SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2016
Apr. 1
Equipment
56,000
Notes Payable
56,000
Purchased equipment by issuing an 7-year,
13% note.
Dec. 31
Interest Expense ($56,000 × 0.13 × 9/12)
Interest Payable
2017
Apr. 1
Interest Expense ($56,000 × 0.13 × 3/12)
Interest Payable
Notes Payable
Cash
15,280
Dec. 31
Interest Expense ($48,000 × 0.13 × 9/12)
Interest Payable
Requirement 2
Dec. 31, 2017
Interest Payable
Notes Payable
Total liabilities
E12-18 Preparing an amortization schedule and recording mortgages payable entries
Learning Objective 1
3. Interest Expense $4,333.33
Keel Company purchased a building and land with a fair market value of $650,000 (building, $550,000,
and land, $100,000) on January 1, 2016. Keel signed a 20-year, 8% mortgage payable. Keel will make
monthly payments of $5,436.86.
Requirements
1. Journalize the mortgage payable issuance on January 1, 2016 (explanations are not required).
2. Prepare an amortization schedule for the first two payments.
3. Journalize the first payment on January 31, 2016 (round to two decimal places).
4. Journalize the second payment on February 29, 2016 (round to two decimal places).
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2016
Jan. 1
Building
550,000
Land
100,000
Requirement 2
Beginning Balance
Principal
Payment
Interest
Expense
Total
Payment
Ending Balance
$ 650,000.00
=
×
=
×
=
×
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2016
Jan. 31
Mortgages Payable
1,103.53
Interest Expense
4,333.33
E12-18, cont.
Requirement 4
Date
Accounts and Explanation
Debit
Credit
2016
Feb. 29
Mortgages Payable
1,110.88
Interest Expense
4,325.98
E12-19 Analyzing alternative plans to raise money
Learning Objective 2
AF Electronics is considering two plans for raising $3,000,000 to expand operations. Plan A is to issue
7% bonds payable, and plan B is to issue 100,000 shares of common stock. Before any new financing,
AF has net income of $250,000 and 200,000 shares of common stock outstanding. Management believes
the company can use the new funds to earn additional income of $500,000 before interest and taxes. The
income tax rate is 30%. Analyze the AF Electronics situation to determine which plan will result in
higher earnings per share. Use Exhibit 12-6 as a guide.
SOLUTION
Plan A:
Issue $3,000,000 of 7%
Bond Payable
Plan B:
Issue $3,000,000 of
Common Stock
E12-20 Determining bond prices and interest expense
Learning Objectives 2, 3
2. Market price $404,200
Nooks is planning to issue $470,000 of 5%, 10-year bonds payable to borrow for a major expansion. The
owner, Simon Nooks, asks your advice on some related matters.
Requirements
1. Answer the following questions:
a. At what type of bond price will Nooks have total interest expense equal to the cash interest
payments?
b. Under which type of bond price will Nooks’ total interest expense be greater than the cash
interest payments?
c. If the market interest rate is 7%, what type of bond price can Nooks expect for the bonds?
2. Compute the price of the bonds if the bonds are issued at 86.
3. How much will Nooks pay in interest each year? How much will Nooks’ interest expense be for the
first year?
SOLUTION
Requirement 1
a.
Face Value
Discount
c.
Discount
Requirement 2
Face value
×
Issue price
Market price or
Cash received
×
E12-21 Journalizing bond issuance and interest payments
Learning Objective 3
1. June 30 Bonds Payable CR $60,000
On June 30, Paulson Company issues 6%, 10-year bonds payable with a face value of $60,000. The
bonds are issued at face value and pay interest on June 30 and December 31.
Requirements
1. Journalize the issuance of the bonds on June 30.
2. Journalize the semiannual interest payment on December 31.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
June 30
Cash
Date
Debit
Credit
E12-22 Journalizing bond issuance and interest payments
Learning Objective 3
1. June 30 Discount DR $7,200
On June 30, Danver Limited issues 5%, 20-year bonds payable with a face value of $120,000. The
bonds are issued at 94 and pay interest on June 30 and December 31.
Requirements
1. Journalize the issuance of the bonds on June 30.
2. Journalize the semiannual interest payment and amortization of bond discount on December 31.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Date
Debit
Credit
E12-23 Journalizing bond transactions
Learning Objective 3
2. Interest Expense DR $3,440
Franklin issued $80,000 of 10-year, 8% bonds payable on January 1, 2016. Franklin pays interest each
January 1 and July 1 and amortizes discount or premium by the straight-line amortization method. The
company can issue its bonds payable under various conditions.
Requirements
1. Journalize Franklin’s issuance of the bonds and first semiannual interest payment assuming the
bonds were issued at face value. Explanations are not required.
