Professional Documents
Culture Documents
Long-Term Liabilities
QUESTIONS
2005
Jan. 1 Cash.................................................................................
306,250
Discount on Bonds Payable.......................................... 43,750
Bonds Payable.......................................................... 350,000
To record issuing bonds at a discount.
Jan. 1 Cash.................................................................................
140,700
Bonds Payable.......................................................... 120,000
Premium on Bonds Payable.................................... 20,700
To record issuing bonds at a premium.
a. Using facts in QS 14-2, the bonds cash proceeds for the bond selling at
a discount are computed as follows
b. Using facts in QS 14-3, the bonds cash proceeds for the bond selling at
a premium are computed as
2005
Mar. 1 Cash................................................................................
202,667
Interest payable*....................................................... 2,667
Bonds payable.......................................................... 200,000
McGraw-Hill Companies, Inc., 2007
56 International Edition: Fundamental Accounting Principles, 18 th Edition
Sold $200,000 of bonds with two months
accrued interest. *($200,000 x .08 x 2/12)
2005
July 1 Bonds Payable................................................................
200,000
Premium on Bonds Payable.......................................... 8,000
Gain on Retirement of Bonds*................................ 3,000
Cash........................................................................... 205,000
To record retirement of bonds before maturity.
*$3,000 = $208,000 - $205,000
2005
Jan. 1 Bonds Payable.................................................................
1,000,000
Common Stock*......................................................... 250,000
Contributed Capital in Excess of Par Value................ 750,000
To record retirement of bonds by stock
conversion. *500,000 shares x $0.50
Collins Industries is restricted in several ways by the creditor bank. They are
restricted from incurring certain types of additional indebtedness, from
making certain investments, from selling a substantial portion of their assets,
from making certain capital expenditures, and from granting substantial cash
dividends. In addition, the company must maintain the agreed upon level of
certain financial ratios and other measures of financial condition.
Rental Expense...............................................................350
Cash (or Payable)..................................................... 350
To record rental expense for car lease.
2. Journal entries
2005
(a)
Jan. 1 Cash.................................................................................
1,700,000
Bonds Payable.......................................................... 1,700,000
Sold bonds at par.
(b)
June 30 Bond Interest Expense.................................................. 76,500
Cash........................................................................... 76,500
Paid semiannual interest on bonds.
(c)
Dec. 31 Bond Interest Expense.................................................. 76,500
Cash........................................................................... 76,500
Paid semiannual interest on bonds.
3.
2005
(a)
Jan. 1 Cash* 1,666,000
Discount on Bonds Payable..........................................
34,000
Bonds Payable.......................................................... 1,700,000
Sold bonds at 98. *($1,700,000 x 0.98)
(b)
Jan. 1 Cash* 1,734,000
Premium on Bonds Payable.................................... 34,000
Bonds Payable.......................................................... 1,700,000
Sold bonds at 102. *($1,700,000 x 1.02)
or:
Six payments of $3,600.................... $ 21,600
Plus discount.................................... 4,569
Total bond interest expense............ $ 26,169
Amount repaid
Six payments of $52,000............... $ 312,000
Par value at maturity..................... 800,000
Total repaid.................................... 1,112,000
Less amount borrowed.................... (819,700)
Total bond interest expense............ $ 292,300
or
Six payments of $52,000.................. $ 312,000
Less premium................................... (19,700)
Total bond interest expense............ $ 292,300
12/31/2007 0 800,000
Amount repaid
Six payments of $52,000............... $ 312,000
Par value at maturity..................... 800,000
Total repaid.................................... 1,112,000
Less amount borrowed.................... (819,700)
Total bond interest expense............ $ 292,300
or
Six payments of $52,000.................. $ 312,000
Less premium................................... (19,700)
Total bond interest expense............ $ 292,300
3. The 6% contract rate is less than the 8% market rate; therefore, the
bonds are issued at a discount.
* Table values are based on a discount rate of 4% (half the annual market rate) and
20 periods (semiannual payments).
