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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
Calculator Output
Exercise 9-7 (LO 9-6)
January 1, 2018
Cash
500,000
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
June 30, 2018
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)
Requirement 2
January 1, 2018
Cash
549,482
June 30, 2018
Interest Expense
21,979
Exercise 9-10 (LO 9-6)
January 1, 2018
Cash
600,000
Bonds Payable
600,000
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
Requirement 2
January 1, 2018
Cash
559,229
Discount on Bonds Payable
40,771
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
Requirement 2
January 1, 2018
Cash
644,632
Bonds Payable
600,000
Chapter 9 - Long-Term Liabilities
Exercise 9-13 (LO 9-6)
January 1, 2018
Cash
600,000
Bonds Payable
600,000
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
Requirement 2
January 1, 2018
Cash
559,740
December 31, 2018
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
Requirement 2
January 1, 2018
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
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
Calculator Output
December 31, 2019
Bonds Payable
500,000
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
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
$600,000
Calculator Output
December 31, 2020
Bonds Payable
600,000
Exercise 9-18 (LO 9-8)
Requirement 1
($ in thousands)
Total
Liabilities
÷
Stockholders’
Equity
=
Debt to Equity
Ratio
Requirement 2
($ in thousands)
Net Income +
Interest + Taxes
÷
Interest
=
Times Interest
Earned Ratio
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
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)
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
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
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
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
= $171,217
Exercise 9-19 (concluded)
Requirement 6
January 31, 2018
Debit
Credit
Sales Revenue
195,000
Retained Earnings
195,000
(Close revenue accounts)
Requirement 7
(a) The debt to equity ratio is:
(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
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,
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