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Chapter 12
Long-Term Liabilities
Review Questions
1. Where is the current portion of notes payable reported on the balance sheet?
The current portion of notes payable is reported in the current liability section of the balance sheet.
2. What is an amortization schedule?
3. What is a mortgage payable?
4. What is a bond payable?
5. What is the difference between the stated interest rate and the market interest rate?
The stated interest rate is the interest rate that determines the amount of cash interest the borrower
6. When does a discount on bonds payable occur?
7. When does a premium on bonds payable occur?
A premium on bonds payable occurs when a bond’s issue price is greater than the face value. This
occurs because the stated rate of interest exceeds the market rate of interest.
8. When a bond is issued, what is its present value?
9. Why would a company choose to issue bonds instead of issuing stock?
12-2
10. What is the carrying amount of a bond?
11. In regard to a bond discount or premium, what is the straight-line amortization method?
The straight-line amortization method allocates an equal amount of bond discount or premium to
12. What type of account is Discount on Bonds Payable? What is its normal balance? Is it added to or
subtracted from the Bonds Payable account to determine the carrying amount?
Discount on Bonds Payable is a contra account to Bonds Payable. The normal balance of the
13. What type of account is Premium on Bonds Payable? What is its normal balance? Is it added to or
subtracted from the Bonds Payable account to determine the carrying amount?
14. What type of account is Premium on Bonds Payable? What is its normal balance? Is it added to or
subtracted from the Bonds Payable account to determine the carrying amount?
Premium on Bonds Payable is an adjunct account to Bonds Payable. The normal balance of the
15. What is the journal entry to retire bonds at maturity?
The journal entry to retire bonds at maturity is a debit to Bonds Payable and a credit to Cash.
16. What type of account is Premium on Bonds Payable? What is its normal balance? Is it added to or
subtracted from the Bonds Payable account to determine the carrying amount?
12-3
17. What type of account is Premium on Bonds Payable? What is its normal balance? Is it added to or
subtracted from the Bonds Payable account to determine the carrying amount?
Premium on Bonds Payable is an adjunct account to Bonds Payable. The normal balance of the
18. What is the journal entry to retire bonds at maturity?
The journal entry to retire bonds at maturity is a debit to Bonds Payable and a credit to Cash.
19. What does it mean when a company calls a bond?
20. What are the two categories of liabilities reported on the balance sheet? Provide examples of each.
21. What does the debt to equity ratio show, and how is it calculated?
The debt to equity ratio shows the relationship between total liabilities and total equity. It is
calculated by taking total liabilities and dividing them by total equity.
18A. Explain each of the key factors that the time value of money depends on.
The time value of money depends on these key factors:
19A. What is an annuity?
20A. How does compound interest differ from simple interest?
21B. In regard to a bond discount or premium, what is the effective-interest amortization method?
The effective-interest amortization method calculates interest expense based on the current
12-4
Short Exercises
Assume bonds payable are amortized using the straight-line amortization method unless stated
otherwise.
S12-1 Accounting for a long-term note payable
Learning Objective 1
On January 1, 2018, Lakeman-Fay signed a $1,500,000, 15-year, 7% note. The loan required Lakeman-
Fay to make annual payments on December 31 of $100,000 principal plus interest.
Requirements
1. Journalize the issuance of the note on January 1, 2018.
2. Journalize the first note payment on December 31, 2018.
SOLUTION
Requirement 1
Requirement 2
S12-2 Accounting for mortgages payable
Learning Objective 1
Ember Company purchased a building with a market value of $280,000 and land with a market value of
$55,000 on January 1, 2018. Ember Company paid $15,000 cash and signed a 25-year, 12% mortgage
payable for the balance.
Requirements
1. Journalize the January 1, 2018, purchase.
2. Journalize the first monthly payment of $3,370 on January 31, 2018. (Round to the nearest dollar.)
S12-2, cont.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Jan. 1
Building
280,000
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Jan. 31
Mortgages Payable ($3,370 − $3,200)
170
S12-3 Determining bond prices
Learning Objective 2
Bond prices depend on the market rate of interest, stated rate of interest, and time. Determine whether
the following bonds payable will be issued at face value, at a premium, or at a discount:
a. The market interest rate is 8%. Idaho issues bonds payable with a stated rate of 7.75%.
b. Austin issued 9% bonds payable when the market interest rate was 8.25%.
c. Cleveland’s Cars issued 10% bonds when the market interest rate was 10%.
d. Atlanta’s Tourism issued bonds payable that pay the stated interest rate of 8.5%. At issuance, the
market interest rate was 10.25%.
SOLUTION
a.
discount
12-6
S12-4 Pricing bonds
Learning Objective 2
Bond prices depend on the market rate of interest, stated rate of interest, and time.
Requirements
1. Compute the price of the following 8% bonds of Country Telecom.
a. $100,000 issued at 75.25
b. $100,000 issued at 103.50
c. $100,000 issued at 94.50
d. $100,000 issued at 103.25
2. Which bond will Country Telecom have to pay the most to retire at maturity? Explain your answer.
SOLUTION
Requirement 1
Face Value
×
Issue Price
=
Market Price
a.
$100,000
×
0.7525
=
$ 75,250
S12-5 Determining bond amounts
Learning Objective 3
Savvy Drive-Ins borrowed money by issuing $3,500,000 of 9% bonds payable at 99.5. Interest is paid
semiannually.
Requirements
1. How much cash did Savvy receive when it issued the bonds payable?
2. How much must Savvy pay back at maturity?
3. How much cash interest will Savvy pay each six months?
SOLUTION
Requirement 1
Requirement 2
Requirement 3
Savvy will pay $157,500 in interest payments every six months.
S12-6 Journalizing bond transactions
Learning Objective 3
Power Company issued a $1,000,000, 5%, 5-year bond payable at face value on January 1, 2018.
Interest is paid semiannually on January 1 and July 1.
