Chapter 10 – Reporting and Interpreting Bonds
E10–23.
Bonds payable (-L) ……………………………………………………….
500,000
Loss on bond call (+Loss, –SE) ………………………………………
Discount on bonds payable (-XL,+ L) …………………………..
Cash (-A) …………………………………………………………………
E10–24.
2. Does not impact SCF
4. Impacts SCF : report $940,000 payment in financing section
PROBLEMS
P10–1.
P10–1.
Req. 1—Comparison of results:
Item
Actual Results
Results with an Increase
in Debt and a Decrease in
Stockholders’ Equity
(a)
Total debt ………………………………………….
$ 40,000
$90,000
(b)
Total assets ………………………………………
360,000
Total stockholders’ equity ……………………
267,000
(d)
Interest expense ………………………………..
(e)
Net income ………………………………………..
(f)
Return on total assets …………………………
20.2%
(g)
Earnings available to stockholders:
(1) Amount …………………………..……………
$ 60,000
$ 57,000
(2) Per share ……………………………………..
(3) Return on stockholders’ equity ………..
22.0%
24.9%
Computations:
(a) Given
17.3%.
$57,000 + [$9,000 x (100% – 40%) = $5,400] = $62,400; $62,400÷ $360,000 =
17.3%.
(g–1) From Item (e)
Chapter 10 – Reporting and Interpreting Bonds
P10–1. (continued)
Req. 2 Interpretation:
The recommendation provided higher financial leverage compared with actual
P10–2.
Req. 1
Interest:
$300,000 x 8%
=
$ 24,000 ÷ 2 = $12,000
Present value
=
=
Req. 2
June 30
2011
Dec. 31
2011
Interest expense ……………………………….
$12,000
$12,000
Req. 3
June 30
2011
Dec. 31
2011
Cash paid ………………………………………..
$12,000
$12,000
2011
2012
Bonds payable …………………………………
$300,000
$300,000
P10–3.
Case A
Case B
Case C
a.
Cash received at issue ……………………………………
$500,000
$475,000
$515,000
b.
Bond interest expense (pretax) …………………………
$ 35,000
$ 37,500
$ 33,500
c.
Bonds payable, 7% …………………………………………
$500,000
d.
Unamortized discount (deduct) ** ……………………..
e.
Unamortized premium (add) ** …………………………
Net liability …………………………………………………….
$500,000
**Balance in discount or premium account
(January 1, 2011) ………………………………………..
Amortization during 2011 ………………………………..
)
)
Unamortized balance on December 31, 2011 ….
$ 13,500
g.
Stated rate of interest (given) …………………………...
P10–4.
Req. 1
December 31, 2011—Financial statements:
Case A
Case B
Case C
At Par,
100
At 99
At 104
a.
Interest expense ……………………………….
$ 10,000
$ 10,100
$ 9,600
b.
Bonds payable …………………………..……..
$100,000
$100,000
$100,000
c.
Unamortized premium or discount ……….
)
d.
Net liability ……………………………………….
$100,000
$ 99,100
e.
Stated rate of interest ………………………..
Cash interest paid ……………………………..
$ 10,000
$ 10,000
$ 10,000
Chapter 10 – Reporting and Interpreting Bonds
P10–4. (continued)
Req. 2—Explanation of differences:
Item a, interest expense, is different (in this situation) from Item f, cash interest paid, by
the amount of any bond discount or premium amortized for the period. This divergence
P10–5.
1. Computation of the amount of the bond liability when issued:
2. Computation of interest expense recorded on December 31, 2011:
$173,161 x 8% = $13,853
3. Managers are normally relatively indifferent between the straight-line and effective-
4.
Date
Debt-to-Equity
Times Interest Earned
Issue date
Increase
No effect
Interest payment date
Increase
Decrease
P10–6.
Req. 1
Computations:
Interest:
$700,000 x 8% x 1/2
=
$ 28,000
=
=
$612,772
Req. 2
June 30
December
31
Interest expense ……………………………….
$32,361
*
$32,361
*
*$700,000 – $612,772 = $87,228 20 periods = $4,361 + $28,000 = $32,361
Req. 3
June 30
Cash paid ………………………………………..
Req. 4
June 30
Bonds payable …………………………………
$617,133
*
*
December
Chapter 10 – Reporting and Interpreting Bonds
P10–7.
