Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Wild, Shaw, Chiappetta, FAP 23e Solutions Manual: Chapter 14
Chapter 14
Long-Term Liabilities
QUESTIONS
1. Notes payable generally involve borrowing from a single creditor, whereas bonds
payable are usually sold to many different lenders (bondholders).
3. Bonds can allow a company’s owners to increase their return on equity without investing
additional amounts. This result occurs as long as the rate of return on the assets
4. A bond indenture is a legal contract between the issuing company and the bondholders
that identifies the obligations and rights of both parties. It specifies such items as the
5. A trustee for bondholders has the responsibility of monitoring the issuer’s actions,
6. The contract rate (also known as the coupon rate, stated rate, or nominal rate) is the rate
7. In general, the supply of and demand for bonds affect market rates. The market rate for
8.B The effective interest method creates a constant rate of interest over a bond’s life
because the market rate at the time of issuance is multiplied by the beginning balance
9. A company’s accounting period and its bond interest payment dates might not always
coincide. If they do not coincide, a company must make an entry to accrue for interest
10. The price of bonds can be computed by finding the present value of both the par value at
11. The issue price of a $2,000 bond sold at 98 ¼ is 98.25% of $2,000, or $1,965. The issue
price of a $6,000 bond priced at 101 ½ is 101.5% of $6,000, or $6,090.
12. The debt-to-equity ratio is calculated by dividing total liabilities by total equity. The
higher a company’s debt-to-equity ratio, the higher proportion of a company’s assets
13. An entrepreneur (owner) must repay the bondholders the principal (par value) according
14. Apple reports long-term debt of $ 53,463 million on its balance sheet. Apple also reports
16. Per Samsung’s statement of cash flows (financing section), the company made
17. The balance sheet of Google indicates that for the year ended December 31, 2015, the
$0.23 is contributed by debt holders.
18.D If a lease qualifies to be recorded as a capital lease, an asset account for the leased
19.D An operating lease is a short-term or cancelable lease in which the lessor retains the
risks and rewards of ownership. The lessee expenses operating lease payments when
20.D Pension plans can be designed as defined benefit plans or defined contribution plans. In
a defined benefit plan the employer estimates the contribution necessary to pay a pre-
defined benefit amount to its retirees. For example, an employee’s monthly pension
Wild, Shaw, Chiappetta, FAP 23e Solutions Manual: Chapter 14
805
QUICK STUDIES
Quick Study 14-1 (5 minutes)
Quick Study 14-2 (10 minutes)
2017
Quick Study 14-3A (10 minutes)
Using facts in QS 14-2, the bond’s cash proceeds for the bond selling at
a discount are computed as follows
806
Quick Study 14-4 (10 minutes)
Quick Study 14-5A (10 minutes)
Using facts in QS 14-4, the bond’s cash proceeds for the bond selling at
a premium are computed as
Cash Flow
Table Value
Present Value
Quick Study 14-6 (10 minutes)
Quick Study 14-7 (15 minutes)
2016
(a)
Dec. 31
Cash ................................................................................
92,640
2017
(b)
(c)
Quick Study 14-8 (10 minutes)
2.
Twenty semiannual interest payments of $10,000* ...............
$200,000
3. Bond interest expense on first payment date:
808
Quick Study 14-9 (10 minutes)
2017
July 1
Bonds Payable ...............................................................
400,000
Quick Study 14-10 (10 minutes)
2017
Quick Study 14-11 (10 minutes)
1.
2. Interest expense = Beginning balance x Annual interest rate
Quick Study 14-12 (10 minutes)
1.
A
Registered bond
5.
E
Convertible bond
809
Quick Study 14-13 (10 minutes)
Ratio of debt to equity
Atlanta Company
Spokane Company
Quick Study 14-14B (10 minutes)
2.
Thirty semiannual interest payments of $12,000* ..................
