1. (1) To pay the face (maturity) amount of the bonds at a specified date. (2) To pay periodic
interest at a specified percentage of the face amount.
2. a. Bonds that may be exchanged for other securities under specified conditions.
b. The issuing corporation reserves the right to redeem the bonds before the maturity date.
3. More than face amount. Because comparable bonds provide a market interest rate (11%) that
4. a. Greater than $26,000,000
b. 1. $26,000,000
3. 9%
5. More than the contract rate
6. a. Premiu
m
8. A mortgage note is an installment note that is secured by a pledge of the borrower’s assets.
9. A bond is an interest-bearing note that requires periodic interest payments and repayment of
the face amount of the bonds at maturity. Bonds consist of two different components:
(1) interest payments made periodically over the life of the bond and (2) the face amount that
must be repaid at maturity. The periodic payments consist entirely of interest, and the final
CHAPTER 12
LONG-TERM LIABILITIES: BONDS AND NOTES
DISCUSSION QUESTIONS
12-1
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
PE 12–1A
Earnings before bond interest and income tax………
…
$750,000 $750,000
Deduct interest on bonds…………………………………
…
350,000 238,000
Income before income tax………………………………… $400,000 $512,000
Deduct income tax…………………………………………
…
160,000 204,800
PE 12–1B
Earnings before bond interest and income tax………
…
$2,000,000 $2,000,000
Deduct interest on bonds…………………………………
…
400,000 250,000
Income before income tax………………………………… $1,600,000 $1,750,000
…
…
…
…
640,000 700,000
Plan 1 Plan 2
PRACTICE EXERCISES
Plan 1 Plan 2
1
2
3
4
1
2
3
4
12-2
…
…
…
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
PE 12–2A
a.
Cash 500,000
PE 12–2B
a.
Cash 800,000
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
PE 12–3A
PE 12–3B
Cash 2,889,599
PE 12–4A
Interest Expense 58,633
PE 12–4B
Interest Expense 176,040
PE 12–5A
Cash 2,170,604
PE 12–5B
Cash 8,308,869
12-4
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
PE 12–6A
Interest Expense 62,940
PE 12–6B
Interest Expense 409,113
*
PE 12–7A
Bonds Payable 1,500,000
PE 12–7B
Bonds Payable 500,000
PE 12–8A
a. Cash 65,000
Notes Payable 65,000
Issued installment notes for cash.
PE 12–8B
a. Cash 45,000
Notes Payable 45,000
Issued installment notes for cash.
b. Interest Expense 3,600
PE 12–9A
a. Number of times interest charges earned:
$3,200,000 + $320,000
$320,000
b. The number of times interest charges are earned has decreased from 13.0 in 2015
PE 12–9B
a. Number of times interest charges earned:
$5,544,000 + $440,000
$440,000
b. The number of times interest charges are earned has increased from 12.0 in 2015 to
2016: = 13.6
2016: = 11.0
12-6
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Ex. 12–1
Domanico
Co.
Shares of common stock outstanding…………………………………
…
÷ 500,000
Earnings per share on common stock…………………………………
…
$ 1.64
b. Earnings before bond interest and income tax………………………
…
$11,800,000
…
Earnings per share on common stock…………………………………
…
$ 3.20
c. Earnings before bond interest and income tax………………………
…
$13,000,000
…
Earnings per share on common stock…………………………………
…
$ 4.64
*
EXERCISES
$10,000,000 bonds payable × 8% interest
***
12-7
…
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Ex. 12–3
Nike’s major source of financing is common stock. It has relatively little long-term debt
compared to stockholders’ equity.
Ex. 12–4
Ex. 12–5
1 Cash 600,000
Bonds Payable 600,000
Ex. 12–6
a. 1. Cash 17,138,298
2. Interest Expense 1,061,170
3. Interest Expense 1,061,170
May
12-8
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Ex. 12–6 (Concluded)
b. Annual interest paid……………………………………………………………
…
$1,850,000
Ex. 12–7
a. Cash 13,023,576
Premium on Bonds Payable 1,023,576
Bonds Payable 12,000,000
*$1,023,576 ÷ 10 semiannual payments
Ex. 12–8
1 Cash 22,000,000
Bonds Payable 22,000,000
2016
Mar.
