财务会计(英文版·原书第五版)课后习题答案。第10单元
CHAPTER 11
Liabilities
ASSIGNMENT CLASSIFICATION TABLE
Brief A B Study Objectives Questions Exercises Exercises Problems Problems
1. Explain a current liability, 1 1 1A 1B
and identify the major types
of current liabilities
2. Describe the accounting for 2 2 1 1A, 2A 1B
notes payable.
3. Explain the accounting for 3, 4, 5, 6 3, 4, 5, 6 2, 3 1A 1B
other current liabilities.
4. Explain why bonds are is- 7, 8, 9, 10, 7 4
sued, and identify the types 11
of bonds.
5. Prepare the entries for the 12, 13, 14, 8, 9, 10 5, 6, 10, 3A, 4A, 6A, 2B, 3B, 5B,
issuance of bonds and in- 11, 12, 13 7A, 8A, 9A 6B, 7B, 8B
terest expense.
6. Describe the entries when 15, 16 11 6, 7 3A, 4A, 2B, 3B, 9B
bonds are redeemed or 10A
converted.
7. Describe the accounting for 17 12 8 5A 4B
long-term notes payable.
8. Identify the methods for the 18 13 9 3A, 4A, 5A 2B, 3B
presentation and analysis of
long-term liabilities.
*9 Compute the market price 21 14
of a bond.
*10. Apply the effective-interest 19, 20 15 10, 11 6A, 7A 5B, 6B
method of amortizing bond
discount and bond
premium.
11-1
ASSIGNMENT CLASSIFICATION TABLE (Continued)
*11 Apply the straight-line 22, 23 16, 17 12, 13 8A, 9A, 7B, 8B, 9B
method of amortizing bond 10A
discount and bond pre-
mium.
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix
to the chapter.
11-2
ASSIGNMENT CHARACTERISTICS TABLE
Problem Difficulty Time Number Description Level Allotted (min.)
1A Prepare current liability entries, adjusting entries, and Moderate 30 40
current liabilities section.
2A Journalize and post note transactions and show balance Moderate 30 40
sheet presentation.
3A Prepare entries to record issuance of bonds, interest ac- Moderate 20 30
crual, and bond redemption.
4A Prepare entries to record issuance of bonds, interest ac- Moderate 15 20
crual, and bond redemption.
5A Prepare installment payments schedule and journal en- Moderate 20 30
tries for a mortgage note payable.
*6A Prepare entries to record issuance of bonds, payment of Moderate 30 40
interest, and amortization of bond discount using
effective-interest method.
*7A Prepare entries to record issuance of bonds, payment of Moderate 30 40
interest, and amortization of premium using effective-
interest method. In addition, answer questions.
*8A Prepare entries to record issuance of bonds, interest ac- Simple 30 40
crual, and amortization for two years.
*9A Prepare entries to record issuance of bonds, interest, and Simple 30 40
amortization of bond premium and discount.
*10A Prepare entries to record interest payments, discount Moderate 30 40
amortization, and redemption of bonds.
1B Prepare current liability entries, adjusting entries, and Moderate 30 40
current liabilities section.
2B Prepare entries to record issuance of bonds, interest ac- Moderate 20 30
crual, and bond redemption.
3B Prepare entries to record issuance of bonds, interest ac- Moderate 15 20
crual, and bond redemption.
4B Prepare installment payments schedule and journal en- Moderate 20 30
tries for a mortgage note payable.
*5B Prepare entries to record issuance of bonds, payment of Moderate 30 40
interest, and amortization of bond premium using
effective-interest method.
11-3
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
*6B Prepare entries to record issuance of bonds, payment of Moderate 30 40
interest, and amortization of discount using effective-
interest method. In addition, answer questions.
*7B Prepare entries to record issuance of bonds, interest ac- Simple 30 40
crual, and amortization for two years.
*8B Prepare entries to record issuance of bonds, interest, and Simple 30 40
amortization of bond premium and discount.
*9B Prepare entries to record interest payments, premium Moderate 30 40
amortization, and redemption of bonds.
11-4
BLOOM'S TAXONOMY TABLE
Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation 1.Explain a current liability, and identify Q11-1 P11-1A the major types of current liabilities. BE11-1 P11-1B 2.Describe the accounting for notes Q11-2 BE11-2 E11-1 P11-2A payable. P11-1A P11-1B
3.Explain the accounting for other cur - Q11-5 Q11-6 Q11-3 BE11-4 E11-2 E11-3 Q11-4 BE11-5 P11-1A rent liabilities. BE11-3 BE11-6 P11-1B 4.Explain why bonds are issued, and Q11-11 Q11-7 Q11-9 BE11-7 E11-4 identify the types of bonds. Q11-8 Q11-10 5.Prepare the entries for the issuance Q11-12 Q11-13 BE11-9 P11-2B E11-7 of bonds and interest expense.. Q11-14 E11-5 BE11-10 P11-3B E11-8
E11-6 P11-3A P11-5B Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems E11-10 P11-4A P11-6B E11-11 P11-6A P11-7B
E11-12 P11-7A P11-8B E11-13 P11-8A 11-5 BE11-8 P11-9A 6.Describe the entries when bonds are Q11-15 E11-6 P11-3A P11-2B
E11-7 P11-4A P11-3B redeemed or converted. Q11-16
BE11-11 P11-10A P11-9B 7.Describe the accounting for long - Q11-17 E11-8 E11-4B
term notes payable. BE11-12 P11-5A
8.Identify the methods for the presen - Q11-18 BE11-13 P11-4A P11-2B tation and analysis of long-term E11-9 P11-5A P11-3B
liabilities. P11-3A
*9. Compute the market price of a bond. Q11-21 BE11-14
*10. Apply the effective-interest method Q11-19 BE11-15 P11-6A P11-6B of amortizing bond discount and E11-10 P11-7A Q11-20
bond premium. E11-11 P11-5B
*11. Apply the straight-line method of Q11-22 Q11-23 E11-13 P11-7B amortizing bond discount and bond BE11-16 E11-8A P11-8B
BE11-17 P11-9A premium. P11-9B
E11-12 P11-10A
Broadening Your Perspective Communication Comp. Analysis Financial Reporting Comp. Ethics Case
Analysis Interpreting A Global Focus Group Decision Case
Research Case Cookie Chronicle Financial
Exploring the Web Statements
ANSWERS TO QUESTIONS
1. Brad is not correct. A current liability is a debt that can reasonably be expected to be paid: (1)
from existing current assets or through the creation of other current liabilities and (2) within one year or the operating cycle, whichever is longer.
2. In the balance sheet, Notes Payable of $30,000 and Interest Payable of $675 ($30,000 X .09 X
3/12) should be reported as current liabilities. In the income statement, Interest Expense of $675 should be reported under other expenses and losses.
(a) Disagree. The company only serves as a collection agent for the taxing authority. It does 3.
not report sales taxes as an expense; it merely forwards the amount paid by the customer
to the government.
(b) The entry to record the proceeds is:
Cash ................................................................................................................ 8,400
Sales ...................................................................................................... 8,000
Sales Taxes Payable .......................................................................... 400
4. (a) The entry when the tickets are sold is:
Cash ......................................................................................................... 900,000 Unearned Football Ticket Revenue .......................................... 900,000
(b) The entry after each game is:
Unearned Football Ticket Revenue ................................................... 180,000
Football Ticket Revenue ............................................................. 180,000
5. Three taxes commonly withheld by employers from employees’ gross pay are: (1) federal
income taxes, (2) state income taxes, and (3) social security (FICA) taxes.
6. (a) The three types of taxes are: (1) FICA, (2) federal unemployment, and (3) state unemployment. (b) The tax liability accounts are classified as current liabilities in the balance sheet. Payroll tax expense is classified under operating expenses in the income statement.
