(continued) P 9-75A
Req. 2
Carrying amount at Dec. 31, 2016:
Bonds payable, net
$2,838,000
Req. 3
Interest expense exceeds cash interest paid because the company
issued the bonds at a discount and must pay back the full face value of
(30-45 min.) P 9-76A
Req. 1
a. Using the PV function in EXCEL, the issue price of the bonds is
$3,006,433.
Req. 2 (amortization table)
A
B
C
D
E
Annual
Interest Date
Interest
Payment
(2% of
Maturity
Value)
Interest
Expense
(6% of
Preceding
Bond
Carrying
Amount)
Discount
Amortization
(B – A)
Discount
Account
Balance
(Preceding
D – C)
Bond
Carrying
Amount
($4,000,000
– D)
Jan. 1, Yr. 1
993,567
3,006,433
Dec. 31, Yr. 1
80,000
180,386
100,386
893,181
3,106,819
Dec. 31, Yr. 2
80,000
186,409
106,409
786,772
3,213,228
Dec. 31, Yr. 3
80,000
192,794
112,794
673,978
3,326,022
Dec. 31, Yr. 4
80,000
199,561
119,561
554,417
3,445,583
Dec. 31, Yr. 5
80,000
206,735
126,735
427,682
3,572,318
Dec. 31, Yr. 6
80,000
214,339
134,339
293,343
3,706,657
Dec. 31, Yr. 7
80,000
222,399
142,399
150,943
3,849,057
Dec. 31, Yr. 8
80,000
230,943
150,943
4,000,000
(continued) P 9-76A
Req. 3 (reporting the liabilities at Dec. 31, Year 4)
Current liabilities:
Current installment of notes payable …………
$ 55,000
Long-term liabilities:
Bonds payable …………………………………………
$4,000,000
Less: Discount on bonds payable …………..
(40-50 min.) P 9-77A
Req. 1 Using the PV function in EXCEL, the issue price of the bonds is
$3,456,387.
Req. 2 (amortization table)
A
B
C
D
E
Semiannual
Interest Date
Interest
Payment
(3% of
Maturity
Value)
Interest
Expense
(4% of
Preceding
Bond
Carrying
Amount)
Discount
Amortization
(B – A)
Discount
Account
Balance
(Preceding
D – C)
Bond
Carrying
Amount
($4,000,000
– D)
Dec. 31, 2016
543,613
3,456,387
June 30, 2017
120,000
138,255
18,255
525,358
3,474,642
Dec. 31, 2017
120,000
138,986
18,986
506,372
3,493,628
June 30, 2018
120,000
139,745
19,745
486,627
3,513,373
Dec. 31, 2018
120,000
140,535
20,535
466,092
June 30, 2019
120,000
141,356
21,356
444,735
3,555,265
Dec. 31, 2019
120,000
142,211
22,211
422,525
3,577,475
June 30, 2020
120,000
143,099
23,099
399,426
3,600,574
Dec. 31, 2020
120,000
144,023
24,023
375,403
3,624,597
June 30, 2021
120,000
144,984
24,984
350,419
3,649,581
Dec. 31, 2021
120,000
145,983
25,983
324,436
3,675,564
June 30, 2022
120,000
147,023
27,023
297,413
3,702,587
Dec. 31, 2022
120,000
148,103
28,103
269,310
3,730,690
June 30, 2023
120,000
149,228
240,082
3,759,918
Dec. 31, 2023
120,000
150,397
30,397
209,685
3,790,315
June 30, 2024
120,000
151,613
31,613
178,073
3,821,927
Dec. 31, 2024
120,000
152,877
32,877
145,196
3,854,804
June 30, 2025
120,000
154,192
34,192
111,004
3,888,996
Dec. 31, 2025
120,000
155,560
35,560
75,444
3,924,556
June 30, 2026
120,000
156,982
36,982
38,461
3,961,539
Dec. 31, 2026
120,000
158,462
38,461
0
4,000,000
Note: numbers may differ slightly due to rounding differences
(continued) P 9-77A
Req. 3
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
a.
Dec.
31
Cash ……………………………………………..
3,456,387
Discount on Bonds Payable ……………
543,613
Convertible Bonds Payable ………..