Requirements
1. Journalize the issuance of the bond payable on January 1, 2018.
2. Journalize the payment of semiannual interest on July 1, 2018.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Requirement 2
Date
Accounts and Explanation
Debit
Credit
S12-7 Journalizing bond transactions
Learning Objective 3
Owen Company issued a $110,000, 11%, 10-year bond payable at 94 on January 1, 2018. Interest is paid
semiannually on January 1 and July 1.
Requirements
1. Journalize the issuance of the bond payable on January 1, 2018.
2. Journalize the payment of semiannual interest and amortization of the bond discount or premium on
July 1, 2018.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Jul. 1
Interest Expense ($6,050 + $330)
6,380
12-10
S12-8 Journalizing bond transactions
Learning Objective 3
Wilkes Mutual Insurance Company issued a $100,000, 5%, 10-year bond payable at 111 on January 1,
2018. Interest is paid semiannually on January 1 and July 1.
Requirements
1. Journalize the issuance of the bond payable on January 1, 2018.
2. Journalize the payment of semiannual interest and amortization of the bond discount or premium on
July 1, 2018.
SOLUTION
Requirement 1
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Jul. 1
Interest Expense ($2,500 − $550)
1,950
S12-9 Journalizing bond transactions including retirement at maturity
Learning Objectives 3, 4
McQueen Company issued a $100,000, 7.5%, 10-year bond payable. Journalize the following
transactions for McQueen Company, and include an explanation for each entry:
a. Issuance of the bond payable at face value on January 1, 2018.
b. Payment of semiannual cash interest on July 1, 2018.
c. Payment of the bond payable at maturity, assuming the last interest payment had already been
recorded. (Give the date.)
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2018
a. Jan. 1
Cash
100,000
Bonds Payable
100,000
Issued bonds at par.
12-12
S12-10 Retiring bonds payable before maturity
Learning Objectives 3, 4
On January 1, 2018, Powell Company issued $350,000 of 10%, five-year bonds payable at 102. Powell
Company has extra cash and wishes to retire the bonds payable on January 1, 2019, immediately after
making the second semiannual interest payment. To retire the bonds, Powell Company pays the market
price of 98.
Requirements
1. What is Powell Company’s carrying amount of the bonds payable on the retirement date?
2. How much cash must Powell Company pay to retire the bonds payable?
3. Compute Powell Company’s gain or loss on the retirement of the bonds payable.
SOLUTION
Requirement 1
Face value
×
Issue price
Market price or
Cash received
Premium on bond
Requirement 2
Requirement 3
S12-11 Preparing the liabilities section of the balance sheet
Learning Objective 5
Luxury Suites Hotels includes the following selected accounts in its general ledger at December 31,
2018:
Notes Payable (long-term)
$
200,000
Accounts Payable
$ 33,000
Bonds Payable (due 2022)
450,000
Discount on Bonds
Payable
13,500
Interest Payable (due next
year)
1,000
Salaries Payable
2,600
Estimated Warranty
Payable
1,300
Sales Tax Payable
400
Prepare the liabilities section of Luxury Suites’s balance sheet at December 31, 2018.
SOLUTION
LUXURY SUITES HOTELS
Balance Sheet (Partial)
December 31, 2018
12-14
S12-12 Computing the debt to equity ratio
Learning Objective 6
Jackson Corporation has the following amounts as of December 31, 2018.
Total assets
$ 55,250
Total liabilities
22,750
Total equity
32,500
Compute the debt to equity ratio at December 31, 2018.
SOLUTION
S12A-13 Determining present value
Learning Objective 7
Appendix 12A
Your grandfather would like to share some of his fortune with you. He offers to give you money under
one of the following scenarios (you get to choose):
1. $8,750 per year at the end of each of the next six years
2. $49,650 (lump sum) now
3. $100,450 (lump sum) six years from now
Requirements
1. Calculate the present value of each scenario using a 6% discount rate. Which scenario yields the
highest present value? Round to the nearest dollar.
2. Would your preference change if you used a 12% discount rate?
12-15
S12A-13, cont.
SOLUTION
Requirement 1
Scenario 1
Present
value
=
Amount of each cash
inflow
×
Annuity PV factor for
i =6%, n = 6
Requirement 2
Scenario 1
Present
value
=
Amount of each cash
inflow
×
Annuity PV factor for
i =12%, n = 6
=
$8,750
×
4.111
=
$35,971
12-16
S12A-14 Determining the present value of bond at issuance
Learning Objective 7
Appendix 12A
On December 31, 2018, when the market interest rate is 12%, Benson Realty issues $600,000 of 9.25%,
10-year bonds payable. The bonds pay interest semiannually. Determine the present value of the bonds
at issuance.
SOLUTION
Present value of principal:
Present value
=
Future value
×
PV factor for
i = 6% (12% / 2),
12-17
S12A-15 Determining future value
Learning Objective 7
Appendix 12A
David is entering high school and is determined to save money for college. David feels he can save
$5,000 each year for the next four years from his part-time job. If David is able to invest at 6%, how
much will he have when he starts college?
SOLUTION
Future value
=
Amount of each cash inflow
×
Annuity FV factor for
i =6%, n = 4
S12B-16 Using the effective-interest amortization method
Learning Objective 8
Appendix 12B
On December 31, 2018, when the market interest rate is 8%, Biggs Realty issues $450,000 of 5.25%,
10-year bonds payable. The bonds pay interest semiannually. The present value of the bonds at issuance
is $365,732.
Requirements
1. Prepare an amortization table using the effective interest amortization method for the first two
semiannual interest periods. (Round to the nearest dollar.)
2. Using the amortization table prepared in Requirement 1, journalize issuance of the bonds and the first
two interest payments.
12-18
S12B-16, cont.
SOLUTION
Requirement 1
Cash Paid
Interest
Expense
Discount
Amortized
Carrying
Amount
Requirement 2
Date
Accounts and Explanation
Debit
Credit
2018
Dec. 31
Cash
365,732
Discount on Bonds Payable ($450,000 − $365,732)
84,268
Bonds Payable
450,000
12-19
S12B-17 Using the effective-interest amortization method
Learning Objective 8
Appendix 12B
. On December 31, 2018, when the market interest rate is 6%, Benson Realty issues $700,000 of 6.25%,
10-year bonds payable. The bonds pay interest semiannually. Benson Realty received $713,234 in cash
at issuance.