2. Journalize Franklin’s issuance of the bonds and first semiannual interest payment assuming the
bonds were issued at 94. Explanations are not required.
3. Journalize Franklin’s issuance of the bonds and first semiannual interest payment assuming the
bonds were issued at 103. Explanations are not required.
4. Which bond price results in the most interest expense for Franklin? Explain in detail.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2016
Jan. 1
Cash
80,000
Bonds Payable
80,000
July 1
Interest Expense
Cash ($80,000 × 0.08 × 6/12)
Requirement 2
Date
Accounts and Explanation
Debit
Credit
2016
Jan. 1
Cash ($80,000 × 0.94)
75,200
Discount on Bonds Payable ($80,000 − $75,200)
Bonds Payable
80,000
July 1
Interest Expense ($240 + $3,200)
Discount on Bonds Payable ($4,800 × 1/20)
Cash ($80,000 × 0.08 × 6/12)
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2016
Jan. 1
Cash ($80,000 × 1.03)
82,400
Premium on Bonds Payable ($82,400 − $80,000)
Bonds Payable
80,000
July 1
Interest Expense ($3,200 − $120)
Premium on Bonds Payable ($2,400 × 1/20)
Cash ($80,000 × 0.08 × 6/12)
Requirement 4
The bond issue at a discount results in a higher interest expense for the company. The discount needs to
E12-24 Journalizing bond issuance and interest payments
Learning Objectives 3, 4
1. Premium CR $3,600
On January 1, 2016, Dave Unlimited issues 10%, 20-year bonds payable with a face value of $180,000.
The bonds are issued at 102 and pay interest on June 30 and December 31.
Requirements
1. Journalize the issuance of the bonds on January 1, 2016.
2. Journalize the semiannual interest payment and amortization of bond premium on June 30, 2016.
3. Journalize the semiannual interest payment and amortization of bond premium on December 31,
2016.
4. Journalize the retirement of the bond at maturity. (Give the date.)
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2016
Jan. 1
Cash ($180,000 × 1.02)
183,600
Premium on Bonds Payable ($183,600 − $180,000)
3,600
Bonds Payable
180,000
2016
Jun. 30
Premium on Bonds Payable ($3,600 × 1/40)
Cash ($180,000 × 0.10 × 6/12)
9,000
Credit
2016
Dec. 31
Premium on Bonds Payable ($3,600 × 1/40)
Cash ($180,000 × 0.10 × 6/12)
9,000
Credit
2035
Dec. 31
Bonds Payable
180,000
E12-25 Retiring bonds payable before maturity
Learning Objective 4
2. Cash CR $696,900
Parkview Magazine issued $690,000 of 15-year, 5% callable bonds payable on July 31, 2016, at 95. On
July 31, 2019, Parkview called the bonds at 101. Assume annual interest payments.
Requirements
1. Without making journal entries, compute the carrying amount of the bonds payable at July 31, 2019.
2. Assume all amortization has been recorded properly. Journalize the retirement of the bonds on July
31, 2019. No explanation is required.
SOLUTION
Requirement 1
Face value $690,000 – Carrying Value $655,500 ($690,000 × .95) = Discount $34,500
Discount $34,500 / 15 years = $2,300 amortized per year
Requirement 2
Date
Accounts and Explanation
Debit
Credit
2019
July 31
Bonds Payable
690,000
Loss on Retirement of Bonds Payable
34,500
E12-26 Reporting current and long-term liabilities
Learning Objectives 2, 3, 5
Optical Dispensary borrowed $330,000 on January 2, 2016, by issuing a 15% serial bond payable that
must be paid in three equal annual installments plus interest for the year. The first payment of principal
and interest comes due January 2, 2017.Complete the missing information. Assume the bonds are issued
at face value.
SOLUTION
Requirement 1
December 31
2016
2017
2018
Current Liabilities:
Interest Payable
Long-term Liabilities:
Bonds Payable
Balance
Rate
Time
Interest Owed
2016
$330,000
×
0.15
×
12/12
=
2017
$220,000
×
0.15
×
12/12
=
2018
$110,000
×
0.15
×
12/12
=
E12-27 Reporting liabilities
Learning Objectives 2, 3, 5
Total Liabilities $358,000
At December 31, MediAssist Precision Instruments owes $51,000 on Accounts Payable, Salaries
Payable of $12,000, and Income Tax Payable of $10,000. MediAssist also has $280,000 of Bonds
Payable that were issued at face value that require payment of a $50,000 installment next year and the
remainder in later years. The bonds payable require an annual interest payment of $5,000, and
MediAssist still owes this interest for the current year. Report MediAssist’s liabilities on its classified
balance sheet.
