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2. a. Bonds that may be exchanged for other securities under specified conditions.
3. More than face amount. Because comparable bonds provide a market interest rate (11%) that
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
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………
…
$1,200,000 $1,200,000
PE 12–1B
Earnings before bond interest and income tax………
…
$2,000,000 $2,000,000
Plan 1 Plan 2
PRACTICE EXERCISES
Plan 1 Plan 2
12-2
PE 12–2A
Cash 1,920,873
PE 12–2B
PE 12–3A
Interest Expense 87,913
PE 12–3B
Interest Expense 176,040
PE 12–4A
PE 12–4B
12-3
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
PE 12–5A
Interest Expense 102,496
PE 12–5B
Interest Expense 409,113
PE 12–6A
Bonds Payable 900,000
PE 12–6B
Bonds Payable 500,000
PE 12–7A
a. Cash 80,000
12-4
PE 12–7B
a. Cash 45,000
PE 12–8A
a. Number of times interest charges earned:
PE 12–8B
a. Number of times interest charges earned:
12-5
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Ex. 12–1
Rhett
Co.
a. Earnings before bond interest and income tax……………………………
…
$15,000,000
b. Earnings before bond interest and income tax……………………………
…
$17,500,000
c. Earnings before bond interest and income tax……………………………
…
$20,000,000
Bond interest……………………………………………………………………… 2,250,000
Ex. 12–2
Factors other than earnings per share that should be considered in evaluating
EXERCISES
12-6
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Ex. 12–3
Ex. 12–4
The bonds were selling at a premium. This is indicated by the selling price of
Ex. 12–5
1 Cash 7,500,000
Bonds Payable 7,500,000
Ex. 12–6
a. 1. Cash 10,504,541
Apr.
12-7
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Ex. 12–6 (Concluded)
b. Annual interest paid………………………………………………………………
…
$ 960,000
Ex. 12–7
a. Cash 22,842,560
c. The bonds sell for more than their face amount because the market rate of
Ex. 12–8
1 Cash 40,000,000
Apr.
2014
12-8
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Ex. 12–9
1 Cash 30,000,000
Ex. 12–10
a. 1. Cash 50,000
b. Notes payable are reported as liabilities on the balance sheet. The portion of the
note payable that is due within one year is reported as a current liability. The
remaining portion of the note payable that is not due within one year is reported
as a long-term liability. For this company, the current and noncurrent portions
of the note payable would be reported as follows:
2014
Mar.
12-9
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Ex. 12–10 (Concluded)
Current liabilities:
Notes payable*……………………………………………………………………
…
$ 7,719
*The principal repayment portion of the next installment payment. See computation below.
Noncurrent liabilities:
Notes payable**……………………………………………………………………
…
$34,930
Ex. 12–11
1 Cash 210,000
Jan.
2014
12-10
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)
Dec. 31, 2014 $125,000 $ 36,074 $ 7,500 (6% of $125,000) $ 28,574 $96,426
b. 2014
Jan. 1 Cash 125,000
Notes Payable 125,000
Amortization of Installment Notes
For the
Year
C
Interest Expense
Ending Note Carrying Amount)
(6% of January 1
12-11
1. The significant loss on redemption of the Simmons Industries bonds should be
Ex. 12–14
a. Number of times interest charges earned:
Ex. 12–15
a. Number of times interest charges earned:
12-12
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Ex. 12–16
a. Number of times interest charges earned:
Appendix 1 Ex. 12–17
Appendix 1 Ex. 12–18
12-13
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Appendix 1 Ex. 12–20
No. The present value of your winnings using an interest rate of 12% is $42,376,650
Appendix 1 Ex. 12–21
Appendix 1 Ex. 12–22
Present value of $1 for 8 semiannual
Appendix 2 Ex. 12–23
a. 1. Cash
43,495,895
12-14
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Appendix 2 Ex. 12–23 (Concluded)
3. Interest Expense*
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
b. Annual interest paid……………………………………… $ 3,500,000
c. The bonds sell for less than their face amount because the market rate
Appendix 2 Ex. 12–24
a. 1. Cash
2. Interest Expense*
3. Interest Expense*
23,829,684
828,580
834,039
1,966,644
216,644
1,750,000
12-15
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Appendix 2 Ex. 12–24 (Concluded)
b. Annual interest paid……………………………………
…
$1,980,000
Appendix 1 and 2 Ex. 12–25
a. Present value of $1 for 10 semiannual
12-16
CHAPTER 12 Long-Term Liabilities: Bonds and Notes
Appendix 1 and 2 Ex. 12–26
a. Present value of $1 for 10 semiannual
b. 6.0% of carrying amount of $71,167,524…………
…
$ 4,270,051
12-17
