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
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
2. Interest payment
3. Market interest rate
4. Periods to maturity
Calculator Output
PV
(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
6/30/18
Requirement 3
Premium. The issue price is $1,427,403.
Calculator Input
Bond
Characteristics
Key
Amount
1. Face amount
FV
$1,300,000
2. Interest payment
3. Market interest rate
4. Periods to maturity
Calculator Output
PV
(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
June 30, 2018
Interest Expense
December 31, 2018
Interest Expense
January 1, 2018
Discount on Bonds Payable
Bonds Payable
June 30, 2018
Chapter 9 – Long-Term Liabilities
Discount on Bonds Payable (difference)
516
Cash ($600,000 x 8% x ½)
December 31, 2018
Interest Expense ([$544,795+$516] x 9% x ½)
24,539
Discount on Bonds Payable (difference)
539
Cash ($600,000 x 8% x ½)
Requirement 3
January 1, 2018
Cash
664,065
June 30, 2018
Interest Expense (664,065 x 7% x ½)
23,242
Cash ($600,000 x 8% x ½)
December 31, 2018
Interest Expense ([$664,065 – $758] x 7% x ½)
23,216
Premium on Bonds Payable (difference)
Cash ($600,000 x 8% x ½)
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
845,280
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
÷
$3,137
=
1.82
Caribbean Key
÷
=
Requirement 2
($ in millions)
Net
Income
÷
Average
Total Assets
=
Return on
Assets Ratio
Bahama Bay
$562
÷
$9,210.5*
=
6.1%
Caribbean Key
÷
=
Requirement 3
($ in millions)
Net Income +
Interest + Taxes
÷
Interest
=
Times Interest
Earned Ratio
Bahama Bay
$880
÷
$170
=
5.2
Caribbean Key
$166
÷
=
2.4
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
500,000
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
Notes Payable (difference)
1,321.33
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
Capital lease:
Problem 9-3B (LO 9-5, 9-6)
Requirement 1
Face amount. The issue price is $850,000.
Calculator Input
Bond
Characteristics
Amount
$25,500
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
850,000
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
2. Interest payment
3. Market interest rate
4. Periods to maturity
Calculator Output
PV
(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
Amount
1. Face amount
$850,000
2. Interest payment
$25,500
3. Market interest rate
4. Periods to maturity
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
913,660
911,002