FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P9-71A
(15-20 min.)
Requirement
Solution:
a. Sales tax payable ($110,000 × .05) 5,500$
b. Note payable, short-term 88,000$
1. For each item, indicate the account and the related amount to be reported as
a current liability on the Salt Air Marine balance sheet at December 31.
Chapter 9: Liabilities Page 61 of 115
Interest payable ($88,000 × .09 × 4/12) 2,640
c. Unearned service revenue ($3,000 × 2/6) 1,000$
d. Estimated warranty payable
e. Portion of long-term note payable due
Interest payable ($75,000 × .10) 7,500
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P9-72A
(30-40 min.)
Requirement
Solution:
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
2016
Mar. 3 Inventory 50,000
Note Payable, Short-term 50,000
Journal
1. Record the transactions in Smooth Notes’ journal. Explanations are not required.
Chapter 9: Liabilities Page 62 of 115
Note Payable, Short-term 15,000
Note Payable, Long-term 75,000
Interest Expense ($50,000 × .04 × 6/12) 1,000
Cash 51,000
Estimated Warranty Payable 4,900
Interest Payable 4,200
2017
Interest Payable 4,200
Interest Expense ($90,000 × .08 × 5/12) 3,000
Cash 22,200
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P9-73A
(20-25 min.)
Requirements
Solution:
Req. 1
ACCOUNT TITLES DEBIT CREDIT
a. May 31 Cash ($9,000,000 × 1/2) 4,500,000
Bonds Payable 4,500,000
To issue bonds at par.
Req. 2 (reporting the liabilities on the balance sheet at Dec. 31, 2016)
Current liabilities:
Interest payable 30,000$
1. Journalize the following transactions:
a. Issuance of half of the bonds on May 31, 2016
b. Payment of interest on November 30, 2016
c. Accrual of interest on December 31, 2016
d. Payment of interest on May 31, 2017
2. Report interest payable and bonds payable as they would appear on the Circuits Plus
balance sheet at December 31, 2016.
Journal
Chapter 9: Liabilities Page 63 of 115
Cash ($4,500,000 × .08 × 6/12) 180,000
To pay interest on bonds.
($4,500,000 × .08 × 1/12) 30,000
Interest Payable 30,000
To accrue interest.
d. May 31 Interest Payable 30,000
Interest Expense
($4,500,000 × .08 × 5/12) 150,000
Cash ($4,500,000 × .08 × 6/12) 180,000
To pay interest on bonds.
2017
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P9-74A
(30-40 min.)
Requirements
Solution:
Req. 1
1. If the market interest rate is 5% when Mackerel Corp. issues its bonds, will the bonds
be priced at par, at a premium, or at a discount? Explain.
2. If the market interest rate is 7% when Mackerel Corp. issues its bonds, will the bonds
be priced at par, at a premium, or at a discount? Explain.
3. Assume that the issue price of the bonds is 96. Journalize the following bonds payable
transactions.
a. Issuance of the bonds on February 28, 2016
b. Payment of interest and amortization of the bond discount on August 31, 2016
c. Accrual of interest and amortization of the bond discount on December 31, 2016, the
year-end
d. Payment of interest and amortization of the bond discount on February 28, 2017
4. Report interest payable and bonds payable as they would appear on the Mackerel
Corp. balance sheet at December 31, 2016.
The 6% bonds issued when the market interest rate is 5% will be priced at a premium.
Chapter 9: Liabilities Page 64 of 115
Req. 2
The 6% bonds issued when the market interest rate is 7% will be priced at a discount.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 3
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
a. Feb. 28 Cash ($1,800,000 × .96) 1,728,000
Discount on Bonds Payable 72,000
Req. 4 (reporting the liabilities on the balance sheet at Dec. 31, 2016)
Current liabilities:
Interest payable 36,000$
Long-term liabilities:
2016
Journal
Chapter 9: Liabilities Page 65 of 115
2017
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P9-75A
(30-40 min.)
Requirements
Solution:
Req. 1
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
2016
Jan. 1 Cash ($3,000,000 × .94) 2,820,000
Discount on Bonds Payable 180,000
Bonds Payable 3,000,000
Journal
1. Journalize the transactions of Lamore Communications, Inc.
2. At December 31, 2016, after all year-end adjustments, determine the carrying amount
of Lamore Communications bonds payable, net.