7. (a) Long-term liabilities are obligations that are expected to be paid after one year. Exam-
ples include bonds and long-term notes. (b) Bonds are a form of interest-bearing notes payable used by corporations, universities, and governmental agencies.
8. (a) The major advantages are:
(1) Stockholder control is not affected—bondholders do not have voting rights, so cur-
rent stockholders retain full control of the company.
(2) Tax savings result—bond interest is deductible for tax purposes; dividends on
stock are not.
(3) Earnings per share may be higher—although bond interest expense will reduce net
income, earnings per share on common stock will often be higher under bond fi-
nancing because no additional shares of common stock 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.
11-6
Questions Chapter 11 (Continued)
9. (a) Secured bonds have specific assets of the issuer pledged as collateral. In contrast, un-
secured bonds are issued against the general credit of the borrower. These bonds are
called debenture bonds.
(b) Term bonds mature at a single specified future date. In contrast, serial bonds mature in
installments.
(c) Registered bonds are issued in the name of the owner. In contrast, bearer (coupon)
bonds are unregistered. Holders of bearer bonds must send in coupons to receive inter-
est payments.
(d) Convertible bonds may be converted into common stock at the bondholders’ option. In
contrast, callable bonds are subject to retirement at a stated dollar amount prior to ma-
turity at the option of the issuer.
10. (a) Face value is the amount of principal the issuer must pay 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.
11. The two major obligations incurred by a company when bonds are issued are the interest
payments due on a periodic basis and the principal which must be paid at maturity.
12. Less than. Investors are required to pay more than the face value; therefore, the market in-
terest rate is less than the contractual rate.
13. $36,000. $800,000 X 9% X 1/2 year = $36,000.
14. $840,000. The balance of the Bonds Payable account minus the balance of the Discount on
Bonds Payable account (or plus the balance of the Premium on Bonds Payable account)
equals the carrying value of the bonds.
15. Debits: Bonds Payable (for the face value) and Premium on Bonds Payable (for the
unamortized balance).
Cash (for 97% of the face value) and Gain on Bond Redemption (to balance Credits:
entry).
16. A convertible bond permits bondholders to convert it into common stock at the option of the
bondholders.
(a) For bondholders, the conversion option gives an opportunity to benefit if the market
price of the common stock 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.
11-7
Questions Chapter 11 (Continued)
17. 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.
18. The nature and the amount of each long-term liability should be presented in the balance sheet 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.
*19. 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 inter- est on the balance outstanding. Accordingly, it results in a better matching of expenses with
revenues than the straight-line method.
*20. 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.
*21. No, Vera is not right. The market price of any bond is a function of three variables: (1) The
payment amounts, (2) The length of time until the amounts are paid, and (3) The market
interest rate.
*22. The straight-line method results in the same amortized 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.
*23. $21,000. Interest expense is the interest to be paid in cash less the premium amortization
for the year. Cash to be paid equals 8% X $300,000 or $24,000. Total premium equals 5%
of $300,000 or $15,000. Since this is to be amortized over 5 years (the life of the bonds) in
equal amounts, the amortization amount is $15,000 ? 5 = $3,000. Thus, $24,000 – $3,000
or $21,000 equals interest expense for 2006.
11-8
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 11-1
(a) A note payable due in two years is a long-term liability, not a current
liability.
(b) $30,000 of the mortgage payable is a current maturity of long-term
debt. This amount should be reported as a current liability.
(c) Interest payable is a current liability because it will be paid out of cur-
rent assets in the near future.
(d) Accounts payable is a current liability because it will be paid out of
current assets in the near future.
BRIEF EXERCISE 11-2
July 1 Cash .............................................................................. 60,000 Notes Payable................................................... 60,000
Interest Expense ....................................................... Dec. 31 3,000
Interest Payable ............................................... 3,000
($60,000 X 10% X 1/2)
BRIEF EXERCISE 11-3
Sales tax payable
(1) Sales = $12,800 = ($13,440 ? 1.05)
(2) Sales taxes payable = $640 = ($12,800 X 5%)
Mar. 16 Cash .............................................................................. 13,440
Sales .................................................................... 12,800
Sales Taxes Payable....................................... 640
11-9
BRIEF EXERCISE 11-4
Gross earnings:
Regular pay (40 X $16) ................................................... $640.00
Overtime pay (5 X $24) ................................................... 120.00 $760.00
Gross earnings .......................................................................... $760.00
Less: FICA taxes payable ($760 X 8%) ............................. $ 60.80
Federal income taxes payable................................. 95.00 155.80 Net pay.......................................................................................... $604.20
BRIEF EXERCISE 11-5
Jan. 15 Wages Expense ......................................................... 760.00 FICA Taxes Payable ($760 X 8%) ................ 60.80
Federal Income Taxes Payable.................... 95.00 Wages Payable ................................................. 604.20 Jan. 15 Wages Payable .......................................................... 604.20
Cash ..................................................................... 604.20
BRIEF EXERCISE 11-6
Cash .............................................................................................. 480,000 Unearned Basketball Ticket Revenue ....................... 480,000 (To record sale of 4,000 season tickets) Unearned Basketball Ticket Revenue ................................ 40,000
Basketball Ticket Revenue ........................................... 40,000
(To record basketball ticket revenues earned)
11-10
BRIEF EXERCISE 11-7
Issue Stock Issue Bond Income before interest and taxes $900,000 $900,000 Interest expense ($2,000,000 X 8%) 0 160,000 Income before income taxes 900,000 740,000 Income tax expense (30%) 270,000 222,000 Net income (a) $630,000 $518,000
Outstanding shares (b) 700,000 500,000 Earnings per share (a) ? (b) $0.90 $1.04
Net income is higher if stock is issued. However, earnings per share is
lower than earnings per share if bonds are issued because of the addi-
tional shares of stock that are outstanding.
BRIEF EXERCISE 11-8
(a) Jan. 1 Cash.......................................................... 4,000,000 Bonds Payable ............................. 4,000,000 (4,000 X $1,000) Bond Interest Expense ....................... (b) July 1 160,000 Cash................................................. 160,000 ($4,000,000 X 8% X 1/2) Bond Interest Expense ....................... (c) Dec. 31 160,000
Bond Interest Payable................ 160,000
($4,000,000 X 8% X 1/2)
11-11
BRIEF EXERCISE 11-9
(a) Jan. 1 Cash ($1,000,000 X .97)....................... 970,000 Discount on Bonds Payable.............. 30,000 Bonds Payable.............................. 1,000,000
Cash ($1,000,000 X 1.04) .................... (b) Jan. 1 1,040,000
Bonds Payable.............................. 1,000,000
Premium on Bonds Payable..... 40,000
BRIEF EXERCISE 11-10
1. Jan. 1 Cash (1,000 X $1,000) .......................... 1,000,000 Bonds Payable ........................ 1,000,000 2. July 1 Cash ($500,000 X 1.02)........................ 510,000 Bonds Payable.............................. 500,000
Premium on Bonds Payable..... 10,000
Cash ($200,000 X .99) .......................... 3. Sept. 1 198,000
Discount on Bonds Payable.............. 2,000 Bonds Payable.............................. 200,000 BRIEF EXERCISE 11-11 Bonds Payable.................................................................... 1,000,000 Loss on Bond Redemption............................................. 90,000
($1,030,000 – $940,000)
Discount on Bonds Payable.................................. 60,000
Cash ($1,000,000 X 1.03)......................................... 1,030,000
11-12
BRIEF EXERCISE 11-12
(A) (B) (C) (D)
Interest Reduction Principal Semiannual
Interest Cash Expense of Principal Balance Period Payment (D) X 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 11-13
Long-term liabilities
Bonds payable, due 2008...................................... $500,000
45,000 $455,000 Less: Discount on bonds payable ....................
