SOLUTION
Requirement 1
a.
$200,000
$168,000
= $8,000
$4,000 per year plus $16,000 = $20,000 interest expense per year
Requirement 2
Date
Accounts and Explanation
Debit
Credit
2018
Jun. 30
Interest Expense ($2,000 + $8,000)
P12-40B Analyzing and journalizing bond transactions
Learning Objectives 2, 3, 4
3. June 30 Interest Expense DR $18,600
On January 1, 2016, Texas Credit Union (TCU) issued 6%, 20-year bonds payable with face value of
$600,000. The bonds pay interest on June 30 and December 31.
Requirements
1. If the market interest rate is 5% when TCU issues its bonds, will the bonds be priced at face value, at
a premium, or at a discount? Explain.
2. If the market interest rate is 9% when TCU issues its bonds, will the bonds be priced at face value, at
a premium, or at a discount? Explain.
3. The issue price of the bonds is 96. Journalize the following bond transactions:
a. Issuance of the bonds on January 1, 2016.
b. Payment of interest and amortization on June 30, 2016.
c. Payment of interest and amortization on December 31, 2016.
d. Retirement of the bond at maturity on December 31, 2035.
SOLUTION
Requirement 1
Requirement 2
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2016
Jan. 1
Cash ($600,000 × 0.96)
576,000
Discount on Bonds Payable ($600,000 − $576,000)
24,000
Bonds Payable
600,000
Issued bonds at discount.
Jun. 30
Interest Expense ($18,000 + $600)
18,600
Dec. 31
Interest Expense ($18,000 + $600)
18,600
2035
Dec. 31
Bonds Payable
600,000
600,000
Retired bonds.
P12-41B Analyzing and journalizing bond transactions
Learning Objectives 2, 3, 4
June 30 Interest Expense DR $3,300
On January 1, 2016, Technicians Credit Union (TCU) issued 7%, 20-year bonds payable with face value
of $100,000. The bonds pay interest on June 30 and December 31. The issue price of the bonds is 108.
Journalize the following bond transactions:
a. Issuance of the bonds on January 1, 2016.
b. Payment of interest and amortization on June 30, 2016.
c. Payment of interest and amortization on December 31, 2016.
d. Retirement of the bond at maturity on December 31, 2035.
SOLUTION
Date
Debit
Credit
2016
Jan. 1
108,000
8,000
100,000
Jun. 30
3,500
Dec. 31
3,500
2035
Dec. 31
100,000
100,000
P12-42B Reporting liabilities on the balance sheet and computing debt to equity ratio
Learning Objectives 5, 6
1. Total Liabilities $268,900
The accounting records of Path Leader Wireless include the following as of December 31, 2016:
Requirements
1. Report these liabilities on the Path Leader Wireless balance sheet, including headings and totals for
current liabilities and long-term liabilities.
2. Compute Path Leader Wireless’s debt to equity ratio at December 31, 2016.
SOLUTION
Requirement 1
PATH LEADER WIRELESS
Balance Sheet (Partial)
December 31, 2016
15,000
21,000
76,000
71,000
Requirement 2
Debt to equity ratio
=
Total liabilities
/
Total equity
=
/
P12AB-43B Determining the present value of bonds payable and journalizing using the effective-
interest amortization method
Learning Objectives 7, 8
Appendixes 12A, 12B
3. Jan. 1, 2016, Cash DR $595,123
Ben Nowak issued $500,000 of 11%, 9-year bonds payable on January 1, 2016. The market interest rate
at the date of issuance was 8%, and the bonds pay interest semiannually.
Requirements
1. How much cash did the company receive upon issuance of the bonds payable? (Round all numbers
to the nearest whole dollar.)
2. Prepare an amortization table for the bond using the effective-interest method, through the first two
interest payments. (Round all numbers to the nearest whole dollar.)