Requirements
1. Prepare an amortization table using the effective interest amortization method for the first two
semiannual interest periods. (Round to the nearest dollar.)
2. Using the amortization table prepared in Requirement 1, journalize issuance of the bonds and the first
two interest payments.
SOLUTION
Requirement 1
Cash Paid
Interest
Expense
Premium
Amortized
Carrying
Amount
12-20
S12B-17, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
2018
Dec. 31
Cash
713,234
Premium on Bonds Payable ($713,234 − $700,000)
13,234
Bonds Payable
700,000
12-21
Exercises
Assume bonds payable are amortized using the straight-line amortization method unless stated
otherwise.
E12-18 Accounting for long-term notes payable transactions
Learning Objective 1
2. Total Liabilities $65,280
Consider the following note payable transactions of Caleb Video Productions.
2018
Oct. 1
Purchased equipment costing $80,000 by issuing a five-year, 8%
note payable. The note requires annual principal payments of
$16,000 plus interest each October 1.
Dec. 31
Accrued interest on the note payable.
2019
Oct. 1
Paid the first installment on the note.
Dec. 31
Accrued interest on the note payable.
Requirements
1. Journalize the transactions for the company.
2. Considering the given transactions only, what are Caleb Video Productions’ total liabilities on
December 31, 2019?
E12-18, cont.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Oct. 1
Equipment
80,000
Notes Payable
80,000
Purchased equipment by issuing an 5-year, 8% note.
Requirement 2
December
31, 2019
12-23
E12-19 Preparing an amortization schedule and recording mortgages payable entries
Learning Objective 1
3. Interest Expense $2,750.00
Kellerman Company purchased a building and land with a fair market value of $550,000 (building,
$425,000, and land, $125,000) on January 1, 2018. Kellerman signed a 20-year, 6% mortgage payable.
Kellerman will make monthly payments of $3,940.37. Round to two decimal places. Explanations are
not required for journal entries.
Requirements
1. Journalize the mortgage payable issuance on January 1, 2018.
2. Prepare an amortization schedule for the first two payments.
3. Journalize the first payment on January 31, 2018.
4. Journalize the second payment on February 28, 2018.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Requirement 2
Beginning
Balance
Principal
Payment
Interest
Expense
Total
Payment
Ending
Balance
E12-19, cont.
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2018
Requirement 4
Date
Accounts and Explanation
Debit
Credit
2018
12-25
E12-20 Analyzing alternative plans to raise money
Learning Objective 2
EPS Plan A $1.96
SB Electronics is considering two plans for raising $4,000,000 to expand operations. Plan A is to issue
9% bonds payable, and plan B is to issue 500,000 shares of common stock. Before any new financing,
SB Electronics has net income of $350,000 and 300,000 shares of common stock outstanding.
Management believes the company can use the new funds to earn additional income of $700,000 before
interest and taxes. The income tax rate is 30%. Analyze the SB Electronics situation to determine which
plan will result in higher earnings per share. Use Exhibit 12-6 as a guide.
SOLUTION
Plan A:
Issue $4,000,000 of 9%
Bond Payable
Plan B:
Issue $4,000,000 of
Common Stock
Net income before new project
$ 350,000
$ 350,000
E12-21 Determining bond prices and interest expense
Learning Objectives 2, 3
2. Market price $436,100
Jones Company is planning to issue $490,000 of 9%, five-year bonds payable to borrow for a major
expansion. The owner, Shane Jones, asks your advice on some related matters.
Requirements
1. Answer the following questions:
a. At what type of bond price will Jones Company have total interest expense equal to the cash
interest payments?
b. Under which type of bond price will Jones Company’s total interest expense be greater than the
cash interest payments?
c. If the market interest rate is 12%, what type of bond price can Jones Company expect for the
bonds?
2. Compute the price of the bonds if the bonds are issued at 89.
3. How much will Jones Company pay in interest each year? How much will Jones Company’s interest
expense be for the first year?
SOLUTION
Requirement 1
Requirement 2
Face value
×
Issue price
Market price or
Requirement 3
12-27
E12-22 Journalizing bond issuance and interest payments
Learning Objective 3
2. Interest Exp. $6,600
On June 30, Parker Company issues 11%, five-year bonds payable with a face value of $120,000. The
bonds are issued at face value and pay interest on June 30 and December 31.
Requirements
1. Journalize the issuance of the bonds on June 30.
2. Journalize the semiannual interest payment on December 31.
SOLUTION
Requirement 1
Requirement 2
E12-23 Journalizing bond issuance and interest payments
Learning Objective 3
1. June 30 Discount $18,200
On June 30, Daughtry Limited issues 8%, 20-year bonds payable with a face value of $130,000. The
bonds are issued at 86 and pay interest on June 30 and December 31.
Requirements
1. Journalize the issuance of the bonds on June 30.
2. Journalize the semiannual interest payment and amortization of bond discount on December 31.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Requirement 2
Date
Accounts and Explanation
Debit
Credit
12-29
E12-24 Journalizing bond transactions
Learning Objective 3
2. Interest Expense $3,430
Anderson Company issued $70,000 of 10-year, 9% bonds payable on January 1, 2018. Anderson
Company pays interest each January 1 and July 1 and amortizes discount or premium by the straight-line
amortization method. The company can issue its bonds payable under various conditions.
Requirements
1. Journalize Anderson Company’s issuance of the bonds and first semiannual interest payment
assuming the bonds were issued at face value. Explanations are not required.
2. Journalize Anderson Company’s issuance of the bonds and first semiannual interest payment
assuming the bonds were issued at 92. Explanations are not required.
3. Journalize Anderson Company’s issuance of the bonds and first semiannual interest payment
assuming the bonds were issued at 103. Explanations are not required.
