000
The following computations should be articulated by team members as
each line is explained and prepared:
Column (A) Cash Interest Paid = Bonds’ par value ($100,000) x Semiannual
contract rate (4.5%).
Column (B) Bond interest expense = Bonds’ prior period carrying value x
Semiannual market rate (4%).
Teamwork in Action (Concluded)
Part 3
Without completing the table, team members should be able to project the
final number in the first column and for each of the columns (A), (D), and
(E). Specifically:
(Col. 1) Last interest period date is 12/31/2023 because this is a five-year
bond, issued 1/1/2019, with semiannual interest payments made
on 6/30 and 12/31 of each year.
(Col. A) Interest paid of $4,500 (every interest period has the same amount
of interest paid).
Part 4
Total Bond interest expense = Interest Paid – Premium
= ($4,500 x 10 periods) – $4,100
= $45,000 – $4,100 = $40,900
Part 5 List likely includes:
Similarities
Differences
a. Table column headings
for the period and for
columns (A), (B), and (E).
a. Column (C) will be Discount Amortization and
Column (D) will be Unamortized Discount.
b. Dates in the period
column and interest paid in
column (A).
b. Bond interest expense is higher (lower) than the
interest paid and will increase (decrease) as we
amortize a discount (premium).
f. Unamortized discount
and premium (D) decreases
each period
f. Computation of Column (E) will be previous Column
(E) plus discount amortization whereas with a
premium we subtract to find the new carrying value.
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 10
Entrepreneurial Decision — BTN 10-5
Part 1
The table below reveals how the five alternative interest-bearing notes
would affect this company’s interest expense, net income, equity, and
return on equity (net income/equity):
Alternative Notes for Expansion
Current 10% Note 15% Note 16% Note 17% Note 20% Note
Income before
interest …………. $ 40,000 $ 56,000 $ 56,000 $ 56,000 $ 56,000 $ 56,000
Part 2
The analysis in Part 1 illustrates the general rule (called “financial
leverage” or “trading on the equity”): When a company earns a higher
return with borrowed funds than it is paying in interest, it increases its
return on equity. In the case of this company, it is predicting a return of
16% on its investment, computed as its expected $16,000 additional annual
income before interest divided by its $100,000 investment. This means that
for it to pursue the investment, the interest on the borrowed funds must be
less than 16%.
Hitting the Road — BTN 10-6
Students’ answers will depend on the municipality and time period chosen
for analysis. Students often find this assignment interesting as it
reinforces the relevance of their accounting studies.