3. For the six months ended July 1, 2016, determine the following for Lamore
Communications, Inc.:
a. Interest expense
b. Cash interest paid
What causes interest expense on the bonds to exceed cash interest paid?
Chapter 9: Liabilities Page 66 of 115
To issue bonds at a discount.
July 1 Interest Expense 99,000
Cash ($3,000,000 × .06 × 6/12) 90,000
Discount on Bonds Payable
To pay interest and amortize bond discount.
Dec. 31 Interest Expense 99,000
Interest Payable
Discount on Bonds Payable 9,000
To accrue interest and amortize bond discount.
2017
Cash 90,000
To pay interest.
2026
Cash 3,000,000
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 2
Carrying amount at Dec. 31, 2016:
Bonds payable, net
Chapter 9: Liabilities Page 67 of 115
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P9-76A
(30-45 min.)
Requirements
Solution:
Req. 1
a. Using the PV function in EXCEL, the issue price of the bonds is $3,006,433.
b. Maturity value is $4,000,000.
1. Assume the market interest rate on January 1 of year 1, the date of issuance of the
bonds, is 6%. Answer the following questions about Mann Ltd.’s long-term liabilities:
a. Using the PV function in Excel, what is the issue price of the bonds?
b. What is the maturity value of the 2% bonds?
c. What is Mann Ltd.’s annual cash interest payment on the 2% bonds?
d. What is the carrying amount of the 2% bonds at December 31, year 1?
2. Using Exhibit 9-4 as a model, prepare an amortization table through the maturity date
for the 2% bonds. (Round all amounts to the nearest dollar.) How much is Mann Ltd.’s
interest expense on the 2% bonds for the year ended December 31, Year 4?
3. Show how Mann Ltd. would report the 2% bonds payable and the 6% notes payable
at Dcember 31, Year 4.
Chapter 9: Liabilities Page 68 of 115
c. Annual cash interest payment is $80,000
d. Carrying amount is $3,106,819.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 2 (amortization table)
A B C D E
Jan. 1, Yr. 1 993,567 3,006,433
Dec. 31, Yr. 1 80,000 180,386 100,386 893,181 3,106,819
Req. 3 (reporting the liabilities at Dec. 31, Year 4)
Current liabilities:
Current installment of notes payable 55,000$
Long-term liabilities:
Bonds payable 4,000,000$
Notes payable
($330,000 – $55,000) 275,000
Bond
Carrying
Amount
($4,000,000 –
D)
Semiannual
Interest Date
Interest
Payment
(2% of
Maturity
Value)
Interest
Expense (6%
of Preceding
Bond Carrying
Amount)
Discount
Amortization
(B – A)
Discount
Account
Balance
(Preceding D
– C)
Chapter 9: Liabilities Page 69 of 115
Dec. 31, Yr. 2 80,000 186,409 106,409 786,772 3,213,228
Dec. 31, Yr. 3 80,000 192,794 112,794 673,978 3,326,022
Dec. 31, Yr. 4 80,000 199,561 119,561 554,417 3,445,583
Dec. 31, Yr. 6 80,000 214,339 134,339 293,343 3,706,657
Dec. 31, Yr. 7 80,000 222,399 142,399 150,943 3,849,057
Interest expense for the year ended Dec. 31, Year 4, is $199,561.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P9-77A
(40-50 min.)
Requirements
Solution:
Req. 1
1. Use the PV function in Excel to calculate the issue price of the bonds.
2. Using Exhibit 9-4 as a model, prepare an effective-interest method amortization table
for the term of the bonds.
3. Journalize the following transactions:
a. Issuance of the bonds on December 31, 2016. Credit Convertible Bonds Payable.
b. Payment of interest and amortization of the bond discount on June 30, 2017.
c. Payment of interest and amortization of the bond discount on December 31, 2017.
d. Conversion by the bondholders on July 1, 2018, of bonds with face value of $1,600,000
into 50,000 shares of Rugaboo Corp.’s $1-par common stock.
4. Show how Rugaboo Corp. would report the remaining bonds payable on its balance
sheet at December 31, 2018.
