320B Answers

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Problem 14-2 1. Liabilities at September 30, 2011 Bonds payable (face amount)......... $160,000,000 Less: discount.................... 20 ,000,000 Initial balance, January 1, 2011. . $140,000,000 June 30, 2011 discount amortization 400,000* Sept. 30, 2011 discount amortization 212,000 ** Sept. 30, 2011 net bonds payable. . $140,612,000 Interest payable **............... $4,000,000 2. Interest expense for year ended September 30, 2011 June 30, 2011 interest expense.... $ 8,400,000* September 30, 2011 interest expense 4,212,000 ** Interest expense for fiscal 2011. . $12,612,000 3. Statement of cash flows for year ended September 30, 2011 Baddour would report the cash inflow of $140,000,000*** from the sale of the bonds as a cash flow from financing activities in its statement of cash flows.

Transcript of 320B Answers

Page 1: 320B Answers

Problem 14-21. Liabilities at September 30, 2011

Bonds payable (face amount)...................................... $160,000,000Less: discount........................................................... 20,000,000Initial balance, January 1, 2011................................ $140,000,000June 30, 2011 discount amortization........................ 400,000*Sept. 30, 2011 discount amortization....................... 212,000**Sept. 30, 2011 net bonds payable............................. $140,612,000

Interest payable **................................................... $4,000,000

2. Interest expense for year ended September 30, 2011

June 30, 2011 interest expense................................. $ 8,400,000*September 30, 2011 interest expense....................... 4,212,000**Interest expense for fiscal 2011................................ $12,612,000

3. Statement of cash flows for year ended September 30, 2011

Baddour would report the cash inflow of $140,000,000*** from the sale of the bonds as a cash flow from financing activities in its statement of cash flows.

The $8,000,000* cash interest paid is a cash outflow from operating activities because interest is an income statement (operating) item.

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Problem 14-2 (concluded)

Calculations:

January 1, 2011***Cash (price: given)...................................................... 140,000,000Discount on bonds (difference)................................... 20,000,000

Bonds payable (face amount).................................. 160,000,000

June 30, 2011*Interest expense (6% x $140,000,000).............................. 8,400,000

Discount on bonds payable (difference)................. 400,000Cash (5% x $160,000,000)........................................ 8,000,000

September 30, 2011**Interest expense (6% x [$140,000,000 + 400,000] x 3/6). 4,212,000

Discount on bonds payable (difference)................. 212,000Interest payable (5% x $160,000,000 x 3/6)............... 4,000,000

Problem 18-1PART A

Jan. 9($ in millions)

Cash (40 million shares x $20 per share)....................................... 800Common stock (40 million shares x $1 par)............................. 40Paid-in capital – excess of par (difference)............................... 760

Mar. 11Equipment (5,000 shares x $20 per share).......................... 100,000

Common stock (5,000 shares x $1 par)......................... 5,000Paid-in capital – excess of par (difference)................... 95,000

PART BJan. 12

($ in millions)Land........................................................................................ 2

Revenue – donation of land................................................ 2

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Note: Donated assets are recorded as revenue at the fair value of the assets received, not paid-in capital. This is discussed in Chapter 10.

Sept. 1($ in millions)

Common stock (2 million shares x $1 par).................................. 2Paid-in capital – excess of par (2 million shares x $19)...................................................................... 38Retained earnings (difference).................................................. 10

Cash.................................................................................... 50

Dec. 1($ in millions)

Cash........................................................................................ 26Common stock.................................................................... 1Paid-in capital – excess of par ........................................... 25

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Problem 18-2Requirement 1

a. February 5, 2011 ($ in millions)

Retirement Treasury Stock

Common stock (6 million sh. x $1) 6 Treasury stock (6 million sh. x $10) 60Paid-in capital – excess of par Cash

60(6 million shares x $7*) 42

Paid-in capital – share repurchase 1Retained earnings (plug) 11

Cash 60* Paid-in capital – excess of par: $1,680 ÷ 240

b. July 9, 2011

Cash (2 million sh. x $12) 24 Cash (2 million sh. x $12) 24Common stock (2 million sh. x $1) 2 Treasury stock (2 million sh. x $10)20Paid-in capital – excess of par 22 Paid-in capital–sh. repurchase4

c. November 14, 2013

Cash (2 million sh. x $7) 14 Cash (2 million sh. x $7) 14Common stock (2 million sh. x $1) 2 Paid-in cap.- sh. repurchase ($1 + 4 ) 5Paid-in capital – excess of par 12 Retained earnings (plug) 1

