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
the face amount of the bonds at maturity. Bonds consist of two different components:
CHAPTER 14
LONG-TERM LIABILITIES: BONDS AND NOTES
DISCUSSION QUESTIONS
14-1
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
PE 14–1A
Earnings before bond interest and income tax…………… $1,200,000 $1,200,000
PE 14–1B
Earnings before bond interest and income tax…………… $2,000,000 $2,000,000
Plan 1 Plan 2
PRACTICE EXERCISES
Plan 1 Plan 2
PE 14–2A
Cash 1,920,873
PE 14–2B
PE 14–3A
Interest Expense 87,913
PE 14–3B
Interest Expense 176,040
PE 14–4A
PE 14–4B
14-3
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
PE 14–5A
Interest Expense 102,496
PE 14–5B
Interest Expense 409,113
PE 14–6A
Bonds Payable 900,000
PE 14–6B
Bonds Payable 500,000
PE 14–7A
a. Cash 80,000
PE 14–7B
a. Cash 45,000
Notes Payable 45,000
PE 14–8A
a. Number of times interest charges earned:
$3,200,000 + $320,000
PE 14–8B
a. Number of times interest charges earned:
$5,544,000 + $440,000
14-5
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Ex. 14–1
Rhett
Co.
a. Earnings before bond interest and income tax………………………………
…
$15,000,000
b. Earnings before bond interest and income tax………………………………
…
$17,500,000
Bond interest………………………………………………………………………
…
2,250,000
c. Earnings before bond interest and income tax………………………………
…
$20,000,000
Bond interest………………………………………………………………………
…
2,250,000
Ex. 14–2
Factors other than earnings per share that should be considered in evaluating
EXERCISES
14-6
…
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Ex. 14–3
Ex. 14–4
The bonds were selling at a premium. This is indicated by the selling price of
Ex. 14–5
1 Cash 7,500,000
Bonds Payable 7,500,000
Ex. 14–6
a. 1. Cash 10,504,541
Discount on Bonds Payable 1,495,459
Apr.
14-7
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Ex. 14–6 (Concluded)
b. Annual interest paid………………………………………………………………
…
$ 960,000
Ex. 14–7
a. Cash 22,842,560
Premium on Bonds Payable 2,842,560
c. The bonds sell for more than their face amount because the market rate of
Ex. 14–8
1 Cash 40,000,000
Apr.
2014
14-8
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Ex. 14–9
1 Cash 30,000,000
Bonds Payable 30,000,000
Ex. 14–10
a. 1. Cash 50,000
Notes Payable 50,000
2014
Mar.
14-9
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Ex. 14–10 (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. 14–11
1 Cash 210,000
Jan.
2014
14-10
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Ex. 14–12
a.
AB D E
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
Dec. 31 Interest Expense 7,500
Amortization of Installment Notes
For the
Year
C
Interest Expense
Ending Note Carrying Amount)
(6% of January 1
14-11
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Ex. 14–13
1. The significant loss on redemption of the Simmons Industries bonds should be
2. The Hunter Corporation bonds outstanding at the end of the current year
Ex. 14–14
a. Number of times interest charges earned:
$745,000,000 + $167,000,000
$167,000,000
Ex. 14–15
a. Number of times interest charges earned:
$310,500,000 + $13,500,000
$13,500,000
2014: = 24.0
Current year: = 5.5
14-12
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Ex. 14–16
a. Number of times interest charges earned:
Appendix 1 Ex. 14–17
Appendix 1 Ex. 14–18
a. First Year: $200,000 × 0.93458 =
$186,916
2014: = 1.7
$3,500,000 + $5,000,000
$5,000,000
14-13
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Appendix 1 Ex. 14–20
No. The present value of your winnings using an interest rate of 12% is $42,376,650
($7,500,000 × 5.65022), which is less than the present value of your winnings using
Appendix 1 Ex. 14–22
Present value of $1 for 8 semiannual
Appendix 2 Ex. 14–23
a. 1. Cash
2. Interest Expense*
43,495,895
1,957,315
14-14
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Appendix 2 Ex. 14–23 (Concluded)
3. Interest Expense*
b. Annual interest paid……………………………………………
…
$ 3,500,000
c. The bonds sell for less than their face amount because the market rate
Appendix 2 Ex. 14–24
a. 1. Cash
3. Interest Expense*
23,829,684
828,580
1,966,644
14-15
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Appendix 2 Ex. 14–24 (Concluded)
b. Annual interest paid……………………………………
…
$1,980,000
c. The bonds sell for more than their face amount because the market rate of
Appendix 1 and 2 Ex. 14–25
a. Present value of $1 for 10 semiannual
periods at 5% semiannual rate………………………
…
0.61391
b. First semiannual interest payment……………………
…
$ 2,100,000
…
…
…
14-16
…
CHAPTER 14 Long-Term Liabilities: Bonds and Notes
Appendix 1 and 2 Ex. 14–26
a. Present value of $1 for 10 semiannual
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
…
…
…
…