Chapter 9 – Long-Term Liabilities
Requirement 3
Discount. The issue price is $24,233,258.
Calculator Input
Bond
Characteristics
Key
Amount
1. Face amount
FV
$26,000,000
2. Interest payment
3. Market interest rate
4. Periods to maturity
Calculator Output
PV
Exercise 9-7 (LO 9-6)
January 1, 2018
Cash
500,000
June 30, 2018
Interest Expense
December 31, 2018
Interest Expense
Exercise 9-8 (LO 9-6)
Requirement 1
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Increase in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 4.5% Stated
Rate
Carrying Value
x 5% Market
Rate
(3) – (2)
Prior Carrying
Value + (4)
1/ 1 /18
$ 457,102
Requirement 2
January 1, 2018
Cash
457,102
Discount on Bonds Payable
June 30, 2018
Interest Expense
December 31, 2018
Interest Expense
22,873
Exercise 9-9 (LO 9-6)
Requirement 1
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Decrease in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 4.5% Stated
Rate
Carrying Value
x 4% Market
Rate
(2) – (3)
Prior Carrying
Value – (4)
548,419
Requirement 2
January 1, 2018
Cash
549,482
June 30, 2018
Interest Expense
21,979
December 31, 2018
Exercise 9-10 (LO 9-6)
January 1, 2018
Cash
600,000
Bonds Payable
600,000
June 30, 2018
Interest Expense
December 31, 2018
Interest Expense
Exercise 9-11 (LO 9-6)
Requirement 1
(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
$ 559,229
562,022
Requirement 2
January 1, 2018
Cash
559,229
Discount on Bonds Payable
40,771
June 30, 2018
Interest Expense
22,369
December 31, 2018
Exercise 9-12 (LO 9-6)
Requirement 1
(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)
1/ 1 /18
$ 644,632
641,260
Requirement 2
January 1, 2018
Cash
644,632
Bonds Payable
600,000
June 30, 2018
Interest Expense
December 31, 2018
Chapter 9 – Long-Term Liabilities
Exercise 9-13 (LO 9-6)
January 1, 2018
Cash
600,000
Bonds Payable
600,000
Interest Expense
Interest Expense
Exercise 9-14 (LO 9-6)
Requirement 1
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Increase in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 7% Stated
Rate
Carrying Value
x 8% Market
Rate
(3) – (2)
Prior Carrying
Value + (4)
1/ 1 /18
$ 559,740
565,521
Requirement 2
January 1, 2018
Cash
559,740
Discount on Bonds Payable
December 31, 2018
Interest Expense
December 31, 2019
Chapter 9 – Long-Term Liabilities
Exercise 9-15 (LO 9-6)
Requirement 1
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Decrease in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 7% Stated
Rate
Carrying Value
x 6% Market
Rate
(2) – (3)
Prior Carrying
Value – (4)
1/ 1 /18
$ 644,161
640,811
637,260
Requirement 2
January 1, 2018
Cash
December 31, 2018
Interest Expense
38,650
December 31, 2019
Exercise 9-16 (LO 9-7)
Requirement 1
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Increase in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 4.5% Stated
Rate
Carrying Value
x 5% Market
Rate
(3) – (2)
Prior Carrying
Value + (4)
1/ 1 /18
$ 457,102
6/30/18
$ 22,500
$ 22,855
$ 355
457,457
6/30/19
458,222
458,633
Requirement 2
If the market rate drops to 7%, it will cost $601,452 to retire the bonds.
Calculator Input
Bond
characteristics
Key
Amount
1. Face amount
FV
$500,000
2. Interest payment each period
3. Market interest rate each period
4. Periods to maturity
Calculator Output
PV
$601,452
December 31, 2019
Bonds Payable
500,000
Loss
142,819
Chapter 9 – Long-Term Liabilities
Exercise 9-17 (LO 9-7)
Requirement 1
(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)
1/ 1 /18
$ 644,632
6/30/18
$ 21,000
$ 19,339
$ 1,661
642,971
641,260
6/30/19
639,498
637,683
635,813
633,887
Requirement 2
If the market rate increases to 8%, it will cost $568,311 to retire the bonds.
