CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Ex. 12–26
a. Present value of $1 for 10 semiannual
periods at 6.0% semiannual rate………………………
…
0.55839
Face amount of bonds……………………………………
…
$80,000,000 $44,671,200
b. 6.0% of carrying amount of $71,167,524……………………………………
…
$ 4,270,051
c. 6.0% of carrying amount of $71,837,575*……………………………………
…
$ 4,310,255
Second semiannual interest payment………………………………………
…
3,600,000
×
12-18
…
…
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Prob. 12–1A
1. Plan 1 Plan 2 Plan 3
Earnings before interest and income tax……
…
$2,100,000 $2,100,000 $2,100,000
Deduct interest on bonds………………………
…
0 0 720,000
2. Plan 1 Plan 2 Plan 3
Earnings before interest and income tax……
…
$1,050,000 $1,050,000 $1,050,000
Deduct interest on bonds………………………
…
0 0 720,000
3. The principal advantage of Plan 1 is that it involves only the issuance of common
stock, which does not require a periodic interest payment or return of principal,
and a payment of preferred dividends is not required. It is also more attractive to
common shareholders than is Plan 2 or 3 if earnings before interest and income tax
PROBLEMS
12-19
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Prob. 12–2A
1. Cash 26,646,292
2. a. Interest Expense 1,232,685
Discount on Bonds Payable*
Cash
*
$1,853,708 ÷ 20 semiannual payments
b. Interest Expense 1,232,685
4. Yes. Investors will not be willing to pay the face amount of the bonds when the
5. Present value of $1 for 20 semiannual
periods at 4.5% semiannual rate……………………
…
0.41464
92,685
1,140,000
12-20
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Prob. 12–3A
1. Cash 66,747,178
2. a. Interest Expense 2,600,141
Premium on Bonds Payable* 212,359
Cash
*
$4,247,178 ÷ 20 seminannual payments
b. Interest Expense 2,600,141
3.
4. Yes. Investors will be willing to pay more than the face amount of the bonds
5. Present value of $1 for 20 semiannual
periods at 4.0% semiannual rate………………………… 0.45639
$2,600,141
2,812,500
12-21
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Prob. 12–4A
1.
1 Cash 63,532,267
Discount on Bonds Payable 10,467,733
Bonds Payable 74,000,000
1 Cash 200,000
Discount on Bonds Payable 261,693
Cash 4,070,000
30 Interest Expense 9,000
Interest Payable 3,000
Notes Payable 28,673
Sept
2016
July
Oct.
12-22
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Prob. 12–4A (Concluded)
30 Interest Expense 7,710
3. Initial carrying amount of bonds……………………………………………
…
$63,532,267
Discount amortized on December 31, 2016………………………………
…
261,693
…
…
2018
Sept
12-23
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Prob. 12–5A
1. 2016
2. a.
31 Interest Expense* 1,199,083
Discount on Bonds Payable 59,083
Cash 1,140,000
*$26,646,292 × 4.5%
b.
Prob. 12–6A
1. 2016
2. a.
31 Interest Expense* 2,669,887
Premium on Bonds Payable 142,613
Dec.
2016
2017
2016
Dec.
12-24
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Prob. 12–1B
1. Plan 1 Plan 2 Plan 3
Earnings before interest and income tax……
…
$10,000,000 $10,000,000 $10,000,000
2. Plan 1 Plan 2 Plan 3
Earnings before interest and income tax……
…
$6,000,000 $6,000,000 $6,000,000
…
3. The principal advantage of Plan 1 is that it involves only the issuance of
common stock, which does not require a periodic interest payment or return of
principal, and a payment of preferred dividends is not required. It is also more
attractive to common shareholders than is Plan 2 or 3 if earnings before interest
12-25
…
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Prob. 12–2B
1. Cash 42,309,236
2. a. Interest Expense 2,392,269
Discount on Bonds Payable*
3.
4. Yes. Investors will not be willing to pay the face amount of the bonds when the
5. Present value of $1 for 40 semiannual
periods at 5.5% semiannual rate……………………
…
0.11746
$2,392,269
92,269
12-26
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Prob. 12–3B
1. Cash 73,100,469
2. a. Interest Expense 3,494,977
Premium on Bonds Payable* 405,023
Cash
*$8,100,469 ÷ 20 semiannual periods
b. Interest Expense 3,494,977
*$8,100,469 ÷ 20 semiannual periods
4. Yes. Investors will be willing to pay more than the face amount of the bonds when
5. Present value of $1 for 20 semiannual
periods at 5% semiannual rate…………………… 0.37689
3,900,000
12-27
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Prob. 12–4B
1.
1 Cash 62,817,040
Premium on Bonds Payable 7,817,040
Bonds Payable 55,000,000
1 Cash 450,000
Premium on Bonds Payable 390,852
Cash 2,475,000
30 Interest Expense 27,000
Interest Payable 9,000
Notes Payable 61,342
Sept.
Oct.
2016
July
12-28
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
2. a. 2016: 2,093,148
b. 2017: 4,203,069
3. Initial carrying amount of bonds…………………………………………
…
$62,817,040
Premium amortized on December 31, 2016……………………………… (390,852)
12-29
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Prob. 12–5B
1. 2016
2. a.
31 Interest Expense* 2,327,008
Discount on Bonds Payable 27,008
3.
Prob. 12–6B
1. 2016
2. a.
31 Interest Expense* 3,655,023
Premium on Bonds Payable 244,977
3.
2016
Dec.
$3,655,023
$2,327,008
Dec.
2016
12-30
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
CP 12–1
GE Capital’s action was legal but caused a great public relations stir at the time.
Some quotes:
“A lot of people feel like they have been sorely used,” said one bond fund manager.
“There was nothing illegal about it, but it was nasty.”
The fund manager said that GE Capital’s decision to upsize its bond issue to $11
billion from $6 billion midway through the offering ordinarily wouldn’t have upset
bondholders.
“But then to find out two days later that they had filed a $50 billion shelf?” he said.
CP 12–2
Without the consent of the bondholders, Bob’s use of the sinking fund cash to
CASES & PROJECTS
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
CP 12–3
Receive $100,000,000 today:
Present value of $100,000,000 today = $100,000,000
Receive $25,000,000 today, plus $9,000,000 per year for 8 years:
CP 12–4
The primary advantage of issuing preferred stock rather than bonds is that the
preferred stock does not obligate Xentec to pay dividends, while interest on
12-32
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
CP 12–5
1.
Shares of common stock………………………………
…
400,000 950,000
Earnings before bond interest and income tax……… $5,000,000 $5,000,000
2. a. Factors to be considered in addition to earnings per share:
1. There is a definite legal obligation to pay interest on bonds, but there is
2. If the bonds are issued, there is a definite commitment to repay the
3. Present stockholders must purchase the new stock if they are to retain
their proportionate control and financial interest in the corporation.
Plan 1 Plan 2
…
…
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
CP 12–6
$173,751 + $1,459,141
2. The number of times interest charges are earned has increased from Year 1 to Year 3.
12-34