会计学原理 第二版 英文版 wiley出版社 第16章 答案

Solutions Manual to accompany Principles of Accounting 2e by Jerry Weygandt , Keryn Chalmers, Lorena Mitrione Michelle Fyfe, Susana Yuen, Donald Kieso, Paul Kimmel Chapter 16 Non-current liabilities John Wiley & Sons Australia, Ltd 16-1 , Accuracy checked CHAPTER 16 Non-current Liabilities ASSIGNMENT CLASSIFICATION TABLE Brief Study Objectives Questions Exercises Exercises Problems 1. Explain why bonds are 1, 2, 3, 4, 1 1 issued. 5, 6 2. Prepare the entries for 7, 8 2, 3, 4 2, 3, 4, 5 1, 2, 5, the issue of bonds and 6, 9 interest expense. 3. Describe the entries 9, 10 5 4, 5, 6, 12, 1, 2, 9 when bonds are 13 redeemed or converted. 4. Describe the accounting 11 6 7 3 for non-current notes payable. 5. Contrast the accounting 12, 13, 14 7 8 4 for operating and finance leases. 6. Identify the methods for 15 8 9 1, 2, 7, 8 the presentation and analysis of non-current liabilities. *7. Calculate the market 18 9 price of a bond. *8. Apply the effective- 16, 17 10 10, 11 5, 6 interest method of amortising bond discount and bond premium. *9. Apply the straight-line 19, 20 11, 12 12, 13 7, 8, 9 method of amortising bond discount and bond premium. *Note: All asterisked Questions, Exercises and Problems relate to material contained in the appendix to the chapter. 16-2 , Accuracy checked ASSIGNMENT CHARACTERISTICS TABLE Problem Difficulty Time Number Description Level Allotted (min.) 1 Prepare entries to record issue of bonds, interest accrual Moderate 20-30 and bond redemption. 2 Prepare entries to record issue of bonds, interest accrual Moderate 15-20 and bond redemption. 3 Prepare Instalment payments schedule and journal Moderate 20-30 entries for a mortgage note payable. 4 Analyse three different lease situations and prepare Moderate 20-30 journal entries. *5 Prepare entries to record issue of bonds, payment of Moderate 30-40 interest, and amortisation of bond discount using effective-interest method. *6 Prepare entries to record issue of bonds, payment of Moderate 30-40 interest, and amortisation of premium using effective- interest method. In addition, answer questions. *7 Prepare entries to record issue of bonds, interest Simple 30-40 accrual, and amortisation for two years. *8 Prepare entries to record issue of bonds, interest, and Simple 30-40 amortisation of bond premium and discount. *9 Prepare entries to record interest payments, discount Moderate 30-40 amortisation and redemption of bonds. 16-3 , Accuracy checked BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems Learning Objective Knowledge Comprehension Application Analysis Synthesis Evaluation 1. Explain why bonds are issued. Q16-5 BE16-1 E16-1 Q16-1 Q16-4 Q16-2 Q16-6 Q16-3 Q16-7 E16-4 P16-9 2. Prepare the entries for the issue of bonds and Q16-8 BE16-2 E16-5 interest expense. BE16-3 P16-1 BE16-4 P16-2 E16-2 P16-5 E16-3 P16-6 Q16-10 3. Describe the entries when bonds are redeemed or Q16-9 P16-9 converted. BE16-5 P16-1 E16-4 P16-2 E16-5 E16-12 E16-6 E16-13 4. Describe the accounting for non-current notes Q16-11 P16-3 payable. BE16-6 E16-7 5. Contrast the accounting for operating and finance Q16-12 Q16-14 P16-4 leases. Q16-13 BE16-7 E16-8 BE16-8 P16-7 Q16-15 6. Identify the methods for the presentation and E16-9 P16-8 analysis of non-current liabilities. P16-1 P16-2 *7. Calculate the market price of a bond. Q16-18 BE16-9 *8. Apply the effective-interest methods of amortising Q16-16 BE16-10 P16-5 bond discount and bond premium. Q16-17 E16-10 P16-6 E16-11 Q16-19 *9. Apply the straight-line method of amortising bond Q16-20 E16-13 discount and bond premium. BE16-11 P16-7 BE16-12 P16-8 E16-12 P16-9 , Accuracy checked Broadening Your Perspective Comp. Analysis Ethics Case Communication Financial Interpreting Financial Reporting Group Statements Decision Case Exploring the Web , Accuracy checked ANSWERS TO QUESTIONS 1. (a) Non-current liabilities are obligations that are expected to be paid after one year. Examples include bonds, non-current notes, and lease obligations. (b) Bonds are a form of interest-bearing notes payable used by companies, universities and governmental agencies. 2. (a) The major advantages are: (1) Shareholder control is not affected — bondholders do not have voting rights, so current Shareholders retain full control of the company. (2) Tax savings result — bond interest is deductible for tax purposes; dividends on shares are not. (3) Earnings per share may be higher — although bond interest expense will reduce profit, earnings per share on ordinary shares will often be higher under bond financing because no additional ordinary shares are issued. (b) The major disadvantages in using bonds are that interest must be paid on a periodic basis and the principal (face value) of the bonds must be paid at maturity. 3. (a) Secured bonds have specific assets of the issuer pledged as collateral. In contrast, unsecured bonds are issued against the general credit of the borrower. These bonds are called debenture bonds. (b) Registered bonds are issued in the name of the owner. In contrast, bearer (coupon) bonds are issued to bearer and are unregistered. Holders of bearer bonds must send in coupons to receive interest payments. (c) Convertible bonds may be converted into ordinary shares at the bondholders’ option. In contrast, callable bonds are subject to call and retirement at a stated dollar amount prior to maturity at the option of the issuer. 4. (a) Face value is the amount of principal due at the maturity date. (Face value is also called par value.) (b) The contractual interest rate is the rate used to determine the amount of cash interest the borrower pays and the investor receives. This rate is also called the stated interest rate because it is the rate stated on the bonds. (c) A bond indenture is a legal document that sets forth the terms of the bond issue. (d) A bond certificate is a legal document that indicates the name of the issuer, the face value of the bonds, and such other data as the contractual interest rate and maturity date of the bonds. 