Chapter 9: Liabilities Page 70 of 115
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 2 (amortization table)
A B C D E
Dec. 31, 2016 543,613 3,456,387
120,000 138,255 18,255 525,358 3,474,642
Dec. 31, 2017 120,000 138,986 18,986 506,372 3,493,628
120,000 139,745 19,745 486,627 3,513,373
Semiannual
Interest Date
Interest
Payment
(3% of
Maturity
Value)
Interest
Expense (4% of
Preceding
Bond Carrying
Amount)
Discount
Amortization
(B – A)
Discount
Account
Balance
(Preceding D –
C)
Bond
Carrying
Amount
($4,000,000 –
D)
June 30, 2017
June 30, 2018
Chapter 9: Liabilities Page 71 of 115
Dec. 31, 2018 120,000 140,535 20,535 466,092 3,533,908
120,000 141,356 21,356 444,735 3,555,265
Dec. 31, 2019 120,000 142,211 22,211 422,525 3,577,475
120,000 143,099 23,099 399,426 3,600,574
120,000 144,984 24,984 350,419 3,649,581
120,000 147,023 27,023 297,413 3,702,587
120,000 149,228 29,228 240,082 3,759,918
Dec. 31, 2023 120,000 150,397 30,397 209,685 3,790,315
120,000 151,613 31,613 178,072 3,821,928
120,000 154,192 34,192 111,004 3,888,996
120,000 156,982 36,982 38,461 3,961,539
June 30, 2025
June 30, 2026
June 30, 2019
June 30, 2020
June 30, 2021
June 30, 2022
June 30, 2023
June 30, 2024
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 3
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
2016
a. Dec. 31 Cash 3,456,387
Discount on Bonds Payable 543,613
Convertible Bonds Payable 4,000,000
Req. 4 (balance sheet presentation of bonds payable at Dec. 31, 2018)
Convertible bonds payable
($4,000,000 − $1,600,000) 2,400,000$
Less: Discount on bonds payable
*3/5 of the bonds are outstanding, so 3/5 of the discount remains.
Journal
Chapter 9: Liabilities Page 72 of 115
2017
Interest Expense 138,255
Cash 120,000
2018
Discount on Bonds Payable
($486,627 × .40) 194,651
Common Stock (50,000 × $1) 50,000
Paid-in Capital in Excess of
To record conversion of bonds.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P9-78A
(20-30 min.)
Requirement
Solution:
Req. 1
Alternative Alternative
1 2
Borrow $4.5 Issue 500,000
mil at 9% shares of stock
Net income 2 years from now 4,225,000$ 4,225,000$
1. Use Excel to evaluate the effect of the above projected alternatives on net income
and
earnings per share two years from now.
2. Write a memo to Mountainside’s management discussing the advantages and
disadvantages of borrowing and of issuing common stock to raise the needed cash.
Chapter 9: Liabilities Page 73 of 115
Projected net income before tax 3,820,000 4,225,000
$3,056,000/500,000 6.11$
$3,380,000/(500,000 + 500,000) 3.38$
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 2
TO: Management of Mountainside Medical Goods
FROM: Student Name
SUBJECT:
Advantages and disadvantages of borrowing versus issuing stock
to raise cash for expansion
Raising money by borrowing has at least two advantages over issuing common stock.
Borrowing does not change the present ownership of the business. It enables the
present owners to keep their proportionate interests in the business and to carry out
their plans without interference from a new group of stockholders. Under normal
conditions, borrowing results in a higher earnings per share of common stock, because
the interest expense on the debt is tax-deductible. And higher earnings per share
usually lead to higher stock prices for company owners.
Chapter 9: Liabilities Page 74 of 115
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E9-79A
(20-30 min.)
Requirements
Solution:
Req. 1
Property, plant, and
equipment: Current liabilities:*
Equipment 745,000$
Mortgage note payable, current
95,000$
Accumulated
Bonds payable, current portion
200,000
1. Show how each relevant item would be reported on the Brownfield Foods, Inc., classified
balance sheet, including headings and totals for current liabilities and long-term liabilities.
2. Answer the following questions about Brownfield Food’s financial position at December
31, 2016:
a. What is the carrying amount of the bonds payable (combine the current and long-term
amounts)?
b. Why is the interest-payable amount so much less than the amount of interest expense?