5. Cash.................................................................................
518,465
Discount on Bonds Payable.......................................... 81,535
Bonds Payable.......................................................... 600,000
Sold bonds at a discount on the stated issue date.
3. The 10% contract rate is greater than the 8% market rate; therefore, the
bonds are issued at a premium.
5. Cash.................................................................................
81,086
2. Discount at issuance
Par value................................................ $350,000
Cash issue price (from part 1)............. (342,125)
Discount at issuance............................ $ 7,875
6. Loss on retirement
Cash paid (from part 5)....................... $ 73,150
Carrying value (from part 4)................ (69,055)
Loss on retirement.............................. $ 4,095
2. Journal entries
2005
May 1 Cash.................................................................................
1,751,000
Interest Payable........................................................ 51,000
Bonds Payable.......................................................... 1,700,000
Sold bonds with 4 months accrued interest.
Supporting computations
Eight payments of $1,750........................ $ 14,000
Par value at maturity................................ 50,000
Total repaid............................................... 64,000
Less amount borrowed........................... (47,974)
Total bond interest expense.................... $ 16,026
or
Eight payments of $1,750........................ $ 14,000
Plus discount........................................... 2,026
Total bond interest expense.................... $ 16,026
2.
2004
Nov. 30 Bond Interest Expense.................................................. 2,003
Discount on Bonds Payable.................................... 253
Cash........................................................................... 1,750
To record 6 months interest and discount amortization.
2005
May 31 Interest Payable.............................................................. 292
Bond Interest Expense.................................................. 1,669
Discount on Bonds Payable.................................... 211
Cash........................................................................... 1,750
To record five months interest ($2,003 - $334)
and amortization ($253 - $42) and eliminate
the accrued interest liability.
Payments
(A) (B) (C) (D) (E)
Debit Debit Credit
Period Beginning Interest Notes Ending
Ending Balance Expense + Payable = Cash Balance
Date [Prior (E)] [7% x (A)] [$25,000/4] [(B) + (C)] [(A) - (C)]
2005
Jan. 1 Cash.................................................................................
25,000
Notes Payable........................................................... 25,000
Borrowed $25,000 by signing a 7%
installment note.
2005
Dec. 31 Interest Expense............................................................. 1,750
Notes Payable................................................................. 6,250
Cash........................................................................... 8,000
To record first installment payment.
2006
Dec. 31 Interest Expense............................................................. 1,313
Notes Payable................................................................. 6,250
Cash........................................................................... 7,563
To record second installment payment.
2007
Dec. 31 Interest Expense............................................................. 875
Notes Payable................................................................. 6,250
Cash........................................................................... 7,125
To record third installment payment.
2008
Dec. 31 Interest Expense............................................................. 438
Notes Payable................................................................. 6,250
Cash........................................................................... 6,688
To record fourth installment payment.
Payments
(A) (B) (C) (D) (E)
Debit Debit Credit
Period Beginning Interest Notes Ending
Ending Balance Expense + Payable = Cash Balance
Date [Prior (E)] [7% x (A)] [(D) - (B)] [computed] [(A) - (C)]
2005
Jan. 1 Cash.................................................................................
25,000
Notes Payable........................................................... 25,000
Borrowed $25,000 by signing a 7%
installment note.
2005
Dec. 31 Interest Expense............................................................. 1,750
Notes Payable................................................................. 5,631
Cash........................................................................... 7,381
To record first installment payment.
2006
Dec. 31 Interest Expense............................................................. 1,356
Notes Payable................................................................. 6,025
Cash........................................................................... 7,381
To record second installment payment.
2007
Dec. 31 Interest Expense.............................................................934
Notes Payable................................................................. 6,447
Cash........................................................................... 7,381
To record third installment payment.
2008
Dec. 31 Interest Expense.............................................................484
Notes Payable................................................................. 6,897
Cash........................................................................... 7,381
To record fourth installment payment.
