Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 10
Chapter 10
Accounting for Long-Term Liabilities
QUESTIONS
1. Notes payable generally involve borrowing from a single creditor, whereas bonds
payable are usually sold to many different lenders (bondholders).
2. A bond is a liability of the issuing company. A share of stock represents an ownership
interest in the company.
3. Bonds can allow a company’s owners to increase their return on equity without investing
additional amounts. This result occurs as long as the rate of return on the assets
acquired from the borrowed cash is greater than the interest rate paid on the bonds.
Bonds also help the current owners remain in control of the company. There is also a tax
advantage with bonds when issued by corporations.
4. A bond indenture is a legal contract between the issuing company and the bondholders
that identifies the obligations and rights of both parties. It specifies such items as the
par value of the bonds, the contract interest rate, the due dates for interest payments,
and the maturity date(s) of the bonds.
14. Samsung’s long-term borrowings increased by ₩570,208 million (computed as
₩1,814,446 million – ₩1,244,238 million).
15. Per Samsung’s statement of cash flows (financing section), the company made
₩1,140,803 (in KRW millions) toward repayment of long-term borrowings and
debentures.
16. The balance sheet of Google indicates the company’s debt–to-equity ratio is 0.29,
computed as $44,793 million divided by $152,502 million. In simple terms this means
that for each $1.00 contributed by equity holders, $0.29 is contributed by debt holders.
17.C If a lease is a long-term lease, then a right-of-use asset account for the lease asset is
debited and a lease liability is credited at an amount equal to the present value of all
future lease payments. Only short-term leases do not result in an asset and liability
being recorded.
18.C A finance lease is a long-term lease in which the lessor transfers substantially all the
risks and rewards of ownership to the lessee—see one or more of five criteria that must
be met. An operating lease is a long-term lease that does not meet any of the five criteria
for a finance lease. In both cases, the lessee records the leased item as its own right-of–
use asset along with a lease liability at the start of the lease term—the amount recorded
equals the present value of all lease payments. The difference with these methods is how
they compute amortization expense on the right-of-use asset.
QUICK STUDIES
Quick Study 10–1 (5 minutes)
a.
A
d.
D
Quick Study 10-2 (10 minutes)
(a)
Jan. 1
Cash ……………………………………………………………………..
Bonds Payable …………………………………………………
10,000
Sold bonds at par.
June 30
Cash ………………………………………………………………..
Paid semiannual interest. *$10,000 x6% x1/2
Quick Study 10-3 (10 minutes)
(1)
June 30
144,000
Cash ………………………………………………………………..
Paid semiannual interest. ($3,600,000 x 8% x ½)
(2)
July 1
Cash ……………………………………………………………………………
Bonds payable ……………………………………………………….
400,000
Sold $400,000 of bonds at par.
Quick Study 10-4 (10 minutes)
1.
(a)
Jan. 1
Cash* …………………………………………………………………….
Discount on Bonds Payable …………………………………..
Bonds Payable …………………………………………………
20,000
Sold bonds at 99. *$20,000 x 0.99
Jan. 1
Cash* …………………………………………………………………….
20,700
Premium on Bonds Payable …………………………..
Bonds Payable …………………………………………………
Sold bonds at 103½. *$20,000 x 1.035
2. Semiannual cash interest payment
= $20,000 par x 12% interest x 1/2 year = $1,200
Quick Study 10-5 (10 minutes)
Jan. 1
Cash* …………………………………………………………………….
Discount on Bonds Payable …………………………………..
Bonds Payable …………………………………………………
250,000
Record issuing bonds at a discount.
*$250,000 x 0.875 = $218,750
Quick Study 10-6 (10 minutes)
Jan. 1
Cash* …………………………………………………………………….
281,400
Bonds Payable …………………………………………………
240,000
Premium on Bonds Payable …………………………..
Record issuing bonds at a premium.
*$240,000 x 1.1725 = $281,400
Quick Study 10-7 (10 minutes)
1. Bond’s cash proceeds: $250,000 x 0.875 = $218,750
3. Bond interest expense on first payment date:
$231,250 / 20 semiannual periods = $11,563 (rounded to whole dollars)
Quick Study 10-8 (15 minutes)
(a)
Jan. 1
Cash ……………………………………………………………………..
Discount on Bonds Payable …………………………………..
Bonds Payable …………………………………………………
100,000
Sold bonds at discount.
June 30
Bond Interest Expense …………………………………………..
5,736
Discount on Bonds Payable* …………………………..
736
Cash** ……………………………………………………….
5,000
(c)
Dec. 31
Bond Interest Expense …………………………………………..