5. The two major obligations incurred by an entity when bonds are issued are the interest payments due on a periodic basis and the principal which must be paid at maturity. 6. Less than. Investors are required to pay more than the face value; therefore, the market interest rate is less than the contractual rate. 7. $36 000. $800 000 × 9% × 1/2 year = $36 000. 8. $840 000. The balance of the Bonds Payable account minus the balance of the Unamortised Discount account (or plus the balance of the Unamortised Premium account) equals the carrying value of the bonds. 9. Debits: Bonds Payable (for the face value) and Unamortised Premium (for the unamortised balance). Credits: Cash (for 97% of the face value) and Gain on Bond Redemption (to balance entry). 16-6 , Accuracy checked Answers to Questions (continued) 10. A convertible bond permits bondholders to convert it into ordinary shares at the option of the bondholders. (a) For bondholders, the conversion option gives an opportunity to benefit if the market price of the ordinary shares increases substantially. (b) For the issuer, convertible bonds usually have a higher selling price and a lower rate of interest than comparable debt securities without the conversion option. 11. No, Roy is not right. Each payment by Roy consists of: (1) interest on the unpaid balance of the loan and (2) a reduction of loan principal. The interest decreases each period while the portion applied to the loan principal increases each period. 12. (a) A lease agreement is a contract in which the lessor gives the lessee the right to use an asset for a specified period in return for one or more periodic rental payments. The lessor is the owner of the property and the lessee is the renter or tenant. (b) The two most common types of leases are operating leases and finance leases. (c) In an operating lease, the property is rented by the lessee and the lessor retains all ownership risks and responsibilities. A finance lease transfers substantially all the benefits and risks of ownership from the lessor to the lessee, so that the lease is in effect a purchase of the property. 13. This lease would be reported as an operating lease. In an operating lease, each payment is debited to Rent Expense. Neither a leased asset nor a lease liability is capitalised. 14. In a finance lease agreement, the lessee records the present value of the minimum lease payments as an asset and a liability. Therefore, Cello Ltd would debit Leased Equipment for $186 300 and credit Lease Liability for the same amount. 15. The nature and the amount of each non-current liability should be presented in the statement of financial position or in schedules in the accompanying notes to the statements. The notes should also indicate the interest rates, maturity dates, conversion privileges, and assets pledged as collateral. *16. Ginny is probably indicating that since the borrower has the use of the bond proceeds over the term of the bonds, the borrowing rate in each period should be the same. The effective- interest method results in a varying amount of interest expense but a constant rate of interest on the balance outstanding. Accordingly, it results in a better matching of expenses with income than the straight-line method. *17. Decrease. Under the effective-interest method the interest charge per period is determined by multiplying the carrying value of the bonds by the effective-interest rate. When bonds are issued at a premium, the carrying value decreases over the life of the bonds. As a result, the interest expense will also decrease over the life of the bonds because it is determined by multiplying the decreasing carrying value of the bonds at the beginning of the period by the effective-interest rate. *18. No, Vera is not right. The market price of any bond is a function of three factors: (1) The dollar amounts to be received by the investor (interest and principal), (2) The length of time until the amounts are received (interest payment dates and maturity date), and (3) The market interest rate. *19. The straight-line method results in the same amortised amount being assigned to Interest Expense each interest period. This amount is determined by dividing the total bond discount or premium by the number of interest periods the bonds will be outstanding. 16-7 , Accuracy checked Answers to Questions (continued) *20. $21 000. Interest expense is the interest to be paid in cash less the premium amortisation for the year. Cash to be paid equals 8% × $300 000 or $24 000. Total premium equals 5% of $300 000 or $15 000. Since this is to be amortised over 5 years (the life of the bonds) in equal amounts, the amortisation amount is $15 000 ? 5 = $3000. Thus, $24 000 – $3000 or $21 000 equals interest expense for 2007. 16-8 , Accuracy checked SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 16-1 Issue Shares Issue Bond Profit before interest and taxes $900 000 $900 000 Interest ($2 000 000 × 8%) 0 160 000 Profit before income taxes 900 000 740 000 Income tax expense (30%) 270 000 222 000 Profit (a) $630 000 $518 000 Issued shares (b) 700 000 500 000 Earnings per share (a) ? (b) $0.90 $1.04 Profit is higher if shares is used. However, earnings per share is lower than earnings per share if bonds are used because of the additional shares issued. BRIEF EXERCISE 16-2 (a) 2010 July 1 Cash ....................................................................... 4 000 000 Bonds Payable (4000 × $1000) ....................... 4 000 000 (b) 2011 January 1 Bond Interest Expense ............................................. 160 000 Cash ............................................................... 160 000 ($4 000 000 × 8% × 1/2) (c) 2011 June 31 Bond Interest Expense ............................................. 160 000 Bond Interest Payable ..................................... 160 000 ($4 000 000 × 8% × 1/2) BRIEF EXERCISE 16-3 (a) Jan. 1 Cash ($1 000 000 × .97) ........................................... 970 000 Unamortised Discount .............................................. 30 000 Bonds Payable ................................................ 