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Chapter 9 - Long-Term Liabilities
Requirement 5
The debt to equity ratio will not be in violation (exceed 2.0) under an operating lease,
but will be in violation (exceed 2.0) under a capital lease. Therefore, Thrillville has a
strong incentive to structure the lease agreement as an operating lease.
Operating lease:
Total
Liabilities
÷
Stockholders’
Equity
=
Debt to Equity Ratio
Capital lease:
Total
Liabilities
÷
Stockholders’
Equity
=
Debt to Equity Ratio
Problem 9-3A (LO 9-5, 9-6)
Requirement 1
Face amount. The issue price is $1,300,000.
Calculator Input
Bond
Characteristics
Key
Amount
Calculator Output
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Increase in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 3.5% Stated
Rate
Carrying Value
x 3.5% Market
Rate
(3) – (2)
Prior Carrying
Value + (4)
Chapter 9 - Long-Term Liabilities
Requirement 2
Discount. The issue price is $1,187,602.
Calculator Input
Bond
Characteristics
Key
Amount
1. Face amount
FV
$1,300,000
Calculator Output
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Increase in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 3.5% Stated
Rate
Carrying Value
x 4% Market
Rate
(3) – (2)
Prior Carrying
Value + (4)
1/ 1 /18
$ 1,187,602
Requirement 3
Premium. The issue price is $1,427,403.
Calculator Input
Bond
Characteristics
Key
Amount
1. Face amount
FV
$1,300,000
Calculator Output
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Decrease in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 3.5% Stated
Rate
Carrying Value
x 3% Market
Rate
(2) – (3)
Prior Carrying
Value – (4)
Problem 9-4A (LO 9-6)
Requirement 1
January 1, 2018
Cash
600,000
Bonds Payable
600,000
Chapter 9 - Long-Term Liabilities
Discount on Bonds Payable (difference)
516
December 31, 2018
Interest Expense ([$544,795+$516] x 9% x ½)
24,539
Requirement 3
January 1, 2018
Cash
664,065
June 30, 2018
Interest Expense (664,065 x 7% x ½)
23,242
December 31, 2018
Interest Expense ([$664,065 – $758] x 7% x ½)
23,216
Problem 9-5A (LO 9-6)
1. Discount
Problem 9-6A (LO 9-6)
Requirement 1
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Increase in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 4% Stated
Rate
Carrying Value
x 4.5% Market
Rate
(3) – (2)
Prior Carrying
Value + (4)
1/ 1 /18
$ 841,464
Requirement 2
January 1, 2018
Cash
841,464
Requirement 3
June 30, 2018
Interest Expense ($841,464 x 9% x ½)
37,866
December 31, 2018
Interest Expense ($843,330 x 9% x ½)
37,950
Problem 9-7A (LO 9-8)
Requirement 1
($ in millions)
Total
Liabilities
÷
Stockholders’
Equity
=
Debt to Equity
Ratio
Bahama Bay
$5,724
÷
$3,137
=
1.82
Requirement 2
($ in millions)
Net
Income
÷
Average
Total Assets
=
Return on
Assets Ratio
Bahama Bay
$562
÷
$9,210.5*
=
6.1%
Requirement 3
($ in millions)
Net Income +
Interest + Taxes
÷
Interest
=
Times Interest
Earned Ratio
Bahama Bay
$880
÷
$170
=
5.2
Chapter 9 - Long-Term Liabilities
PROBLEMS: SET B
Problem 9-1B (LO 9-2)
Requirement 1
January 1, 2018
Building
610,000
Cash
110,000
Requirement 2
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Decrease in
Carrying
Value
(5)
Carrying
Value
Monthly
Payment
Carrying Value
x 0.09 x 1/12
(2) – (3)
Prior Carrying
Value – (4)
Requirement 3
January 31, 2018
Interest Expense ($500,000 x 9% x 1/12)
3,750.00
Requirement 4
Over the 15 year mortgage, $412,839 is interest expense and $500,000 goes to
Problem 9-2B (LO 9-3, 9-8)
Requirement 1
Assets
=
Liabilities
+
Stockholders’
Equity
$201 million
$91 + $61 = $152 million
?
Requirement 2
Total
Liabilities
÷
Stockholders’
Equity
=
Debt to Equity Ratio
Requirement 3
An operating lease is like a rental. Over the lease term, the company making the lease
payments records rent expense and the company receiving the rent payments records
Requirement 4
Yes. The debt to equity ratio will not be affected under an operating lease. However,
Chapter 9 - Long-Term Liabilities
Requirement 5
The debt to equity ratio will not be in violation under an operating lease, but will be in
violation under a capital lease. Therefore, Chunky Cheese Pizza has a strong incentive
to structure the lease agreement as an operating lease.
Operating lease:
Total
Liabilities
÷
Stockholders’
Equity
=
Debt to Equity Ratio
Problem 9-3B (LO 9-5, 9-6)
Requirement 1
Face amount. The issue price is $850,000.
Calculator Input
Bond
Characteristics
Key
Amount
Calculator Output
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Increase in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 3% Stated
Rate
Carrying Value
x 3% Market
Rate
(3) – (2)
Prior Carrying
Value + (4)
1/ 1 /18
$ 850,000
Chapter 9 - Long-Term Liabilities
Requirement 2
Discount. The issue price is $789,597.
Calculator Input
Bond
Characteristics
Key
Amount
1. Face amount
FV
$850,000
Calculator Output
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Increase in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 3% Stated
Rate
Carrying Value
x 3.5% Market
Rate
(3) – (2)
Prior Carrying
Value + (4)
Chapter 9 - Long-Term Liabilities
Requirement 3
Premium. The issue price is $916,254.
Calculator Input
Bond
Characteristics
Key
Amount
1. Face amount
FV
$850,000
Calculator Output
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Decrease in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 3% Stated
Rate
Carrying Value
x 2.5% Market
Rate
(2) – (3)
Prior Carrying
Value – (4)
1/ 1 /18
$ 916,254