Discount on Bonds Payable* …………………………..
736
Cash** ……………………………………………………….
5,000
Paid semiannual interest and record amor-
tization. *$6,624 – $5,888 **$100,000 x10% x1/2
Quick Study 10-9 (10 minutes)
1. Bond’s cash proceeds: $250,000 x 1.23375 = $308,437.5 or $308,438 rounded
2.
Twenty semiannual interest payments of $10,000* ……………
Quick Study 10–10 (10 minutes)
July 1
Bonds Payable ………………………………………………………
400,000
Premium on Bonds Payable …………………………………..
Gain on Retirement of Bonds* …………………………..
Cash ………………………………………………………………..
Quick Study 10-11 (10 minutes)
Jan. 1
Bonds Payable ……………………………………………………….
3,000,000
Common Stock* …………………………………………………
1,000,000
Paid-In Capital in Excess of Par Value …………………..
2,000,000
Record retirement of bonds by stock
conversion. *1,000,000 shares x $1
Quick Study 10-12 (10 minutes)
1.
Jan. 1
Cash ……………………………………………………………………..
Notes Payable ………………………………………………….
340,000
Issued notes for cash.
2. Interest expense = Beginning balance x Annual interest rate
$27,200 = $340,000 8%
Principal reduction = Cash payments – Interest expense
$57,955 = $85,155 $27,200
Quick Study 10-13 (10 minutes)
1.
A
Registered bond
5.
E
Convertible bond
2.
C
Serial bond
6.
D
Bond Indenture
3.
H
7.
G
Sinking fund bond
4.
Bearer bond
8.
Debenture
Quick Study 10-14 (10 minutes)
Ratio of debt to equity
Atlanta Company
Spokane Company
Total liabilities ……………………..
$429,000
$ 549,000
Total equity ………………………….
$572,000
$1,830,000
Debt–to-equity ratio ………………
0.75
0.30
Quick Study 10–15A (10 minutes)
Cash Flow
Table
Table Value*
Amount
Present Value
Par (maturity) value ……..
B.1
0.3769
$250,000
$ 94,225
Interest (annuity) …………
B.3
12.4622
10,000**
124,622
Price of bonds …………….
$218,847
* Table values are based on a discount rate of 5% (half the annual market rate) and
20 periods (semiannual payments).
** $250,000 x 8% x ½ year = $10,000
Quick Study 10–16A (10 minutes)
Cash Flow
Table
Table Value*
Amount
Present Value
Par (maturity) value ……..
B.1
0.3083
$240,000
$ 73,992
Interest (annuity) …………
B.3
17.2920
12,000**
207,504
Price of bonds …………….
$281,496
Quick Study 10-17B (10 minutes)
1. Bond’s cash proceeds: $240,000 x .7525 = $180,600
Thirty semiannual interest payments of $12,000* ………………
3. Bond interest expense on first payment date:
$180,600 x 7% = $12,642
Quick Study 10-18B (10 minutes)
1. Bond’s cash proceeds: $240,000 x 1.1725 = $281,400
Thirty semiannual interest payments of $12,000* ………………
Less premium ($281,400 – $240,000) …………………………………
3. Bond interest expense on first payment date:
$281,400 x 4% = $11,256
Quick Study 10-19C (10 minutes)
Cash (or Payable)……………………………………………..
Record rental expense for car lease.
Quick Study 10–20C (10 minutes)
Right–of-Use Asset…………………………………………………
15,499
Lease Liability ………………………………………………….
15,499
Record right-of-use lease asset.
EXERCISES
Exercise 10-1 (20 minutes)
1
Don’t Expand
2
Debt Financing
3
Equity Financing
Income before interest expense …..
$ 50,000
$ 75,000
$ 75,000
Interest expense ………………………….
$ 0
$ 6,400*
$ 0
Net income ………………………………….
$ 50,000
$ 68,600
$ 75,000
Exercise 10-2 (20 minutes)
1.
Jan. 1
Cash ……………………………………………………………………..
3,400,000
Bonds Payable …………………………………………………
3,400,000
Sold bonds at par.
2.
Bond Interest Expense …………………………………………..
Cash ……………………………………………………….
Dec. 31
Bond Interest Expense …………………………………………..
Cash ……………………………………………………….
3.
Dec. 31
Bonds Payable ………………………………………………………
3,400,000
Cash ……………………………………………………….
3,400,000
Paid par value at maturity.
(Assume interest was already recorded.)
Exercise 10-3 (15 minutes)
1. Semiannual cash interest payment = $3,400,000 x 9% x 1/2 = $153,000
2. Journal entries
(a)
Jan. 1
Cash ……………………………………………………….