Treasury stock (2 million sh. x $10)20

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Problem 18-9Assumption A – noncumulative

Preferred Common Total $150

Current preference $10 (10% x $100) (10 ) $140

Remainder to common $140 (140 ) 0

Allocation $10 $140

Assumption B – cumulative

Preferred Common Total $150

Dividends in arrears:-2010 $10 (10% x $100) (10)-2011 10 (10% x $100) (10)Current preference 10 (10% x $100) (10 )

$120Remainder to common $120 (120 )

0 Allocation $30 $120

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Problem 21-2 (concluded)

Wright CompanyStatement of Cash Flows

For year ended December 31, 2011 (in $000)

Cash flows from operating activities:Cash inflows: From customers $382 Cash outflows: To suppliers of goods (142) To employees (48) For interest (10) For income taxes (73 ) Net cash flows from operating activities $109

Cash flows from investing activities: Sale of land 7 Purchase of short-term investment (25) Purchase of equipment (150 ) Net cash flows from investing activities (168)

Cash flows from financing activities: Repayment of notes payable (30) Sale of bonds payable 60 Sale of common stock 76 Payment of cash dividends (35 ) Net cash flows from financing activities 71

Net increase in cash 12

Cash balance, January 1 30Cash balance, December 31 $ 42

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Problem 14-3Requirement 1

Cash Effective Increase in OutstandingPayment Interest Balance Balance

4.5% x Face Amount 5% x Outstanding Balance96,768

1 4,500 .05 (96,768) = 4,838 338 97,1062 4,500 .05 (97,106) = 4,855 355 97,4613 4,500 .05 (97,461) = 4,873 373 97,8344 4,500 .05 (97,834) = 4,892 392 98,2265 4,500 .05 (98,226) = 4,911 411 98,6376 4,500 .05 (98,637) = 4,932 432 99,0697 4,500 .05 (99,069) = 4,953 453 99,5228 4,500 .05 (99,522) = 4,978* 478 100,000

36,000 39,232 3,232* rounded.

Requirement 2

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Cash Recorded Increase in OutstandingPayment Interest Balance Balance

4.5% x Face Amount Cash plus Discount Reduction $3,232 ÷ 896,768

1 4,500 (4,500 + 404) = 4,904 404 97,1722 4,500 (4,500 + 404) = 4,904 404 97,5763 4,500 (4,500 + 404) = 4,904 404 97,9804 4,500 (4,500 + 404) = 4,904 404 98,3845 4,500 (4,500 + 404) = 4,904 404 98,7886 4,500 (4,500 + 404) = 4,904 404 99,1927 4,500 (4,500 + 404) = 4,904 404 99,5968 4,500 (4,500 + 404) = 4,904 404 100,000

36,000 39,232 3,232

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Problem 14-3 (continued)

Requirement 3

(effective interest)Interest expense (5% x $98,226)....................................... 4,911

Discount on bonds payable (difference)................. 411Cash (4.5% x $100,000)............................................ 4,500

(straight-line)Interest expense ($4,500 + 404)........................................ 4,904

Discount on bonds payable ($3,232 ÷ 8)................. 404Cash (4.5% x $100,000)............................................ 4,500

Requirement 4

By the straight-line method, a company determines interest indirectly by allocating a discount or a premium equally to each period over the term to maturity. This is allowed if doing so produces results that are not materially different from the interest method. The decision should be guided by whether the straight-line method would tend to mislead investors and creditors in the particular circumstance.

Allocating the discount or premium equally over the life of the bonds by the straight-line method results in an unchanging dollar amount of interest each period. By the straight-line method, the amount of the discount to be reduced periodically is calculated, and the effective interest is the “plug” figure.

Unchanging dollar amounts like these are not produced when the effective interest approach is used. By that approach, the dollar amounts of interest vary over the term to maturity because the percentage rate of interest remains constant, but is applied to a changing debt balance.

Remember that the “straight-line method,” is not an alternative method of determining interest in a conceptual sense, but is an application of the materiality concept. The appropriate application of GAAP, the effective interest method, is by-passed as a practical expediency in situations when doing so has no “material” effect on the results.

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Problem 14-3 (concluded)

Requirement 5 The amortization schedule in requirement 1 gives us the answer: $9,864. The

outstanding debt balance after the June 30, 2013, interest payment (line 5) is the present value at that time ($98,637) of the remaining payments. Since $10,000 face amount of the bonds is 10% of the entire issue, we take 10% of the table amount.

