CHAPTER 15
Long-Term Liabilities
ASSIGNMENT CLASSIFICATION TABLE
Learning Objectives
Questions
Brief
Exercises
Do It!
Exercises
1. Describe the major
characteristics of bonds.
1, 2, 3, 4
1
1
2. Explain how to account for
bond transactions.
5, 6, 7, 8, 9
1, 2, 3, 4, 5,
6, 13
2a, 2b
2, 3, 4, 5, 6,
7, 8
3. Explain how to account for
long–term notes payable.
7
3
15, 16
8, 9, 10
11, 12, 13,
*5. Apply the straight-line
method of amortizing bond
discount and bond premium.
17, 18
11, 12
15, 16
*6. Apply the effective-interest
method of amortizing bond
discount and bond premium.
19, 20
13
17, 18
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Prepare entries to record issuance of bonds, interest
accrual, and bond redemption.
Moderate
20–30
2A
Prepare entries to record issuance of bonds, interest
accrual, and bond redemption.
Moderate
15–20
3A
Prepare entries for interest payment, bond redemption,
and interest accrual.
Moderate
15–20
5A
Analyze three different lease situations and prepare
journal entries.
Moderate
20–30
*6A
Prepare entries to record issuance of bonds, interest
accrual, and straight-line amortization for two years.
Simple
30–40
*7A
Prepare entries to record issuance of bonds, interest, and
straight-line amortization of bond premium and discount.
Simple
30–40
*8A
Prepare entries to record interest payments, straight-line
premium amortization, and redemption of bonds.
Moderate
30–40
*9A
Prepare entries to record issuance of bonds, payment
of interest, and amortization of bond discount using
effective-interest method.
Moderate
30–40
Prepare journal entries to record issuance of bonds,
Moderate
30–40
WEYGANDT ACCOUNTING PRINCIPLES 12E
CHAPTER 15
LONG-TERM LIABILITIES
Number
LO
BT
Difficulty
Time (min.)
BE1
2
AP
Simple
2–3
BE2
2
AP
Simple
2–3
BE3
2
AP
Simple
4–6
BE4
2
AP
Simple
3–5
BE5
2
AP
Simple
4–6
BE6
2
AP
Simple
3–5
BE7
3
AP
Simple
6–8
BE8
4
AP
Simple
3–5
BE9
4
AP
Simple
6–8
BE10
4
AP
Simple
3–5
BE11
5
AP
Simple
4–6
BE12
5
AP
Simple
4–6
*BE13
2, 6
AP
Simple
4–6
DI1
1
C
Simple
2–3
DI2a
2
AP
Simple
4–6
DI2b
2
AP
Simple
3–5
DI3
3
AP
Simple
4–6
DI4
4
AP
Simple
4–6
EX1
1
C
Simple
4–6
EX2
2
AP
Simple
4–6
EX3
2
AP
Simple
4–6
EX4
2
AP
Simple
5–7
EX5
2
AP
8–10
EX6
2
AP
Simple
6–8
EX7
2
AP
Simple
6–8
EX8
2
AP
8–10
EX9
3
AP
Simple
6–8
EX10
3
AP
Simple
8–10
EX11
4
AP
Simple
3–5
EX12
4
AN
Simple
4–6
EX13
4
AN
Simple
4–6
LONG-TERM LIABILITIES (Continued)
Number
LO
BT
Difficulty
Time (min.)
*EX15
5
AP
Simple
6–8
*EX16
5
AP
Simple
6–8
*EX17
6
AP
Moderate
8–10
6
AP
Moderate
8–10
P1A
AP
Moderate
20–30
P2A
AP
Moderate
15–20
P3A
2
AP
Moderate
15–20
P4A
3, 4
AP
Moderate
20–30
P5A
4
AP
Moderate
20–30
*P6A
4, 5
AP
Simple
30–40
*P7A
4, 5
AP
Simple
30–40
*P8A
5
AP
Moderate
30–40
*P9A
6
AP
Moderate
30–40
*P10A
4, 6
AP
Moderate
30–40
BYP1
2, 4
AN
Simple
5–10
BYP2
4
AP
Simple
10–15
BYP3
4
AP
Simple
10–15
BYP4
1
Simple
BYP5
AN
Moderate
15–20
BYP6
1
Simple
10–15
BYP7
Simple
10–15
BYP8
Simple
5–10
BYP9
AP
Moderate
10–15
BLOOM’ S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End–of-Chapter Exercises and Problems
Learning Objective
Knowledge
Comprehension
Application
Analysis
Synthesis
Evaluation
1. Describe the major characteristics of
bonds.
Q15-1
Q15-2
Q15-3
Q15-4
DI15-1
E15-1
2. Explain how to account for bond
transactions.
