Financial Accounting, 9/e 10–21
Present value:
$1,400,000 x 0.78941
=
1,105,174
$ 56,000* x 7.01969
=
393,103
Issue price
=
$1,498,277**
Req. 1
January 1:
Cash (+A) ……………………………………………………………………
1,498,277
Bonds Payable (+L) ………………………………………………….
1,498,277
Req. 2
Req. 3
June 30
Balance sheet:
E10–24.
1. $960,000 will be reported as a financing cash inflow.
Financial Accounting, 9/e 10–23
PROBLEMS
P10–1.
Req. 1
Current debt-to-equity ratio: $500,000 / $300,000 = 1.67
Req. 2
Req. 3
Debt-to-equity ratio assuming issuance of stock: $500,000 / $400,000 = 1.25
Req. 4
It is important to note that the above calculations assume that Arbor’s other liability and
equity accounts do not change, and that we are only adding additional debt or equity to
P10–2.
Req. 1
Present value
$ 100,000 x .67556
=
67,556
$ 4,000* x 8.11090
=
32,444
Issue price
$100,000
Req. 2
June 30
Dec. 31
Interest expense ($100,000 x .08 x 1/2) .
$4,000
$4,000
Req. 3
June 30
Dec. 31
Cash owed ($100,000 x .08 x 1/2) ………
$4,000
$4,000
This Year
Bonds payable book value …………………
$100,000
P10–3.
CASE A
a. Cash received at issuance (Case A): Market interest 7%
$500,000 x 0.50835
=
$ 35,000* x 7.02358
=
Financial Accounting, 9/e 10–25
*$500,000 x .07
**Using Excel or a financial calculator results in a
present value of $500,000.
CASE B
a. Cash received at issuance (Case B): Market interest 8%
Present value:
$500,000 x 0.46319
=
231,595
$ 35,000* x 6.71008
=
234,853
Issue price
=
$466,448**
c. Cash payment for interest: $500,000 x .07 = $35,000
CASE C
a. Cash received at issuance (Case C): Market interest 6%
Present value:
$500,000 x 0.55839
=
279,195
$ 35,000* x 7.36009
=
257,603
Issue price
=
$536,798**
10–26 Solutions Manual
b. Interest expense calculation: $536,798 x .06 = $32,208
c. Cash payment for interest: $500,000 x .07 = $35,000
Case A
Case B
Case C
a.
Cash received at issue ……………………………………
$500,000
$466,448
$536,798
P10–4.
CASE A:
$800,000 x 0.73069 ………………………………………………
$ 584,552
$32,000* x 6.73274 ………………………………………………
215,448
Issue price (market rate same as coupon rate) …………
$800,000
(at par)**
CASE B:
$800,000 x 0.78941 ………………………………………………
$ 631,528
$32,000* x 7.01969 ………………………………………………
224,630
Issue price (market rate less than coupon) ……………….
$856,158
(at a premium)**
CASE C:
$800,000 x 0.67684 ………………………………………………
$ 541,472
$32,000* x 6.46321 ………………………………………………
206,823
Issue price (market rate greater than coupon rate) …….
$ 748,295
(at a discount)**
b.
Interest expense recorded in Year 1 ………………….
$ 35,000
$ 32,208
c.
Cash paid for interest in Year 1 ………………………..
d.
Cash paid at maturity for bond principle …………….
$500,000
$500,000
$500,000
Financial Accounting, 9/e 10–27
*$800,000 x .08 x 1/2
**Using Excel or a financial calculator results in a
present value of $748,294 (rounded).
P10–5.
1. Issuance price:
Present value:
2. Computation of interest expense recorded on December 31 of this year:
$173,159 x .08 = $13,853
3.
Time
Debt-to-Equity
Times Interest Earned
(a) Issuance
Increase
Stays the same
(b) Interest expense recorded
Increase
Decrease*
P10–6.