The ratio of pledged assets to secured liabilities describes the pool of assets
that are committed to being available for paying the secured creditors if the
borrower should experience financial distress and be unable to make payment
on the secured liabilities. The increasing value of the ratio could arise from at
least two sets of activities.
First, the borrower could be significantly decreasing the amount of debt that is
secured by assets, but still keeping the assets pledged as collateral. These
activities would cause the ratios numerator to stay constant while the
denominator decreases.
Second, the borrower might be keeping the amount of debt constant while
greatly increasing the amount of assets that have been pledged as security. A
higher ratio value would result from a larger numerator, while the denominator
stayed constant.
In either case, the increasing ratio could be alarming to the unsecured creditor
because it might reflect a growing concern by the secured creditors that the
values of the borrowers assets are not sufficient for paying the secured
debts. If so, the unsecured creditors are more vulnerable to losing their
balances if the company should be forced into bankruptcy. Of course, the
change could arise from a combination of both activities. In accordance with
a basic concept of financial analysis, the change in a ratio does not fully
explain what happened, but does point out areas where potential problems
might exist and where we might search for more complete answers.
Option 3: = $38,500
* Table values are based on a discount rate of 4% (half the annual market rate)
and 20 periods (semiannual payments).
b.
2005
Jan. 1 Cash.................................................................................
22,718
Premium on Bonds Payable.................................... 2,718
Bonds Payable.......................................................... 20,000
Sold bonds on stated issue date.
Part 2
a.
Cash Flow Table Table Value* Amount Present Value
Par value...................... B.1 0.3769 $20,000 $ 7,538
Interest (annuity)......... B.3 12.4622 1,000 12,462
Price of bonds............. $20,000
* Table values are based on a discount rate of 5% (half the annual market rate) and
20 periods (semiannual payments). (Note: When the contract rate and market rate
are the same, the bonds sell at par and there is no discount or premium.)
b.
2005
Jan. 1 Cash.................................................................................
20,000
Bonds Payable.......................................................... 20,000
Sold bonds on stated issue date.
Part 3
a.
Cash Flow Table Table Value* Amount Present Value
Par value..................... B.1 0.3118 $20,000 $ 6,236
Interest (annuity)........ B.3 11.4699 1,000 11,470
Price of bonds............ $17,706
Bond discount............ $ 2,294
* Table values are based on a discount rate of 6% (half the annual market rate) and
20 periods (semiannual payments).
b.
2005
Jan. 1 Cash.................................................................................
17,706
Discount on Bonds Payable.......................................... 2,294
Bonds Payable.......................................................... 20,000
Sold bonds on stated issue date.
Part 2
[Note: The semiannual amounts for (a), (b), and (c) below are the same throughout the bonds
life because this company uses straight-line amortization.]
Part 3
or:
Thirty payments of $60,000.................. $1,800,000
Plus discount......................................... 271,776
Total bond interest expense................. $2,071,776
Part 4
2004
Dec. 31 Bond Interest Expense.................................................. 69,059
Discount on Bonds Payable.................................... 9,059
Cash........................................................................... 60,000
To record six months interest and
discount amortization.
Part 6
[Note: Parts 1 through 5 are repeated assuming a bond premium.]
Requirement 1
2004
Jan. 1 Cash.................................................................................
2,447,990
Premium on Bonds Payable.................................... 447,990
Bonds Payable.......................................................... 2,000,000
Sold bonds on issue date at a premium.
Requirement 2
(a) Cash Payment = $2,000,000 x 6% x 6/12 = $60,000
Requirement 3
Requirement 5
2004
June 30 Bond Interest Expense..................................................
45,067
Premium on Bonds Payable.......................................... 14,933
Cash........................................................................... 60,000
To record six months interest and
premium amortization.
2004
Dec. 31 Bond Interest Expense..................................................
45,067
Premium on Bonds Payable.......................................... 14,933
Cash........................................................................... 60,000
To record six months interest and
premium amortization.