$360,000
Quick Study 14-15B (10 minutes)
810
Quick Study 14-16 (10 minutes)
(1)
(2)
Quick Study 14-17C (10 minutes)
Quick Study 14-18C (10 minutes)
811
Quick Study 14-19 (10 minutes)
a. The par value of the 4.625% bond issuance is £337 million. The carrying
Quick Study 14-20 (10 minutes)
a. There is an inverse relation between market rates and bond prices (to
see this, look at the decreasing discount rate as the yield rate increases
c. Because the bonds trade at a premium in the market (111.67), it would
be more expensive to retire the bonds than the balance sheet (par)
Wild, Shaw, Chiappetta, FAP 23e Solutions Manual: Chapter 14
EXERCISES
Exercise 14-1 (15 minutes)
2. Journal entries
2017
(a)
Jan. 1
Cash ................................................................
3,400,000
3.
2017
(a)
Jan. 1
Cash* ................................................................
3,332,000
813
Exercise 14-2 (30 minutes)
2. Total bond interest expense over the life of the bonds
Amount repaid
Six payments of $7,200* .................
$ 43,200
Semiannual
Period-End
Unamortized
Discount
Carrying
Value
(0)
1/01/2017 .........................
$9,138
$170,862
814
Exercise 14-3 (25 minutes)
1. Semiannual cash interest payment = $800,000 x 6% x ½ year = $24,000
4. Estimation of the market price at the issue date
Cash Flow
Table
Table Value*
Amount
Present Value
815
Exercise 14-4 (20 minutes)
2017
(a)
Dec. 31
Cash ................................................................................
186,534
2018
(b)
June 30
Bond Interest Expense ..................................................
7,684
(c)
Dec. 31
Bond Interest Expense ..................................................
7,684
816
Exercise 14-5 (35 minutes)
2017
(a)
Dec. 31
Cash ................................................................
188,000
(b)
2018
June 30
Bond Interest Expense ................................
8,000
Dec. 31
Bond Interest Expense ................................
8,000
2019
June 30
Bond Interest Expense ................................
8,000
817
Exercise 14-6 (20 minutes)
2016
(a)
Dec. 31
Cash ................................................................................
216,222
Premium on Bonds Payable ................................
16,222
818
Exercise 14-7 (30 minutes)
2. Total bond interest expense over the life of the bonds
Amount repaid
Six payments of $26,000* ...............
$156,000
3. Straight-line amortization table ($9,850/6 = $1,642)
Semiannual
Interest Period-End
Unamortized
Premium
Carrying
Value
819
Exercise 14-8 (25 minutes)
2. Number of payments = 5 years x 2 per year = 10 semiannual payments
4. Estimation of the market price at the issue date
Cash Flow
Table
Table Value*
Amount
Present Value
5.
Cash ................................................................................
162,172
Exercise 14-9 (20 minutes)
1. Cash proceeds from sale of bonds at issuance
2. Discount at issuance
Par value ................................................
$700,000
3. Total amortization for first 6 years
The first six years (from 1/1/17 to 12/31/22) equals 40% of the bonds’ 15-
4. Carrying value of the bonds at 12/31/2022
Discount at issuance (from part 2) ......
$ 15,750
Entire Group
Retired 20%
5. Cash purchase price
6. Loss on retirement
7. Journal entry at retirement for 20% of bonds
2023
821
Exercise 14-10 (20 minutes)
Amortization table for the loan
Payments
Period
Ending
Date
(A)
Beginning
Balance
[Prior (E)]
(B)
Debit
Interest
Expense
[7% x (A)]
+
(C)
Debit
Notes
Payable
[(D) - (B)]
=
(D)
Credit
Cash
[computed]
(E)
Ending
Balance
[(A) - (C)]
822
Exercise 14-11 (20 minutes)
2017
Jan. 1
Cash ................................................................................
100,000
2018
Dec. 31
Interest Expense ............................................................
5,423
Exercise 14-12 (15 minutes)
1a. Current debt-to-equity ratio = $220,000 / $400,000* = 0.55
2. Montclair’s risk will increase because it will have more debt. That debt