To issue bonds at a discount.
2017
b.
June
30
Interest Expense …………………………...
138,255
Cash …………………………………………
120,000
Discount on Bonds Payable ……….
18,255
To pay interest and amortize bond
discount.
c.
Dec.
31
Interest Expense …………………………...
138,986
Cash …………………………………………
120,000
Discount on Bonds Payable ……….
18,986
To pay interest and amortize bond
discount.
2018
d.
July
1
Convertible Bonds Payable …………….
1,600,000
Discount on Bonds Payable
($486,627 × .40) …………………….
194,651
Common Stock (50,000 × $1) ……..
Paid-in Capital in Excess of
To record conversion of bonds.
Req. 4 (balance sheet presentation of bonds payable at
Dec. 31, 2018)
_____
*3/5 (or .60) of the bonds are outstanding, so 3/5 of the discount remains.
(20-30 min.) P 9-78A
Req. 1
Alternative
Alternative
1
2
Borrow $4.5
Issue 500,000
mil at 9%
shares of stock
Net income 2 years from
now
$4,225,000
$4,225,000
Less interest expense
405,000
-0-
Projected net income
before tax
3,820,000
4,225,000
Projected net income 2
Earnings per share:
$3,056,000/500,000
$3,380,000/(500,000 +
Less income tax expense
Req. 2
TO: Management of Mountainside Medical Goods
FROM: Student Name
SUBJECT: Advantages and disadvantages of borrowing
versus issuing stock to raise cash for expansion
Raising money by borrowing has at least two advantages over issuing
common stock. Borrowing does not change the present ownership of the
business. It enables the present owners to keep their proportionate interests
in the business and to carry out their plans without interference from a new
group of stockholders. Under normal conditions, borrowing results in a higher
(continued) P 9-78A
earnings per share of common stock, because the interest expense on the
debt is tax-deductible. And higher earnings per share usually lead to higher
stock prices for company owners.
The main advantage of issuing stock is that owners avoid the burden of
making interest and principal payments on the debt. Issuing stock creates no
liability to pay anything to the owners. If the directors consider it necessary,
they can refuse to pay dividends in order to conserve cash. Therefore, it is
safer to issue stock.
Student responses may vary.
(20-30 min.) P 9-79A
Req. 1
Brownfield Foods, Inc.
Partial Balance Sheet
Dec. 31, 2016
Property, plant, and
equipment:
Current liabilities:*
Equipment ……………..
$745,000
Mortgage note
Accumulated
payable, current ………….
$ 95,000
depreciation ………..
(166,000)
Bonds payable,
579,000
current portion…………….
200,000
Interest payable ……………..
74,000
Total current liabilities ………
369,000
Mortgage note
payable ……………………….
$316,000
bonds payable... (23,000)*
277,000
Pension liability ……………..
50,000**
Notes:
* The order of listing current liabilities and long-term liabilities is optional. However,
Discount on Bonds Payable should come immediately after Bonds Payable. Also, it
is customary to report Interest Payable after the related liability accounts, Mortgage
Note Payable and Bonds Payable, Current Portion.
(continued) P 9-79A
Req. 2
a.
Carrying amount of bonds payable:
Current portion ………………………………………………
$200,000
Long-term portion ($300,000 − $23,000) …………..
277,000
Carrying amount …………………………………………….
$477,000
Req. 3
Times-interest-earned ratio
=
Operating income
=
$340,000
Interest expense
$226,000
=
1.50 times
Req. 4
Leverage
ratio
=
Total assets ($4,600,000)
Total stockholders’ equity ($3,588,000)*
=
1.28
Debt ratio
=
Total liabilities [$1,012,000 = $369,000 + $643,000]
=
0.22
Total assets ($4,600,000)
*$4,600,000 – $369,000 – $643,000 = $3,588,000
(continued) P 9-79A
Req. 5
Leverage
ratio
=
Total assets ($8,500,000)
Total stockholders’ equity ($3,588,000)
=
2.37
(15-20 min.) P 9-80B
a. Sales tax payable ($130,000 × .05) ……………………………….
$ 6,500
b. Note payable, short-term …………………………………………….