Notes payable, due 2011 ....................................... 80,000
Mortgage payable .................................................... 50,000
Total long-term liabilities ............................. $585,000
11-13
*BRIEF EXERCISE 11-14
(a) i = 10%
? $10,000
0 1 2 3 4 5 6 7 8
Discount rate from Table 11 A-1 is .46651 (8 periods at 10%). Present value of $10,000 to be received in 8 periods discounted at 10% is there- fore $4,665.10 ($10,000 X .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 11 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 X 4.62288).
*BRIEF EXERCISE 11-15
(a) Bond Interest Expense................................................... 46,884
Discount on Bonds Payable................................ 1,884
Cash ............................................................................ 45,000
(b) Interest expense is greater than interest paid because the bonds
sold at a discount which must be amortized 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.
11-14
*BRIEF EXERCISE 11-16
(a) Jan. 1 Cash (.96 X $3,000,000) ...................... 2,880,000 Discount on Bonds Payable ............. 120,000
Bonds Payable ............................. 3,000,000
(b) July 1 Bond Interest Expense ....................... 141,000
Discount on Bonds Payable..... 6,000
($120,000 ? 20) Cash ................................................. 135,000 ($3,000,000 X 9% X 1/2) *BRIEF EXERCISE 11-17
(a) Cash (1.02 X $2,000,000) ........................................ 2,040,000 Bonds Payable.................................................. 2,000,000
Premium on Bonds Payable ........................ 40,000
(b) Bond Interest Expense ........................................... 96,000 Premium on Bonds Payable ................................. 4,000
($40,000 ? 10)
Cash ($2,000,000 X 10% X 1/2) .................... 100,000
11-15
SOLUTIONS TO EXERCISES
EXERCISE 11-1
(a) Jun. 1 Cash..................................................................... 70,000 Notes Payable ............................................ 70,000 (b) Jun. 30 Interest Expense.............................................. 700 Interest Payable......................................... 700 [($70,000 X 12%) X 1/12] (c) Dec. 1 Notes Payable .................................................. 70,000
4,200 Interest Payable ($70,000 X 12% X 6/12)....
Cash .............................................................. 74,200
(d) $4,200
EXERCISE 11-2
SUE JACKSON COMPANY
Apr. 10 Cash .......................................................................... 26,500 Sales................................................................. 25,000
Sales Taxes Payable ................................... 1,500 PERSON COMPANY
Cash .......................................................................... 15 20,330
Sales ($20,330 ? 1.07) ................................. 19,000
Sales Taxes Payable ................................... 1,330
($20,330 – $19,000)
EXERCISE 11-3
(a) Nov. 30 Cash................................................................. 180,000 Unearned Subscriptions .................. 180,000 (9,000 X $20) (b) Dec. 31 Unearned Subscriptions ........................... 15,000
Subscription Revenue ...................... 15,000
($180,000 X 1/12)
11-16
EXERCISE 11-3 (Continued)
(c) Mar. 31 Unearned Subscriptions ............................... 45,000
Subscription Revenue........................... 45,000
($180,000 X 3/12)
EXERCISE 11-4
Plan One Plan Two
Issue Stock Issue Bonds Income before interest and taxes $600,000 $600,000 Interest ($2,700,000 X 10%) — 270,000 Income before taxes 600,000 330,000 Income tax expense (30%) 180,000 99,000 Net income $420,000 $231,000 Outstanding shares 150,000 90,000 Earnings per share $2.80 $2.57
EXERCISE 11-5
(a) Jan. 1 Cash................................................................. 200,000 Bonds Payable .................................... 200,000
(b) July 1 Bond Interest Expense .............................. 10,000 Cash ($200,000 X 10% X 1/2)........... 10,000
Bond Interest Expense .............................. (c) Dec. 31 10,000
Bond Interest Payable....................... 10,000
EXERCISE 11-6
(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 X 1.04)...................... 416,000
(c) July 1 Bond Interest Expense .............................. 54,000
Cash ($1,200,000 X 9% X 1/2) ......... 54,000
11-17
EXERCISE 11-7
1. June 30 Bonds Payable ............................................ 130,000
Loss on Bond Redemption ..................... 25,100
($132,600 – $107,500)
Discount on Bonds Payable .......... 22,500
($130,000 – $107,500)
Cash ($130,000 X 102%).................. 132,600
2. June 30 Bonds Payable ............................................ 150,000 Premium on Bonds Payable ................... 1,000
Gain on Bond Redemption............. 4,000*
Cash ($150,000 X 98%) .................... 147,000
*$151,000 – (98% X $150,000)
3. Dec. 31 Bonds Payable ............................................ 40,000
Common Stock................................... 6,000
($5 X 40 X 30)
Paid-in Capital in Excess of
Par Value ......................................... 34,000
Note: As per the textbook, the market value of the stock is ignored in the
conversion.
EXERCISE 11-8
2006
Issuance of Note
Dec. 31 Cash......................................................................... 240,000 Mortgage Note Payable ............................ 240,000 2007 First Installment Payment
Interest Expense.................................................. June 30 12,000
($240,000 X 10% X 6/12)
Mortgage Note Payable..................................... 4,000
Cash................................................................ 16,000
11-18
EXERCISE 11-8 (Continued)
Second Installment Payment
Dec. 31 Interest Expense ................................................. 11,800
[($240,000 – $4,000) X 10% X 6/12] Mortgage Note Payable..................................... 4,200
Cash ............................................................... 16,000
EXERCISE 11-9
Long-term liabilities
Bonds payable, due 2014.............................. $180,000
Add: Premium on bonds payable ............ 32,000 $212,000
Note payable, due 2010 ................................. 59,500
Total long-term liabilities ..................... $271,500
*EXERCISE 11-10
(a) Jan. 1 Cash................................................................. 468,844 Discount on Bonds Payable .................... 31,156 Bonds Payable .................................... 500,000 (b) July 1 Bond Interest Expense .............................. 23,442 ($468,844 X 5%) Discount on Bonds Payable ........... 942 Cash ($500,000 X 9% X 1/2)............. 22,500 (c) Dec. 31 Bond Interest Expense .............................. 23,489
[($468,844 + $942) X 5%]
Discount on Bonds Payable ........... 989
Bond Interest Payable....................... 22,500
11-19
EXERCISE 11-10 (Continued)
(b), (c)
(B)
Interest Expense
11-20(A) to Be Recorded (C) (D)
Interest to (5% X Preceding Discount Unamortized Semiannual (E)
Be Paid Amortization Discount Interest Bond Carrying Value) Bond
Periods (E X .05) Carrying Value (4.5% X $500,000) (B) – (A) (D) – (C)
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
*EXERCISE 11-11
(a) Jan. 1 Cash................................................................. 424,925 Premium on Bonds Payable ........... 24,925
Bonds Payable .................................... 400,000
Bond Interest Expense .............................. (b) July 1 21,246
($424,925 X 5%)
Premium on Bonds Payable .................... 754
Cash........................................................ 22,000
($400,000 X 11% X 1/2)
(c) Dec. 31 Bond Interest Expense .............................. 21,209
[($424,925 – $754) X 5%] Premium on Bonds Payable .................... 791
Bond Interest Payable....................... 22,000
11-21
(b), (c)
(B) Interest Expense
(A) to Be Recorded (C) (D) 11-22Interest to Premium Unamortized Semiannual (5.0% X Preceding (E)
Be Paid Amortization Premium Interest Bond Carrying Value) Bond
(5.5% X $400,000) (A) – (B) (D) – (C) Periods (E X .05) 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
*EXERCISE 11-12
(a) Jan. 1 Cash ($600,000 X 103%) ............................ 618,000 Premium on Bonds Payable ........... 18,000
Bonds Payable .................................... 600,000
(b) July 1 Bond Interest Expense .............................. 26,550 Premium on Bonds Payable .................... 450 ($18,000 X 1/40) Cash ($600,000 X 9% X 1/2)............. 27,000
(c) Dec. 31 Bond Interest Expense............................. 26,550
Premium on Bonds Payable................... 450
Bond Interest Payable ..................... 27,000
2026
(d) Jan. 1 Bonds Payable............................................ 600,000
Cash ...................................................... 600,000
*EXERCISE 11-13
(a) 2005