3. Journalize the issuance of the bonds on January 1, 2016, and payment of the first semiannual interest
amount and amortization of the bond on June 30, 2016. Explanations are not required.
SOLUTION
Requirement 1
Present value of principal:
Present value
=
Future value
×
=
Present value of stated interest:
Present value
=
×
=
=
=
Present value of bonds payable:
Present value
=
=
=
PV factor for
P12AB-43B, cont.
Requirement 2
Cash Paid
Interest
Expense
Premium
Amortized
Carrying
Amount
01/01/2016
$ 595,123
06/30/2016
$ 27,500
$ 23,805
$ 3,695
591,428
12/31/2016
27,500
23,657
3,843
587,585
=
Face value
×
rate
×
Time
$27,500
=
$500,000
×
×
=
×
Time
=
$595,123
×
=
$591,428
×
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2016
Jan. 1
Cash
595,123
Premium on Bonds Payable ($595,123 − $500,000)
95,123
Bonds Payable
500,000
Jun. 30
Interest Expense ($27,500 − $3,695)
Premium on Bonds Payable
27,500
P12AB-44B Determining the present value of bonds payable and journalizing using the effective-
interest amortization method
Learning Objectives 7, 8
Appendixes 12A, 12B
3. Jan. 1, 2016, Cash DR $565,710
Spa, Inc. is authorized to issue 11%, 10-year bonds payable. On January 1, 2016, when the market
interest rate is 12%, the company issues $600,000 of the bonds. The bonds pay interest semiannually.
Requirements
1. How much cash did the company receive upon issuance of the bonds payable? (Round all numbers
to the nearest whole dollar.)
2. Prepare an amortization table for the bond using the effective-interest method, through the first two
interest payments. (Round all numbers to the nearest whole dollar.)
3. Journalize the issuance of the bonds on January 1, 2016, and payment of the first semiannual interest
amount and amortization of the bond on June 30, 2016. Explanations are not required.
SOLUTION
Requirement 1
Present value of principal:
Present value
=
Future value
×
=
×
Present value of stated interest:
=
×
=
×
=
Present value of bonds payable:
Present value
=
PV of principal
+
PV of stated interest
=
+
=
PV factor for
i = 6% (12% / 2),
Requirement 2
Cash Paid
Interest
Expense
Discount
Amortized
Carrying
Amount
01/01/2016
$ 565,710
06/30/2016
$ 33,000
$ 33,943
$ 943
566,653
12/31/2016
33,000
33,999
999
567,652
=
Face value
×
rate
×
Time
$600,000
×
×
=
×
Time
=
$565,710
×
=
$566,653
×
P12AB-44B, cont.
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2016
Jan. 1
Cash
565,710
Jun. 30
Interest Expense ($33,000 + $943)
Continuing Problem
P12-45 Describing bonds and journalizing transactions for bonds payable using the straight-line
amortization method
This problem continues the Daniels Consulting situation from Problem P11-35 of Chapter 11. Daniels
Consulting is considering raising additional capital. Daniels plans to raise the capital by issuing
$500,000 of 8%, seven-year bonds on January 1, 2017. The bonds pay interest semiannually on June 30
and December 31. On January 1, 2017, the market rate of interest required by investors for similar bonds
is 10%.
Requirements
1. Will Daniels’s bonds issue at face value, a premium, or a discount?
2. Calculate and record the cash received on the bond issue date.
3. Journalize the first interest payment on June 30 and amortize the premium or discount using the
straight-line amortization method.
SOLUTION
Requirement 1
Requirement 2
Present value of principal:
Present value
=
Future value
×
=
Present value of stated interest:
Present value
=
×
=
=
=
Present value of bonds payable:
Present value
=
=
=
PV factor for
i = 5% (10% / 2),
Date
Accounts and Explanation
Debit
Credit
2017
Jan. 1
Cash
450,480
Discount on Bonds Payable ($500,000 − $450,480)
49,520
Bonds Payable
500,000
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2017
Jun. 30
Interest Expense ($20,000 + $3,537)
23,537
Discount on Bonds Payable ($49,520 × 1/14)
Cash
Critical Thinking
Decision Case 12-1
The following questions are not related.