Interest payable ($80,000 × .08 × 4/12) ………………………….
c. Unearned service revenue ($1,800 × 2/6) ………………………
$ 600
d. Estimated warranty payable
($11,400 + $33,000 − $34,500) …………………………………
$ 9,900
e. Portion of long-term note payable due
within one year ………………………………………………………
Interest payable ($70,000 × .06) ……………………………………
(30-40 min.) P 9-81B
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Mar.
3
Inventory ………………………………………………
70,000
Note Payable, Short-term ………………….
70,000
May
31
Cash …………………………………………………….
Note Payable, Short-term ………………….
14,167
Note Payable, Long-term …………………..
Sept.
3
Note Payable, Short-term ………………………
70,000
Interest Expense ($70,000 × .10 × 6/12) …..
3,500
Cash ………………………………………………..
73,500
Dec.
31
Warranty Expense ($193,000 × .03) …………
5,790
Estimated Warranty Payable ……………..
5,790
Dec.
31
Interest Expense ($85,000 × .05 × 7/12) …..
2,479
Interest Payable………………………………..
2017
May
31
Note Payable, Short-term ………………………
Interest Payable ……………………………………
2,479
Interest Expense ($85,000 × 0.05 × 5/12) …
1,771
Cash ………………………………………………..
18,417
(20-25 min.) P 9-82B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
a.
May
31
Cash ($9,000,00 × 1/2) ………………….
4,500,000
Bonds Payable ……………………….
4,500,000
To issue bonds at par.
b.
Nov.
30
Interest Expense …………………………
157,500
Cash ($4,500,000 × .07 × 6/12) ….
157,500
To pay interest on bonds.
c.
Dec.
31
Interest Expense
($4,500,000 × .07 × 1/12) ………………
Interest Payable ……………………..
To accrue interest.
2017
d.
May
31
Interest Payable ………………………….
26,250
Interest Expense
($4,500,000 × .07 × 5/12) ………………
131,250
Cash ………………………………………
157,500
To pay interest on bonds.
Req. 2 (reporting the liabilities on the balance sheet at
Dec. 31, 2016)
(30-40 min.) P 9-83B
Req. 1
The 8% bonds issued when the market interest rate is 7% will be priced
at a premium. They are relatively attractive in this market, so investors
will pay a price above par value to acquire them.
Req. 2
(continued) P 9-83B
Req. 3
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
a.
Feb.
28
Cash ($900,000 × 0.99) ………………………………
891,000
Discount on Bonds Payable ……………………..
9,000
Bonds Payable …………………………………….
900,000
To issue bonds payable at a discount.
b.
Aug.
31
Interest Expense …………………………..………….
36,450
Discount on Bonds Payable ($9,000 / 20) ..
450
Cash ($900,000 × .08 × 6/12)………………….
36,000
c.
Dec.
31
Interest Expense …………………………..………….
Discount on Bonds Payable ($450 × 4/6) …
Interest Payable ($36,000 4/6) …………….
To accrue interest and amortize bond discount.
2017
d.
Feb.
28
Interest Payable (from Dec. 31) …………………
24,000
Interest Expense …………………………..………….
12,150
Discount on Bonds Payable ($450 × 2/6) …
150
Cash ($900,000 × .08 × 6/12)………………….
36,000
To pay interest and amortize bond discount.
Req. 4 (reporting the liabilities on the balance sheet at
Dec. 31, 2016)
Current liabilities:
Interest payable ……………………………………….
$ 24,000
Bonds payable …………………………………………
Less: Discount on bonds payable
(30-40 min.) P 9-84B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Jan.
1
Cash ($6,000,000 × .96) ………………………….
5,760,000
Discount on Bonds Payable …………………..
240,000
Bonds Payable ………………………………….
6,000,000
To issue bonds at a discount.
July
1
Interest Expense …………………………………..
282,000
Cash ($6,000,000 × .09 × 6/12) …………….
270,000
Discount on Bonds Payable
12,000
To pay interest and amortize bond
discount.
Dec.
31
Interest Expense …………………………………..
282,000
Interest Payable ($6,000,000 × .09 × 6/12) …
270,000
Discount on Bonds Payable
($240,000 / 20) ……………………………….
12,000
To accrue interest and amortize bond
discount.
