CHAPTER 10
Long-Term Liabilities
OVERVIEW OF EXERCISES, PROBLEMS, AND CASES
Estimated
Time in
Learning Objectives Exercises Minutes Level
Module 1
1. Identify the components of the Long-Term Liability
category of the balance sheet.
2. Define the important characteristics of bonds payable. 1 10 Easy
Module 2
5. Find the amortization of premium or discount 15* 15 Mod
using the effective interest method. 16* 15 Mod
17* 20 Mod
6 10 Mod
Module 3
7. Determine whether a lease agreement must be 7 10 Mod
reported as a liability on the balance sheet. 8 10 Mod
9 20 Mod
Module 4
8. Explain how inventors use ratios to evaluate long-term
liabilities.
12 10 Mod
Module 5
10. Explain deferred taxes and calculate the deferred tax liability 13 5 Easy
(Appendix). 14 10 Easy
*Exercise, problem, or case covers two or more learning objectives
Level = Difficulty levels: Easy; Moderate (Mod); Difficult (Diff)
10-2 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
Problems Estimated
and Time in
Learning Objectives Alternates Minutes Level
Module 1
1. Identify the components of the Long-Term Liability 9 20 Mod
category of the balance sheet.
Module 2
5. Find the amortization of premium or discount 2 25 Mod
using the effective interest method. 3 25 Mod
8# 20 Mod
8** 20 Mod
Module 3
7. Determine whether a lease agreement must be 5 35 Diff
reported as a liability on the balance sheet.
Module 4
8. Explain how investors use ratios to evaluate long-term 9* 20 Mod
liabilities.
Module5
10. Explain deferred taxes and calculate the deferred tax liability 6 15 Mod
(Appendix). 7 30 Diff
9* 20 Mod
CHAPTER 10 • LONG-TERM LIABILITIES 10-3
Estimated
Time in
Learning Objectives Cases Minutes Level
Module 1
1. Identify the components of the Long-Term Liability 1* 40 Mod
category of the balance sheet. 4* 25 Mod
2. Define the important characteristics of bonds payable.
Module 2
5. Find the amortization of premium or discount
using the effective interest method.
Module 3
7. Determine whether a lease agreement must be 4* 25 Mod
reported as a liability on the balance sheet. 6 30 Mod
Module 4
8. Explain how investors use ratios to evaluate long-term 1* 25 Mod
liabilities.
Module 5
10. Explain deferred taxes and calculate the deferred tax liability 2* 40 Mod
(Appendix). 3* 25 Mod
10-4 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISES
LO 2 EXERCISE 10-1 RELATIONSHIPS
Cash Interest Amort. Carrying
Interest Expense Disc./Prem. Value
LO 3 EXERCISE 10-2 ISSUE PRICE
1. a. $500,000
2. a. $500,000 × 8% × 1/2 year = $20,000
3. a. $ 20,000 × 13.59033 (Table 9-4, n = 20, i = 4%) = $271,807
$500,000 × 0.45639 (Table 9-2, n = 20, i = 4%) = 228,195
Issue price $500,002*
*Should equal $500,000; the difference is due to rounding in present value
factors.
CHAPTER 10 • LONG-TERM LIABILITIES 10-5
LO 3 EXERCISE 10-3 ISSUE PRICE
a. $500,000 × 0.62092 (n = 5, i = 10%) = $ 310,460
$ 40,000* × 3.79076 (n = 5, i = 10%) = 151,630
$ 462,090
*500 bonds × $1,000 par × 8% = $40,000
LO 4 EXERCISE 10-4 IMPACT OF TWO BOND ALTERNATIVES
1. If the company issues bonds with a face rate of 8% when the market rate is 9%, the
2. If the company issues bonds with a face rate of 10% when the market rate is 9%, the
bonds will be issued at a premium. The company will receive an amount in excess of
LO 6 EXERCISE 10-5 REDEMPTION OF BONDS
1. Redemption price: $75,000 × 1.03 = $ 77,250
Carrying value: $75,000 – $1,750 = 73,250
$ (4,000) loss
2. The gain or loss on bond redemption should be presented on the income statement.
10-6 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 6 EXERCISE 10-6 REDEMPTION OF A BOND AT MATURITY
Since the bonds are fully matured, the carrying value equals the face value and there
will be no gain or loss on the redemption of the bonds.
The effect on the accounting equation of the redemption of the bonds is as follows:
LO 7 EXERCISE 10-7 LEASED ASSET
1. Payment × Table Factor Ord. Annuity = PV Min. Lease Payments
LO 7 EXERCISE 10-8 FINANCIAL STATEMENT IMPACT OF A LEASE
1. Payment × Table Factor Ord. Annuity = PV Min. Lease Payment
2. $9,508.65
Lease Interest Reduction of Lease
Date Payment Expense Obligation Obligation
CHAPTER 10 • LONG-TERM LIABILITIES 10-7
LO 7 EXERCISE 10-9 LEASED ASSETS
1. a. The value of the forklift will not appear on the balance sheet.
b. The lease payments will appear on the income statement as lease expense.