4. Which bond price results in the most interest expense for Anderson Company? Explain in detail.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Requirement 2
Date
Accounts and Explanation
Debit
Credit
E12-24, cont.
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2018
Requirement 4
The bond issue at a discount results in a higher interest expense for the company. The discount needs to
be amortized over the life of the bond, resulting in interest expense greater than the amount of interest
actually paid.
E12-25 Journalizing bond issuance and interest payments
Learning Objectives 3, 4
1. Premium $9,600
On January 1, 2018, Roberts Unlimited issues 8%, 20-year bonds payable with a face value of $240,000.
The bonds are issued at 104 and pay interest on June 30 and December 31.
Requirements
1. Journalize the issuance of the bonds on January 1, 2018.
2. Journalize the semiannual interest payment and amortization of bond premium on June 30, 2018.
3. Journalize the semiannual interest payment and amortization of bond premium on December 31,
2018.
4. Journalize the retirement of the bond at maturity, assuming the last interest payment has already been
recorded. (Give the date.)
12-31
E12-25, cont.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2018
Requirement 4
Date
Accounts and Explanation
Debit
Credit
2037
E12-26 Retiring bonds payable before maturity
Learning Objective 4
2. Cash $606,000
CoastalView Magazine issued $600,000 of 15-year, 5% callable bonds payable on July 31, 2018, at 94.
On July 31, 2021, CoastalView called the bonds at 101. Assume annual interest payments.
Requirements
1. Without making journal entries, compute the carrying amount of the bonds payable at July 31, 2021.
2. Assume all amortization has been recorded properly. Journalize the retirement of the bonds on July
31, 2021. No explanation is required.
SOLUTION
Requirement 1
Face value $600,000 – Carrying Value $564,000 ($600,000 × 0.94) = Discount $36,000
Discount $36,000 / 15 years = $2,400 amortized per year
Requirement 2
Date
Accounts and Explanation
Debit
Credit
2021
12-33
E12-27 Reporting current and long-term liabilities
Learning Objectives 2, 3, 5
Pediatric Dispensary borrowed $390,000 on January 2, 2018, by issuing a 15% serial bond payable that
must be paid in three equal annual installments plus interest for the year. The first payment of principal
and interest comes due January 2, 2019. Complete the missing information. Assume the bonds are issued
at face value.
December 31
2018
2019
2020
Current Liabilities:
Bonds Payable
$____
__
$____
__
$____
__
Interest Payable
_____
_
_____
_
_____
_
Long-term Liabilities:
_____
_
_____
_
_____
_
Bonds Payable
_____
_
_____
_
_____
_
SOLUTION
Requirement 1
December 31
2018
2019
2020
E12-28 Reporting liabilities
Learning Objectives 2, 3, 5
Total Liabilities $378,000
At December 31, MediStat Precision Instruments owes $52,000 on Accounts Payable, Salaries Payable
of $12,000, and Income Tax Payable of $10,000. MediStat also has $300,000 of Bonds Payable that
were issued at face value that require payment of a $35,000 installment next year and the remainder in
later years. The bonds payable require an annual interest payment of $4,000, and MediStat still owes this
interest for the current year. Report MediStat’s liabilities on its classified balance sheet on December 31,
2018.
SOLUTION
MEDISTAT PRECISION INSTRUMENTS
Balance Sheet (Partial)
December 31, 2018
12-35
E12-29 Computing the debt to equity ratio
Learning Objective 6
Ludwig Corporation has the following data as of December 31, 2018:
Total Current
Liabilities
$ 36,210
Total Stockholders’ Equity
$ ?
Total Current Assets
58,200
Other Assets
36,800
Long-term
Liabilities
139,630
Property, Plant, and Equipment,
Net
206,440
Compute the debt to equity ratio at December 31, 2018.
Assets:
Liabilities:
Current assets
$ 58,200
Current liabilities
$ 36,210
Other assets
36,800
Long-term liabilities
139,630
Property, plant and equipment
206,440
Total Liabilities
175,840
Stockholder’s Equity
125,600
Total Assets
$301,440
Total Liabilities &
Stockholder’s Equity
$ 301,440
Debt to equity ratio
=
Total liabilities
/
Total equity
=
$175,840
/
$125,600
=
1.40
12-36
E12A-30 Determining the present value of bonds payable
Learning Objective 7
Appendix 12A
2. Present Value $77,594
Interest rates determine the present value of future amounts. (Round to the nearest dollar.)
Requirements
1. Determine the present value of 10-year bonds payable with face value of $86,000 and stated interest
rate of 14%, paid semiannually. The market rate of interest is 14% at issuance.
2. Same bonds payable as in Requirement 1, but the market interest rate is 16%.
3. Same bonds payable as in Requirement 1, but the market interest rate is 12%.
SOLUTION
Requirement 1
Requirement 2
Present value of principal:
Present value
=
Future value
×
PV factor for
i = 8% (16% / 2),
12-37
E12A-30, cont.
Requirement 3
Present value of principal:
Present value
=
Future value
×
PV factor for
i = 6% (12% / 2),
12-38
E12B-31 Journalizing bond transactions using the effective-interest amortization method
Learning Objective 8
Appendix 12B
2. Interest Expense $4,995
Journalize issuance of the bond and the first semiannual interest payment under each of the following
three assumptions. The company amortizes bond premium and discount by the effective-interest
amortization method. Explanations are not required.
1. Seven-year bonds payable with face value of $83,000 and stated interest rate of 10%, paid
semiannually. The market rate of interest is 10% at issuance. The present value of the bonds at
issuance is $83,000.
2. Same bonds payable as in assumption 1, but the market interest rate is 16%. The present value of the
bonds at issuance is $62,433.