This can be confirmed by calculating the present value:

Interest $450¥ x 2.72325 * = $1,225Principal $10,000 x 0.86384 ** = 8,638 Present value (price) of the bonds $9,864 (rounded)

¥ 4.5% x $10,000* present value of an ordinary annuity of $1: n=3, i=5% (Table 4)** present value of $1: n=3, i=5% (Table 2)

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Problem 14-4Requirement 1

$8,000,000 (outstanding balance at maturity)

Requirement 2 $6,627,273 (outstanding balance at sale date)

Requirement 3 20 years (40 semiannual periods)

Requirement 4 At the effective interest rate (By the alternative straight-line approach,

interest would be the same amount each period)

Requirement 5 8% [($320,000 ÷ $8,000,000) x 2]

Requirement 6 10% [($331,364 ÷ $6,627,273) x 2]

Requirement 7 $12,800,000 ($320,000 x 40)

Requirement 8 $14,172,727 ($12,800,000* + [$8,000,000 – 6,627,273])

(Total cash interest plus the discount)

*$320,000 x 40

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Problem 14-5Requirement 1

Interest $3,600,000¥ x 6.46321 * = $23,267,556Principal $80,000,000 x 0.67684 ** = 54,147,200 Present value (price) of the bonds $77,414,756

¥ 4.5% x $80,000,000* present value of an ordinary annuity of $1: n=8, i=5% (Table 4)** present value of $1: n=8, i=5% (Table 2)

Requirement 2

(a) Cromley

Cash Effective Increase in OutstandingPayment Interest Balance Balance

4.5% x Face Amount 5% x Outstanding Balance Discount Reduction77,414,756

1 3,600,000 .05 (77,414,756) = 3,870,738 270,738 77,685,4942 3,600,000 .05 (77,685,494) = 3,884,275 284,275 77,969,7693 3,600,000 .05 (77,969,769) = 3,898,488 298,488 78,268,2574 3,600,000 .05 (78,268,257) = 3,913,413 313,413 78,581,6705 3,600,000 .05 (78,581,670) = 3,929,084 329,084 78,910,7546 3,600,000 .05 (78,910,754) = 3,945,538 345,538 79,256,2927 3,600,000 .05 (79,256,292) = 3,962,815 362,815 79,619,1078 3,600,000 .05 (79,619,107) = 3,980,893 * 380,893 80,000,000

28,800,000 31,385,244 2,585,244

* rounded.

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Problem 14-5 (continued)

(b) Barnwell

Cash Effective Increase in OutstandingPayment Interest Balance Balance

4.5% x Face Amount 5% x Outstanding Balance Discount Reduction77,415

1 3,600 .05 (77,415) = 3,871 271 77,6862 3,600 .05 (77,686) = 3,884 284 77,9703 3,600 .05 (77,970) = 3,899 299 78,2694 3,600 .05 (78,269) = 3,913 313 78,5825 3,600 .05 (78,582) = 3,929 329 78,9116 3,600 .05 (78,911) = 3,946 346 79,2577 3,600 .05 (79,257) = 3,963 363 79,6208 3,600 .05 (79,620) = 3,980 * 380 80,000

28,800 31,385 2,585*rounded

Requirement 3

February 1, 2011 (Cromley)Cash (price determined above)................................. 77,414,756Discount on bonds payable (difference)................ 2,585,244

Bonds payable (face amount).............................80,000,000

February 1, 2011 (Barnwell)Bond investment (face amount)............................. 80,000

Discount on bond investment (difference)......... 2,585Cash (price paid)................................................ 77,415

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Problem 14-5 (continued)

Requirement 4

July 31, 2011 (Cromley)Interest expense (from schedule) ................................ 3,870,738

Discount on bonds payable (from schedule) ...... 270,738Cash (from schedule) ......................................... 3,600,000

July 31, 2011 (Barnwell)Cash (from schedule).............................................. 3,600Discount on bond investment (from schedule)........ 271

Interest revenue (from schedule)............................. 3,871

December 31, 2011 (Cromley)Interest expense (5/6 x $3,884,275)............................. 3,236,896

Discount on bonds payable (5/6 x $284,275)...... 236,896Interest payable (5/6 x $3,600,000)..................... 3,000,000

December 31, 2011 (Barnwell)Interest receivable (5/6 x $3,600)........................... 3,000Discount on bond investment (5/6 x $284)............ 237

Interest revenue (5/6 x $3,884)............................... 3,237

January 31, 2012 (Cromley)Interest expense (1/6 x $3,884,275)............................. 647,379Interest payable (from adjusting entry above)............. 3,000,000