Q15-5
Q15-6
Q15-8
Q15-7
Q15-9
BE15-1
BE15-2
BE15-3
BE15-4
BE15-5
BE15-6
DI15-2a
DI15-2b
E15-3
E15-4
E15-5
E15-6
E15-7
E15-8
P15-1A
P15-2A
P15-3A
DI15-4
E15-11
E15-14
P15-1A
P15-10A
*5. Apply the straight–line method of
amortizing bond discount and bond
premium.
Q15-17
Q15-18
Q15-17
BE15-11
BE15-12
E15-15
E15-16
P15-6A
P15-7A
P15-8A
*6. Apply the effective-interest method
Q15-19
BE15-13
P15-9A
ANSWERS TO QUESTIONS
1. (a) Long-term liabilities are obligations that are expected to be paid after one year. Examples
include bonds, long-term notes, and lease obligations.
(b) Bonds are a form of interest-bearing notes payable used by corporations, universities, and
governmental agencies.
2. (a) Secured bonds have specific assets of the issuer pledged as collateral. In contrast, unse–
cured bonds are issued against the general credit of the borrower. These bonds are called
debenture bonds.
4. The two major obligations incurred by a company when bonds are issued are the interest
payments due on a periodic basis and the principal which must be paid at maturity.
5. Less than. Investors are required to pay more than the face value; therefore, the market interest
rate is less than the contractual rate.
8. Debits: Bonds Payable (for the face value) and Premium on Bonds Payable (for the
unamortized balance).
Credits: Cash (for 97% of the face value) and Gain on Bond Redemption (for the difference
between the cash paid and the bonds’ carrying value).
9. A convertible bond permits bondholders to convert it into common stock at the option of the
bondholders.
Questions Chapter 15 (Continued)
11. The nature and the amount of each long-term liability should be presented in the balance sheet
or in schedules in the accompanying notes to the statements. The notes should also indicate the
interest rates, maturity dates, conversion privileges, and assets pledged as collateral.
12. (a) The major advantages are:
(1) Stockholder control is not affected—bondholders do not have voting rights, so current
stockholders retain full control of the company.
13. (a) A lease agreement is a contract in which the lessor gives the lessee the right to use an
asset for a specified period in return for one or more periodic rental payments. The lessor is
the owner of the property and the lessee is the renter or tenant.
(b) The two most common types of leases are operating leases and capital leases.
14. This lease would be reported as an operating lease. In an operating lease, each payment is debited
to Rent Expense. Neither a leased asset nor a lease liability is capitalized.
15. In a capital lease agreement, the lessee records the present value of the lease payments as an
asset and a liability. Therefore, Benedict Company would debit Leased Asset—Equipment for
$186,300 and credit Lease Liability for the same amount.
16. Apple did not redeem any of its debt during the 2013 fiscal year.
*17. The straight-line method results in the same amortized amount being assigned to Interest
Expense each interest period. This amount is determined by dividing the total bond discount or
premium by the number of interest periods the bonds will be outstanding.
*18. $28,000. Interest expense is the interest to be paid in cash less the premium amortization for the
year. Cash to be paid equals 8% X $400,000 or $32,000. Total premium equals 5% of $400,000
*19. Kelli is probably indicating that since the borrower has the use of the bond proceeds over the
term of the bonds, the borrowing rate in each period should be the same. The effective-interest
method results in a varying amount of interest expense but a constant rate of interest on the
Questions Chapter 15 (Continued)
*20. Decrease. Under the effective-interest method the interest charge per period is determined by
multiplying the carrying value of the bonds by the effective-interest rate. When bonds are issued
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 15-1
Mar. 1 Cash ($30,000 X 98%) ………………… 294,000
Discounts on Bonds Payable …….. 6,000
Bonds Payable …………………… 300,000
BRIEF EXERCISE 15-2
BRIEF EXERCISE 15-3
2017
(a) Jan. 1 Cash ………………………………………… 4,000,000
Bonds Payable
(4,000 X $1,000) ………………. 4,000,000
BRIEF EXERCISE 15-4
(a) Jan. 1 Cash ($2,000,000 X 97%) ……………. 1,940,000
Discount on Bonds Payable ………. 60,000
Bonds Payable …………………… 2,000,000
BRIEF EXERCISE 15-5
1. Jan. 1 Cash (1,000 X $1,000) ………………… 1,000,000
Bonds Payable …………………… 1,000,000
BRIEF EXERCISE 15-6
Bonds Payable ………………………………………………… 1,000,000
Loss on Bond Redemption
BRIEF EXERCISE 15-7
Semiannual
Interest
Period
(A)
Cash
Payment
(B)
Interest
Expense
(D) X 10%
(C)
Reduction
of Principal
(A) – (B)
(D)
Principal
Balance
(D) – (C)
Issue Date
1
$130,196
$80,000
$50,196
$800,000
749,804
2017
Dec. 31 Cash ……………………………………………………. 800,000
BRIEF EXERCISE 15-8
Long-term liabilities
Bonds payable, due 2019 ……………………………….. $600,000
Less: Discount on bonds payable ………………….. 45,000 $555,000
BRIEF EXERCISE 15-9
Issue Stock
Issue Bond
Income before interest and taxes
Interest ($2,000,000 X 8%)
$700,000
0
$700,000
160,000
Net income is higher if stock is used. However, earnings per share is lower
than earnings per share if bonds are used because of the additional shares
of stock that are outstanding.
