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
2. Plan 1 Plan 2 Plan 3
Earnings before interest and income tax…
…
$1,050,000 $1,050,000 $1,050,000
…
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
PROBLEMS
12-18
…
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Prob. 12–2A
1. Cash
2. a. Interest Expense
Discount on Bonds Payable*
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 5.0% semiannual rate……………………
…
…
0.14205
214,477
4,714,477
91,420,905
12-19
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Prob. 12–3A
1. Cash
2. a. Interest Expense
Premium on Bonds Payable*
4. Yes. Investors will be willing to pay more than the face amount of the bonds
5. Present value of $1 for 40 semiannual
periods at 4.5% semiannual rate…………………
…
0.17193
191,403,720
7,964,907
1,035,093
12-20
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Prob. 12–4A
1.
1 Cash 77,906,048
Discount on Bonds Payable 10,093,952
Bonds Payable 88,000,000
1 Cash 240,000
30 Interest Expense 4,400,000
Cash 4,400,000
30 Interest Expense 9,000
Interest Payable 3,000
Notes Payable 43,434
Sept.
June
2015
2014
July
Oct.
12-21
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Prob. 12–4A (Concluded)
30 Interest Expense 7,371
3. Initial carrying amount of bonds……………………………………………
…
$77,906,048
2016
Sept.
12-22
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Appendix 1 and 2 Prob. 12–5A
1. 2014
2. a.
31 Interest Expense* 4,571,045
Appendix 1 and 2 Prob. 12–6A
1. 2014
2. a.
31 Interest Expense* 8,613,167
Dec.
2014
2014
Dec.
12-23
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
Deduct interest on bonds……………………
0 0 3,600,000
2. Plan 1 Plan 2 Plan 3
Earnings before interest and income tax…
$6,000,000 $6,000,000 $6,000,000
Deduct interest on bonds……………………
0 0 3,600,000
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
12-24
…
…
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Prob. 12–2B
1. Cash
2. a. Interest Expense
b. Interest Expense
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
2,392,269
42,309,236
2,392,269
12-25
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Prob. 12–3B
1. Cash
2. a. Interest Expense
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
73,100,469
3,494,977
12-26
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
30 Interest Expense 2,475,000
Cash 2,475,000
30 Interest Expense 27,000
Interest Payable 9,000
Notes Payable 61,342
2015
Sept.
June
2014
July
Oct.
12-27
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Prob. 12–4B (Concluded)
30 Interest Expense 23,320
2016
Sept.
12-28
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Appendix 1 and 2 Prob. 12–5B
1. 2014
July 1 Cash 42,309,236
2. a.
Appendix 1 and 2 Prob. 12–6B
1. 2014
2. a.
31 Interest Expense* 3,655,023
b.
2014
Dec.
2015
2014
12-29
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.”
CP 12–2
Without the consent of the bondholders, Bob’s use of the sinking fund cash to
CASES & PROJECTS
12-30
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
CP 12–3
Receive $100,000,000 today:
Receive $25,000,000 today, plus $9,000,000 per year for 8 years:
Present value of $25,000,000 today = $25,000,000
Receive $15,000,000 per year for 10 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
12-31
CP 12–5
1.
Shares of common stock………………………………
…
400,000 950,000
…
…
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
Plan 1 Plan 2
12-32
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
CP 12–6
$214,824 + $1,356,595
12-33