1 000 000 (b) Jan. 1 Cash ($1 000 000 × 1.04) ......................................... 1 040 000 Bonds Payable ................................................ 1 000 000 Unamortised Premium .................................... 40 000 16-9 , Accuracy checked BRIEF EXERCISE 16-4 1. Jan. 1 Cash (1000 × $1000) ................................................ 1 000 000 Bonds Payable ................................................ 1 000 000 2. July 1 Cash ($500 000 × 1.02) ............................................ 510 000 Bonds Payable ................................................ 500 000 Unamortised Premium .................................... 10 000 3. Sept. 1 Cash ($200 000 × .99) .............................................. 198 000 Unamortised Discount .............................................. 2 000 Bonds Payable ................................................ 200 000 BRIEF EXERCISE 16-5 Bonds Payable ......................................................................................... 1 000 000 Loss on Bond Redemption ($1 030 000 – $940 000) ............................... 90 000 Unamortised Discount .................................................................... 60 000 Cash ($1 000 000 × 103%)............................................................. 1 030 000 BRIEF EXERCISE 16-6 (A) (B) (C) (D) Semiannual Interest Reduction Principal Interest Cash Expense of Principal Balance Period Payment (D) × 5% (A) – (B) (D) – (C) Issue Date $400 000 1 $32 097 $20 000 $12 097 387 903 Dec. 31 Cash ................................................................................. 400 000 Mortgage Notes Payable ......................................... 400 000 June 30 Interest Expense............................................................... 20 000 Mortgage Notes Payable .................................................. 12 097 Cash ....................................................................... 32 097 BRIEF EXERCISE 16-7 1. Rent Expense ................................................................................. 80 000 Cash ..................................................................................... 80 000 2. Leased Asset — Building ............................................................... 900 000 Lease Liability ....................................................................... 900 000 16-10 , Accuracy checked BRIEF EXERCISE 16-8 Non-current liabilities Bonds payable, due 2012 ....................................................... $500 000 Less: Unamortised Discount .................................................. 45 000 $455 000 Notes payable, due 2015 ........................................................ 80 000 Lease liability .......................................................................... 32 000 Total non-current liabilities ............................................ $567 000 *BRIEF EXERCISE 16-9 (a) i = 10% ? $10 000 0 1 2 3 4 5 6 7 8 Discount rate from Table 16 A-1 is .46651 (8 periods at 10%). Present value of $10 000 to be received in 8 periods discounted at 10% is therefore $4665.10 ($10 000 × .46651). (b) i = 8% ? $10 000 $10 000 $10 000 $10 000 $10 000 $10 000 0 1 2 3 4 5 6 Discount rate from Table 16 A-2 is 4.62288 (6 periods at 8%). Present value of 6 payments of $10 000 each discounted at 8% is therefore $46 228.80 ($10 000 × 4.62288). *BRIEF EXERCISE 16-10 (a) Interest Expense ............................................................................ 46 884 Unamortised Discount .......................................................... 1 884 Cash ..................................................................................... 45 000 (b) Interest expense is greater than interest paid because the bonds sold at a discount which must be amortised over the life of the bonds. The bonds sold at a discount because investors demanded a market interest rate higher than the contractual interest rate. (c) Interest expense increases each period because the bond carrying value increases each period. As the market interest rate is applied to this bond carrying amount, interest expense will increase. 16-11 , Accuracy checked *BRIEF EXERCISE 16-11 (a) January 1 Cash (.96 × $3 000 000) ........................................... 2 880 000 Unamortised Discount .............................................. 120 000 Bonds Payable ................................................ 3 000 000 (b) July 1 Bond Interest Expense .............................................. 141 000 Unamortised Discount ..................................... 6 000 ($120 000 ? 20) Cash ($3 000 000 × 9% × 1/2) ........................ 135 000 *BRIEF EXERCISE 16-12 (a) Cash (1.02 × $2 000 000) ............................................................... 2 040 000 Bonds Payable ..................................................................... 2 000 000 Unamortised Premium .......................................................... 40 000 (b) Bond Interest Expense ................................................................... 96 000 Unamortised Premium ($40 000 ? 10) ............................................ 4 000 Cash ($2 000 000 × 10% × 1/2) ............................................ 100 000 16-12 , Accuracy checked SOLUTIONS TO EXERCISES EXERCISE 16-1 Plan One Plan Two Issue Shares Issue Bonds Profit before interest and taxes $600 000 $600 000 Interest ($2 700 000 × 10%) — 270 000 Profit before taxes 600 000 330 000 Income tax expense (30%) 180 000 99 000 Profit $420 000 $231 000 Issued shares 150 000 90 000 Earnings per share $2.80 $2.57 EXERCISE 16-2 (a) Jan. 1 Cash ....................................................................... 200 000 Bonds Payable ................................................ 200 000 (b) July 1 Bond Interest Expense ............................................. 10 000 Cash ($200 000 × 10% × 1/2) ......................... 10 000 (c) Dec. 31 Bond Interest Expense ............................................. 10 000 Bond Interest Payable ..................................... 