3,400,000
Bonds Payable …………………………………………………
3,400,000
Sold bonds at par.
Bond Interest Expense …………………………..
Cash ……………………………………………………….
Paid semiannual interest on bonds.
(c)
Dec. 31
Bond Interest Expense …………………………..
Cash ……………………………………………………….
Paid semiannual interest on bonds.
3.
(a)
Jan. 1
Cash* ……………………………………………………….
3,332,000
Discount on Bonds Payable …………………………..
68,000
Bonds Payable …………………………………………………
3,400,000
Sold bonds at 98. *($3,400,000 x 0.98)
(b)
Jan. 1
Cash* ……………………………………………………….
3,468,000
Premium on Bonds Payable …………………………..
68,000
Bonds Payable …………………………………………………
3,400,000
Sold bonds at 102. *($3,400,000 x 1.02)
Exercise 10-4 (30 minutes)
1. Discount = Par value – Issue price = $180,000 – $170,862 = $9,138
2. Total bond interest expense over the life of the bonds
Six payments of $7,200 ………………………..
$ 43,200
Plus discount …………………………..………….
9,138
Total bond interest expense …………………
$ 52,338
Less amount borrowed …………………
3. Straight-line amortization table ($9,138/6 = $1,523)
Semiannual
Period-End
Unamortized
Discount
Carrying
Value
(0)
1/01/2019 …………………….
$9,138
$170,862
(1)
6/30/2019 …………………….
7,615
172,385
(2)
(3)
6/30/2020 …………………….
4,569
175,431
(4)
(5)
6/30/2021 …………………….
1,523
178,477
(6)
12/31/2021 …………………….
0
180,000
Exercise 10-5 (20 minutes)
(a)
Jan. 1
Cash ……………………………………………………………………..
186,534
Discount on Bonds Payable …………………………..
13,466
Bonds Payable …………………………………………………
200,000
Sold bonds at discount.
(b)
June 30
Bond Interest Expense …………………………………………..
7,684
Discount on Bonds Payable** …………………………..
1,684
Cash*……………………………………………………….
6,000
Paid semiannual interest and record amor-
tization. *$200,000 x6% x1/2 **13,466 – $11,782
(c)
Dec. 31
Bond Interest Expense …………………………………………..
7,684
Discount on Bonds Payable** …………………………..
1,684
Cash*……………………………………………………….
6,000
Paid semiannual interest and record amor-
tization. *$200,000 x6% x1/2 **$11,782 – $10,098
Exercise 10-6 (35 minutes)
2019
(a)
Dec. 31
Cash ……………………………………………………………………..
188,000
Discount on Bonds Payable …………………………..
12,000
Bonds Payable …………………………………………………
200,000
Sold bonds at discount.
(b)
2020
June 30
Bond Interest Expense …………………………………………..
8,000
Discount on Bonds Payable* …………………………..
3,000
Cash** ……………………………………………………….
5,000
Paid semiannual interest and record amor-
tization. *$12,000-$9,000 **$200,000x 5% x ½
Bond Interest Expense …………………………………………..
8,000
Discount on Bonds Payable* …………………………..
3,000
Cash** ……………………………………………………….
5,000
Paid semiannual interest and record amor-
tization. *$9,000- $6,000 **$200,000x 5% x ½
2021
June 30
Bond Interest Expense …………………………………………..
8,000
Discount on Bonds Payable* …………………………..
3,000
Cash** ……………………………………………………….
5,000
Paid semiannual interest and record amor-
tization. *$6,000-$3,000 **$200,000 x 5% x ½
Dec. 31
Bond Interest Expense …………………………………………..
8,000
Discount on Bonds Payable* …………………………..
3,000
5,000
(c)
Dec. 31
Bonds Payable ………………………………………………………
200,000
Cash ……………………………………………………….
200,000
Record maturity and payment of bonds.
Exercise 10-7 (40 minutes)
1. Straight-line amortization table ([$100,000-$95,952]/8 = $506)
Semiannual
Period-End
Unamortized
Discount †
Carrying
Value
1/01/2019(issuance) ……
$4,048
$95,952
6/30/2019 ……………..
3,542
96,458
12/31/2019 ……………..
3,036
96,964
6/30/2020 ……………..
2,530
97,470
6/30/2021 ……………..
1,518
98,482
1,012
98,988
6/30/2022 ……………..
99,494
† Supporting computations
Eight payments of $3,500 …………………..
$ 28,000
Plus discount ……………………………………
4,048
Total bond interest expense ………………
$ 32,048
Eight payments of $3,500** ………………..