Part 2
Straight-line amortization table ($10,666/10 = $1,067*)
Semiannual Unamortized Carrying
Interest Period-End Premium Value
1/01/2004 $10,666 $510,666
12/31/2008 0 500,000
* Rounded to nearest dollar. ** Adjusted for rounding.
2004
Dec. 31 Bond Interest Expense..................................................
15,183
Premium on Bonds Payable.......................................... 1,067
Cash........................................................................... 16,250
To record six months interest and
premium amortization.
Part 2
(A) (B) (C) (D) (E)
Semiannual Cash Interest Bond Interest Premium Unamortized Carrying
Interest Paid Expense Amortization Premium Value
Period-End [3.25% x $500,000] [3% x Prior (E)] [(A) - (B)] [Prior (D) - (C)] [$500,000 + (D)]
1/01/2004 $10,666 $510,666
2004
Dec. 31 Bond Interest Expense..................................................
15,292
Premium on Bonds Payable.......................................... 958
Interest Payable........................................................ 16,250
To record six months interest and
premium amortization.
Part 4
As of December 31, 2006
Cash Flow Table Table Value* Amount Present Value
Par value...................... B.1 0.8885 $500,000 $444,250
Interest (annuity)......... B.3 3.7171 16,250 60,403
Price of bonds............. $504,653
* Table values are based on a discount rate of 3% (half the annual original market
rate) and 4 periods (semiannual payments).
Part 2
Eight payments of $16,250* ................. $ 130,000
Par value at maturity............................. 650,000
Total repaid............................................ 780,000
Less amount borrowed........................ (584,361)
Total bond interest expense................ $ 195,639
or:
Eight payments of $16,250*.................. $ 130,000
Plus discount........................................ 65,639
Total bond interest expense................ $ 195,639
*
Semiannual interest payment, computed as $650,000 x 5% x year.
Part 4
2004
June 30 Bond Interest Expense..................................................
24,455
Discount on Bonds Payable.................................... 8,205
Cash........................................................................... 16,250
To record six months interest and
discount amortization.
2004
Dec. 31 Bond Interest Expense..................................................
24,455
Discount on Bonds Payable.................................... 8,205
Cash........................................................................... 16,250
To record six months interest and
discount amortization.
Part 5
If the market interest rate on the issue date had been 4% instead of 8%, the
bonds would have sold at a premium because the contract rate of 5% would
have been greater than the market rate.
This change would affect the balance sheet because the bond liability would
be larger (par value plus a premium instead of par value minus a discount).
As the years passed, the bond liability would decrease with amortization of
the premium instead of increasing with amortization of the discount.
The income statement would show smaller amounts of bond interest expense
over the life of the bonds issued at a premium than it would show if the bonds
had been issued at a discount.
The statement of cash flows would show a larger amount of cash received
from borrowing. However, the cash flow statements presented over the life of
the bonds (after issuance) would report that the same amount of cash was
paid for interest. This cash amount is fixed as it is the product of the contract
rate and the par value of the bonds and is unaffected by the change in the
market rate.
Part 2
Eight payments of $16,250* ................. $ 130,000
Par value at maturity............................. 650,000
Total repaid............................................ 780,000
Less amount borrowed........................ (584,361)
Total bond interest expense................ $ 195,639
or:
Eight payments of $16,250*.................. $ 130,000
Plus discount........................................ 65,639
Total bond interest expense................ $ 195,639
*
Semiannual interest payment, computed as $650,000 x 5% x year.
Part 3
Part 4
2004
June 30 Bond Interest Expense..................................................
23,374
Discount on Bonds Payable.................................... 7,124
Cash........................................................................... 16,250
To record six months interest and
discount amortization.
2004
Dec. 31 Bond Interest Expense..................................................
23,659
Discount on Bonds Payable.................................... 7,409
Cash........................................................................... 16,250
To record six months interest and
discount amortization.