Req. 1
Computations:
Interest:
$1,000,000 x 10% x 1/2
=
$ 50,000
=
=
Req. 2
June 30
December
31
Interest expense ……………………………….
$53,118
*
$53,305
**
Req. 3
June 30
December
31
Cash paid ………………………………………..
$50,000
Req. 4
June 30
December
31
Bonds payable …………………………………
$888,413
*
$891,718
**
P10–8.
Req. 1
Principal:
$800,000 x 0.5674 ………………………………………………………
$453,920
Interest:
$ 64,000 x 3.6048 ……………………………………………………….
230,707
Bond issue price ………………………………………………………
$684,627
Req. 2—Straight-line amortization:
2011
2012
2013
2014
2015
a.
Cash interest payment
($800,000 x 8%) ……………….
$64,000
$64,000
$64,000
$64,000
$64,000
c.
Bond interest expense ………….
$87,075
$87,075
$87,075
$87,075
$87,075
Req. 3 —Effective-interest amortization:
Bond Amortization Schedule
Date
Cash
Payment
Interest Expense
Amortization of
Discount
Net
Liability
1/1/2011
$684,627
12/31/2011
$64,000
$684,627
x
12%
=
$82,155
$18,155
702,782
12/31/2012
64,000
x
12%
=
723,116
12/31/2013
64,000
x
12%
=
745,890
12/31/2014
64,000
x
12%
=
771,397
$115,373
*Rounded
A constant interest rate can be demonstrated each year by dividing interest expense by
the net liability – the answer on all lines will be the effective rate (12%).
Req. 4
Effective-interest amortization is preferable to straight-line because it better measures
Chapter 10 – Reporting and Interpreting Bonds
P10–9.
Req. 1
Computations:
Interest:
$2,000,000 x 10% x 1/2
=
$ 100,000
$ 2,000,000 x 0.4564
=
$ 100,000 x 13.5903
=
Req. 2
June 30
December
31
Interest expense ……………………………….
$86,408
*
$86,408
*
*$2,271,830 – $2,000,000= $271,830 20 periods = $13,592
June 30
December
31
Cash paid ………………………………………..
Req. 4
June 30
December
31
Bonds payable …………………………………
$2,258,238
*
$2,244,646
**
P10–10.
Req. 1
Computations:
Interest:
$700,000 x 13% x 1/2
=
$ 45,500
=
=
Req. 2
June 30
December
31
Interest expense ……………………………….
$43,546
*
$43,429
**
Req. 3
June 30
December
31
Cash paid ………………………………………..
$45,500
$45,500
Req. 4
June 30
*
*
Chapter 10 – Reporting and Interpreting Bonds
P10–11.
Req. 1
Principal:
$300,000 x 0.6209 …………………………………………………….
$186,270
Interest:
$33,000 x 3.7908 ………………………………………………………
125,096
Issue (sale) price ……………………………………………………….
$311,366
Cash (+A) ……………………………………………………………………
Premium on bonds payable (+L) …………………………………
11,366
Bonds payable (+L) …………………………………………………..
Sale of bonds at a premium.
Req. 3
December 31, 2011:
Bond interest expense (+E, –SE) …………………………………….
30,727
Premium on bonds payable (-L) ……………………………………..
2,273
Cash (-A) …………………………………………………………………
33,000
Interest payment plus premium amortization.
Long-term Liabilities:
Bonds payable ………………………………………………………….
$300,000
$309,093
P10–12.
1. Missing amounts are underlined:
Date
Cash
Interest
Amortization
Balance
Jan. 1, 2011 ………………………..
$48,808
End of Year 2011 …………………
$3,600
$3,417
$183
48,625
End of Year 2012 …………………
3,404
48,429
End of Year 2013 …………………
3,390
48,219
End of Year 2014 …………………
*
48,000
2. Maturity (par) amount: $48,000 from last column at end of the last year.
4. Premium: $48,808 – $48,000 = $808.
6. Effective-interest amortization: Evident from the computations in the schedule.
The amortization amount is different each year.
8. Yield or effective rate of interest: $3,417 $48,808 = 7%.
10. Balance sheet:
2011
2012
2013
2014
Bonds payable, 7.5%
$48,625
$48,429
*
$48,000
*