BRIEF EXERCISE 15-10
1. Rent Expense ………………………………………………… 80,000
Cash ………………………………………………………. 80,000
*BRIEF EXERCISE 15-11
(a) Jan. 1 Cash (96% X $5,000,000) ……………. 4,800,000
Discount on Bonds Payable ………. 200,000
Bonds Payable …………………… 5,000,000
*BRIEF EXERCISE 15-12
(a) Jan. 1 Cash (102% X $4,000,000) ………….. 4,080,000
Bonds Payable …………………… 4,000,000
Premium on Bonds Payable … 80,000
*BRIEF EXERCISE 15-13
(a) Interest Expense ……………………………………………. 48,070
Discount on Bonds Payable …………………….. 3,070
Cash ………………………………………………………. 45,000
SOLUTIONS FOR DO IT! REVIEW EXERCISES
DO IT! 15-1
1. False. Mortgage bonds and sinking fund bonds are both examples of
secured bonds.
2. False. Convertible bonds can be converted into common stock at the
DO IT! 15-2a
(a) Cash ……………………………………………………………… 520,000
Bonds Payable ……………………………………….. 500,000
DO IT! 15-2b
Loss on Bond Redemption ……………………………………. 6,000
DO IT! 15-3
Cash ……………………………………………………………………. 700,000
Mortgage Payable ………………………………………….. 700,000
(To record mortgage loan)
DO IT! 15-4
(a) Leased Asset—Equipment ………………………………… 192,000
Lease Liability …………………………………………… 192,000
(To record leased asset and lease liability)
SOLUTIONS TO EXERCISES
EXERCISE 15-1
1. True.
2. True.
EXERCISE 15-2
2017
(a) Jan. 1 Cash ……………………………………………… 500,000
Bonds Payable ………………………… 500,000
EXERCISE 15-3
2017
(a) Jan. 1 Cash ……………………………………………….. 400,000
Bonds Payable ………………………….. 400,000
EXERCISE 15-4
2017
(a) Jan. 1 Cash ……………………………………………….. 400,000
Bonds Payable ………………………….. 400,000
EXERCISE 15-5
At 100
(a) (1) Cash ……………………………………………………. 2,000,000
Bonds Payable ……………………………….. 2,000,000
At 98
At 103
(3) Cash ……………………………………………………. 2,060,000
Bonds Payable ……………………………….. 2,000,000
Premium on Bonds Payable ……………. 60,000
EXERCISE 15-5 (Continued)
Redemption of bonds before maturity at 98
(c) Bonds Payable …………………………………….. 2,000,000
Conversion of bonds into common stock
(d) Bonds Payable ……………………………………. 2,000,000
EXERCISE 15-6
(a) (1) Cash ………………………………………………………. 485,000
Discount on Bonds Payable …………………….. 15,000
Bonds Payable ………………………………….. 500,000
OR
Principal at maturity ………………………………… $500,000
Annual interest payments
(b) (1) Cash ………………………………………………………. 525,000
Bonds Payable ………………………………….. 500,000
Premium on Bonds Payable ………………. 25,000
EXERCISE 15-6 (Continued)
(2) Annual interest payments
($40,000 X 5) ………………………………………… $200,000
OR
Principal at maturity ………………………………… $500,000
Annual interest payments
EXERCISE 15-7
(a) Jan. 1 Interest Payable ……………………………… 112,000
Cash ……………………………………….. 112,000
EXERCISE 15-8
1. June 30 Bonds Payable ………………………………. 130,000
Loss on Bond Redemption
EXERCISE 15-8 (Continued)
2. June 30 Bonds Payable ……………………………… 150,000
Premium on Bonds Payable …………… 1,000
3. Dec. 31 Bonds Payable ……………………………… 20,000
EXERCISE 15-9
2017
Issuance of Note
Dec. 31 Cash …………………………………………………….. 300,000
2018
First Installment Payment
Dec. 31 Interest Expense
($300,000 X 10%) ……………………………….. 30,000
2019
Second Installment Payment
EXERCISE 15-10
January 1, 2017
(a) Cash ……………………………………………………………. 300,000
December 31, 2017
Interest Expense
($300,000 X 8%) ………………………………………… 24,000
December 31, 2018
Interest Expense
[($300,000 – $16,000) X 8%] ………………………… 22,720
(b) Current: $17,280
[$40,000 – ($284,000 X 8%)]
EXERCISE 15-11
Long-term liabilities
Bonds payable, due 2022 …………………………. $180,000