3. Same bonds payable as in assumption 1, but the market interest rate is 8%. The present value of the
bonds at issuance is $91,727.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Cash
83,000
12-39
E12B-31, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Cash
62,433
Requirement 3
Date
Accounts and Explanation
Debit
Credit
12-40
Problems (Group A)
P12-32A Journalizing liability transactions and reporting them on the balance sheet
Learning Objectives 1, 5
2. Total Liabilities $653,334
The following transactions of Johnson Pharmacies occurred during 2018 and 2019:
2018
Mar. 1
Borrowed $450,000 from Coconut Creek Bank. The 15-year, 5% note
requires payments due annually, on March 1. Each payment consists of
$30,000 principal plus one year’s interest.
Dec. 1
Mortgaged the warehouse for $250,000 cash with Saputo Bank. The
mortgage requires monthly payments of $8,000. The interest rate on the
note is 12% and accrues monthly. The first payment is due on January 1,
2019.
31
Recorded interest accrued on the Saputo Bank note.
31
Recorded interest accrued on the Coconut Creek Bank note.
2019
Jan. 1
Paid Saputo Bank monthly mortgage payment.
Feb. 1
Paid Saputo Bank monthly mortgage payment.
Mar. 1
Paid Saputo Bank monthly mortgage payment.
1
Paid first installment on note due to Coconut Creek Bank.
Requirements
1. Journalize the transactions in the Johnson Pharmacies general journal. Round to the nearest dollar.
Explanations are not required.
2. Prepare the liabilities section of the balance sheet for Johnson Pharmacies on March 1, 2019 after all
the journal entries are recorded.
E12-32A, cont.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Mar. 1
Cash
450,000
Notes Payable
450,000
12-42
P12-32A, cont.
Requirement 1, cont.
Saputo Bank Interest Calculations
Beginning
Balance
Principal
Payment
Interest
Expense
Total
Payment
Ending
Balance
Requirement 2
JOHNSON PHARMACIES
Balance Sheet (Partial)
March 1, 2019
P12-32A, cont.
Requirement 2, cont.
Beginning
Balance
Principal
Payment
Interest
Expense
Total
Payment
Ending
Balance
12/01/2018
$ 250,000
P12-33A Analyzing, journalizing, and reporting bond transactions
Learning Objectives 2, 3
2. Discount $3,000
Danny’s Hamburgers issued 6%, 10-year bonds payable at 90 on December 31, 2018. At December 31,
2020, Danny reported the bonds payable as follows:
Long-term Liabilities:
Bonds Payable
$
600,000
Less: Discount on Bonds
Payable
(48,00
0)
$
552,000
Danny’s pays semiannual interest each June 30 and December 31.
Requirements
1. Answer the following questions about Danny’s bonds payable:
a. What is the maturity value of the bonds?
b. What is the carrying amount of the bonds at December 31, 2020?
c. What is the semiannual cash interest payment on the bonds?
d. How much interest expense should the company record each year?
2. Record the June 30, 2020, semiannual interest payment and amortization of discount.
SOLUTION
Requirement 1
a.
$600,000
Requirement 2
Date
Accounts and Explanation
Debit
Credit
2020
P12-34A Analyzing and journalizing bond transactions
Learning Objectives 2, 3, 4
3. June 30, 2018, Interest Expense $25,200
On January 1, 2018, Nurses Credit Union (NCU) issued 8%, 20-year bonds payable with face value of
$600,000. The bonds pay interest on June 30 and December 31.
Requirements
1. If the market interest rate is 7% when NCU issues its bonds, will the bonds be priced at face value, at
a premium, or at a discount? Explain.
2. If the market interest rate is 9% when NCU issues its bonds, will the bonds be priced at face value, at
a premium, or at a discount? Explain.
3. The issue price of the bonds is 92. Journalize the following bond transactions:
a. Issuance of the bonds on January 1, 2018.
b. Payment of interest and amortization on June 30, 2018.
c. Payment of interest and amortization on December 31, 2018.
d. Retirement of the bond at maturity on December 31, 2037, assuming the last interest payment has
already been recorded.
SOLUTION
Requirement 1
Requirement 2
12-46
P12-34A, cont.
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2018
Jan. 1
Cash ($600,000 × 0.92)
552,000
Discount on Bonds Payable ($600,000 − $552,000)
48,000
Bonds Payable
600,000
Issued bonds at discount.
Dec. 31
Interest Expense ($24,000 + $1,200)
25,200
Discount on Bonds Payable ($48,000 × 1/40)
1,200
Cash ($600,000 × 0.08 × 6/12)
24,000
P12-35A Analyzing and journalizing bond transactions
Learning Objectives 2, 3, 4
June 30, 2018, Interest Expense $37,750
On January 1, 2018, Educators Credit Union (ECU) issued 8%, 20-year bonds payable with face value
of $1,000,000. These bonds pay interest on June 30 and December 31. The issue price of the bonds is
109.
Journalize the following bond transactions:
a. Issuance of the bonds on January 1, 2018.
b. Payment of interest and amortization on June 30, 2018.
c. Payment of interest and amortization on December 31, 2018.
d. Retirement of the bond at maturity on December 31, 2037, assuming the last interest payment has
already been recorded.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2018
Jan. 1
Cash ($1,000,000 × 1.09)
1,090,000
Premium on Bonds Payable ($1,090,000 − $1,000,000)
90,000
P12-36A Reporting liabilities on the balance sheet and computing debt to equity ratio
Learning Objectives 5, 6
1. Total Liabilities $276,200
The accounting records of Pack Leader Wireless include the following as of December 31, 2018:
Accounts Payable
$
77,000
Salaries Payable
$ 7,500
Mortgages Payable (long-
term)
73,000
Bonds Payable (current
portion)
25,000
Interest Payable
18,000
Premium on Bonds
Payable
10,000
Bonds Payable (long-term)
63,000
Unearned Revenue (short-
term)
2,700
Total Stockholders’ Equity
140,000
Requirements
1. Report these liabilities on the Pack Leader Wireless balance sheet, including headings and totals for
current liabilities and long-term liabilities.
2. Compute Pack Leader Wireless’s debt to equity ratio at December 31, 2018.
12-49
P12-36A, cont.