Par value at maturity ………………………….
Total repaid ………………………………………
Less amount borrowed ……………………..
Semiannual straight-line interest expense = $32,048 / 8 = $4,006
Semiannual bond discount amortization = $4,048 / 8 = $506
Exercise 10-7 (Concluded)
2.
2019
June 30
Bond Interest Expense …………………………………………..
4,006
Discount on Bonds Payable …………………………..
506
Cash ………………………………………………………………..
3,500
Record 6 months’ interest and discount amortization.
Dec. 31
Bond Interest Expense …………………………………………..
Discount on Bonds Payable …………………………..
506
Cash ………………………………………………………………..
3,500
3.
2022
Dec. 31
Bonds Payable ………………………………………………………
100,000
Cash ………………………………………………………………..
100,000
Paid par value at maturity.
(Assume interest was already recorded.)
Exercise 10-8 (20 minutes)
(a)
Jan. 1
Cash ……………………………………………………………………..
216,222
Premium on Bonds Payable …………………………..
16,222
Bonds Payable …………………………………………………
200,000
Sold bonds at premium.
June 30
Bond Interest Expense …………………………………………..
Premium on Bonds Payable* …………………………..
Cash** ……………………………………………………….
10,000
(c)
Dec. 31
Bond Interest Expense ………………………………………………..
Exercise 10-9 (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
$156,000
Less amount borrowed …………………
3. Straight-line amortization table ($9,850/6 = $1,642)
Semiannual
Interest Period–End
Unamortized
Premium
Carrying
Value
1/01/2019
$9,850
$409,850
6/30/2019
8,208
408,208
6/30/2020
4,924
404,924
6/30/2021
1,640*
401,640
12/31/2021
0
400,000
*Adjusted for rounding.
Exercise 10–10 (15 minutes)
1.
July 1
Bonds Payable ………………………………………………………
10,000
Discount on Bonds Payable …………………………..
Cash ……………………………………………………….
10,500
2.
July 1
Bonds Payable ………………………………………………………
10,000
Premium on Bonds Payable …………………………..
1,000
Gain on Retirement of Bonds* …………………………..
500
Cash ……………………………………………………….
10,500
Record retirement of bonds before maturity. *$11,000 –
$10,500=$500 Gain
Exercise 10–11 (20 minutes)
Par value …………………………………………
$700,000
Cash issue price ……………………………..
2. Amortization for the first 6 years of the 15-year bonds.
$15,750 x (6 / 15) = $6,300.
3. Carrying value of the bonds at 12/31/2024
Discount at issuance (from part 1) ……
$ 15,750
Less amortization (from part 2) ………..
(6,300)
Remaining discount ………………………..
$ 9,450
Bonds
Par value ………………………………………….
$700,000
Remaining discount …………………………
(9,450)
Carrying value ………………………………….
$690,550
4. Journal entry at retirement of bonds
Jan. 1
Bonds Payable ………………………………………………………
700,000
Exercise 10-12 (20 minutes)
Background (given): Amount of each payment = Initial note balance / Table B.3 PV factor
= $100,000 / 3.3872 = $29,523
Amortization table for the loan
Payments
Period
Ending
Date
(A)
Beginning
Balance
[Prior (E)]
(B)
Debit
Interest
Expense
[7% x (A)]
+
(C)
Debit
Notes
Payable
[(D) – (B)]
=
(D)
Credit
Cash
[computed]
(E)
Ending
Balance
[(A) – (C)]
2019 …….
$100,000
$ 7,000
$ 22,523
$ 29,523
$77,477
2020 …….
77,477
5,423
24,100
29,523
53,377
2021 …….
$18,092
$100,000
Exercise 10-13 (20 minutes)
2019
Jan. 1
Cash ……………………………………………………………………..
Notes Payable ………………………………………………….
100,000
Borrowed $100,000 by signing a 7%
installment note.
2019
Dec. 31
Interest Expense ……………………………………………………
7,000
Notes Payable ……………………………………………………….
22,523
Cash ………………………………………………………………..
29,523
Record first installment payment.
2020
Dec. 31
Interest Expense ……………………………………………………
Notes Payable ……………………………………………………….
Cash ………………………………………………………………..
29,523
Record second installment payment.
2021
Dec. 31
Interest Expense ……………………………………………………
3,736
Notes Payable ……………………………………………………….
25,787
Cash ………………………………………………………………..
29,523
Record third installment payment.
2022
Dec. 31
Interest Expense ……………………………………………………
Notes Payable ……………………………………………………….
Cash ………………………………………………………………..
29,523
Record fourth installment payment.