Part 2
Six payments of $4,950 ................... $ 29,700
Par value at maturity........................ 90,000
Total repaid....................................... 119,700
Less amount borrowed.................... (92,283)
Total bond interest expense............ $ 27,417
or:
Six payments of $4,950.................... $ 29,700
Less premium................................... (2,283)
Total bond interest expense............ $ 27,417
Part 3
2004
Dec. 31 Bond Interest Expense.................................................. 4,597
Premium on Bonds Payable.......................................... 353
Cash........................................................................... 4,950
To record six months interest and
premium amortization.
Part 5
2006
Jan. 1 Bonds Payable ...............................................................
90,000
Premium on Bonds Payable.......................................... 835
Cash*......................................................................... 88,200
Gain on Retirement of Bonds.................................. 2,635
To record the retirement of bonds.
*($90,000 x 98%)
Part 6
If the market rate on the issue date had been 12% instead of 10%, the bonds
would have sold at a discount because the contract rate of 11% would have been
lower than the market rate.
This change would affect the balance sheet because the bond liability would be
smaller (par value minus a discount instead of par value plus a premium). As the
years passed, the bond liability would increase with amortization of the discount
instead of decreasing with amortization of the premium.
The income statement would show larger amounts of bond interest expense over
the life of the bonds issued at a discount than it would show if the bonds had
been issued at a premium.
The statement of cash flows would show a smaller amount of cash received from
borrowing. However, the cash flow statements presented over the life of the
bonds (after issuance) would report the same total amount of cash paid for
interest. This amount is fixed as it is the product of the contract rate and the par
value of the bonds and is unaffected by the change in the market rate.
10/31/2006.............
331,817 26,545 73,638 100,183 258,179
10/31/2007.............
258,179 20,654 79,529 100,183 178,650
10/31/2008.............
178,650 14,292 85,891 100,183 92,759
10/31/2009.............
92,759 7,424* 92,759 100,183 0
$100,915 $400,000 $500,915
* Adjusted for rounding
Part 3
2004
Dec. 31 Interest Expense.............................................................
5,333
Interest Payable........................................................ 5,333
Accrued interest on the installment
note payable ($32,000 x 2/12).
2005
Oct. 31 Interest Expense............................................................. 26,667
Interest Payable.............................................................. 5,333
Notes Payable.................................................................68,183
Cash........................................................................... 100,183
Record first payment on installment note
(interest expense = $32,000 - $5,333).
10/31/2005.............
$400,000 $32,000 $ 80,000 $112,000 $320,000
10/31/2006.............
320,000 25,600 80,000 105,600 240,000
10/31/2007.............
240,000 19,200 80,000 99,200 160,000
10/31/2008.............
160,000 12,800 80,000 92,800 80,000
2004
Dec. 31 Interest Expense.............................................................
5,333
Interest Payable........................................................ 5,333
Accrued interest on the installment
note payable ($32,000 x 2/12).
2005
Oct. 31 Interest Expense............................................................. 26,667
Interest Payable.............................................................. 5,333
Notes Payable.................................................................80,000
Cash........................................................................... 112,000
Record first payment on installment note
(interest expense = $32,000 - $5,333).
Wildcat Company
Pledged assets [($900,000 x 43%) + $225,000]...........................$612,000
Secured liabilities ($210,000 + $135,000)....................................$345,000
Ratio ($612,000 / $345,000)...........................................................1.77 to 1
Athens Company
Pledged assets [($450,000 x 54%) + $150,000]...........................$393,000
Secured liabilities ($75,000 + $60,000)........................................$135,000
Ratio ($393,000 / $135,000)..........................................................2.91 to 1
Part 2
Part 2
Leased AssetOffice Equipment................................. 79,854
Lease Liability........................................................... 79,854
To record capital lease of office equipment.
Part 3
Capital Lease Liability Payment (Amortization) Schedule
Part 4
Depreciation ExpenseOffice Equipment..................
15,971
Accum. DepreciationOffice Equipment.............. 15,971
To record depreciation ($79,854 / 5 years).
b.
2005
Jan. 1 Cash.................................................................................
48,475
Premium on Bonds Payable.................................... 3,475
Bonds Payable.......................................................... 45,000
Sold bonds on stated issue date.
