20
Corporations and
Bonds Payable
ANSWERS TO DISCUSSION QUESTIONS AND
CRITICAL THINKING/ETHICAL CASE
2. Secured bonds pledge assets as security, while debenture bonds pledge no
specific assets.
6. It has to be adjusted to prorate the increase in interest expense over the life
of the bond.
9. Maturity value of bond (face value) minus unamortized discount or maturity
value of bond plus unamortized premium.
10. The interest method is used so that interest is a constant percentage of the
11. Amortization of discount or premium must be up to date. When a bond is
retired, the unamortized premium or discount as well as the liability must be
13. One stock show does not guarantee success in the stock market. Both
SOLUTIONS TO CONCEPT CHECKS
1.
a.
May 1
Cash
105
0
0
00
2
c.
0
0
2.
Date
Accounts
Dr.
Cr.
3.
Cash
220.00
4.
5.
Premium on Bonds Payable
6. a. The carrying value of the bond at the beginning of the period is $93,165
b. The interest payment to the bondholders every six months is $3,500.
7.
Date
Accounts
Dr.
Cr.
Oct. 1
Bond Interest Expense
CONCEPT CHECKS (CONTINUED)
8. a. The carrying value of the bond at the beginning of the period is $249,600.
b. The interest paid to the bondholders every six months is $5,720.
9.
Date
Accounts
Dr.
Cr.
Premium on Bonds Payable
10.
a.
Bond Sinking Fund
7,000
Cash
7,000
b.
Bond Sinking Fund
Earned
c.
Bonds Payable
SOLUTIONS TO SET A EXERCISES
20A–1.
(After-tax earnings
– Dividends for
/ Common shares
= EPS
20A-2.
a.
May 1
Cash
925
0
0
0
00
5
0
20A-3.
201X
a. Feb.
1
Cash
264
0
0
0
00
0
6
5
5
20A-4.
a. Feb.
1
Cash
291
5
0
0
00
Premium on Bonds Payable
16
5
0
0
00
Bonds Payable
275
0
0
0
00
b. Aug.
1
Bond Interest Expense
4
6
7
5
00
Premium on Bonds Payable
8
2
5
00
Cash
5
5
0
0
00
EXERCISES (CONTINUED)
20A-5
a. July
1
Cash
62
3
5
0
00
Discount on Bonds Payable
37
6
5
0
00
Bonds Payable
100
0
0
0
00
b. Dec.
Bond Interest Expense
7
4
1
00
Discount on Bonds Payable
7
4
1
00
Cash
3
0
0
0
00
c. June
7
8
5
00
Discount on Bonds Payable
7
8
5
00
Cash
3
0
0
0
00
20A–6.
a.
Bond Sinking Fund
23
0
0
0
00
0
0
0
Bond Sinking Fund
0
7
0
0
7
0
20A–7.
Long-Term Liabilities
5% Bonds Payable
$470,000
SOLUTIONS TO SET B EXERCISES
20B–1.
(After-tax earnings
– Dividends for preferred)
/ Common shares
outstanding
= EPS
Ryan
– $0)
= $3.40
Hart
– $24,000)
= $3.25
20B-2.
a.
Nov. 1
Cash
875
0
0
00
Bonds Payable
875
0
0
0
00
b.
May 1
Bond Interest Expense
13
2
5
00
Oct. 31
0
0
0
0
0
20B-3.
201X
a. Mar.
1
Cash
220
0
0
0
00
Discount on Bonds Payable
30
0
0
0
00
1
14
5
0
0
7
5
0
250
20B-4.
a. Mar.
1
Cash
260
0
0
0
00
Premium on Bonds Payable
10
0
0
0
00
Bonds Payable
250
0
0
0
00
1
13
5
0
2
5
Cash
13
7
5
0
00
250
0
0
Cash
250
0
0
0
00
EXERCISES (CONTINUED)
20B–5.
a. July
1
Cash
66
6
4
1
00
Discount on Bonds Payable
38
3
5
9
00
Bonds Payable
105
0
0
0
00
b. Dec.
Bond Interest Expense
3
3
2
05
Discount on Bonds Payable
1
8
2
05
Cash
3
1
5
0
00
3
4
1
00
Discount on Bonds Payable
1
9
1
00
Cash
3
1
5
0
00
20B-6.
a.
Bond Sinking Fund
23
1
0
0
00
Cash
23
1
0
0
00
Bond Sinking Fund Interest Earned
3
1
0
00
Bonds Payable
0
0
0
00
20B-7.