SOLUTION
Requirement 1
PACK LEADER WIRELESS
Balance Sheet (Partial)
December 31, 2018
Requirement 2
Debt to equity ratio
=
Total liabilities
/
Total equity
12-50
P12AB-37A Determining the present value of bonds payable and journalizing using the effective-
interest amortization method
Learning Objectives 7, 8
Appendixes 12A, 12B
3. Jan. 1, 2018, Cash $629,634
Brad Nelson, Inc. issued $600,000 of 7%, six-year bonds payable on January 1, 2018. The market
interest rate at the date of issuance was 6%, and the bonds pay interest semiannually.
Requirements
1. How much cash did the company receive upon issuance of the bonds payable? (Round to the nearest
dollar.)
2. Prepare an amortization table for the bond using the effective-interest method, through the first two
interest payments. (Round to the nearest dollar.)
3. Journalize the issuance of the bonds on January 1, 2018, and the first and second payments of the
semiannual interest amount and amortization of the bonds on June 30, 2018, and December 31, 2018.
Explanations are not required.
SOLUTION
Requirement 1
Present value of principal:
Present value
=
Future value
×
PV factor for
12-51
P12AB-37A, cont.
Requirement 2
Cash Paid
Interest
Expense
Premium
Amortized
Carrying
Amount
01/01/2018
$ 629,634
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2018
Jan. 1
Cash
629,634
Premium on Bonds Payable ($629,634 − $600,000)
29,634
12-52
P12AB-38A Determining the present value of bonds payable and journalizing using the effective-
interest amortization method
Learning Objectives 7, 8
Appendixes 12A, 12B
3. Jan. 1, 2018, Cash $214,035
Relaxation, Inc. is authorized to issue 7%, 10-year bonds payable. On January 1, 2018, when the market
interest rate is 12%, the company issues $300,000 of the bonds. The bonds pay interest semiannually.
Requirements
1. How much cash did the company receive upon issuance of the bonds payable? (Round to the nearest
dollar.)
2. Prepare an amortization table for the bond using the effective-interest method, through the first two
interest payments. (Round to the nearest dollar.)
3. Journalize the issuance of the bonds on January 1, 2018, and the first and second payments of the
semiannual interest amount and amortization of the bonds on June 30, 2018, and December 31, 2018.
Explanations are not required.
SOLUTION
Requirement 1
Present value of principal:
Present value
=
Future value
×
PV factor for
i = 6% (12% / 2),
P12AB-38A, cont.
Requirement 2
Cash Paid
Interest
Expense
Discount
Amortized
Carrying
Amount
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2018
Jan. 1
Cash
214,035
Problems (Group B)
P12-39B Journalizing liability transactions and reporting them on the balance sheet
Learning Objectives 1, 5
2. Total Liabilities $661,776
The following transactions of Great Value Pharmacies occurred during 2018 and 2019:
2018
Mar. 1
Borrowed $390,000 from Bartow Bank. The six-year, 13% note
requires payments due annually, on March 1. Each payment consists
of $65,000 principal plus one year’s interest.
Dec. 1
Mortgaged the warehouse for $350,000 cash with Saylor Bank. The
mortgage requires monthly payments of $7,000. The interest rate on
the note is 9% and accrues monthly. The first payment is due on
January 1, 2019.
31
Recorded interest accrued on the Saylor Bank note.
31
Recorded interest accrued on the Bartow Bank note.
2019
Jan. 1
Paid Saylor Bank monthly mortgage payment.
Feb. 1
Paid Saylor Bank monthly mortgage payment.
Mar. 1
Paid Saylor Bank monthly mortgage payment.
1
Paid first installment on note due to Bartow Bank.
Requirements
1. Journalize the transactions in the Great Value Pharmacies general journal. Round to the nearest
dollar. Explanations are not required.
2. Prepare the liabilities section of the balance sheet for Great Value Pharmacies on March 1, 2019 after
all the journal entries are recorded.
12-55
P12-39B, cont.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Mar. 1
Cash
390,000
Notes Payable
390,000
P12-39B, cont.
Requirement 1, cont.
Saylor Bank Interest Calculations
Beginning
Balance
Principal
Payment
Interest
Expense
Total
Payment
Ending
Balance
12/01/2018
$ 350,000
Requirement 2
GREAT VALUE PHARMACIES
Balance Sheet (Partial)
March 1, 2019
Liabilities
Current Liabilities
12-57
P12-39B, cont.
Requirement 2, cont.
Beginning
Balance
Principal
Payment
Interest
Expense
Total
Payment
Ending
Balance
12/01/2018
$ 350,000
12-58
P12-40B Analyzing, journalizing, and reporting bond transactions
Learning Objectives 2, 3
2. Discount $2,250
Johnny’s Hamburgers issued 8%, 10-year bonds payable at 85 on December 31, 2018. At December 31,
2020, Johnny reported the bonds payable as follows:
Long-term Liabilities:
Bonds Payable
$ 300,000
Less: Discount on Bonds
Payable
(36,000)
$ 264,000
Johnny pays semiannual interest each June 30 and December 31.
Requirements
1. Answer the following questions about Johnny’s bonds payable:
a. What is the maturity value of the bonds?
b. What is the carrying amount of the bonds at December 31, 2020?
c. What is the semiannual cash interest payment on the bonds?
d. How much interest expense should the company record each year?
2. Record the June 30, 2020, semiannual interest payment and amortization of discount.
SOLUTION
Requirement 1
a.
$300,000
Requirement 2
Date
Accounts and Explanation
Debit
Credit
2020
Jun. 30
Interest Expense ($2,250 + $12,000)
14,250
12-59
P12-41B Analyzing and journalizing bond transactions
Learning Objectives 2, 3, 4
3. June 30 Interest Expense $7,350
On January 1, 2018, Doctors Credit Union (DCU) issued 7%, 20-year bonds payable with face value of
$200,000. The bonds pay interest on June 30 and December 31.
Requirements
1. If the market interest rate is 5% when DCU issues its bonds, will the bonds be priced at face value, at
a premium, or at a discount? Explain.