SOLUTION
MEDIASSIST PRECISION INSTRUMENTS
Balance Sheet (Partial)
December 31
50,000
12,000
10,000
Total Liabilities
E12-28 Computing the debt to equity ratio
Learning Objective 6
Burkhart Corporation has the following data as of December 31, 2016:
Compute the debt to equity ratio at December 31, 2016.
SOLUTION
Assets:
Liabilities:
E12A-29 Determining the present value of bonds payable
Learning Objective 7
Appendix 12A
2. Present Value $71,329
Interest rates determine the present value of future amounts. (Round all numbers to the nearest whole
dollar.)
Requirements
1. Determine the present value of six-year bonds payable with face value of $84,000 and stated interest
rate of 12%, paid semiannually. The market rate of interest is 12% at issuance.
2. Same bonds payable as in Requirement 1, but the market interest rate is 16%.
3. Same bonds payable as in Requirement 1, but the market interest rate is 10%.
SOLUTION
Requirement 1
Present value = $84,000 because the stated rate of interest equals the market rate of interest.
E12A-29, cont.
Requirement 3
Present value of principal:
Present value
=
Future value
×
=
Present value of stated interest:
Present value
=
×
=
=
Present value
=
=
=
PV factor for
i = 5% (10% / 2),
E12B-30 Journalizing bond transactions using the effective-interest amortization method
Learning Objective 8
Appendix 12B
2. Interest Expense DR $6,208
Journalize issuance of the bond and the first semiannual interest payment under each of the following
three assumptions. The company amortizes bond premium and discount by the effective-interest
amortization method. Explanations are not required.
1. Ten-year bonds payable with face value of $86,000 and stated interest rate of 14%, paid
semiannually. The market rate of interest is 14% at issuance. The present value of the bonds at
issuance is $86,000.
2. Same bonds payable as in assumption 1, but the market interest rate is 16%. The present value of the
bonds at issuance is $77,594.
3. Same bonds payable as in assumption 1, but the market interest rate is 8%. The present value of the
bonds at issuance is $121,028.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
E12B-30, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Cash
77,594
Discount on Bonds Payable ($86,000 − $77,594)
Interest Expense
Discount on Bonds Payable
Cash
Cash Paid
Interest
Expense
Discount
Amortized
Carrying
Amount
E12B-30, cont.
Requirement 3
Date
Accounts and Explanation
Debit
Credit
Cash
121,028
Premium on Bonds Payable ($121,028 − $86,000)
35,028
Bonds Payable
86,000
Interest Expense
Premium on Bonds Payable
Cash
Cash Paid
Interest
Expense
Premium
Amortized
Carrying
Amount
Beginning
$ 121,028
1st pmt
$ 6,020
$ 4,841
$ 1,179
Interest
=
×
=
×
119,849
Problems (Group A)
P12-31A Journalizing liability transactions and reporting them on the balance sheet
Learning Objectives 1, 5
1. Mar. 1, 2017, Mortgage Payable DR $4,710
2. Total Liabilities $345,998
The following transactions of Smith Pharmacies occurred during 2016 and 2017:
Requirements
1. Journalize the transactions in the Smith Pharmacies general journal. Round all answers to the nearest
dollar. Explanations are not required.
2. Prepare the liabilities section of the balance sheet for Smith Pharmacies on March 1, 2017 after all
the journal entries are recorded.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2016
Mar. 1
Cash
240,000
Notes Payable
240,000
Dec. 1
Cash
150,000
Mortgages Payable
150,000
Dec. 31
Interest Expense ($240,000 × 0.07 × 10/12)
Interest Payable
Dec. 31
Interest Expense ($150,000 × 0.11 × 1/12)
1,375
Interest Payable
1,375
2017
Interest Payable
1,375
Jan. 1
Mortgages Payable ($6,000 − $1,375)
4,625
Cash
6,000
Feb. 1
Interest Expense
1,333
Mortgages Payable ($6,000 − $1,333)
4,667
Cash
6,000
Mar. 1
Interest Expense
1,290
Mortgages Payable ($6,000 − $1,290)
4,710
Cash
6,000
Mar. 1
Interest Payable
Interest Expense($240,000 × 0.07 × 2/12)
2,800
Notes Payable
Cash
P12-31A
Requirement 1, cont.
Sawyer Bank Interest Calculations
Beginning
Balance
Principal
Payment
Interest
Expense
Total
Payment
Ending
Balance
12/01/2016
$ 150,000
01/01/2017
$ 150,000
$ 4,625
1,375
$ 6,000
145,375
02/01/2017
145,375
1,333
140,708
03/01/2017
140,708
1,290
135,998
Interest
Expense
=
×
Market
=
×
=
×
=
×
Requirement 2
SMITH PHARMACIES
Balance Sheet (Partial)
March 1, 2017