Req. 1
Issuance price:
=
=
=
Present value:
$1,000,000 x 0.31180
=
311,800
$ 50,000* x 11.4699
=
573,495
Issue price
=
$885,295**
Req. 2
June 30
December 31
Interest expense ……………………………….
$53,118
*
$53,305
**
$885,295 x .12 x ½ = $53,118
**[$885,296 + ($53,118 – $50,000)] x .12 x ½= $53,305
Req. 3
June 30
December 31
Cash paid ($1,000,000 x .10 x ½) ……….
$50,000
$50,000
Req. 4
Bonds payable …………………………………
4*
Financial Accounting, 9/e 10–29
P10–7.
Present value:
$100,000 x 0.78941
=
78,941
$ 2,000* x 7.01969
=
14,039
Issue price
=
$92,980
Req. 1
January 1:
92,980
7,020
100,000
Req. 2
March 31:
2,789
789
2,000
2,813
813
2,000
Book value of bond: $94,582 ($100,000 – ($7,020 – $789 – $813))
September 31:
2,837
837
2,000
P10–7 (continued).
December 31:
2,863
863
2,000
Req. 3
December 31:
P10–8.
Present value:
$100,000 x 0.78941
=
78,941
$ 2,000* x 7.01969
=
14,039
Issue price
=
$92,980
Req. 1
January 1:
92,980
92,980
Req. 2
2,789
789
2,000
Book value of bond: $93,769 ($92,980 + $789)
P10–8 (continued).
June 30:
Financial Accounting, 9/e 10–31
2,813
813
2,000
Book value of bond: $94,582 ($93,769 + $813)
Book value of bond: $96,282 ($95,419 + $863)
Req. 3
December 31:
Balance sheet:
2,837
Bonds Payable (+L) …………………………………………………..
837
Cash (-A) ($100,000 x .08 x ¼) …………………………………..
2,000
2,863
Bonds Payable (+L) …………………………………………………..
863
Cash (-A) ($100,000 x .08 x ¼) …………………………………..
2,000
10–32 Solutions Manual
P10–9.
Req. 1
Issuance price:
Present value
$700,000 x 0.31180
=
218,260
Req. 2
June 30
December 31
Interest expense ……………………………….
$44,408
*
$44,343
**
$740,141 x .12 x ½ = $44,408
**[$740,141 – ($45,500- $44,408)] x .12 x ½= $44,343
Req. 3
June 30
December 31
Cash paid ………………………………………..
June 30
Bonds payable …………………………………
*
*
$ 45,500* x 11.46992
=
=
Financial Accounting, 9/e 10–33
P10–10.
1. Missing amounts are underlined:
Date
Cash
Interest
Amortization
Balance
Jan. 1, Year 1 ………………………
$48,813
End of Year 1 ………………………
$3,600
$3,417
$183
48,630
2. Principle amount: $48,000 from last column at end of the last year.
3. Cash received: $48,813 from last column at January 1, Year 1.
4. Bonds were issued at a premium: $48,813 – $48,000 = $813.
5. Cash disbursed for interest each period: $3,600
Total cash distributed over life of bonds: $3,600 x 4 = $14,400.
6. Coupon rate: $3,600 $48,000 = 7.5%.
End of Year 2 ………………………
3,404
48,434
End of Year 3 ………………………
3,390
48,224
End of Year 4 ………………………
*
10–34 Solutions Manual
P10–11.
Present value:
$300,000 x 0.85349
=
256,047
$ 9,000* x 7.32548
=
65,929
Issue price
=
$321,976
Req. 1
January 1:
321,976
21,976
300,000
Req. 2
6,440
2,560
9,000
Book value of bond: $319,416 ($300,000 + ($21,976 – $2,560))
June 30:
6,388
2,612
9,000
Book value of bond: $316,804 ($300,000 + ($21,976 – $2,560 – $2,612))
6,336
2,664
6,283
2,717
9,000