10 000 EXERCISE 16-3 (a) Jan. 1 Cash ....................................................................... 200 000 Bonds Payable ................................................ 200 000 (b) July 1 Bond Interest Expense ............................................. 8 000 Cash ($200 000 × 8% × 1/2) ........................... 8 000 (c) Dec. 31 Bond Interest Expense ............................................. 8 000 Bond Interest Payable ..................................... 8 000 16-13 , Accuracy checked EXERCISE 16-4 (a) 2010 Jan. 1 Cash ...................................................................... 300 000 Bonds Payable .............................................. 300 000 (b) 2011 Jan. 1 Bond Interest Expense ............................................ 13 500 Cash ($300 000 × 9% × 1/2) ......................... 13 500 (c) June 30 Bond Interest Expense ............................................ 13 500 Bond Interest Payable ................................... 13 500 (d) 2020 July 1 Bonds Payable ........................................................ 300 000 Cash.............................................................. 300 000 EXERCISE 16-5 (a) Jan. 1 Bond Interest Payable .............................................. 72 000 Cash ............................................................... 72 000 (b) Jan 1 Bonds Payable ......................................................... 400 000 Loss on Bond Redemption ....................................... 16 000 Cash ($400 000 × 1.04) .................................. 416 000 (c) July 1 Bond Interest Expense ............................................. 54 000 Cash ($1 200 000 × 9% × 1/2) ........................ 54 000 EXERCISE 16-6 1. June 30 Bonds Payable ........................................................ 130 000 Loss on Bond Redemption ...................................... 25 100 ($132 600 – $107 500) Unamortised Discount ................................... 22 500 ($130 000 – $107 500) Cash ($130 000 × 102%) .............................. 132 600 2. June 30 Bonds Payable ........................................................ 150 000 Unamortised Premium ............................................ 1 000 Gain on Bond Redemption ............................ 4 000* Cash ($150 000 × 98%) ................................ 147 000 *$151 000 – (98% × $150 000) 3. Dec. 31 Bonds Payable ........................................................ 40 000 Share Capital ................................................ 40 000 Note: As per the textbook, the market value of the shares is ignored in the conversion. 16-14 , Accuracy checked EXERCISE 16-7 2010 Issue of Note Dec. 31 Cash .................................................................................... 240 000 Mortgage Note Payable ............................................... 240 000 2011 First Instalment Payment June 30 Interest Expense ($240 000 × 10% × 6/12)............................ 12 000 Mortgage Note Payable ......................................................... 4 000 Cash ........................................................................... 16 000 Second Installment Payment Dec. 31 Interest Expense.................................................................... 11 800 [($240 000 – $4000) × 10% × 6/12] Mortgage Note Payable ......................................................... 4 200 Cash ........................................................................... 16 000 EXERCISE 16-8 (a) Car Rental Expense ...................................................... 500 Cash .................................................................... 500 (b) Jan. 1 Leased Equipment ......................................................... 99 474 Lease Liability ...................................................... 99 474 Dec. 31 Interest expense ............................................................ 9 947 Lease Liability ................................................................ 30 053 Cash .................................................................... 40 000 EXERCISE 16-9 Non-current liabilities Bonds payable, due 2016 .......................................................... $180 000 Add: Unamortised Premium ....................................................... 32 000 $212 000 Lease liability ............................................................................. 49 200 Total non-current liabilities ............................................... $261 200 *EXERCISE 16-10 (a) July 1 Cash ............................................................................ 468 844 Unamortised Discount ................................................... 31 156 Bonds Payable ..................................................... 500 000 (b) Jan. 1 Bond Interest Expense .................................................. 23 442 ($468 844 × 5%) Unamortised Discount .......................................... 942 Cash ($500 000 × 9% × 1/2) ................................ 22 500 (c) June 30 Bond Interest Expense [($468 844 + $942) × 5%] ......... 23 489 Unamortised Discount .......................................... 989 Bond Interest Payable .......................................... 22 500 16-15 , Accuracy checked *EXERCISE 16-10 (continued) (b), (c) (B) Interest Expense (A) to Be Recorded (C) (D) Semiannual Interest to (5% × Preceding Discount Unamortised (E) Interest Be Paid Bond Carrying Value) Amortisation Discount Bond Periods (4.5% × $500 000) (E × .05) (B) – (A) (D) – (C) Carrying Value Issue date 31 156 468 844 1 22 500 23 442 942 30 214 469 786 2 22 500 23 489 989 29 225 470 775 , Accuracy checked *EXERCISE 16-11 (a) Jan. 1 Cash ....................................................................... 424 925 Unamortised Premium .................................... 24 925 Bonds Payable ................................................ 400 000 (b) July 1 Bond Interest Expense ($424 925 × 5%) .................. 21 246 Unamortised Premium .............................................. 754 Cash ($400 000 × 11% × 1/2) ......................... 