Part 2
a.
Cash Flow Table Table Value* Amount Present Value
Par value................. B.1 0.5584 $45,000 $25,128
Interest (annuity).... B.3 7.3601 2,700 19,872
Price of bonds........ $45,000**
* Table values are based on a discount rate of 6% (half the annual market rate) and
10 periods (semiannual payments). (Note: When the contract rate and market
rate are the same, the bonds sell at par and there is no discount or premium.)
**Adjusted for rounding.
b.
2005
Jan. 1 Cash.................................................................................
45,000
Bonds Payable.......................................................... 45,000
Sold bonds on stated issue date.
b.
2005
Jan. 1 Cash.................................................................................
41,838
Discount on Bonds Payable.......................................... 3,162
Bonds Payable.......................................................... 45,000
Sold bonds on stated issue date.
Part 2
[Note: The semiannual amounts for (a), (b), and (c) below are the same throughout
the bonds life because the company uses straight-line amortization.]
or:
Twenty payments of $85,000 .......... $1,700,000
Plus discount.................................... 194,999
Total bond interest expense............ $1,894,999
Part 4
Semiannual Unamortized Carrying
Period-End Discount Value
1/01/2004..................... $194,999 $1,505,001
Part 5
2004
June 30 Bond Interest Expense..................................................94,750
Discount on Bonds Payable.................................... 9,750
Cash........................................................................... 85,000
To record six months interest and
discount amortization.
2004
Dec. 31 Bond Interest Expense..................................................94,750
Discount on Bonds Payable.................................... 9,750
Cash........................................................................... 85,000
To record six months interest and
discount amortization.
Requirement 1
2004
Jan. 1 Cash.................................................................................
2,096,466
Premium on Bonds Payable.................................... 396,466
Bonds Payable.......................................................... 1,700,000
Sold bonds on issue date at a premium.
Requirement 2
Requirement 3
or:
Twenty payments of $85,000 .......... $1,700,000
Less premium................................... (396,466)
Total bond interest expense............ $1,303,534
Requirement 4
Requirement 5
2004
June 30 Bond Interest Expense..................................................
65,177
Premium on Bonds Payable.......................................... 19,823
Cash........................................................................... 85,000
To record six months interest and
premium amortization.
2004
Dec. 31 Bond Interest Expense..................................................
65,177
Premium on Bonds Payable.......................................... 19,823
Cash........................................................................... 85,000
To record six months interest and
premium amortization.
Part 2
Straight-line amortization table ($6,494/10 = $649)
Semiannual Unamortized Carrying
Interest Period-End Premium Value
1/01/2004 $6,494 $166,494
12/31/2008 0 160,000
* Adjusted for rounding.
2004
Dec. 31 Bond Interest Expense..................................................
6,551
Premium on Bonds Payable.......................................... 649
Interest Payable........................................................ 7,200
To record six months interest and
premium amortization.
Part 2
(A) (B) (C) (D) (E)
Semiannual Cash Interest Bond Interest Premium Unamortized Carrying
Interest Paid Expense Amortization Premium Value
Period-End [4.5% x $160,000] [4% x Prior (E)] [(A) - (B)] [Prior (D) - (C)] [$160,000 + (D)]
1/01/2004 $6,494 $166,494
2004
Dec. 31 Bond Interest Expense..................................................
6,638
Premium on Bonds Payable.......................................... 562
Interest Payable........................................................ 7,200
To record six months interest and
premium amortization.
Part 4
As of December 31, 2006
Cash Flow Table Table Value* Amount Present Value
Par value................. B.1 0.8548 $160,000 $136,768
Interest (annuity).... B.3 3.6299 7,200 26,135
Price of bonds........ $162,903
* Table values are based on a discount rate of 4% (half the annual original market
rate) and 4 periods (semiannual payments).