2. If the market interest rate is 8% when DCU issues its bonds, will the bonds be priced at face value, at
a premium, or at a discount? Explain.
3. The issue price of the bonds is 93. Journalize the following bond transactions:
a. Issuance of the bonds on January 1, 2018.
b. Payment of interest and amortization on June 30, 2018.
c. Payment of interest and amortization on December 31, 2018.
d. Retirement of the bond at maturity on December 31, 2037, assuming the last interest payment has
already been recorded.
SOLUTION
Requirement 1
Requirement 2
P12-41B, cont.
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2018
Jan. 1
Cash ($200,000 × 0.93)
186,000
Discount on Bonds Payable ($200,000 − $186,000)
14,000
Bonds Payable
200,000
Issued bonds at discount.
12-61
P12-42B Analyzing and journalizing bond transactions
Learning Objectives 2, 3, 4
June 30 Interest Expense $15,600
On January 1, 2018, Electricians Credit Union (ECU) issued 8%, 20-year bonds payable with face value
of $400,000. The bonds pay interest on June 30 and December 31. The issue price of the bonds is 104.
Journalize the following bond transactions:
a. Issuance of the bonds on January 1, 2018.
b. Payment of interest and amortization on June 30, 2018.
c. Payment of interest and amortization on December 31, 2018.
d. Retirement of the bond at maturity on December 31, 2037, assuming the last interest payment has
already been recorded.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2018
Jan. 1
Cash ($400,000 × 1.04)
416,000
Premium on Bonds Payable ($416,000 − $400,000)
16,000
Bonds Payable
400,000
Issued bonds at premium.
12-62
P12-43B Reporting liabilities on the balance sheet and computing debt to equity ratio
Learning Objectives 5, 6
1. Total Liabilities $286,200
The accounting records of Compass Wireless include the following as of December 31, 2018:
Accounts Payable
$ 74,000
Salaries Payable
$ 7,500
Mortgages Payable (long-
term)
80,000
Bonds Payable (current
portion)
25,000
Interest Payable
21,000
Premium on Bonds Payable
13,000
Bonds Payable (long-term)
63,000
Unearned Revenue (short-
term)
2,700
Total Stockholders’ Equity
145,000
Requirements
1. Report these liabilities on the Compass Wireless balance sheet, including headings and totals for
current liabilities and long-term liabilities.
2. Compute Compass Wireless’s debt to equity ratio at December 31, 2018.
12-63
P12-43B, cont
SOLUTION
Requirement 1
COMPASS WIRELESS
Balance Sheet (Partial)
December 31, 2018
Requirement 2
12-64
P12AB-44B Determining the present value of bonds payable and journalizing using the effective-
interest amortization method
Learning Objectives 7, 8
Appendixes 12A, 12B
3. Jan. 1, 2018, Cash $311,613
Ari Goldstein issued $300,000 of 11%, five-year bonds payable on January 1, 2018. The market interest
rate at the date of issuance was 10%, and the bonds pay interest semiannually.
Requirements
1. How much cash did the company receive upon issuance of the bonds payable? (Round to the nearest
dollar.)
2. Prepare an amortization table for the bond using the effective-interest method, through the first two
interest payments. (Round to the nearest dollar.)
3. Journalize the issuance of the bonds on January 1, 2018, and the first second payments of the
semiannual interest amount and amortization of the bonds on June 30, 2018, and December 31, 2018.
Explanations are not required.
SOLUTION
Requirement 1
Present value of principal:
Present value
=
Future value
×
PV factor for
12-65
P12AB-44B, cont.
Requirement 2
Cash
Paid
Interest
Expense
Premium
Amortized
Carrying
Amount
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2018
Jan. 1
Cash
311,613
Premium on Bonds Payable ($311,613 − $300,000)
11,613
Bonds Payable
300,000
12-66
P12AB-45B Determining the present value of bonds payable and journalizing using the effective-
interest amortization method
Learning Objectives 7, 8
Appendixes 12A, 12B
3. Jan. 1, 2018, Cash $468,895
Sleep Well, Inc. is authorized to issue 9%, 10-year bonds payable. On January 1, 2018, when the market
interest rate is 10%, the company issues $500,000 of the bonds. The bonds pay interest semiannually.
Requirements
1. How much cash did the company receive upon issuance of the bonds payable? (Round to the nearest
dollar.)
2. Prepare an amortization table for the bond using the effective-interest method, through the first two
interest payments. (Round to the nearest dollar.)
3. Journalize the issuance of the bonds on January 1, 2018, and the first and second payment of the
semiannual interest amount and amortization of the bonds on June 30, 2018, and December 31, 2018.
Explanations are not required.
SOLUTION
Requirement 1
Present value of principal:
12-67
P12AB-45B, cont.
Requirement 2
Cash
Paid
Interest
Expense
Discount
Amortized
Carrying
Amount
01/01/2018
$ 468,895
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2018
Jan. 1
Cash
468,895
Discount on Bonds Payable ($500,000 − $468,895)
31,105
Bonds Payable
500,000
Using Excel
P12-46 Using Excel for long-term notes payable amortization schedule
Patrick’s Delivery Services is buying a van to help with deliveries. The cost of the vehicle is $35,000,
the interest rate is 6%, and the loan is for three years. The van is to be repaid in three equal installment
payments. Payments are due at the end of each year.
Requirements
1. Complete the data table.
2. Using the present value of an ordinary annuity table, calculate the payment amount and complete the
amortization schedule.
a. Calculate the loan payment by dividing the loan amount by the appropriate present value factor.
b. Round values to two decimal places and ignore rounding errors on the last payment.
c. Use absolute cell references and relative cell references in formulas.
3. Using the Excel PMT function, calculate the payment amount and complete the amortization
schedule.
a. The PMT function calculates a payment amount that results in a negative number. Reverse this to a
positive number for calculations in the amortization schedule.
b. Round values to two decimal places and ignore rounding errors on the last payment.
c. Use absolute cell references and relative cell references in formulas.
