CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Prob. 14–1A
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
common shareholders than is Plan 2 or 3 if earnings before interest and income tax
PROBLEMS
14-18
…
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Prob. 14–2A
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
91,420,905
4,714,477
214,477
14-19
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Prob. 14–3A
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
14-20
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Prob. 14–4A
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
2014
July
Oct.
14-21
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
3. Initial carrying amount of bonds…………………………………………………
…
$77,906,048
14-22
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Appendix 1 and 2 Prob. 14–5A
1. 2014
2. a.
Appendix 1 and 2 Prob. 14–6A
1. 2014
2. a.
31 Interest Expense* 8,613,167
2014
2014
Dec.
14-23
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Prob. 14–1B
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………………………… 00 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………………………… 00 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
principal, and a payment of preferred dividends is not required. It is also more
14-24
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Prob. 14–2B
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 5.5% semiannual rate………………………………
…
0.11746
92,269
42,309,236
2,392,269
14-25
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Prob. 14–3B
1. Cash
2. a. Interest Expense
b. Interest Expense
4. Yes. Investors will be willing to pay more than the face amount of the bonds when the interest
5. Present value of $1 for 20 semiannual
periods at 5% semiannual rate………………………………
…
0.37689
73,100,469
3,494,977
3,494,977
14-26
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Prob. 14–4B
1.
1 Cash 62,817,040
Premium on Bonds Payable 7,817,040
31 Premium on Bonds Payable 390,852
Interest Expense 390,852
30 Interest Expense 27,000
Interest Payable 9,000
Notes Payable 61,342
Sept.
2014
July
14-27
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Prob. 14–4B (Concluded)
30 Interest Expense 23,320
3. Initial carrying amount of bonds………………………………………………
…
$62,817,040
2016
Sept.
14-28
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Appendix 1 and 2 Prob. 14–5B
1. 2014
2. a.
31 Interest Expense* 2,327,008
Appendix 1 and 2 Prob. 14–6B
1. 2014
2. a.
2014
Dec.
2014
14-29
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
CP 14–1
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 14–2
Without the consent of the bondholders, Bob’s use of the sinking fund cash to
CASES & PROJECTS
14-30
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
CP 14–3
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 14–4
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
14-31
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
CP 14–5
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
14-32
CP 14–6
$214,824 + $1,356,595
14-33