Cash ............................................................... 550,000 Dec. 31 Discount on Bonds Payable................... 50,000 Bonds Payable................................... 600,000 2006 (b) Bond Interest Expense............................. June 30 35,500 Discount on Bonds Payable.......... 2,500 ($50,000 ? 20) Cash ($600,000 X 11% X 1/2) ......... 33,000 2006 (c) Bond Interest Expense............................. Dec. 31 35,500 Discount on Bonds Payable.......... 2,500 Cash ($600,000 X 11% X 1/2) ......... 33,000
2015 (d) Bonds Payable............................................ Dec. 31 600,000
Cash ...................................................... 600,000
11-23
SOLUTIONS TO PROBLEMS
PROBLEM 11-1A
15,000 (a) Jan. 1 Cash ..................................................................... Notes Payable .......................................... 15,000 5 Cash ..................................................................... 10,400 Sales ($10,400 ? 104%).......................... 10,000 Sales Taxes Payable .............................. 400 ($10,400 – $10,000) 12 Unearned Service Revenue .......................... 9,000 Service Revenue...................................... 9,000
Sales Taxes Payable ....................................... 14 5,800 Cash............................................................. 5,800
Accounts Receivable...................................... 20 37,856 Sales............................................................ 36,400
Sales Taxes Payable .............................. 1,456 (700 X $52 X 4%)
Cash ..................................................................... 25 12,480
Sales ($12,480 ? 104%).......................... 12,000
Sales Taxes Payable .............................. 480
($12,480 – $12,000)
(b) Jan. 31 Interest Expense...................................... 100
Interest Payable .............................. 100
($15,000 X 8% X 1/12)
(c) Current liabilities
Notes payable................................................................................ $15,000 Accounts payable ........................................................................ 42,500 Unearned service revenue ($15,000 – $9,000).................... 6,000 Sales taxes payable ($400 + $1,456 + $480) ........................ 2,336
100 Interest payable ............................................................................
Total current liabilities....................................................... $65,936
11-24
PROBLEM 11-2A
(a) Jan. 2 Merchandise Inventory or
Purchases ...................................................... 20,000
Accounts Payable................................. 20,000
Feb. 1 Accounts Payable.......................................... 20,000
Notes Payable ........................................ 20,000
Mar. 31 Interest Expense ............................................ 300 ($20,000 X 9% X 2/12)
Interest Payable..................................... 300
Apr. 1 Notes Payable ................................................. 20,000 Interest Payable.............................................. 300 Cash .......................................................... 20,300
July 1 Equipment ........................................................ 41,000
Cash .......................................................... 11,000
Notes Payable ........................................ 30,000
Sept. 30 Interest Expense ............................................ 750 ($30,000 X 10% X 3/12)
Interest Payable..................................... 750
Oct. 1 Notes Payable ................................................. 30,000 Interest Payable.............................................. 750 Cash .......................................................... 30,750 Cash ................................................................... 15,000 Dec. 1
Notes Payable ........................................ 15,000
Dec. 31 Interest Expense ............................................ 100 ($15,000 X 8% X 1/12)
Interest Payable..................................... 100
11-25
PROBLEM 11-2A (Continued)
(b)
Notes Payable
4/1 20,000 2/1 20,000
10/1 30,000 7/1 30,000
12/1 15,000 12/31 Bal. 15,000
Interest Expense 300 3/31
750 9/30 100 12/31
1,150 12/31 Bal. Interest Payable
300 3/31 4/1 300
10/1 750 9/30 750
12/31 100 12/31 Bal. 100
(c) Current liabilities
Notes payable........................................................ $15,000
Interest payable .................................................... 100 $15,100
(d) Total interest is $1,150.
11-26
PROBLEM 11-3A
(a) 2006
June 1 Cash.......................................................... 1,000,000 Bonds Payable ............................. 1,000,000
Bond Interest Expense ....................... (b) Dec. 31 6,667
Bond Interest Payable................ 6,667
($1,000,000 X 8% X 1/12) ....................
(c) Current Liabilities
Bond Interest Payable ........................ 6,667
Long-term Liabilities
Bonds Payable ...................................... 1,000,000
(d) 2007
June 1 Bond Interest Payable ........................ 6,667 Bond Interest Expense ....................... 33,333 ($1,000,000 X 8% X 5/12) Cash................................................. 40,000 (e) Dec. 1 Bond Interest Expense ....................... 40,000
Cash ($1,000,000 X 8% X 1/2) .. 40,000
(f) Dec. 1 Bonds Payable ...................................... 1,000,000 Loss on Bond Redemption ............... 10,000
Cash ($1,000,000 X 1.01) ........... 1,010,000
11-27
PROBLEM 11-4A
(a) 2006
Jan. 1 Cash ($400,000 X 1.05)........................ 420,000
Bonds Payable ......................... 400,000
Premium on Bonds Payable 20,000
(b) Current Liabilities
Bond Interest Payable ($400,000 X 9% X 1/2) .. $ 18,000
Long-term Liabilities
Bond Payable, due 2016 $400,000
Add: Premium on Bonds Payable 18,000 $418,000
(c) 2008
Jan. 1 Bonds Payable....................................... $400,000
Premium on Bonds Payable.............. 16,000 Loss on Bond Redemption................ 4,000*
Cash ($400,000 X 1.05) .......... 420,000
*($420,000 – $416,000)
11-28
PROBLEM 11-5A
(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) 2006
Dec. 31 Cash ............................................................... 800,000 Mortgage Notes Payable ................ 800,000
2007
Interest Expense ........................................ June 30 32,000
Mortgage Notes Payable ......................... 26,865
Cash ...................................................... 58,865
Dec. 31 Interest Expense ........................................ 30,925
27,940 Mortgage Notes Payable ......................... Cash ...................................................... 58,865 (c) 12/31/07
Current Liabilities
Current portion of mortgage notes payable $59,276*
Long-term Liabilities
Mortgage notes payable $685,919**
*($29,057 + $30,219)
**($745,195 – $59,276)
11-29
*PROBLEM 11-6A
(a) 2006
July 1 Cash .......................................................... 3,375,680 Discount on Bonds Payable.............. 224,320 Bonds Payable.............................. 3,600,000
Bond Interest Expense ....................... 168,784 (b) Dec. 31 ($3,375,680 X 5%) Discount on Bonds Payable..... 6,784 Bond Interest Payable................ 162,000 ($3,600,000 X 9% X 1/2) (c) 2007 Bond Interest Expense ....................... July 1 169,123 [($3,375,680 + $6,784) X 5%]
Discount on Bonds Payable..... 7,123 Cash ................................................. 162,000
Bond Interest Expense ....................... (d) Dec. 31 169,479 [($3,382,464 + $7,123) X 5%]
Discount on Bonds Payable..... 7,479 Bond Interest Payable................ 162,000
KINGSTON SATELLITES (e)
Bond Discount Amortization
Effective-Interest Method—Semiannual Interest Payments
9% Bonds Issued at 10%
(A) (B) (C) (D) (E)
Semi- Interest Discount Unamor- Bond annual Interest Expense Amor- tized Carrying Interest to Be to Be tization Discount Value Periods Paid Recorded (B) – (A) (D) – (C) ($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
11-30
*PROBLEM 11-7A
(a) (1) 2006
July 1 Cash................................................. 5,679,533 Bonds Payable .................... 5,000,000
Premium on Bonds Payable.............................. 679,533
Bond Interest Expense .............. (2) Dec. 31 227,181
($5,679,533 X 4%)
Premium on Bonds
Payable....................................... 22,819
Bond Interest Payable....... 250,000
($5,000,000 X 5%)
(3) 2007
July 1 Bond Interest Expense .............. 226,269 [($5,679,533 – $22,819) X 4%] Premium on Bonds Payable ......................................... 23,731 Cash ........................................ 250,000
Bond Interest Expense .............. (4) Dec. 31 225,319
[($5,656,714 – $23,731) X 4%]
Premium on Bonds
Payable ......................................... 24,681 Bond Interest Payable....... 250,000
(b) Bonds payable.................................................... 5,000,000
Add: Premium on bonds payable ............... 608,302* 5,608,302
*($679,533 – $22,819 – $23,731 – $24,681)
11-31
*PROBLEM 11-7A (Continued)
(c) Dear :
Thank you for asking me to clarify some points about the bonds is- sued by Strigel Chemical Company.