12-9
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Ex. 12–9
1 Cash 15,000,000
Bonds Payable 15,000,000
Ex. 12–10
a. 1. Cash 85,000
Notes Payable 85,000
2016
May
12-10
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Ex. 12–10 (Concluded)
Current liabilities:
Notes payable*………………………………………………………………………
…
$10,510
* The principal repayment portion of the next installment payment. See computation below.
Noncurrent liabilities:
Notes payable**……………………………………………………………………… $64,668
** Original note payable………………………………………………………………
…
$85,000
Ex. 12–11
1 Cash 175,000
Notes Payable 175,000
Jan.
2016
12-11
…
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Ex. 12–12
a.
AB DE
Decrease Dec. 31
January 1 Note in Notes Carrying
Carrying Payment Payable Amount
Amount (Cash Paid) (B – C) (A – D)
b. 2016
Jan. 1 Cash 147,750
Notes Payable 147,750
Dec. 31 Interest Expense 10,343
Notes Payable 33,277
Interest Expense
Ending Note Carrying Amount)
(7% of January 1
Amortization of Installment Notes
For the
Year
C
12-12
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Ex. 12–13
1. The significant loss on redemption of the Simmons Industries bonds should be
2. The Hunter Corporation bonds outstanding at the end of the current year
should be reported as a current liability on the balance sheet because they
mature within one year.
Ex. 12–14
a. Number of times interest charges earned:
$685,000,000 + $147,000,000
$147,000,000
Ex. 12–15
a. Number of times interest charges earned:
$310,500,000 + $13,500,000
$13,500,000
2016: = 24.0
Current year: = 5.7
12-13
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Ex. 12–16
a. Number of times interest charges earned:
b. The number of times interest charges are earned has decreased from 2.2 in 2015
Ex. 12–17
$1,000,000 × 0.75131 = $751,310
Cash on hand today can be invested to earn income. If $751,315 is invested at 10%, it wil
l
be worth $1,000,000 at the end of three years.
Ex. 12–18
a. First Year: $200,000 × 0.93458 =
Second Year: $200,000 × 0.87344 =
$186,916
174,688
2016: = 1.7
$3,500,000 + $5,000,000
$5,000,000
12-14
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Ex. 12–20
No. The present value of your winnings using an interest rate of 12% is $31,047,750
($6,250,000 × 4.96764), which is less than the present value of your winnings using
an interest rate of 5% ($40,395,063; see Ex. 12–19). This is because the winnings are
affected by the higher interest rate.
Ex. 12–21
Present value of $1 for 10 semiannual
periods at 4.5% semiannual rate………………………
…
0.64393
Face amount of bonds……………………………………… $25,000,000 $16,098,250
Ex. 12–22
Present value of $1 for 10 semiannual
periods at 4.5% semiannual rate………………………
…
0.64393
Face amount of bonds……………………………………… $42,000,000 $27,045,060
Ex. 12–23
a. 1. Cash
2. Interest Expense*
Discount on Bonds Payable
207,315
43,495,895
1,957,315
×
×
12-15
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Ex. 12–23 (Concluded)
3. Interest Expense* 1,966,644
Discount on Bonds Payable
Cash
*
($43,495,895 + $207,315) × 4.5%
Note: The following data in support of the proceeds of the bond issue stated in
the exercise are presented for the instructor’s information. Students are not
required to make the computations.
b. Annual interest paid…………………………………………………………
…
$ 3,500,000
Plus discount amortized*…………………………………………………… 423,959
c. The bonds sell for less than their face amount because the market rate of interest is
greater than the contract rate of interest. Investors are not willing to pay the full face
Ex. 12–24
a. 1. Cash 23,829,684
2. Interest Expense* 834,039
Premium on Bonds Payable 155,961
3. Interest Expense* 828,580
216,644
1,750,000
12-16
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Ex. 12–24 (Concluded)
b. Annual interest paid……………………………………………………………
…
$1,980,000
Less premium amortized*……………………………………………………
…
317,381
Ex. 12–25
a. Present value of $1 for 10 semiannual
periods at 5% semiannual rate……………………… 0.61391
Face amount of bonds…………………………………
…
$35,000,000 $21,486,850
Present value of an annuity of $1 for 10
semiannual periods at 5% semiannual rate………
…
7.72173
…
…
…
*
$37,702,483 – $214,876
d. Annual interest paid……………………………………………………………
…
$ 4,200,000
Less premium amortized*……………………………………………………
…
440,496
Interest expense for first year………………………………………………… $ 3,759,504
×
12-17