Part 2
Thirty payments of $3,600* ............. $108,000
Par value at maturity........................ 120,000
Total repaid....................................... 228,000
Less amount borrowed.................... (99,247)
Total bond interest expense............ $128,753
or:
Thirty payments of $3,600* ............. $108,000
Plus discount.................................... 20,753
Total bond interest expense............ $128,753
*
Semiannual interest payment, computed as $120,000 x 6% x year.
Part 4
2004
June 30 Bond Interest Expense.................................................. 4,292
Discount on Bonds Payable.................................... 692
Cash........................................................................... 3,600
To record six months interest and
discount amortization.
2004
Dec. 31 Bond Interest Expense.................................................. 4,292
Discount on Bonds Payable.................................... 692
Cash........................................................................... 3,600
To record six months interest and
discount amortization.
Part 2
Thirty payments of $3,600* ............. $108,000
Par value at maturity........................ 120,000
Total repaid....................................... 228,000
Less amount borrowed.................... (99,247)
Total bond interest expense............ $128,753
or:
Thirty payments of $3,600* ............. $108,000
Plus discount.................................... 20,753
Total bond interest expense............ $128,753
*
Semiannual interest payment, computed as $120,000 x 6% x year.
Part 3
Part 4
2004
June 30 Bond Interest Expense.................................................. 3,970
Discount on Bonds Payable.................................... 370
Cash........................................................................... 3,600
To record six months interest and
discount amortization.
2004
Dec. 31 Bond Interest Expense.................................................. 3,985
Discount on Bonds Payable.................................... 385
Cash........................................................................... 3,600
To record six months interest and
discount amortization.
Part 2
Eight payments of $58,500 ............. $ 468,000
Par value at maturity........................ 900,000
Total repaid....................................... 1,368,000
Less amount borrowed.................... (987,217)
Total bond interest expense............ $ 380,783
or:
Eight payments of $58,500 ............. $ 468,000
Less premium................................... (87,217)
Total bond interest expense............ $ 380,783
Part 3
2004
Dec. 31 Bond Interest Expense..................................................
48,904
Premium on Bonds Payable.......................................... 9,596
Cash........................................................................... 58,500
To record six months interest and
premium amortization.
Part 5
2006
Jan. 1 Bonds Payable ...............................................................
900,000
Premium on Bonds Payable.......................................... 47,826
Loss on Retirement of Bonds....................................... 6,174
Cash*......................................................................... 954,000
To record the retirement of bonds.
*($900,000 x 106%)
Part 6
If the market rate on the issue date had been 14% instead of 10%, the bonds
would have sold at a discount because the contract rate of 13% would have been
lower than the market rate.
This change would affect the balance sheet because the bond liability would be
smaller (par value minus a discount instead of par value plus a premium). As the
years passed, the bond liability would increase with amortization of the discount
instead of decreasing with amortization of the premium.
The income statement would show larger amounts of bond interest expense over
the life of the bonds issued at a discount than it would show if the bonds had
been issued at a premium.
The statement of cash flows would show a smaller amount of cash received from
borrowing. However, the cash flow statements presented over the life of the
bonds (after issuance) would report the same total amount of cash paid for
interest. This amount is fixed as it is the product of the contract rate and the par
value of the bonds and is unaffected by the change in the market rate.
Part 2
Payments
(A) (B) (C) (D) (E)
Debit Debit Credit
Period Beginning Interest Notes Ending
Ending Balance Expense + Payable = Cash Balance
Date [Prior (E)] [10% x (A)] [(D) - (B)] [computed] [(A) - (C)]
9/30/2005...............
$300,000 $30,000 $ 90,632 $120,632 $209,368
9/30/2006...............
209,368 20,937 99,695 120,632 109,673
9/30/2007...............
109,673 10,959* 109,673 120,632 0
Part 3
2004
Dec. 31 Interest Expense.............................................................
7,500
Interest Payable........................................................ 7,500
Accrued interest on the installment
note payable ($30,000 x 3/12).
2005
Sept. 30 Interest Expense.............................................................22,500
Interest Payable.............................................................. 7,500
Notes Payable.................................................................