3. How many times did Brownfield Foods cover its interest expense during 2016?
4. Assume that all of the existing liabilities are included in the information provided.
Calculate the leverage ratio and debt ratio of the company. Use year-end figures in place of
averages where needed for the purpose of calculating ratios in this problem. Evaluate the
health of the company from a leverage point of view. What other information would be
helpful in making your evaluation?
5. Independent of your answer to (4), assume that Footnote 8 of the financial statements
includes commitments for long-term operating leases over the next 15 years in the amount
of $3,900,000. If the company had to capitalize these leases in 2016, how would it change
the leverage ratio and the debt ratio? How would this impact your assessment of the
company’s health from a leverage point of view?
Brownfield Foods, Inc.
Partial Balance Sheet
Dec. 31, 2016
Chapter 9: Liabilities Page 75 of 115
bonds payable…
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Notes:
** Computation of pension liability:
Req. 2
a. Carrying amount of bonds payable:
Current portion 200,000$
b.
Req. 3
Times-interest-earned ratio = = 340,000$
* The order of listing current liabilities and long-term liabilities is optional. However,
Discount on Bonds Payable should come immediately after Bonds Payable. Also, it is
customary to report Interest Payable after the related liability accounts, Mortgage Note
Payable and Bonds Payable, Current Portion.
Operating income
Chapter 9: Liabilities Page 76 of 115
Projected pension benefit obligation 455,000$
Pension liability to be reported on the balance sheet 50,000$
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 4
Req. 5
Total stockholders’ equity
=
Total assets ($8,500,000)
Total assets ($4,600,000)
1.28
=
Leverage ratio
Leverage ratio
=
=
2.37
Total stockholders’ equity
Chapter 9: Liabilities Page 77 of 115
Debt ratio
=
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P9-80B
(15-20 min.)
Requirement
Solution:
a. Sales tax payable ($130,000 × .05) 6,500$
1. For each item, indicate the account and the related amount to be reported as a
current liability on the Sea Spray Marine balance sheet at December 31.
Chapter 9: Liabilities Page 78 of 115
b. Note payable, short-term 80,000$
Interest payable ($80,000 × .08 × 4/12) 2,133
c. Unearned service revenue ($1,800 × 2/6) 600$
d. Estimated warranty payable
e. Portion of long-term note payable due
Interest payable ($70,000 × .06) 4,200
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P9-81B
(30-40 min.)
Requirement
Solution:
ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Mar. 3 Inventory 70,000
Note Payable, Short-term 70,000
Journal
1. Record the transactions in Signature Music Company’s journal. Explanations are not
required.
DATE
2016
Chapter 9: Liabilities Page 79 of 115
Note Payable, Short-term 14,167
Note Payable, Long-term 70,833
Interest Expense ($70,000 × .10 × 6/12) 3,500
Cash 73,500
Estimated Warranty Payable 5,790
Interest Payable 2,479
Note Payable, Short-term 14,167
Interest Payable 2,479
Interest Expense ($85,000 × 0.05 × 5/12) 1,771
Cash 18,417
2017
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P9-82B
(20-25 min.)
Requirements
Solution:
Req. 1
ACCOUNT TITLES AND EXPLANATION
DEBIT CREDIT
a. May 31 Cash ($9,000,00 × 1/2) 4,500,000
Bonds Payable 4,500,000
Req. 2 (reporting the liabilities on the balance sheet at Dec. 31, 2014)
Current liabilities:
1. Journalize the following transactions:
a. Issuance of half of the bonds on May 31, 2016
b. Payment of interest on November 30, 2016
c. Accrual of interest on December 31, 2016
d. Payment of interest on May 31, 2017
2. Report interest payable and bonds payable as they would appear on the Laptops Plus
balance sheet at December 31, 2016.
Journal
DATE
2016
Chapter 9: Liabilities Page 80 of 115
To issue bonds at par.
Cash ($4,500,000 × .07 × 6/12) 157,500
($4,500,000 × .07 × 1/12) 26,250
Interest Payable 26,250
To accrue interest.
d. May 31 Interest Payable 26,250
Interest Expense
($4,500,000 × .07 × 5/12) 131,250
Cash 157,500
2017