Chapter 9 – Long-Term Liabilities
9-60 Financial Accounting, 5e
Requirement 3
Premium. The issue price is $916,254.
Calculator Input
Bond
Characteristics
Key
Amount
1. Face amount
FV
$850,000
2. Interest payment
3. Periods to maturity
4. Market interest rate
PV
(1)
Date
(2)
Cash
Paid
(4)
Decrease in
Carrying
Value
(5)
Carrying
Value
Face Amount
Prior Carrying
Chapter 9 – Long-Term Liabilities
Problem 9-8B (LO 9-8)
Requirement 1
($ in millions)
Total
Liabilities
÷
Stockholders’
Equity
=
Debt to Equity
Ratio
Surf City
÷
=
Paradise Falls
÷
=
Requirement 2
($ in millions)
Net
Income
÷
Average
Total Assets
=
Return on
Assets Ratio
Surf City
$18
÷
$19,816*
=
0.1%
Paradise Falls
÷
=
3.3%
Requirement 3
($ in millions)
Net Income +
Interest + Taxes
÷
Interest
=
Times Interest
Earned Ratio
Surf City
÷
=
Paradise Falls
÷
=
Chapter 9 – Long-Term Liabilities
9-62 Financial Accounting, 5e
ADDITIONAL PERSPECTIVES
Continuing Problem: Great Adventures
AP9-1
Requirement 1
(1)
Date
(2)
Cash
Paid
(4)
Decrease in
Carrying
Value
(5)
Carrying
Value
Monthly
Prior Carrying
Chapter 9 – Long-Term Liabilities
Requirement 2
November 1, 2022
Land
500,000
Notes Payable (long-term)
Requirement 3
November 30, 2022
Interest Expense ($500,000 × 6% × 1/12)
2,500
Notes Payable (difference)
3,051
5,551
December 31, 2022
Interest Expense ($496,949 × 6% × 1/12)
2,485
Notes Payable (difference)
3,066
Cash (monthly payment)
5,551
Requirement 4
* Portion of note that will be paid within one year of the balance sheet date.
Chapter 9 – Long-Term Liabilities
9-64 Financial Accounting, 5e
Additional Perspective 9-1 (in General Ledger)
Students will be given the following existing trial balance.
Great Adventures, Inc.
Trial Balance
December 31, 2022
(Prior to transactions in AP9-1)
Accounts
Debit
Credit
Cash
$ 89,070
Accounts Receivable
50,000
Allowance for Uncollectible Accounts
$ 2,400
Inventory
Prepaid Insurance
Land
Equipment
62,000
Accumulated Depreciation
25,250
Accounts Payable
Deferred Revenue
Warranty Liability
Contingent Liability
12,000
Income Tax Payable
14,500
Interest Payable
750
Notes Payable (current)
10,000
Notes Payable (long-term)
20,000
Common Stock
20,000
Retained Earnings
33,450
Service Revenue
44,500
Sales Revenue
120,000
Interest Revenue
Sales Discounts
Depreciation Expense
Insurance Expense
Rent Expense
Salaries Expense
24,000
Supplies Expense
Bad Debt Expense
Repairs and Maintenance Expense
Warranty Expense
Chapter 9 – Long-Term Liabilities
Chapter 9 – Long-Term Liabilities
9-66 Financial Accounting, 5e
Additional Perspective 9-1 (in General Ledger, continued)
November 1, 2022
Land
500,000
Notes Payable (long-term)
500,000
(Purchase land by issuing a note payable)
November 30, 2022
Interest Expense ($500,000 × 6% × 1/12)
Notes Payable (long-term)
5,551
December 31, 2022
Interest Expense ($496,949 × 6% × 1/12)
2,485
Notes Payable (long-term)
3,066
Cash (monthly payment)
5,551
(Pay monthly installment on note )
December 31, 2022
Notes Payable (long-term)
Notes Payable (current)
Chapter 9 – Long-Term Liabilities
Additional Perspective 9-1 (in General Ledger, continued)
Great Adventures, Inc.
Income Statement
For the period ended December 31, 2022
Service revenue
$ 44,500
Sales revenue
Sales discounts
Cost of goods sold
38,500
Gross profit
$125,650
Depreciation Expense
17,250
Insurance Expense
5,700
Rent Expense
2,400
Salaries Expense
24,000
Supplies Expense
Bad Debt Expense
Repairs and Maintenance Expense
Warranty Expense
Loss
Operating income (loss)
57,000
Interest revenue
120
Interest expense
(6,785)
Income before income taxes
50,335
Income tax expense
Chapter 9 – Long-Term Liabilities
9-68 Financial Accounting, 5e
Additional Perspective 9-1 (in General Ledger, continued)
Great Adventures, Inc.