90,632
Cash........................................................................... 120,632
Record first payment on installment note
(interest expense = $30,000 - $7,500).
9/30/2005...............
$300,000 $30,000 $100,000 $130,000 $200,000
9/30/2006...............
200,000 20,000 100,000 120,000 100,000
9/30/2007...............
100,000 10,000 100,000 110,000 0
2004
Dec. 31 Interest Expense.............................................................
7,500
Interest Payable........................................................ 7,500
Accrued interest on the installment
note payable ($300,000 x .10 x 3/12).
2005
Sept. 30 Interest Expense............................................................. 22,500
Interest Payable.............................................................. 7,500
Notes Payable.................................................................
100,000
Cash........................................................................... 130,000
Record first payment on installment note
(interest expense = $30,000 - $7,500).
Part 1
Hunt Company
Part 2
Part 2
Leased AssetOffice Equipment................................. 37,908
Lease Liability........................................................... 37,908
To record capital lease of office equipment.
Part 3
Capital Lease Liability Payment (Amortization) Schedule
Part 4
Depreciation ExpenseOffice Equipment..................7,582
Accum. DepreciationOffice Equipment.............. 7,582
To record depreciation ($37,908 / 5 years).
Part 1
Part 2
Assume the secured loan is taken, then the percent of assets financed by:
a. Debt
b. Equity
2. The interest that Best Buy must pay on the 2.25% convertible
subordinated debentures is: $402,000,000 x .0225 = $9,045,000.
3. During the year ended February 26, 2005, Best Buy did not issue any
long-term debt that provided cash. (They did, however, pay off
$371,000,000 in long-term debt.)
2. For both years, Best Buys debt-to-equity ratio is above the industry
average of 1.1. This implies that Best Buys debt level is slightly riskier
than that of its competitors.
Circuit Citys debt-to-equity ratio is below the industry average for both
years, implying that its debt level is less risky than the industry average
at least on this dimension.
MEMORANDUM
TO:
FROM:
SUBJECT:
The bottom line is that the market prices the bonds according to their
perceived risks and returns. What your associate needs to focus on is the
level of risk she is willing to accept and then invest accordingly.
2a. Home Depots notes offer a 3 % interest rate. If the interest rate for
similar notes at similar interest were 3 %, then Home Depot would
have offered these notes at their par value of $1 billion. However,
since the notes were issued at a discount, the interest rate for similar
notes at similar risk must have been greater than 3 %, causing the
notes to have been issued at a discount.
Parts 1 and 2
Effective Interest Amortization of Bond Premium
(A) (B) (C) (D) (E)
Semi- Cash Bond
annual Interest Interest Premium Unamortized Carrying
Period-end Paid Expense Amortization Premium Value
1/01/2008 $ 4,100 $ 104,100
6/30/2008 $ 4,500 $ 4,164 $ 336 3,764 103,764
12/31/2008 4,500 4,151 349 3,415 103,415
6/30/2009 4,500 4,137 363 3,052 103,052
12/31/2009 4,500 4,122 378 2,674 102,674
6/30/2010 4,500 4,107 393 2,281 102,281
Since teams generally have 4 or 5 members, the team solution will likely end about
here. The remainder of the table is shown for help in answering part 3.
Part 4
Total Bond interest expense = Interest Paid - Premium
= ($4,500 x 10 periods) - $4,100
= $45,000 - $4,100 = $40,900
Since the payment of $1,625 payment only covers interest, the loan
balance stays at $400,000.
Part 1
The table below reveals how the five alternative interest-bearing notes
affect Melton Franchise Systems interest expense, net income, equity, and
return on equity (net income/equity):
Part 2
Students answers will depend on the municipality and time period chosen
for analysis. Students often find this assignment interesting as it
reinforces the relevance of their accounting studies.
2. Dixons debt-to-equity ratio declined from the prior year to the current
year. However, for both years, Dixons debt-to-equity ratio is higher
than both Best Buy and Circuit City, indicating a higher debt risk (at
least on this dimension).