(1) The amount of interest expense reported for 2007 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 2007. Straight-line interest expense for
2007 is $432,046 [$250,000 + $250,000 – ($33,977 + *$33,977)].
*$679,533 ? 20
(3) The total cost of borrowing is as shown below:
Semiannual interest payments
($5,000,000 X 10% X 1/2) = $250,000 X 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 amortization.
If you have other questions, please contact me.
Sincerely,
11-32
*PROBLEM 11-8A
(a) 2006
Jan. 1 Cash ($2,000,000 X 96%).................... 1,920,000
Discount on Bonds Payable ............. 80,000
Bonds Payable ............................. 2,000,000
(b) See page 11-34.
(c) 2006
July 1 92,000 Bond Interest Expense ....................... Discount on Bonds
Payable ($80,000 ? 40)........... 2,000 Cash................................................. 90,000 ($2,000,000 X 9% X 1/2) Bond Interest Expense ....................... Dec. 31 92,000 Discount on Bonds
Payable....................................... 2,000 Bond Interest Payable................ 90,000 2007 Bond Interest Payable ........................ Jan. 1 90,000 Cash................................................. 90,000
Bond Interest Expense ....................... July 1 92,000 Discount on Bonds Payable....................................... 2,000 Cash................................................. 90,000 ($2,000,000 X 9% X 1/2) Bond Interest Expense ....................... Dec. 31 92,000
Discount on Bonds
Payable....................................... 2,000
Bond Interest Payable................ 90,000
11-33
*PROBLEM 11-8A (Continued)
(D) (E) Unamortized Bond Discount Carrying Value
(D) – (C) $2,000,000 – (D)] $80,000 $1,920,000 1 78,000 1,922,000 2 76,000 1,924,000
3 74,000 1,926,000 Issue date (b) 4 72,000 1,928,000 (A) (B) (C) Semiannual Interest to Interest Expense Discount 11-34Interest Be Paid) to Be Recorded Amortization
Periods (4.5% X $2,000,000) (A) + (C) ($80,000 ? 40)
$90,000 $92,000 $2,000
90,000 92,000 2,000
90,000 92,000 2,000
90,000 92,000 2,000
*PROBLEM 11-8A (Continued)
(d) Current Liabilities
Bond interest payable $ 90,000
Long-term Liabilities
Bonds payable $2,000,000
Less: Discount on bonds payable 72,000 $1,928,000
11-35
*PROBLEM 11-9A
(a) Jan. 1 Cash ($3,000,000 X 103%).................. 3,090,000 Premium on Bonds
Payable ......................................... 90,000 Bonds Payable.............................. 3,000,000
Bond Interest Expense ....................... July 1 115,500 Premium on Bonds Payable.............. 4,500 ($90,000 ? 20) Cash ................................................. 120,000 ($3,000,000 X 8% X 1/2)
Bond Interest Expense ....................... Dec. 31 115,500 Premium on Bonds Payable.............. 4,500
Bond Interest Payable................ 120,000
(b) Jan. 1 Cash ($3,000,000 X 96%) .................... 2,880,000 120,000 Discount on Bonds Payable.............. Bonds Payable.............................. 3,000,000
Bond Interest Expense ....................... July 1 126,000 Discount on Bonds Payable ($120,000 ? 20)........... 6,000 Cash ................................................. 120,000 126,000 Dec. 31 Bond Interest Expense ....................... Discount on Bonds
Payable ......................................... 6,000
Bond Interest Payable................ 120,000
11-36
*PROBLEM 11-9A (Continued)
(c) Premium
Current Liabilities
Bond interest payable $ 120,000
Long-term Liabilities
Bonds payable, due 2016 $3,000,000
Add: Premium on bonds payable 81,000* $3,081,000
*$90,000 – $4,500 – $4,500 Discount
Current Liabilities Bond interest payable $ 120,000 Long-term Liabilities Bonds payable, due 2016 $3,000,000
Less: Discount on bonds payable 108,000* $2,892,000
*$120,000 – $6,000 – $6,000
11-37
*PROBLEM 11-10A
96,000 (a) Jan. 1 Bond Interest Payable........................... Cash ................................................... 96,000 (b) July 1 Bond Interest Expense ......................... 100,500 Discount on Bonds
Payable ($90,000 ? 20) ............. 4,500 Cash ($2,400,000 X .04)................ 96,000
(c) July 1 Bonds Payable......................................... 800,000 Loss on Bond Redemption.................. 44,500
Discount on Bonds Payable....... 28,500*
Cash ($800,000 X 102%) .............. 816,000
*($90,000 – $4,500) X 1/3 = $28,500
(d) Dec. 31 Bond Interest Expense ......................... 67,000
Discount on Bonds Payable....... 3,000*
Bond Interest Payable.................. 64,000**
*($90,000 – $4,500) X 2/3 = $57,000; $57,000 ? 19 = $3,000 or
$4,500 X 2/3 = $3,000
**($2,400,000 – $800,000 = $1,600,000; $1,600,000 X 4% = $64,000)
11-38
PROBLEM 11-1B
(a) Jan. 5 Cash ..................................................................... 17,280 Sales ($17,280 ? 108%) ......................... 16,000
Sales Taxes Payable.............................. 1,280 ($17,280 – $16,000)
Unearned Service Revenue.......................... 12 10,000 Service Revenue ..................................... 10,000
14 Sales Taxes Payable....................................... 7,700 Cash ............................................................ 7,700
Accounts Receivable...................................... 20 32,400 Sales............................................................ 30,000
Sales Taxes Payable.............................. 2,400 (600 X $50 X 8%)
Cash ..................................................................... 18,000 21 Notes Payable .......................................... 18,000
Cash ..................................................................... 25 12,420
Sales ($12,420 ? 108%) ......................... 11,500
Sales Taxes Payable.............................. 920
($12,420 – $11,500)
(b) Jan. 31 Interest Expense ..................................... 45
Interest Payable.............................. 45
($18,000 X 9% X 1/12 =
$135; $135 X 1/3)
(c) Current liabilities
Notes payable ............................................................................... $18,000
Accounts payable........................................................................ 52,000