Discount on bonds payable (1/6 x $284,275)...... 47,379Cash (stated rate x face amount)............................ 3,600,000

January 31, 2012 (Barnwell)Cash (stated rate x face amount)............................... 3,600Discount on bond investment (1/6 x $284)............ 47

Interest receivable (from adjusting entry above). . . 3,000Interest revenue (1/6 x $3,884)............................... 647

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Problem 14-5 (concluded)July 31, 2012 (Cromley)Interest expense (from schedule) ................................ 3,898,488

Discount on bonds payable (from schedule) ...... 298,488Cash (from schedule) ......................................... 3,600,000

July 31, 2012 (Barnwell)Cash (from schedule).............................................. 3,600Discount on bond investment (from schedule)........ 299

Interest revenue (from schedule)............................. 3,899

December 31, 2012 (Cromley)Interest expense (5/6 x $3,913,413)............................. 3,261,177

Discount on bonds payable (5/6 x $313,413)...... 261,177Interest payable (5/6 x $3,600,000)..................... 3,000,000

December 31, 2012 (Barnwell)Interest receivable (5/6 x $3,600)........................... 3,000Discount on bond investment (5/6 x $313)............ 261

Interest revenue (5/6 x $3,913)............................... 3,261

January 31, 2013 (Cromley)Interest expense (1/6 x $3,913,413)............................. 652,236*Interest payable (from adjusting entry above)............. 3,000,000

Discount on bonds payable (1/6 x $313,413)...... 52,236*Cash (stated rate x face amount)............................ 3,600,000

January 31, 2013 (Barnwell)Cash (stated rate x face amount)............................... 3,600Discount on bond investment (1/6 x $313)............ 52

Interest receivable (from adjusting entry above). . . 3,000Interest revenue (1/6 x $3,913)............................... 652

*rounded

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Problem 14-6Requirement 1

April 1, 2011 (Western)Cash ($29,300,000 + [1/12 x 12% x $30,000,000])....... 29,600,000Discount on bonds payable ($30 million – $29.3 million) 700,000

Bonds payable (face amount).............................30,000,000Interest payable (1/12 x 12% x $30,000,000)........ 300,000

April 1, 2011 (Stillworth)Bond investment (face amount)............................. 30,000Interest receivable (1/12 x 12% x $30,000).............. 300

Discount on bond investment ($30,000 – $29,300) 700Cash ($29,300 + [1/12 x 12% x $30,000]).............. 29,600

Alternative: Some accountants prefer to credit (debit) interest expense (revenue), rather than interest payable (receivable), when bonds are sold (purchased).

April 1, 2011 (Western)Cash ($29,300,000 + [1/12 x 12% x $30,000,000])...... 29,600,000Discount on bonds payable ($30 million – $29.3 million) 700,000

Bonds payable (face amount).............................30,000,000Interest expense (1/12 x 12% x $30,000,000)....... 300,000

April 1, 2011 (Stillworth)Bond investment (face amount)............................. 30,000Interest revenue (1/12 x 12% x $30,000).................... 300

Discount on bond investment ($30,000 – $29,300) 700Cash ($29,300 + [1/12 x 12% x $30,000]).............. 29,600

If the alternate entries are used, entries at the next interest date would require simply a debit (credit) to interest expense (revenue) for the full interest. The interest accounts would then reflect the same net debit of five months' interest.

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Problem 14-6 (continued)

Requirement 2

The original maturity of the bonds was 3 years, or 36 months. But since the bonds weren’t sold until one month after they were dated, they are outstanding for only 35 months. Straight-line amortization, then, is $700,000 ÷ 35 months = $20,000 per month for Western (and $700 ÷ 35 months = $20 per month for Stillworth’s investment).

August 31, 2011 (Western)Interest expense ($1,800,000 + 100,000 – 300,000) . . 1,600,000Interest payable (accrued interest from above)........... 300,000

Discount on bonds payable ($20,000 x 5 months) 100,000Cash ($30,000,000 x 12% x 6/12) ......................... 1,800,000

August 31, 2011 (Stillworth)Cash ($30,000 x 12% x 6/12) .................................. 1,800Discount on bond investment ($20 x 5 months) ..... 100

Interest receivable (accrued interest from above). . 300Interest revenue ($1,800 + 100 – 300).................... 1,600

If alternate method of recording accrued interest is used:

August 31, 2011 (Western)Interest expense ($1,800,000 + $100,000) ................. 1,900,000