2. a.
b.
Journal Dec. 31 Lease Liability ……………………………………….. 1,110
Entry Interest Expense ……………………………………. 400*
Analysis Cash ………………………………………………. 1,510
To record lease payment.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash (1,510) Lease Liability (1,110) (400) Interest Expense 400* (400)
*$5,001 × 8% = $400
10-8 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 9 EXERCISE 10-10 IMPACT OF TRANSACTIONS INVOLVING BONDS ON
STATEMENT OF CASH FLOWS
F—Proceeds from issuance of bonds payable
LO 9 EXERCISE 10-11 IMPACT OF TRANSACTIONS INVOLVING CAPITAL LEASES ON
STATEMENT OF CASH FLOWS
1. Garnett obtained the equipment by signing a lease; no cash changed hands. As a
2. F—Reduction of lease obligation (principal portion of lease payment)
O—Interest expense
O—Depreciation expense—leased assets
LO 9 EXERCISE 10-12 IMPACT OF TRANSACTIONS INVOLVING TAX LIABILITIES ON
STATEMENT OF CASH FLOWS
LO 10 EXERCISE 10-13 TEMPORARY AND PERMANENT DIFFERENCES (Appendix)
1. Permanent 4. Temporary
CHAPTER 10 • LONG-TERM LIABILITIES 10-9
LO 10 EXERCISE 10-14 DEFERRED TAX (Appendix)
Balance of deferred tax account:
2016 Tax depreciation = $10,667
Book depreciation = 6,400
Difference = $ 4,267
× Tax rate × 0.40
Entry to deferred tax = $1,707 credit
Balance of account = $1,707 credit
2018 Tax depreciation = $10,666
Book depreciation = 6,400
Difference = $ 4,266
× Tax rate × 0.40
Entry to deferred tax = $1,706 credit
Balance of account = $5,120 credit
10-10 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
MULTI-CONCEPT EXERCISES
LO 4,5 EXERCISE 10-15 ISSUANCE OF A BOND AT FACE VALUE
1. $300,000* × 0.61391 (Table 9-2, n = 10, i = 5%) = $184,173
$ 15,000** × 7.72173 (Table 9-4, n = 10, i = 5%) = 115,826
Issuance price $299,999***
Journal 2016
Entry Jan. 1 Cash …………………………………………………………. 300,000
Analysis Bonds Payable ………………………………………. 300,000
To record issuance of bond.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash 300,000 Bonds Payable 300,000
3. The effect on the accounting equation of the payment of interest, on July 1, 2016, is
as follows:
Journal July 1 Interest Expense …………………………………………. 15,000
Entry Cash ……………………………………………………. 15,000
Analysis To record payment of interest.
CHAPTER 10 • LONG-TERM LIABILITIES 10-11
LO 4,5 EXERCISE 10-16 IMPACT OF A DISCOUNT
1.
Journal 2016
Entry Jan. 1 Cash …………………………………………………………. 91,526
Analysis Discount on Bonds Payable………………………….. 8,474
Bonds Payable ………………………………………. 100,000
To record issuance of bond.
Balance Sheet Income Statement
2.
Journal 2016
Entry Dec. 31 Interest Expense …………………………………………. 9,153
Analysis Cash ($100,000 × 9%) ……………………………. 9,000
Discount on Bonds Payable …………………….. 153
To record payment of interest and amortization of discount.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash* (9,000)
Discount on
Bonds Payable*** 153
(9,153)
Interest
Expense** 9,153
(9,153)
*$100,000 × 9% × 1 year = $9,000
**$91,526 × 10% × 1 year = $9,153
***TheDiscountonBondsPayableaccounthasdecreased.Itisshownasanincreaseintheequationabovebecauseitisacontraaccountand
causestotalliabilitiestoincrease.
10-12 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 4,5 EXERCISE 10-17 IMPACT OF A PREMIUM
1.
Journal 2016
Entry Jan. 1 Cash …………………………………………………………. 109,862
Analysis Premium on Bonds Payable ……………………. 9,862
Bonds Payable ………………………………………. 100,000
To record the issuance of bonds.
Balance Sheet Income Statement
2.