22 000 (c) Dec. 31 Bond Interest Expense ............................................. 21 209 [($424 925 – $754) × 5%] Unamortised Premium .............................................. 791 Bond Interest Payable ..................................... 22 000 16-17 , Accuracy checked *EXERCISE 16-11 (continued) (b) (c) (B) Interest Expense (A) to Be Recorded (C) (D) Semiannual Interest to (5.0% × Preceding Premium Unamortised (E) Interest Be Paid Bond Carrying Value) Amortisation Premium Bond Periods (5.5% × $400 000) (E × .05) (A) – (B) (D) – (C) Carrying Value Issue date 24 925 424 925 1 22 000 21 246 754 24 171 424 171 2 22 000 21 209 791 23 380 423 380 , Accuracy checked *EXERCISE 16-12 (a) Jan. 1 Cash ($600 000 × 103%) .......................................... 618 000 Unamortised Premium .................................... 18 000 Bonds Payable ................................................ 600 000 (b) July 1 Bond Interest Expense ............................................. 26 550 Unamortised Premium ($18 000 × 1/40) ................... 450 Cash ($600 000 × 9% × 1/2) ........................... 27 000 (c) Dec. 31 Bond Interest Expense ............................................ 26 550 Unamortised Premium ............................................ 450 Bond Interest Payable ................................... 27 000 2030 (d) Jan. 1 Bonds Payable ........................................................ 600 000 Cash.............................................................. 600 000 *EXERCISE 16-13 (a) 2010 Dec. 31 Cash ...................................................................... 550 000 Unamortised Discount ............................................. 50 000 Bonds Payable .............................................. 600 000 (b) 2011 June 30 Bond Interest Expense ............................................ 35 500 Unamortised Discount ($50 000 ? 20) ........... 2 500 Cash ($600 000 × 11% × 1/2)........................ 33 000 (c) 2011 Dec. 31 Bond Interest Expense ............................................ 35 500 Unamortised Discount ................................... 2 500 Cash ($600 000 × 11% × 1/2)........................ 33 000 (d) 2020 Dec. 31 Bonds Payable ........................................................ 600 000 Cash.............................................................. 600 000 16-19 , Accuracy checked SOLUTIONS TO PROBLEMS PROBLEM 16-1 (a) 2010 June 1 Cash ....................................................................... 1 000 000 Bonds Payable ................................................ 1 000 000 (b) Dec. 31 Bond Interest Expense ............................................. 6 667 Bond Interest Payable ..................................... 6 667 ($1 000 000 × 8% × 1/12) ......................................... (c) Current Liabilities Bond Interest Payable .............................................. 6 667 Non-current Liabilities Bonds Payable ......................................................... 1 000 000 (d) 2011 June 1 Bond Interest Payable .............................................. 6 667 Bond Interest Expense ............................................. 33 333 ($1 000 000 × 8% × 5/12) Cash ............................................................... 40 000 (e) Dec. 1 Bond Interest Expense ............................................. 40 000 Cash ($1 000 000 × 8% × 1/2) ........................ 40 000 (f) Dec. 1 Bonds Payable ......................................................... 1 000 000 Loss on Bond Redemption ....................................... 10 000 Cash ($1 000 000 × 1.01) ............................... 1 010 000 16-20 , Accuracy checked PROBLEM 16-2 (a) 2010 Jan. 1 Cash ($400 000 × 1.05) ........................................ 420 000 Bonds Payable ............................................ 400 000 Unamortised Premium ................................ 20 000 (b) Current Liabilities Bond Interest Payable ($400 000 × 9% × 1/2) ............................ $ 18 000 Non-current Liabilities Bond Payable, due 2017................................................... 400 000 Add: Unamortised Premium .............................................. 18 000* $418 000 *$20 000 – ($20 000 ? 10) (c) 2012 Jan. 1 Bonds Payable ..................................................... $400 000 Unamortised Premium .......................................... 16 000 Loss on Bond Redemption ................................... 4 000* Cash ($400 000 × 1.05) .............................. 420 000 *($420 000 – $416 000) 16-21 , Accuracy checked PROBLEM 16-3 (a) Semiannual Cash Interest Reduction of Principal Interest Period Payment Expense Principal Balance Issue Date $800 000 1 $58 865 $32 000 $ 26 865 773 135 2 58 865 30 925 27 940 745 195 3 58 865 29 808 29 057 716 138 4 58 865 28 646 30 219 685 919 $114 081 (b) 2010 Dec. 31 Cash ...................................................................... 800 000 Mortgage Notes Payable ............................... 800 000 2011 June 30 Interest Expense ..................................................... 32 000 Mortgage Notes Payable ......................................... 26 865 Cash.............................................................. 58 865 Dec. 31 Interest Expense ..................................................... 30 925 Mortgage Notes Payable ......................................... 27 940 Cash.............................................................. 58 865 (c) 31/12/08 Current Liabilities Current portion of mortgage notes payable $59 276* Non-current Liabilities Mortgage notes payable $685 919** *($29 057 + $30 219) **($745 195 – $59 276) 16-22 , Accuracy checked PROBLEM 16-4 (a) Ortiz Enterprises should record the Casey Ltd lease as a finance lease because the lease term is greater than 75% of the estimated economic life of the leased property. Both the Lester Inc. and Schoen Ltd leases should be reported as operating leases because none of the four conditions is met to require treatment as a finance lease. (b) The Casey Ltd lease is a finance lease. The entry to record the finance lease on 1 January 2010 therefore is as follows: Leased Asset — Truck ....................................................................... 