Calculator Input
Bond
Characteristics
Key
Amount
1. Face amount
FV
$600,000
2. Interest payment each period
3. Market interest rate each period
4. Periods to maturity
Calculator Output
PV
$568,311
December 31, 2020
Bonds Payable
600,000
Exercise 9-18 (LO 9-8)
Requirement 1
($ in thousands)
Total
Liabilities
÷
Stockholders’
Equity
=
Debt to Equity
Ratio
E-Travel
=
Pricecheck
=
Requirement 2
($ in thousands)
Net Income +
Interest + Taxes
÷
Interest
=
Times Interest
Earned Ratio
E-Travel
=
Pricecheck
=
Chapter 9 – Long-Term Liabilities
Exercise 9-19
Requirement 1
January 1
Debit
Credit
Cash
100,000
Notes Payable
100,000
(Issue a note payable)
January 4
Debit
Credit
Cash
31,000
Accounts Receivable
January 11
Debit
Credit
Accounts Payable
11,000
January 15
Debit
Credit
Salaries Expense
28,900
Cash
January 30
Debit
Credit
Cash
130,000
Accounts Receivable
Sales Revenue
Cost of Goods Sold
112,500
Inventory
January 31
Debit
Credit
Interest Expense
Notes Payable
Cash
($583 = $100,000 × 7% × 1/12)
Exercise 9-19 (continued)
Requirement 2
(a) January 31
Debit
Credit
Depreciation Expense
800
Accumulated Depreciation
800
(Record depreciation for January)
($800 = [$120,000−$24,000] / 120 months)
(b) January 31
Debit
Credit
Bad Debt Expense
Allowance for Uncollectible Accounts
(c) January 31
Debit
Credit
Salaries Expense
Salaries Payable
(d) January 31
Debit
Credit
Income Tax Expense
Income Tax Payable
Chapter 9 – Long-Term Liabilities
Exercise 9-19 (continued)
Requirement 3
Freedom Fireworks
Adjusted Trial Balance
January 31, 2018
Accounts
Debit
Credit
Cash
$ 165,320
Accounts Receivable
133,000
Allowance for Uncollectible Accounts
$ 4,100
Inventory
39,500
Land
67,300
Buildings
120,000
Accumulated Depreciation
10,400
Accounts Payable
Salaries Payable
26,100
Income Tax Payable
Notes Payable
98,603
Common Stock
200,000
Retained Earnings
155,400
Sales Revenue
195,000
Cost of Goods Sold
112,500
Salaries Expense
55,000
Bad Debt Expense
Depreciation Expense
Interest Expense
Income Tax Expense
Exercise 9-19 (continued)
Requirement 3 (continued)
Accounts
Ending
Balance
Beginning balance in bold, entries during January in blue,
and adjusting entries in red.
Cash
$165,320
=
11,200+100,000+31,000−11,000−28,900+65,000−1,980
Accounts Receivable
133,000
=
34,000−31,000+130,000
Allow for Uncoll Accts
=
1,800+2,300
=
152,000−112,500
Land
=
67,300
Buildings
120,000
=
Accumulated Depreciation
=
9,600+800
Accounts Payable
=
17,700−11,000
Salaries Payable
=
Income Tax Payable
=
Notes Payable
=
Common Stock
200,000
=
Retained Earnings
155,400
=
Sales Revenue
195,000
=
Cost of Goods Sold
112,500
=
Salaries Expense
=
Bad Debt Expense
=
Depreciation Expense
=
Interest Expense
=
Income Tax Expense
=
Chapter 9 – Long-Term Liabilities
Exercise 9-19 (continued)
Requirement 4
Freedom Fireworks
Multiple-Step Income Statement
For the year month ended January 31, 2018
Sales revenue
$195,000
Cost of goods sold
112,500
Bad debt expense
Depreciation expense
Total operating expenses
Interest expense
Income tax expense
Requirement 5
Freedom Fireworks
Classified Balance Sheet
January 31, 2018
Assets
Liabilities
Cash
$ 165,320
Accounts payable
$ 6,700
Accounts receivable
133,000
Salaries payable
26,100
Less: Allowance
Income tax payable
Inventory
Notes payable, current
17,411
Total current liabilities
58,211
Notes payable, long-term
81,192
Total liabilities
Land
Buildings
Common stock
Less: Accumulated Depreciation
Retained earnings
*
Total assets
$510,620
= $171,217
Exercise 9-19 (concluded)
Requirement 6
January 31, 2018
Debit
Credit
Sales Revenue
195,000
Retained Earnings
195,000
(Close revenue accounts)
Retained Earnings
179,183
Cost of Goods Sold
112,500
Salaries Expense
Bad Debt Expense
Depreciation Expense
800
Interest Expense
583
Income Tax Expense
(Close expense accounts)
Requirement 7
(a) The debt to equity ratio is:
Debt to Equity
$139,403
$371,217
(b) The times interest earned ratio is:
Times Interest
=
Net Income +Interest
Expense + Tax Expense
=
$15,817 +$583 +$8,000
=
41.9
Chapter 9 – Long-Term Liabilities
PROBLEMS: SET A
Problem 9-1A (LO 9-2)
Requirement 1
January 1, 2018
Building
360,000
Requirement 2
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Decrease in
Carrying
Value
(5)
Carrying
Value
Monthly
Payment
Carrying Value
x 0.07 x 1/12
(2) – (3)
Prior Carrying
Value – (4)
1/1/18
$ 300,000.00
Requirement 3
January 31, 2018
Interest Expense ($300,000 x 7% x 1/12)
1,750.00
3,483.25
to reducing the carrying value of the loan.
Requirement 4
Total payments on the loan are $417,990. Since actual payments on the loan are
Problem 9-2A (LO 9-3, 9-8)
Requirement 1
Assets
=
Liabilities
+
Stockholders’
Equity
$81 million
$11 + $41 = $52 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,