Discount on bonds payable ($20,000 x 5 months) 100,000Cash ($30,000,000 x 12% x 6/12) ......................... 1,800,000

August 31, 2011 (Stillworth)Cash ($30,000 x 12% x 6/12) .................................. 1,800Discount on bond investment ($20 x 5 months) ..... 100

Interest revenue ($1,800 + $100)............................ 1,900

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Problem 14-6 (continued)December 31, 2011 (Western)Interest expense ($1,200,000 + $80,000).................... 1,280,000

Discount on bonds payable ($20,000 x 4 months) 80,000Interest payable ($30,000,000 x 12% x 4/12)........ 1,200,000

December 31, 2011 (Stillworth)Interest receivable ($30,000 x 12% x 4/12).............. 1,200Discount on bond investment ($20 x 4 months)..... 80

Interest revenue ($1,200 + $80).............................. 1,280

February 28, 2012 (Western)Interest expense ($1,800,000 + 40,000 – 1,200,000) . 640,000Interest payable (from adjusting entry).................... 1,200,000

Discount on bonds payable ($20,000 x 2 months) 40,000Cash ($30,000,000 x 12% x 6/12) ......................... 1,800,000

February 28, 2012 (Stillworth)Cash ($30,000 x 12% x 6/12)................................... 1,800Discount on bond investment ($20 x 2 months)..... 40

Interest receivable (from adjusting entry)............ 1,200Interest revenue ($1,800 + 40 – 1,200) .................. 640

August 31, 2012 (Western)Interest expense ($1,800,000 + $120,000)................. 1,920,000

Discount on bonds payable ($20,000 x 6 months) 120,000Cash ($30,000,000 x 12% x 6/12) ......................... 1,800,000

August 31, 2012 (Stillworth)Cash ($30,000 x 12% x 6/12) .................................. 1,800Discount on bond investment ($20 x 6 months) ..... 120

Interest revenue ($1,800 + $120)............................ 1,920

December 31, 2012 (Western)Interest expense ($1,200,000 + $80,000).................... 1,280,000

Discount on bonds payable ($20,000 x 4 months) 80,000Interest payable ($30,000,000 x 12% x 4/12)........ 1,200,000

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Problem 14-6 (continued)December 31, 2012 (Stillworth)Interest receivable ($30,000 x 12% x 4/12).............. 1,200Discount on bond investment ($20 x 4 months)..... 80

Interest revenue ($1,200 + $80).............................. 1,280

February 28, 2013 (Western)Interest expense ($1,800,000 + 40,000 – 1,200,000) . 640,000Interest payable (from adjusting entry).................... 1,200,000

Discount on bonds payable ($20,000 x 2 months) 40,000Cash ($30,000,000 x 12% x 6/12) ......................... 1,800,000

February 28, 2013 (Stillworth)Cash ($30,000 x 12% x 6/12)................................... 1,800Discount on bond investment ($20 x 2 months)..... 40

Interest receivable (from adjusting entry)............ 1,200Interest revenue ($1,800 + 40 – 1,200) .................. 640

August 31, 2013 (Western)Interest expense ($1,800,000 + $120,000) ................. 1,920,000

Discount on bonds payable ($20,000 x 6 months) 120,000Cash ($30,000,000 x 12% x 6/12) ......................... 1,800,000

August 31, 2013 (Stillworth)Cash ($30,000 x 12% x 6/12) .................................. 1,800Discount on bond investment ($20 x 6 months) ..... 120

Interest revenue ($1,800 + $120)............................ 1,920

December 31, 2013 (Western)Interest expense ($1,200,000 + $80,000).................... 1,280,000

Discount on bonds payable ($20,000 x 4 months) 80,000Interest payable ($30,000,000 x 12% x 4/12)........ 1,200,000

December 31, 2013 (Stillworth)Interest receivable ($30,000 x 12% x 4/12).............. 1,200Discount on bond investment ($20 x 4 months)..... 80

Interest revenue ($1,200 + $80).............................. 1,280

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Problem 14-6 (concluded)

February 28, 2014 (Western)Interest expense ($1,800,000 + 40,000 – 1,200,000). 640,000Interest payable (from adjusting entry).................... 1,200,000

Discount on bonds payable ($20,000 x 2 months) 40,000Cash ($30,000,000 x 12% x 6/12) ......................... 1,800,000

Bonds payable .................................................... 30,000,000Cash ................................................................30,000,000

February 28, 2014 (Stillworth)Cash ($30,000 x 12% x 6/12)................................... 1,800Discount on bond investment ($20 x 2 months)...... 40