62 000 Lease Liability ........................................................................... 62 000 (c) The Lester Inc. lease is an operating lease. The entry to record the lease payment in 2007 therefore is as follows: Rent Expense ..................................................................................... 4 000 Cash ......................................................................................... 4 000 (d) Interest expense ............................................................................... 5 580 Lease liability .................................................................................... 9 420 Cash ........................................................................................ 15 000 Depreciation expense ....................................................................... 10 333 Accumulated depreciation ....................................................... 10 333 Note: based on the lease term years (6) as the lessee will not take up the asset at the end of the lease. 16-23 , Accuracy checked *PROBLEM 16-5 (a) 2010 July 1 Cash ....................................................................... 3 375 680 Unamortised Discount .............................................. 224 320 Bonds Payable ................................................ 3 600 000 (b) Dec. 31 Bond Interest Expense ($3 375 680 × 5%) ............... 168 784 Unamortised Discount ..................................... 6 784 Bond Interest Payable ..................................... 162 000 ($3 600 000 × 9% × 1/2) (c) 2011 July 1 Bond Interest Expense ............................................. 169 123 [($3 375 680 + $6 784) × 5%] Unamortised Discount ..................................... 7 123 Cash ............................................................... 162 000 (d) Dec. 31 Bond Interest Expense ............................................. 169 479 [($3 382 464 + $7 123) × 5%] Unamortised Discount ..................................... 7 479 Bond Interest Payable ..................................... 162 000 (e) KINGSTON SATELLITES Bond Discount Amortisation Effective-Interest Method — Semiannual Interest Payments 9% Bonds Issued at 10% (A) (B) (C) (D) (E) Semi- Interest Discount Unamortised Bond annual Interest Expense Amortisation Discount Carrying Interest to Be to Be (B) – (A) (D) – (C) Value Periods Paid Recorded ($3 600 000 – D) Issue date $224 320 $3 375 680 1 $162 000 $168 784 $6 784 217 536 3 382 464 2 162 000 169 123 7 123 210 413 3 389 587 3 162 000 169 479 7 479 202 934 3 397 066 16-24 , Accuracy checked *PROBLEM 16-6 (a) (1) 2010 July 1 Cash .............................................................. 5 679 533 Bonds Payable ...................................... 5 000 000 Unamortised Premium ........................... 679 533 (2) Dec. 31 Bond Interest Expense .................................... 227 181 ($5 679 533 × 4%) Unamortised Premium .................................... 22 819 Bond Interest Payable ........................... 250 000 ($5 000 000 × 5%) (3) 2011 July 1 Bond Interest Expense .................................... 226 269 [($5 679 533 – $22 819) × 4%] Unamortised Premium .................................... 23 731 Cash...................................................... 250 000 (4) Dec. 31 Bond Interest Expense .................................... 225 319 [($5 656 714 – $23 731) × 4%] Unamortised Premium .................................... 24 681 Bond Interest Payable ........................... 250 000 (b) Bonds payable ............................................................................... 5 000 000 Add: Unamortised Premium ........................................................... 608 302* 5 608 302 *($679 533 – $22 819 – $23 731 – $24 681) (c) Dear _____________________ Thank you for asking me to clarify some points about the bonds issued by Strigel Chemical Ltd. (1) The amount of interest expense reported for 2011 related to these bonds is $451 588 ($226 269 + $225 319). (2) When the bonds are sold at a premium, the effective-interest method will result in more interest expense reported than the straight-line method in 2011. Straight-line interest expense for 2011 is $432 046 [$250 000 + $250 000 – ($33 977 + $33 977)]. (3) The total cost of borrowing is as shown below: Semiannual interest payments ($5 000 000 × 10% × 1/2) = $250 000 × 20 ....................................... $5 000 000 Less: Bond premium ($5 679 533 – $5 000 000) ................................. 679 533 Total cost of borrowing ................................................................ $4 320 467 (4) The total bond interest expense over the life of the bonds is the same under either method of amortisation. If you have other questions, please contact me. Yours sincerely 16-25 , Accuracy checked *PROBLEM 16-7 (a) 2010 Jan. 1 Cash ($2 000 000 × 96%) ..................................... 1 920 000 Unamortised Discount .......................................... 80 000 Bonds Payable ............................................ 2 000 000 (b) See pages 16-27. (c) 2010 July 1 Bond Interest Expense ......................................... 92 000 Unamortised Discount ($80 000 ? 40) ......... 2 000 Cash ........................................................... 90 000 ($2 000 000 × 9% × 1/2) Dec. 31 Bond Interest Expense ......................................... 92 000 Unamortised Discount ................................. 2 000 Bond Interest Payable ................................. 90 000 2011 Jan. 1 Bond Interest Payable .......................................... 90 000 Cash ........................................................... 90 000 July 1 Bond Interest Expense ......................................... 92 000 Unamortised Discount ................................. 2 000 Cash ........................................................... 