SOLUTION
The student templates for Using Excel are available online in MyAccountingLab in the Multimedia
12-69
Continuing Problem
P12-47 Describing bonds, journalizing transactions for bonds payable using the straight-line
amortization method, and journalizing transactions for a mortgage payable
This problem continues the Canyon Canoe Company situation from Chapter 11. Canyon Canoe
Company is considering raising additional capital for further expansion. The company wants to finance
a new business venture into guided trips down the Amazon River in South America. Additionally, the
company wants to add another building on their land to offer more services for local customers.
Canyon Canoe Company plans to raise the capital by issuing $210,000 of 7.5%, six-year bonds on
January 2, 2020. The bonds pay interest semiannually on June 30 and December 31. The company
receives $208,476 when the bonds are issued.
The company also issues a mortgage payable for $450,000 on January 2, 2020. The proceeds from
the mortgage will be used to construct the new building. The mortgage requires annual payments of
$45,000 plus interest for ten years, payable on December 31. The mortgage interest rate is 8%.
Requirements
1. Will the bonds issue at face value, a premium, or a discount?
2. Record the following transactions. Include dates and round to the nearest dollar. Omit explanations.
a. Cash received from the bond issue.
b. Cash received from the mortgage payable.
c. Semiannual bond interest payments for 2020. Amortize the premium or discount using the straight-
line amortization method.
d. Payment on the mortgage payable for 2020.
3. Calculate the total interest expense incurred in 2020.
12-70
SOLUTION
Requirement 1
Requirement 2
Date
Accounts and Explanation
Debit
Credit
2020
Jan. 2
Cash
208,476
Discount on Bonds Payable ($210,000 − $208,476)
1,524
Bonds Payable
210,000
Requirement 3
Date
Interest
Expense
12-71
Critical Thinking
Tying It All Together Case 12-1
The Walt Disney Company is a diversified entertainment company that is comprised of five different
business segments. Walt Disney began as a cartoon studio in 1920 and today is known as a leading
worldwide entertainment provider.
Requirements
1. On The Walt Disney Company’s balance sheet dated October 3, 2015, the company reports
borrowings of $12,773 million. Review Note 8 (Borrowings) of the company’s annual report. What
are the different types of borrowings the company holds?
2. Perform a web search for the terms commercial paper and U.S. medium-term notes. What do each of
these terms mean?
3. Review the information included in Note 8. What are the maturity dates for The Walt Disney
Company’s U.S. medium-term notes?
SOLUTION
Requirement 1
Requirement 2
Commercial paper is an unsecured, short-term debt instrument issued by a corporation, typically to meet
Requirement 3
12-72
1. Duncan Brooks needs to borrow $500,000 to open new stores. Brooks can borrow $500,000 by
issuing 5%, 10-year bonds at 96. How much will Brooks actually receive in cash under this
arrangement? How much must Brooks pay back at maturity? How will Brooks account for the
difference between the cash received on the issue date and the amount paid back?
2. Brooks prefers to borrow for longer periods when interest rates are low and for shorter periods when interest
rates are high. Why is this a good business strategy?
SOLUTION
Requirement 1
Brooks will actually borrow $480,000 ($500,000 × 0.96). Brooks must pay back the full $500,000 at
Requirement 2
Companies prefer to borrow for longer periods when interest rates are low in order to lock in the low
Ethical Issues 12-1
Raffie’s Kids, a nonprofit organization that provides aid to victims of domestic violence, low-income
families, and special-needs children, has a 30-year, 5% mortgage on the existing building. The mortgage
requires monthly payments of $3,000. Raffie’s bookkeeper is preparing financial statements for the
board and, in doing so, lists the mortgage balance of $287,000 under current liabilities because the board
hopes to be able to pay the mortgage off in full next year. Of the mortgage principal, $20,000 will be
paid next year if Raffie’s pays according to the mortgage agreement. The board members call you, their
trusted CPA, to advise them on how Raffie’s Kids should report the mortgage on its balance sheet. What
is the ethical issue? Provide and discuss the reason for your recommendation.
SOLUTION
The ethical issue here is whether the full mortgage should be shown as a current liability. While Raffie’s
12-73
Fraud Case 12-1
Bill and Edna had been married two years and had just reached the point where they had enough savings to start
investing. Bill’s uncle Dave told them that he had recently inherited some very rare railroad bonds from
his grandmother’s estate. He wanted to help Bill and Edna get a start in the world and would sell them
50 of the bonds at $100 each. The bonds were dated 1873, beautifully engraved, showing a face value of
$1,000 each. Uncle Dave pointed out that “United States of America” was printed prominently at the top
and that the U.S. government had established a sinking fund to retire the old railroad bonds. A sinking
fund is a fund established for the purpose of repaying the debt. It allows the organization (the U.S.
government, in this example) to set aside money over time to retire the bonds. All Bill and Edna needed
to do was hold on to them until the government contacted them, and they would eventually get the full
$1,000 for each bond. Bill and Edna were overjoyed—until a year later when they saw the exact same
bonds for sale at a coin and stamp shop priced as “collectors’ items” for $9.95 each!
Requirements
1. If a company goes bankrupt, what happens to the bonds it issued and the investors who bought the
bonds?
2. When investing in bonds, how can you tell whether the bond issue is a legitimate transaction?
3. Is there a way to determine the relative risk of corporate bonds?
SOLUTION
Requirement 1
When a company goes bankrupt, there is a court settlement in which the remaining assets of the
Requirement 2
Stocks and bonds should normally be purchased only through a licensed securities dealer. Investors
Requirement 3
Bonds are given a grade to indicate their credit quality. Private independent rating services such as
Financial Statement Case 12-1
Requirements
1. How much was Target Corporation’s long-term debt at January 30, 2016?
2. Compute Target Corporation’s debt to equity ratio at January 30, 2016. How does it compare to
Kohl’s Corporation’s ratio?
SOLUTION
Requirement 1
Requirement 2
(In Millions)
Target:
Debt to equity ratio
=
Total liabilities
/
Total equity