2017
Jan.
Interest Payable …………………………………….
270,000
Cash …………………………………………………
270,000
To pay interest.
Jan.
Bonds Payable ……………………………………..
6,000,000
Cash …………………………………………………
6,000,000
To pay off bonds at maturity.
(continued) P 9-84B
Req. 2
Carrying amount at Dec. 31, 2016:
Req. 3
a. Interest expense = $282,000
b. Cash interest paid = $270,000
Interest expense exceeds cash interest paid because the company
(30-45 min.) P 9-85B
Req. 1
a. Using the PV function in EXCEL, the issue price of the bonds is
$2,441,119.
Req. 2 (amortization table)
A
B
C
D
E
Annual
Interest Date
Interest
Payment
(3% of
Maturity
Value)
Interest
Expense
(6% of
Preceding
Bond
Carrying
Amount)
Discount
Amortization
(B – A)
Discount
Account
Balance
(Preceding
D – C)
Bond
Carrying
Amount
($3,000,000
– D)
Jan. 1, Yr. 1
558,881
2,441,119
Dec. 31, Yr. 1
90,000
146,467
56,467
502,414
2,497,586
Dec. 31, Yr. 2
90,000
149,855
59,855
442,559
2,557,441
Dec. 31, Yr. 3
90,000
153,446
63,446
379,113
2,620,887
Dec. 31, Yr. 4
90,000
157,253
67,253
311,860
2,688,140
Dec. 31, Yr. 5
90,000
161,288
71,288
240,571
2,759,429
Dec. 31, Yr. 6
90,000
165,566
75,566
165,005
2,834,995
Dec. 31, Yr. 7
90,000
170,100
80,100
2,915,094
Dec. 31, Yr. 8
90,000
174,906
84,906
3,000,000
(continued) P 9-85B
Req. 3 (reporting the liabilities at Dec. 31, Year 4)
Current liabilities:
Current portion of notes payable …………….
$ 50,000
Long-term liabilities:
Bonds payable ……………………………………….
(40-50 min.) P 9-86B
Req. 1 Using the PV function in EXCEL, the issue price of the bonds is
$1,739,841.
Req. 2 (amortization table)
A
B
C
D
E
Semiannual
Interest Date
Interest
Payment
(3.5% of
Maturity
Value)
Interest
Expense
(4.5% of
Preceding
Bond
Carrying
Amount)
Discount
Amortization
(B – A)
Discount
Account
Balance
(Preceding
D – C)
Bond
Carrying
Amount
($2,000,000
– D)
Dec. 31, 2016
260,159
1,739,841
June 30, 2017
70,000
78,293
8,293
251,866
1,748,134
Dec. 31, 2017
70,000
78,666
8,666
243,200
1,756,800
June 30, 2018
70,000
79,056
9,056
234,144
1,765,856
Dec. 31, 2018
70,000
79,464
9,464
224,680
1,775,320
June 30, 2019
70,000
79,889
9,889
214,791
1,785,209
Dec. 31, 2019
70,000
80,334
10,334
204,457
1,795,543
June 30, 2020
70,000
80,799
10,799
193,657
1,806,343
Dec. 31, 2020
70,000
81,285
11,285
182,372
1,817,628
June 30, 2021
70,000
81,793
11,793
170,579
1,829,421
Dec. 31, 2021
70,000
82,324
12,324
158,255
1,841,745
June 30, 2022
70,000
82,879
12,879
145,376
1,854,624
Dec. 31, 2022
70,000
83,458
13,458
131,918
1,868,082
June 30, 2023
70,000
84,064
14,064
117,854
1,882,146
Dec. 31, 2023
70,000
84,697
14,697
103,158
1,896,842
June 30, 2024
70,000
85,358
15,358
87,800
1,912,200
Dec. 31, 2024
70,000
86,049
16,049
71,751
1,928,249
June 30, 2025
70,000
86,771
16,771
54,980
1,945,020
Dec. 31, 2025
70,000
87,526
17,526
37,454
1,962,546
June 30, 2026
70,000
88,315
18,315
1,980,861
Dec. 31, 2026
70,000
89,139
19,139
2,000,000
Note: numbers may differ slightly due to rounding differences