90 000 ($2 000 000 × 9% × 1/2) Dec. 31 Bond Interest Expense ......................................... 92 000 Unamortised Discount ................................. 2 000 Bond Interest Payable ................................. 90 000 (d) Current Liabilities Bond interest payable ....................................................... $90 000 Non-current Liabilities Bonds payable .................................................................. $2 000 000 Less: Unamortised Discount ............................................ 72 000 $1 928 000 16-26 , Accuracy checked PROBLEM 16-7 (continued) (b) (A) (B) (C) (D) (E) Semiannual Interest to Interest Expense Discount Unamortized Bond Interest Be Paid to Be Recorded Amortisation Discount Carrying Value Periods (4.5% × $2 000 000) (A) + (C) ($80 000 ? 40) (D) – (C) [$2 000 000 – (D)] Issue date $80 000 $1 920 000 1 $90 000 $92 000 $2 000 78 000 1 922 000 2 90 000 92 000 2 000 76 000 1 924 000 3 90 000 92 000 2 000 74 000 1 926 000 4 90 000 92 000 2 000 72 000 1 928 000 , Accuracy checked *PROBLEM 16-8 (a) Jan. 1 Cash ($3 000 000 × 103%) ....................................... 3 090 000 Unamortised Premium .................................... 90 000 Bonds Payable ................................................ 3 000 000 July 1 Bond Interest Expense ............................................. 115 500 Unamortised Premium .............................................. 4 500 ($90 000 ? 20) Cash ............................................................... 120 000 ($3 000 000 × 8% × 1/2) Dec. 31 Bond Interest Expense ............................................. 115 500 Unamortised Premium .............................................. 4 500 Bond Interest Payable ..................................... 120 000 (b) Jan. 1 Cash ($3 000 000 × 96%) ......................................... 2 880 000 Unamortised Discount .............................................. 120 000 Bonds Payable ................................................ 3 000 000 July 1 Bond Interest Expense ............................................. 126 000 Unamortised Discount ($120 000 ? 20) ........... 6 000 Cash ............................................................... 120 000 Dec. 31 Bond Interest Expense ............................................. 126 000 Unamortised Discount ..................................... 6 000 Bond Interest Payable ..................................... 120 000 (c) Premium Current Liabilities Bond interest payable ....................................................... $120 000 Non-current Liabilities Bonds payable, due 2020 ................................................. $3 000 000 Add: Unamortised Premium .............................................. 81 000 $3 081 000 Discount Current Liabilities Bond interest payable ....................................................... $120 000 Non-current Liabilities Bonds payable, due 2020 ................................................. $3 000 000 Less: Unamortised Discount ............................................ 108 000 $2 892 000 16-28 , Accuracy checked *PROBLEM 16-9 (a) Jan. 1 Bond Interest Payable .............................................. 96 000 Cash ............................................................... 96 000 (b) July 1 Bond Interest Expense ............................................. 100 500 Unamortised Discount ($90 000 ? 20) ............. 4 500 Cash ($2 400 000 × .04) ................................. 96 000 (c) July 1 Bonds Payable ......................................................... 800 000 Loss on Bond Redemption ....................................... 44 500 Unamortised Discount ..................................... 28 500* Cash ($800 000 × 102%) ................................ 816 000 *($90 000 – $4500) × 1/3 = $28 500 (d) Dec. 31 Bond Interest Expense ............................................. 67 000 Unamortised Discount ..................................... 3 000* Bond Interest Payable ..................................... 64 000** *($90 000 – $4500) × 2/3 = $57 000; $57 000 ? 19 = $3000 or $4500 × 2/3 = $3000 **($2 400 000 – $800 000 = $1 600 000; $1 600 000 × 4% = $64 000) 16-29 , Accuracy checked BROADENING YOUR PERSPECTIVE BYP 16-1 FINANCIAL REPORTING PROBLEM (a) At 30 June 2009, Telstra’s long-term debt was $16 350 million. There was a $1949 million increase ($16 350–$14 401) in long-term debt during the year. Note 17 sections c, d and e provide further details on Telstra’s long term debt. (b) Finance leases are reported in the notes. Finance leases are accounted for under trade and other receivables in the statement of financial position. 16-30 , Accuracy checked BYP 16-2 COMPARATIVE ANALYSIS PROBLEM (a) Reject shop Super Cheap Auto 1. Debt to total $281 417$56 608 ,59%,64%assets $96 066$437 771 2. Times $27 027，$8032$41 886 - $9751 ,4.36 times,3.30 timesinterest $8032$9751earned (b) The higher the percentage of debt to total assets, the greater the risk that a company may be unable to meet its maturing obligations. Super Cheap Auto’s 2009 debt to asset ratio was approximately 5% more than the Reject Shop’s and it would be considered slightly less able to meet its obligations. The times interest earned ratio provides an indication of a company’s ability to meet interest payments. Since the Reject Shop’s times interest earned ratio is higher than Super Cheap Auto’s, Reject Shop has more ability to meet its interest payments than Super Cheap Auto. However, the times interest earned ratios are strong and both companies should have no difficulty meeting these payments. 