Unearned service revenue ($16,000 – $10,000) ................. 6,000
Sales taxes payable ($1,280 + $2,400 + $920) .................... 4,600
45 Interest payable............................................................................
Total current liabilities ...................................................... $80,645
11-39
PROBLEM 11-2B
(a) 2006
May 1 Cash ........................................................ 800,000 Bonds Payable............................ 800,000 Bond Interest Expense ..................... (b) Dec. 31 12,000
Bond Interest Payable.............. 12,000
($800,000 X 9% X 2/12)
(c) Current Liabilities
Bond Interest Payable................................... $12,000
Long-term Liabilities
Bonds Payable, due 2011 ............................ $800,000
(d) 2007
May 1 Bond Interest Payable....................... 12,000 Bond Interest Expense ..................... 24,000 ($800,000 X 9% X 4/12) Cash ($800,000 X 9% X 1/2) .... 36,000 Bond Interest Expense ..................... (e) Nov. 1 36,000
Cash ............................................... 36,000
(f) Nov. 1 Bonds Payable..................................... 800,000
Loss on Bond Redemption.............. 8,000
Cash ($800,000 X 1.01)............. 808,000
11-40
PROBLEM 11-3B
(a) 2006
Jan. 1 Cash ($300,000 X 1.04)...................... 312,000
Bonds Payable ........................... 300,000
Premium on Bonds Payable .. 12,000
(b) Current Liabilities
Bond interest payable ($300,000 X 10% X 1/2) $15,000
Long-term Liabilities
Bonds payable, due 2016.............................. $300,000
Add: Premium on bonds payable ............ 10,800 $310,800
(c) 2008
Jan. 1 Bonds Payable .................................... 300,000 Premium on Bonds Payable ........... 9,600 Loss on Bond Redemption ............. 5,400*
Cash ($300,000 X 1.05) ............ 315,000
*($315,000 – $309,600)
11-41
PROBLEM 11-4B
(a) Semiannual Cash Interest Reduction of Principal Interest Period Payment Expense Principal Balance
Issue Date $600,000
1 $44,149 $24,000 $20,149 579,851
2 44,149 23,194 20,955 558,896
3 44,149 22,356 21,793 537,103
4 44,149 21,484 22,665 514,438
$85,562
(b) 2005
Dec. 31 Cash................................................................ 600,000 Mortgage Notes Payable................. 600,000
2006
Interest Expense......................................... June 30 24,000
Mortgage Notes Payable.......................... 20,149
Cash....................................................... 44,149
Dec. 31 Interest Expense......................................... 23,194
20,955 Mortgage Notes Payable.......................... Cash....................................................... 44,149 (c) 12/31/06
Current Liabilities
Current portion of mortgage notes payable $44,458*
Long-term Liabilities
Mortgage notes payable, due 2015 $514,438**
*($21,793 + $22,665)
**($558,896 – $21,793 – $22,665)
11-42
*PROBLEM 11-5B
(a) 2006
July 1 Cash.......................................................... 4,543,626 Bonds Payable ............................. 4,000,000
Premium on Bonds Payable ......................................... 543,626
Bond Interest Expense ....................... (b) Dec. 31 181,745
($4,543,626 X 4%)
Premium on Bonds Payable ............. 18,255
Bond Interest Payable................ 200,000
($4,000,000 X 5%)
(c) 2007
July 1 Bond Interest Expense ....................... 181,015 [($4,543,626 – $18,255) X 4%] Premium on Bonds Payable ............. 18,985 Cash................................................. 200,000
(d) Dec. 31 Bond Interest Expense ....................... 180,255 [($4,525,371 – $18,985) X 4%]
Premium on Bonds Payable ............. 19,745 Bond Interest Payable................ 200,000
CLINTIN CORPORATION (e)
Bond Premium Amortization
Effective-Interest Method—Semiannual Interest Payments
10% Bonds Issued at 8%
(A) (B) (C) (D) (E)
Semi- Premium Unamor- Bond
annual Interest Amor- tized Carrying Interest to Be Interest tization Premium Value Periods Paid Expense (A) – (B) (D) – (C) ($4,000,000 + D) Issue date $543,626 $4,543,626
1 $200,000 $181,745 $18,255 525,371 4,525,371
2 200,000 181,015 18,985 506,386 4,506,386
3 200,000 180,255 19,745 486,641 4,486,641
11-43
*PROBLEM 11-6B
(a) (1) 2006
July 1 Cash ................................................. 1,750,757 Discount on Bonds Payable ......................................... 249,243 Bonds Payable..................... 2,000,000
Bond Interest Expense............... 87,538 (2) Dec. 31 ($1,750,757 X 5%) Discount on Bonds Payable .............................. 7,538 Bond Interest Payable ....... 80,000 ($2,000,000 X 4%)
2007 (3) Bond Interest Expense............... July 1 87,915 [($1,750,757 + $7,538) X 5%] Discount on Bonds Payable .............................. 7,915
Cash ........................................ 80,000
Bond Interest Expense............... (4) Dec. 31 88,311
[($1,758,295 + $7,915) X 5%]
Discount on Bonds
Payable .............................. 8,311
Bond Interest Payable ....... 80,000
(b) Bonds payable .................................................... $2,000,000
Less: Discount on bonds
payable.......................................... 225,479* 1,774,521
*($249,243 – $7,538 – $7,915 – $8,311)
11-44
*PROBLEM 11-6B (Continued)
(c) Dear :
Thank you for asking me to clarify some points about the bonds is- sued by Wilkowski Company.
(1) The amount of interest expense reported for 2007 related to
these bonds is $176,226 ($87,915 + $88,311).
(2) When the bonds are sold at a discount, the effective-interest
method will result in less interest expense reported than the
straight-line method in 2007. Straight-line interest expense for
2007 is $184,924 [$80,000 + $80,000 + ($12,462* + $12,462)].
*$249,243 ? 20
(3) The total cost of borrowing is $1,849,243 as shown below:
Semiannual interest payments
($2,000,000 X 4%) = $80,000; $80,000 X 20 ............... $1,600,000
Add: Bond discount ($2,000,000 – $1,750,757)........... 249,243
Total cost of borrowing .............................................. $1,849,243
(4) The total bond interest expense over the life of the bonds is the
same under either method of amortization.
If you have other questions, please contact me.
Sincerely,
11-45
*PROBLEM 11-7B
(a) 2006
Jan. 1 Cash ($5,000,000 X 1.04) .................... 5,200,000
Bonds Payable.............................. 5,000,000
Premium on Bonds Payable..... 200,000
(b) See page 11-47.