Balance Sheet
December 31, 2022
Assets
Liabilities
Current assets:
Current liabilities:
Cash
$ 77,968
Accounts payable
$ 20,800
Accounts receivable
50,000
Deferred Revenue
Allow for Uncoll Accts
Warranty Liability
Inventory
Prepaid Insurance
Income tax payable
Total current assets
Interest payable
Notes Payable (current)
Total liabilities
Long-term assets:
Land
500,000
Stockholders’ Equity
Equipment
62,000
Common stock
20,000
Accumulated depreciation
(25,250)
Retained earnings
69,285
Total stockholders’ equity
89,285
$670,218
Total assets
$670,218
Chapter 9 – Long-Term Liabilities
Additional Perspective 9-1 (in General Ledger, concluded)
Dec. 31, 2022
Debit
Credit
Service Revenue
44,500
Sales Revenue
Dec. 31, 2022
Retained Earnings
128,435
Cost of Goods Sold
38,500
Depreciation Expense
17,250
Insurance Expense
Salaries Expense
24,000
Supplies Expense
Bad Debt Expense
Repairs and Maintenance Expense
Loss
Interest Expense
Chapter 9 – Long-Term Liabilities
9-70 Financial Accounting, 5e
Financial Analysis: American Eagle
AP9-2
($ in thousands)
Requirement 1
Total
Liabilities
÷
Stockholders’
Equity
=
Debt to
Equity Ratio
Requirement 2
Net
Income
÷
Average
Total Assets
=
Return on
Assets
Requirement 3
The bankruptcy risk of American Eagle is low. The company carries very little debt
Chapter 9 – Long-Term Liabilities
Financial Analysis: Buckle
AP9-3
($ in thousands)
Requirement 1
Total
Liabilities
÷
Stockholders’
Equity
=
Debt to
Equity Ratio
$149,308
Requirement 2
Net
Income
÷
Average
Total Assets
=
Return on
Assets
Requirement 3
The bankruptcy risk of The Buckle is low. The company carries no bank borrowings
Chapter 9 – Long-Term Liabilities
9-72 Financial Accounting, 5e
Comparative Analysis: American Eagle vs. Buckle
AP9-4
($ in thousands)
Requirement 1
Total
Liabilities
÷
Stockholders’
Equity
=
Debt to
Equity Ratio
Requirement 2
Net
Income
÷
Average Total
Assets
=
Return on
Assets Ratio
$89,707
Chapter 9 – Long-Term Liabilities
Ethics
AP9-5
1. Current liabilities are understated and long-term liabilities are overstated by
$447,116.
2.
Current
Ratio
Debt to Equity
Ratio
Current Assets/
Current Liabilities
Total Liabilities /
Total Equity
= 1.15
= 1.32
= 0.99
= 1.32
3. Yes.
By misclassifying the current portion of the note as part of long-term liabilities, the
current ratio is overstated. Thus, the company’s ability to pay its debt in the following
4. No.
The portion of the note that is due within one year of the balance sheet date
Chapter 9 – Long-Term Liabilities
9-74 Financial Accounting, 5e
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
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
Chapter 9 – Long-Term Liabilities
9-76 Financial Accounting, 5e
Earnings Management
AP9-8
Requirement 1
Calculator Input
Bond
Characteristics
Key
Amount
1. Face amount
FV
$100,000,000
2. Interest payment
3. Periods to maturity
4. Market interest rate
PV
$110,465,146
Requirement 2
Calculator Input
Bond
Characteristics
Key
Amount
1. Face amount
FV
$100,000,000
2. Interest payment
3. Periods to maturity
4. Market interest rate
Chapter 9 – Long-Term Liabilities
Requirement 3
Calculator Input
Bond
Characteristics
Key
Amount
1. Face amount
FV
$100,000,000
2. Interest payment
3. Periods to maturity
PV
Requirement 4
December 31, 2021
Bonds Payable
100,000,000
Premium on Bonds Payable
Requirement 5
No.
Investors likely would not agree with David Plesko’s plan. To report the $27 million