16-31 , Accuracy checked BYP 16-3 INTERPRETING FINANCIAL STATEMENTS (a) David Jones only has operating leases (b) The impact on the financial statements is the recognition of the rental payment as an expense, reducing net profit. Also the bank balance will reduce for the payment of the rental payment 16-32 , Accuracy checked BYP 16-4 EXPLORING THE WEB (a) , In 1916, Standard Statistics began to assign debt ratings to corporate bonds, with sovereign debt ratings following shortly thereafter , In 1940, municipal bond ratings were introduced , In 1941, Poor's Publishing and Standard Statistics merged to form the Standard & Poor's Corporation (b) Ratings are based on information supplied to Ratings Services by the issuer or its agents and information obtained by Ratings Services from other sources it considers reliable. Ratings Services relies on the issuer, its accountants, counsel, advisors and other experts for the accuracy, completeness and timeliness of the information submitted in connection with the rating and surveillance processes. (c) AAA An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong. Bonds which are rated AAA are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as ‘gilt edged’. Interest payments are protected by a large or an exceptionally stable margin and the principal is secure. While the various protective elements are likely to change, such changes as can be visualised are most unlikely to impair the fundamentally strong position of such issues. 16-33 , Accuracy checked BYP 16-5 GROUP DECISION CASE (a) Face value of bonds ..................................................................................... $6 000 000 Proceeds from sale of bonds ($6 000 000 × .96) .......................................... 5 760 000 Unamortised Discount .................................................................................. $ 240 000 Bond discount amortisation per year: $240 000 ? 5 = $48 000 Face value of bonds ....................................................................... $6 000 000 Amount of original discount ............................................................ $240 000 Less: Amortisation through 1 January 2010 (2-year) ..................... 96 000 144 000 Carrying value of bonds, 1 January 2010 ....................................... $5 856 000 (b) 1. Bonds Payable ...................................................................... 6 000 000 Unamortised Discount .................................................. 144 000 Gain on Bond Redemption ........................................... 856 000* Cash ............................................................................ 5 000 000 (To record redemption of 8% bonds) *$5 856 000 – $5 000 000 2. Cash ..................................................................... 5 000 000 Bonds Payable ............................................................. 5 000 000 (To record sale of 10-year 11% bonds at par) (c) Dear CEO Spirit The early redemption of the 8%, 5-year bonds results in recognising a gain of $856,000 that increases current year net profit by the after-tax effect of the gain. The amount of the liabilities on the balance sheet will be lowered by the issue of the new bonds and retirement of the 5-year bonds. 1. The cash flow of the company as it relates to bonds payable will be adversely affected as follows: Annual interest payments on the new issue ($5 000 000 × .11) ................. $550 000 Annual interest payments on the 5-year bonds ($6 000 000 × .08) ............ 480 000 Additional cash outflows per year ............................................................... $ 70 000 2. The amount of interest expense shown on the income statement will be higher as a result of the decision to issue new bonds: Annual interest expense on new bonds ......................................... $550 000 Annual interest expense on 8% bonds: Interest payment ............................................................... $480 000 Discount amortisation........................................................ 48 000 528 000 Additional interest expense per year ............................................. $ 22 000 These comparisons hold for only the 3-year remaining life of the 8%, 5-year bonds. The company must acknowledge either redemption of the 8% bonds at maturity, 1 January 2013, or refinancing of that issue at that time and consider what interest rates will be in 2013 in evaluating a redemption and issue in 2009. Yours sincerely 16-34 , Accuracy checked BYP 16-6 COMMUNICATION ACTIVITY To: Bob Jetson From: I. M. Student Subject: Bond Financing (1) The advantages of bond financing over equity financing include: 1. Shareholder control is not affected. 2. Tax savings result. 3. Earnings per share of ordinary shares may be higher. (2) The types of bonds that may be issued are: 1. Secured or unsecured bonds. Secured bonds have specific assets of the issuer pledged as collateral. Unsecured bonds are issued against the general credit of the borrower (these are normally issued as debentures). 2. Registered or bearer bonds. Registered bonds are issued in the name of the owner, while bearer bonds are not. 3. Convertible bonds, which can be converted by the bondholder into ordinary shares. 4. Callable bonds, which are subject to early retirement by the issuer at a stated amount. (3) Laws grant companies the power to issue bonds after formal approval by the board of directors and shareholders. The terms of the bond issue are set forth in a legal document called a bond indenture. After the bond indenture is prepared, bond certificates are printed. 16-35 , Accuracy checked BYP 16-7 ETHICS CASE (a) The stakeholders in the Hanley case are: , Stacey Buyer, CEO, founder and majority shareholder, 51%. , Mary Sommers, minority shareholder, 40%. , Other minority shareholders, 9%. , Existing creditors (debt holders). , Future bondholders. , Employees, suppliers and customers. (b) The ethical issues: The desires of the majority shareholder (Stacey Buyer) versus the desires of the minority shareholders (Mary Sommers and others). Doing what is right for the company and others versus doing what is best for oneself. Questions: Is what Stacey wants to do legal? Is it unethical? Is Stacey’s action brash and irresponsible? Who may benefit/suffer if Stacey arranges a high-risk bond issue? Who may benefit/suffer if Mary Sommers gains control of Hanley? (c) The rationale provided by the student will be more important than the specific position because this is a borderline case with no right answer. 16-36 , Accuracy checked