(c) 2006
July 1 Bond Interest Expense ....................... 240,000 Premium on Bonds Payable.............. 10,000 ($200,000 ? 20) Cash ($5,000,000 X 5%).............. 250,000
Bond Interest Expense ....................... Dec. 31 240,000
Premium on Bonds Payable.............. 10,000
Bond Interest Payable................ 250,000
2007
Jan. 1 Bond Interest Payable......................... 250,000 Cash ................................................. 250,000
July 1 Bond Interest Expense ....................... 240,000
Premium on Bonds Payable.............. 10,000
Cash ................................................. 250,000
Dec. 31 Bond Interest Expense ....................... 240,000 Premium on Bonds Payable.............. 10,000
Bond Interest Payable................ 250,000
(d) Current Liabilities
Bond interest payable $250,000
Long-term Liabilities
Bonds payable, due 2016 $5,000,000
Add: Premium on bonds payable 160,000 $5,160,000
11-46
EXERCISE 11-7B (Continued)
(D) (E) Unamortized Bond Premium Carrying Value
(D) – (C) [$5,000,000 + (D)] $200,000 $5,200,000 1 190,000 5,190,000 2 180,000 5,180,000
3 170,000 5,170,000 (b) Issue date 4 160,000 5,160,000 (A) (B) (C)
Semiannual Interest to Interest Expense Premium Interest Be Paid to Be Recorded Amortization Periods (5% X $5,000,000) (A) – (C) ($200,000 ? 20) 11-47
$250,000 $240,000 $10,000
250,000 240,000 10,000
250,000 240,000 10,000
250,000 240,000 10,000
*PROBLEM 11-8B
(a) 2006
2,080,000 July 1 Cash ($2,000,000 X 104%).................. Premium on Bonds Payable ......................................... 80,000 Bonds Payable.............................. 2,000,000 Bond Interest Expense ....................... Dec. 31 76,000 Premium on Bonds Payable.............. 4,000 ($80,000 ? 20) Bond Interest Payable................ 80,000 ($2,000,000 X 8% X 1/2)
2006 (b)
Cash ($2,000,000 X 98%) .................... July 1 1,960,000
Discount on Bonds Payable.............. 40,000
Bonds Payable.............................. 2,000,000
Dec. 31 Bond Interest Expense ....................... 82,000 Discount on Bonds
Payable ($40,000 ? 20) ............. 2,000
Bond Interest Payable................ 80,000
($2,000,000 X 8% X 1/2)
(c) Premium
Long-term Liabilities
Bonds payable, due 2016 $2,000,000
Add: Premium on bonds payable 76,000 $2,076,000
Discount
Long-term Liabilities
Bonds payable, due 2016 $2,000,000
Less: Discount on bonds payable 38,000 $1,962,000
11-48
*PROBLEM 11-9B
(a) 2007
Jan. 1 Bond Interest Payable ...................... 120,000 Cash............................................... 120,000 Bond Interest Expense ..................... (b) July 1 110,000 Premium on Bonds Payable ........... 10,000 ($200,000 ? 20) Cash............................................... 120,000
(c) July 1 Bonds Payable .................................... 1,800,000
Premium on Bonds Payable ........... 114,000*
Gain on Bond Redemption..... 96,000
($1,914,000 – $1,818,000)
Cash ($1,800,000 X 101%)....... 1,818,000
*($200,000 – $10,000) X .60 = $114,000
(d) Dec. 31 Bond Interest Expense ..................... 44,000
Premium on Bonds Payable ........... 4,000**
Bond Interest Payable.............. 48,000
($1,200,000 X 8% X 1/2)
$76,000 **$200,000 – $10,000 – $114,000 = $76,000; = $4,000 or $10,000 X .40.19
11-49
COMPREHENSIVE PROBLEM: CHAPTERS 6 TO 11
(a) Paris Troyer
Company Company
$ 70,300 $ 48,400 Cash
Accounts Receivable (1.) 309,700 312,500
(20,000) Allowance for Doubtful Accounts (13,600)
Merchandise Inventory (2.) 517,000 520,200
Plant and Equipment 255,300 257,300
Accumulated Depreciation (3.) (188,375) (189,850)
Total Assets $950,325 $928,550
Current Liabilities (4.) $440,200 $452,500
Long-term Liabilities 78,000 64,000
Total Liabilities 518,200 516,500
Stockholders’ Equity 432,125* 412,050**
Total Liabilities and Stockholders’ Equity $950,325 $928,550
*$454,750 – $75,725 ($188,375 – $112,650) change in accumulated
depreciation + $53,100 ($517,000 – $463,900) change in inventory.
**$432,050 – $20,000 allowance for doubtful accounts.
(b) Based on a review of the companies and revision of financial statements for purposes of comparability, it can be seen that Paris Company is in a better financial position. However, this claim to the better position is a tenuous one. The amounts within each category in the balance sheet of each company are very similar.
In terms of short-term liquidity, Paris Company is in a little stronger financial position. Total current assets for Paris Company are $883,400 versus $861,100 for Troyer. Comparing these to the current liabilities, Troyer has a current ratio of 1.90 ($861,100 ? $452,500) versus 2.01 ($883,400 ? $440,200) for Paris.
11-50
BYP 11-1 FINANCIAL REPORTING PROBLEM
(a) Total current liabilities at December 27, 2003, $6,415 million.
PepsiCo’s total current liabilities increased by $363 ($6,415 – 6,052)
million over the prior year.
(b) In Note 2 under the subheading ―Commitments and Contingencies,‖
PepsiCo states: ―We recognize liabilities for contingencies and com-
mitments when a loss is probable and estimable.
(c) The components of current liabilities are:
Short-term obligations $591,000,000
Accounts payable and other current liabilities $5,213,000,000
Income taxes payable $611,000,000
(d) At December 27, 2003, PepsiCo’s long-term debt was $5,777 ($1,702 +
$4,075) million. There was a $636 million decrease ($6,413 – $5,777) in
long-term debt during the year. Note 9 indicates that long-term debt
obligations consists of notes due in 2004–2026 of $1,186 million,
reclassified short-term borrowings of $375 million, zero coupon notes
due in 2004–2012 of $330 million, and other long-term debt of $257
million. This note also states that $446 million of current maturities of
long-term debt obligations are excluded.
(e) PepsiCo reported $6,303 million of long-term contractual commit-
ments as of December 27, 2003.
11-51
BYP 11-2 COMPARATIVE ANALYSIS PROBLEM
(a) PepsiCo’s largest current liability was ―accounts payable and other
liabilities‖ at $5,213 million. Its total current liabilities were $6,415 mil-
lion. Coca-Cola’s largest current liability was ―accounts payable and
accrued expenses‖ at $4,058 million. Its total current liabilities were
$7,886 million.
(b) (in millions) PepsiCo Coca-Cola
(1) Working capital $6,930 – 6,415 = $515 $8,396 – $7,886 = $510
$6,930 $8,396 (1) Current ratio = 1.06:1 $6,415 =1.08:1 $7,886
(c) Based on this information, it appears that both companies are only
narrowly liquid. The working capital levels are both low, as are the
current ratios.
(d) PepsiCo Coca-Cola 1. Debt to total $12,192* = 48.1% $12,915** = 47.2% assets $25,327 $27,342
2. Times interest $3,568 + $1,424 + $163 $4,347 + $1,148 + $178 = 31.6 times = 31.9 times earned $163 $178
*$6,415 + $1,702 + $4,075 **7,886 + $2,517 + $2,512
(e) The higher the percentage of debt to total assets, the greater the risk
that a company may be unable to meet its maturing obligations.
PepsiCo’s 2003 debt to total assets ratio was only slightly more than
Coca-Cola’s. The times interest earned ratio provides an indication of
a company’s ability to meet interest payments. Both times interest
earned ratios are excellent and, therefore, both companies will have
no difficulty meeting these interest payments.
11-52
BYP 11-3 RESEARCH CASE
(a) A put is an option to sell a security at a specified price, usually within
a limited period. Vivendi was committed to pay $250 million in cash
due to a decline in its stock price.
(b) If Vevendi borrows money its solvency would decline. Investors and
creditors would probably find it less attractive because its debt to
total assets ratio would increase and times interest earned and cash
debt coverage ratio would probably decrease. Vivendi’s profitability
would probably decrease because of increased interest expense.
(c) The regulators raided the headquarters in order to ―access all the
company’s internal documents.‖ They probably wanted to reduce the
risk that relevant documents would be destroyed.
(d) The timing is important. Vivendi was in the midst of negotiating a
renewal of credit lines. Failure to obtain such renewals would result in
a severe cash crunch.
(e) Under French law, attorney privilege does not apply once the COB
(Commission des Operations de Bourse) has begun its investigation.
(This is France’s version of the Securities and Exchange Commis-
sion). In the U.S. this is not the case.
11-53
BYP 11-4 INTERPRETING FINANCIAL STATEMENTS
(a) Lufkin Industries CNH Global N. V.