Long-Term Liabilities
9% Bonds Payable
$580,000
Add: Premium on Bonds Payable
SOLUTIONS TO SET A PROBLEMS
PROBLEM 20A-1 LESTER CORPORATION
AMORTIZATION SCHEDULE
(1)
Period
Carrying
Value,
Beginning of
Period
Total
Interest
Expense
Interest Paid to
Bondholders
(Semiannual
Rate x Face
Value)
Amortized Discount
Transferred to
Increase Interest
Expense
Carrying Value,
End of Period
1
3
(2)
a. Jan.
1
Cash
376
2
0
0
00
Discount on Bonds Payable
3
8
0
0
00
Bonds Payable
380
0
0
0
00
1
9
1
9
Bond Interest Expense
4
8
4
5
00
4
7
5
PROBLEM 20A-2 DOUGLAS CORPORATION
AMORTIZATION SCHEDULE
Period
Period
End of Period
1
3
Carrying
Value,
Beginning of
Interest
Paid to
Bondholder
Interest
Expense
Premium to Be
Carrying Value,
PROBLEM 20A-2 (CONTINUED)
May
1
Cash
642
0
0
0
00
Premium on Bonds Payable
42
0
0
0
00
0
0
00
Premium on Bonds Payable
0
5
0
00
Cash
0
0
0
00
Dec.
0
00
Premium on Bonds Payable
3
5
0
00
PROBLEM 20A-3
(1)
ACORN CORPORATION
AMORTIZATION SCHEDULE
Period
Carrying
Value,
Beginning of
Period
Interest
Paid to
Bondholder
s
Interest
Expense to be
Recorded
Discount to Be
Amortized
Carrying Value,
End of Period
1
2
3
(2)
a. Jan.
1
Cash
265
6
5
0
00
Discount on Bonds Payable
34
3
5
0
00
300
0
0
0
9
3
9
Dec.
Bond Interest Expense
9
9
5
34
9
9
5
0
0
0
(3)
PROBLEM 20A-4
(1)
LEFFER CORPORATION
AMORTIZATION SCHEDULE
Period
Carrying
Value,
Beginning of
Period
Interest Paid to
Bondholders
(Semiannual Rate
x Face Value)
Interest Expense
Recorded
Premium to Be
Amortized
Carrying Value,
End of Period
(2)
a. June
1
Cash
324
4
6
5
00
Premium on Bonds Payable
24
4
6
5
00
Bonds Payable
300
0
0
0
00
9
7
1
c. Dec.
1
4
0
SOLUTIONS TO SET B PROBLEMS
PROBLEM 20B-1
(1)
LEMMING CORPORATION
AMORTIZATION SCHEDULE
Period
(2)
a. Jan.
1
Cash
460
8
0
0
00
Discount on Bonds Payable
19
2
0
0
00
Bonds Payable
480
0
0
0
00
4
0
0
Dec.
3
6
0
9
6
0
Cash
4
0
0
00
Bond Interest Expense
PROBLEM 20B-2
LANGSTON CORPORATION
AMORTIZATION SCHEDULE
Period
Carrying Value,
Beginning of
Period
Interest Paid to
Bondholders
Interest Expense
Recorded
Premium to Be
Amortized
Carrying Value,
End of Period
PROBLEM 20B-2 (CONTINUED)
May
1
Cash
436
0
0
0
00
Premium on Bonds Payable
36
0
0
0
00
Nov.
1
23
0
0
Cash
24
0
0
0
00
0
0
PROBLEM 20B-3
(1) WILCOX CORPORATION
AMORTIZATION SCHEDULE
Period
Carrying Value,
Beginning of
Period
Interest Paid to
Bondholders
Interest Expense
to be Recorded
Discount to Be
Amortized
Carrying Value,
End of Period
(2)
a. Jan.
1
Cash
265
9
1
6
00
Discount on Bonds Payable
34
3
8
4
00
1
Bond Interest Expense
15
9
5
4
96
Dec.
31
Bond Interest Expense
16
0
1
1
36
15
0
1
5
00
(3)
Dec.
31
Bond Interest Expense
10
6
7
4
24
0
1
0
00
PROBLEM 20B-4
(1) LEFFER CORPORATION
AMORTIZATION SCHEDULE
Period
Carrying Value,
Beginning of
Period
Interest Paid to
Bondholders
(Semiannual Rate
x Face Value
Interest Expense
Recorded
Premium to
Be Amortized
Carrying
Value, End of
Period
(2)
a. Apr.
1
Cash
179
5
3
7
00
Premium on Bonds Payable
19
5
3
7
00
Bonds Payable
160
0
0
0
00
1
8
6
1
Cash
8
0
0
00
c. Dec.
5
5
8
4
Bond Interest Payable
4
0
0
00
FINANCIAL REPORT PROBLEM SOLUTION—2016 Amazon’s Annual Report