Requirements
1. Duncan Brooks needs to borrow $500,000 to open new stores. Brooks can borrow $500,000 by
issuing 5%, 10-year bonds at 96. How much will Brooks actually receive in cash under this
arrangement? How much must Brooks pay back at maturity? How will Brooks account for the
difference between the cash received on the issue date and the amount paid back?
2. Brooks prefers to borrow for longer periods when interest rates are low and for shorter periods when
interest rates are high. Why is this a good business strategy?
SOLUTION
Requirement 1
Brooks will actually borrow $480,000 ($500,000 × 0.96). Brooks must pay back the full $500,000 at
Requirement 2
Companies prefer to borrow for longer periods when interest rates are low in order to lock in the low
Ethical Issue 12-1
Raffie’s Kids, a nonprofit organization that provides aid to victims of domestic violence, low-income
families, and special-needs children, has a 30-year, 5% mortgage on the existing building. The mortgage
requires monthly payments of $3,000. Raffie’s bookkeeper is preparing financial statements for the
board and, in doing so, lists the mortgage balance of $287,000 under current liabilities because the board
hopes to be able to pay the mortgage off in full next year. Of the mortgage principal, $20,000 will be
paid next year if Raffie’s pays according to the mortgage agreement. The board members call you, their
trusted CPA, to advise them on how Raffie’s Kids should report the mortgage on its balance sheet. What
is the ethical issue? Provide and discuss the reason for your recommendation.
SOLUTION
The ethical issue here is whether the full mortgage should be shown as a current liability. While Raffie’s
Fraud Case 12-1
Bill and Edna had been married two years and had just reached the point where they had enough savings
to start investing. Bill’s uncle Dave told them that he had recently inherited some very rare railroad
bonds from his grandmother’s estate. He wanted to help Bill and Edna get a start in the world and would
sell them 50 of the bonds at $100 each. The bonds were dated 1873, beautifully engraved, showing a
face value of $1,000 each. Uncle Dave pointed out that “United States of America” was printed
prominently at the top and that the U.S. government had established a sinking fund to retire the old
railroad bonds. A sinking fund is a fund established for the purpose of repaying the debt. It allows the
organization (the U.S. government, in this example) to set aside money over time to retire the bonds. All
Bill and Edna needed to do was hold on to them until the government contacted them, and they would
eventually get the full $1,000 for each bond. Bill and Edna were overjoyed—until a year later when they
saw the exact same bonds for sale at a coin and stamp shop priced as “collectors’ items” for $9.95 each!
Requirements
1. If a company goes bankrupt, what happens to the bonds it issued and the investors who bought the
bonds?
2. When investing in bonds, how can you tell whether the bond issue is a legitimate transaction?
3. Is there a way to determine the relative risk of corporate bonds?
SOLUTION
Requirement 1
When a company goes bankrupt, there is a court settlement in which the remaining assets of the
Requirement 2
Stocks and bonds should normally be purchased only through a licensed securities dealer. Investors
Requirement 3
Bonds are given a grade to indicate their credit quality. Private independent rating services such as
Financial Statement Case 12-1
Use the Starbucks Corporation financial statements to answer the following questions. Visit
Requirements
1. How much was Starbucks Corporation’s long-term debt at September 29, 2013?
2. Compute Starbucks Corporation’s debt to equity ratio at September 29, 2013. How does it compare
to Green Mountain Coffee Roasters, Inc.?
SOLUTION
Requirement 1
Requirement 2
Starbucks:
Debt to equity ratio
=
Total liabilities
/
Total equity
1.57
=
$7,034.4 million
/
$4,482.3 million
Debt to equity ratio
0.43
=
/