Working capital $97.6 – $37.0 = $60.6 $7,431 – $7,353 = $78
$97.6 $7,431 Current ratio = 1.01:1 $37.0 = 2.64:1 $7,353
CNH Global N.V.’s liquidity is very low and Lufkin Industries’ is strong.
Most significant is CNH Global N.V.’s very low current ratio.
(b)
Debt to total $75.1 $15,303 = 30.5% = 88.9% assets ratio $246.1 $17,212
Times interest $19.5 + $12.7 + $.9 –$332 – $105 + $726 = 36.8 times = .4 times earned $.9 $726
CNH Global N.V. relied heavily on debt financing – 89% of every dollar
of assets was financed with debt versus only 31% by Lufkin Indus-
tries. CNH Global N.V. could not cover its interest payments with
earnings before interest and taxes. CNH Global N.V. does not appear
to be able to service its debt. Lufkin Industries’ interest coverage is
comfortable and it may be able to take on even more debt.
Return on $19.5 –$332 (c) = 8.1% = –1.9% assets ratio ($246.1 + $233.6)/2 ($17,577 + $17,212)/2
$19.5 –$332 Profit margin = 7% = –3.7% ratio $278.9 $9,030
CNH Global N.V. has negative profitability ratios because it reported a
loss for the year. The loss, low liquidity, and low solvency indicate
future viability problems for CNH Global N.V.
11-54
BYP 11-5 A GLOBAL FOCUS
(a) In the 1870s, a securities system was introduced in Japan and pub- lic bond negotiation began. This resulted in the request for a public trading institution and the ―Stock Exchange Ordinance‖ was
enacted in May of 1878. Based on this ordinance, the ―Tokyo Stock
Exchange Co., Ltd.‖ was established on May 15, 1878 and trading began on June 1st. Japan now has five stock exchanges.
(b) In March of 1943, the ―Japan Securities Exchange Law‖ was enacted
to reorganize the Stock Exchange as a wartime-controlled institu- tion. With worsening war conditions and air raids on the main island of Japan, the securities market was forced to suspend trading ses- sions on all securities markets on August 10, 1945. Trading was restarted by unofficial group transactions in December of 1945.
(c) The following are major items with respect to decisions by the com- pany that need to be disclosed to the public:
Issuance of stocks, convertible bonds, and bonds with warrants.
Reduction of capital.
Stock split or stock consolidation.
Merger.
Dissolution.
Purchase or sale of stocks or equity interest in a subsidiary.
Change of representative.
Change of the trade name.
(d) The following are major items with respect to ―occurrence of material
fact‖ that need to be disclosed to the public:
Damage incurred by natural disaster or business operations.
Change in major shareholders.
Commencement of litigation or rendering of a court judgment.
11-55
BYP 11-5 (Continued)
Commencement of bankruptcy or reorganization proceedings.
Dishonor of notes.
Change of laws and the like in the home country that have a ma-
terial effect on the company or its shareholders, such as restric-
tion on transfer of stocks, nationalization of the company.
Tender offer for the company’s stocks.
Occurrence of facts causing the delisting from the foreign stock
exchange or the like.
11-56
BYP 11-6 A GLOBAL FOCUS
(a) Apache Corporation bonds were sold at a discount because the
proceeds of the bond issue ($99 million) were less than the face
value of the bonds, which was $100 million. The contractual in-
terest rate of 9.25% on the bonds was lower than the market in-
terest rate. The actual market rate cannot be determined but it is
likely to be close to 9.50%.
(b) Apache Corporation incurred more debt in order to reduce bank
debt, pay off convertible notes payable, and have cash funds for
general corporate purposes.
11-57
BYP 11-7 EXPLORING THE WEB
(a) In 1909, Moody introduced the first bond ratings as part of Moody’s
Analyses of Railroad Investments.
(b) Emphasis on the Qualitative
Focus on the Long-Term
Global Consistency
Level and Predictability of Cash Flow
Reasonably Adverse Scenarios
―Seeing Through‖ Local Accounting Practices
(c) Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are gener-
ally 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 visualized are most unlikely to
impair the fundamentally strong position of such issues.
11-58
BYP 11-8 GROUP DECISION CASE
(a) Face value of bonds $6,000,000
Proceeds from sale of bonds ($6,000,000 X .96) 5,760,000
Discount on bonds payable $ 240,000 Bond discount amortization per year: $240,000 ? 5 = $48,000
Face value of bonds $6,000,000
Amount of original discount $240,000
Less: Amortization through January 1, 2006
(2-year) 96,000 144,000
Carrying value of bonds, January 1, 2006 $5,856,000
(b) 1. Bonds Payable .................................................. 6,000,000
Discount on Bonds Payable ................ 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 President Bailey:
The early redemption of the 8%, 5-year bonds results in recognizing a
gain of $856,000 that increases current year net income by the after-
tax effect of the gain. The amount of the liabilities on the balance
sheet will be lowered by the issuance of the new bonds and retire-
ment of the 5-year bonds.
1. The cash flow of the company as it relates to bonds payable will
be adversely affected as follows:
11-59
BYP 11-8 (Continued)
Annual interest payments on the new issue $550,000
($5,000,000 X .11)
Annual interest payments on the 5-year bonds 480,000
($6,000,000 X .08)
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 amortization 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, January 1, 2009, or refinancing of that is- sue at that time and consider what interest rates will be in 2009 in evaluating a redemption and issuance in 2006.
Sincerely,
11-60
BYP 11-9 COMMUNICATION ACTIVITY
To: Ken Robson
From: I. M. Student
Subject: Bond Financing
(1) The advantages of bond financing over common stock financing
include:
1. Stockholder control is not affected.
2. Tax savings result.
3. Earnings per share of common stock 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.
2. Term or serial bonds. Term bonds mature at a single specified
date, while serial bonds mature in installments.
3. Registered or bearer bonds. Registered bonds are issued in the
name of the owner, while bearer bonds are not.
4. Convertible bonds, which can be converted by the bondholder
into common stock.
5. Callable bonds, which are subject to early retirement by the
issuer at a stated amount.
(3) State laws grant corporations the power to issue bonds after formal
approval by the board of directors and stockholders. The terms of
the bond issue are set forth in a legal document called a bond in-
denture. After the bond indenture is prepared, bond certificates are
printed.
11-61
BYP 11-10 ETHICS CASE
(a) The stakeholders in the Wesley case are:
Mel Horn, president, founder, and majority stockholder.
Mary Sommers, minority stockholder.
Other minority stockholders.
Existing creditors (debt holders).
Future bondholders.
Employees, suppliers, and customers.
(b) The ethical issues:
The desires of the majority stockholder (Mel Horn) versus the
desires of the minority stockholders (Mary Sommers and others).
Doing what is right for the company and others versus doing what is
best for oneself.
Questions:
Is what Mel wants to do legal? Is it unethical? Is Mel’s action brash
and irresponsible? Who may benefit/suffer if Mel arranges a high-
risk bond issue? Who may benefit/suffer if Mary Sommers gains
control of Wesley?
(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.
11-62
BYP 11-11 CONTINUING COOKIE CHRONICLE
(a) $2,000 X 6% X 2.5/12 = $25
(b) Total interest expense and interest payable $2,000 X 6% X 9.5/12 = $95
Entry required $95 – $25 accrued to January 31 = $70
Aug. 31 Interest Expense ($2,000 X 6% X 7/12) 70
Interest Payable 70
(c) Sept. 15 Note Payable 2,000 Interest Payable ($25 + $70) 95
Interest Expense ($2,000 X 6% X 0.5/12) 5
Cash ($2,000 + ($2,000 X 6% X 10/12)) 2,100
11-63
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