Journal 2016
Entry Dec. 31 Interest Expense …………………………………………. 8,789
Analysis Premium on Bonds Payable …………………………. 211
Cash ($100,000 × 9%) ……………………………. 9,000
To record interest and amortize premium
on bond.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash (9,000)*
Premium on
Bonds Payable (211) (8,789)
Interest
Expense 8,789** (8,789)
*$100,000 × 9% × 1 year = $9,000
**$109,862 × 8% × 1 year = $8,789
Bonds payable ……………………………………………………………………………. $100,000
CHAPTER 10 • LONG-TERM LIABILITIES 10-13
PROBLEMS
LO 3 PROBLEM 10-1 FACTORS THAT AFFECT THE BOND ISSUE PRICE
1. a. The bonds would be issued at par, since the face or coupon rate is equal to the
market rate of interest.
2. a. $100,000 × 0.55368 (Table 9-2, n = 20, i = 3%) = $ 55,368
$ 3,000* × 14.87747 (Table 9-4, n = 20, i = 3%) = 44,632
Total present value = $100,000
LO 5 PROBLEM 10-2 AMORTIZATION OF DISCOUNT
1. Discount Amortization
Effective Interest Method of Amortization
Col. 1 Col. 2 Col. 3 Col. 4
Cash Interest Discount
Interest Expense Amortized Carrying
Date 10% 12% Col. 2 – Col. 1 Value
1/01/16 $ 9,279
2. Interest expense $5,721
Cash interest payment 5,000
Discount amortized $ 721
10-14 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 10-2 (Concluded)
3.
Journal 2018
Entry Dec. 31 Interest Expense …………………………………………. 1,142
Analysis Discount on Bonds Payable …………………….. 142
Cash ……………………………………………………. 1,000
To record interest and amortize discount.
Balance Sheet Income Statement
STOCKHOLDERS’
NET
LO 5 PROBLEM 10-3 AMORTIZATION OF PREMIUM
1. Premium Amortization
Effective Interest Method of Amortization
Col. 1 Col. 2 Col. 3 Col. 4
Cash Interest Premium
Interest Expense Amortized Carrying
Date 10% 8% Col. 2 – Col. 1 Value
1/01/16 $10,799
2. Interest expense $4,202
Cash interest payment 5,000
Premium amortized $ 798 (rounded to $798 in amortization table)
CHAPTER 10 • LONG-TERM LIABILITIES 10-15
PROBLEM 10-3 (Concluded)
3.
Journal 2018
Entry Dec. 31 Interest Expense …………………………………………. 841
Analysis Premium on Bonds Payable …………………………. 159
Cash ……………………………………………………. 1,000
To record interest and amortize premium.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash (1,000)
Premium on
Bonds Payable (159)
(841)
Interest Expense 841
(841)
LO 6 PROBLEM 10-4 REDEMPTION OF BONDS
1. Redemption price $200,000 × 1.01 = $202,000
2. Redemption price $200,000 × 1.03 = $206,000
3. The gain or loss on bond redemption should be presented on the income statement.
4. Bonds are redeemed early only if it is advantageous to the issuing firm. However,
early redemption is usually not favorable to the investor because it usually means
10-16 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 7 PROBLEM 10-5 FINANCIAL STATEMENT IMPACT OF A LEASE
1. Col. 1 Col. 2 Col. 3 Col. 4
Interest Reduction of
Lease Expense Obligation Lease
Date Payment 8% Col. 1 – Col. 2 Obligation
1/01/16 $112,994
12/31/16 $28,300 $9,040 $19,260 93,734
2.
Journal 2016
Entry Jan. 1 Leased Truck ……………………………………………… 112,994
3.
Journal 2017
Entry Dec. 31 Lease Liability …………………………………………….. 20,801
Analysis Interest Expense …………………………………………. 7,499
Cash ……………………………………………………. 28,300
To record payment of lease liability
and interest.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash (28,300) Lease Liability (20,801) (7,499) Interest Expense 7,499 (7,499)
CHAPTER 10 • LONG-TERM LIABILITIES 10-17
PROBLEM 10-5 (Concluded)
Journal Dec. 31 Depreciation Expense—Leased Truck …………… 22,599
Entry Accumulated Depreciation—
Analysis Leased Truck ……………………………………… 22,599
4. Long-term assets:
Leased truck ………………………………………………………………………….. $113,000
Accumulated depreciation ……………………………………………………….. 45,198*
$ 67,802
*$22,599 × 2 years = $45,198
Current liabilities:
Lease liability …………………………………………………………………………. $ 22,465
Long-term liabilities:
Lease liability …………………………………………………………………………. $ 50,473
10-18 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 10 PROBLEM 10-6 DEFERRED TAX (Appendix)
1.
Journal 2016
Entry Dec. 31 Income Tax Expense …………………………………… 200
2. The Deferred Tax account exists to reconcile the difference between the accounting
done for tax purposes and that done for reporting to stockholders, also referred to as
book purposes. The balance of the Deferred Tax account represents all temporary
differences between book and tax accounting reflected at the corporate tax rate. The