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Problem 9-4B (LO 9-6)
Requirement 1
January 1, 2018
Cash
3,000,000
Bonds Payable
3,000,000
(Issue bonds at face amount)
June 30, 2018
Requirement 2
January 1, 2018
Cash
2,813,067
Discount on Bonds Payable
186,933
Bonds Payable
3,000,000
(Issue bonds at a discount)
Chapter 9 - Long-Term Liabilities
Requirement 3
January 1, 2018
Cash
3,203,855
Bonds Payable
3,000,000
Premium on Bonds Payable
203,855
(Issue bonds at a premium)
Problem 9-5B (LO 9-6)
Problem 9-6B (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)
Requirement 2
January 1, 2018
Cash
1,098,002
Bonds Payable
1,000,000
Requirement 3
June 30, 2018
Interest Expense ($1,098,002 x 6% x ½)
32,940
Premium on Bonds Payable (difference)
2,060
December 31, 2018
Interest Expense ($1,095,942 x 6% x ½)
32,878
Problem 9-7B (LO 9-8)
Requirement 1
($ in millions)
Total
Liabilities
÷
Stockholders’
Equity
=
Debt to Equity
Ratio
Surf City
$11,519
÷
$8,309
=
1.39
Requirement 2
($ in millions)
Net
Income
÷
Average
Total Assets
=
Return on
Assets Ratio
Surf City
$18
÷
$19,816*
=
0.1%
Requirement 3
($ in millions)
Net Income +
Interest + Taxes
÷
Interest
=
Times Interest
Earned Ratio
Surf City
$374
÷
$356
=
1.1
Chapter 9 - Long-Term Liabilities
ADDITIONAL PERSPECTIVES
Continuing Problem: Great Adventures
AP9-1
Requirement 1
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Decrease in
Carrying
Value
(5)
Carrying
Value
Monthly
Payment
Carrying Value
x 6% x 1/12
(2) – (3)
Prior Carrying
Value – (4)
1/ 1 /20
$ 500,000
Requirement 2
January 1, 2020
Cash
500,000
January 31, 2020
Interest Expense ($500,000 x 6% x 1/12)
2,500
Notes Payable (difference)
3,051
February 28, 2020
Interest Expense ($496,949 x 6% x 1/12)
2,485
Chapter 9 - Long-Term Liabilities
Financial Analysis: American Eagle
AP9-2
Requirement 1
($ in thousands)
Total
Liabilities
÷
Stockholders’
Equity
=
Debt to Equity
Ratio
2015
$557,162
÷
$1,139,746
=
0.49
Requirement 2
($ in thousands)
Net
Income
÷
Average
Total Assets
=
Return on
Assets
2015
$80,322
÷
$1,695,536*
=
4.7%
Requirement 3
The bankruptcy risk of American Eagle is very low. The company carries very little
Chapter 9 - Long-Term Liabilities
Financial Analysis: Buckle
AP9-3
Requirement 1
($ in thousands)
Total
Liabilities
÷
Stockholders’
Equity
=
Debt to Equity
Ratio
2015
$187,715
÷
$355,278
=
0.53
Requirement 2
($ in thousands)
Net
Income
÷
Average
Total Assets
=
Return on
Assets
Requirement 3
The bankruptcy risk of The Buckle is very low. The company carries no bank
Chapter 9 - Long-Term Liabilities
Comparative Analysis: American Eagle vs. Buckle
AP9-4
Requirement 1
($ in thousands)
Total
Liabilities
÷
Stockholders’
Equity
=
Debt to
Equity Ratio
American Eagle
$557,162
÷
$1,139,746
=
0.49
Requirement 2
($ in thousands)
Net
Income
÷
Average Total
Assets
=
Return on
Assets Ratio
American Eagle
$80,322
÷
$1,695,536*
=
4.7%
Chapter 9 - Long-Term Liabilities
Ethics
AP9-5
Requirement 1
Calculator Input
Bond
Characteristics
Key
Amount
1. Face amount
FV
$10,000,000
Calculator Output
Requirement 2
December 31, 2018
Bonds Payable
10,000,000
Requirement 3
It is not ethical to deceive investors into thinking the $2 million gain is part of on-
Requirement 4
In order to report the $2 million gain, the company will give up bonds with interest
Chapter 9 - Long-Term Liabilities
Internet Research
AP9-6
This case provides an opportunity for students to learn more about credit ratings at
Chapter 9 - Long-Term Liabilities
Written Communication
AP9-7
Requirement 1
A company that borrows by issuing bonds is effectively by-passing the bank and
borrowing directly from the investing public, usually at a lower interest rate than it
would in a bank loan. However, issuing bonds entails significant bond issue costs for
Requirement 2
One of the primary reasons for issuing bonds over issuing common stock relates to
Requirement 3
The price of a bond is calculated as the present value of the principal (the face amount
on the bond due at maturity) plus the present value of the periodic interest payments.
Chapter 9 - Long-Term Liabilities
9-66 Financial Accounting
Earnings Management
AP9-8
Requirement 1
Calculator Input
Bond
Characteristics
Key
Amount
Calculator Output
Requirement 2
Calculator Input
Bond
Characteristics
Key
Amount
1. Face amount
FV
$100,000,000
Calculator Output
Chapter 9 - Long-Term Liabilities
Requirement 3
Calculator Input
Bond
Characteristics
Key
Amount
Calculator Output
Requirement 4
December 31, 2018
Bonds Payable
100,000,000
Requirement 5
David Plesko’s plan is ethical as long as he properly discloses the early retirement of
6% bonds and the reissue of 9% bonds. However, investors would probably disagree