Interest receivable (from adjusting entry)............ 1,200Interest revenue ($1,800 + 40 – 1,200) .................. 640

Cash .................................................................... 30,000Investment in bonds ....................................... 30,000

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Problem 14-7Requirement 1

Interest $16,000,000¥ x 17.15909 * = $274,545,440Principal $400,000,000 x 0.14205 ** = 56,820,000 Present value (price) of the bonds $331,365,440¥ 4% x $400,000,000* present value of an ordinary annuity of $1: n=40, i=5% (Table 4)** present value of $1: n=40, i=5% (Table 2)

Requirement 2 (a)

Cash (price determined above)................................. 331,365,440Discount on bonds (difference)............................. 68,634,560

Bonds payable (face amount).............................400,000,000

(b)Bond investment (face amount)............................. 400,000

Discount on bond investment (difference)......... 68,635Cash (0.1% x $331,365,440)................................ 331,365

Requirement 3 (a)

Interest expense (5% x $331,365,440)........................ 16,568,272Discount on bonds payable (difference)............ 568,272Cash (4% x $400,000,000)...................................16,000,000

(b)Cash (4% x $400,000)............................................. 16,000Discount on bond investment (difference)............ 568

Interest revenue (5% x $331,365)........................... 16,568

Requirement 4 (a)

Interest expense (5% x [$331,365,440 + $568,272]). . 16,596,686Discount on bonds payable (difference)............ 596,686Cash (4% x $400,000,000)...................................16,000,000

(b)

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Cash (4% x $400,000)............................................. 16,000Discount on bond investment (difference)............ 597

Interest revenue (5% x [$331,365 + $568])............ 16,597

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Problem 14-8

1. Interest expense for year ended December 31, 2011

Dec. 31, 2011, interest expense (calculated below 1 ) $4,422

2. Liabilities at December 31, 2011

Bonds payable (face amount)...................................... $500,000Less: discount 2........................................................ (57,785 ) Initial balance, November 1, 2011........................... $442,215Dec. 31, 2011 discount amortization 3..................... 255 Balance, December 31, 2011............................... $442,470

Interest payable 4...................................................... $4,167

3. Interest expense for year ended December 31, 2012

April 30, 2012 interest expense 5............................. $ 8,844Oct. 31, 2012 interest expense 6.............................. 13,289Dec. 31, 2012 interest expense 7.............................. 4,438 Interest expense for 2012..................................... $26,571

Or, using the amortization schedule below: $13,266 x 4/6 + 13,289 + 13,313 x 2/6 = $26,571

4. Liabilities at December 31, 2012Balance, December 31, 2011 (from req. 2 above). . . $442,470April 30, 2012 discount amortization 8.................... 511Oct. 31, 2012 discount amortization 9...................... 789Dec. 31, 2012 discount amortization 10.................... 271 Balance, December 31, 2012............................... $444,041

Interest payable 11..................................................... $4,167

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Problem 14-8 (concluded)

Calculations:

November 1, 2011Cash (price: given)........................................... 442,215Discount on bonds (difference)....................... 57,785 2

Bonds payable (face amount)....................... 500,000

Partial amortization schedule (not required)Cash Increase in Outstanding

Payment Effective Interest Balance Balance442,215

1 12,500 .03 (442,215) = 13,266 766 442,9812 12,500 .03 (442,981) = 13,289 789 443,7703 12,500 .03 (443,770) = 13,313 813 444,583

December 31, 2011Interest expense (3% x $442,215 x 2/6)............... 4,4221

Discount on bonds payable (difference)...... 255 Interest payable (2.5% x $500,000 x 2/6)....... 4,167

April 30, 2012Interest expense (3% x $442,215 x 4/6)............... 8,844 5

Interest payable (from adjusting entry above). . . . 4,167Discount on bonds payable (difference)...... 511 Cash (stated rate x face amount)..................... 12,500

October 31, 2012Interest expense (3% x [$442,215 + 255 + 511]) 13,289 6

Discount on bonds payable (difference)....... 789 Cash (stated rate x face amount)..................... 12,500

December 31, 2012Interest expense (3% x [$442,215 + 255 + 511 + 789] x 2/6) 4,438 7

Discount on bonds payable (difference)...... 271 Interest payable (2.5% x $500,000 x 2/6)....... 4,167

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Problem 14-9Requirement 1

Cash (price given).................................................. 5,795,518Discount on bonds payable (difference)................ 12,204,482

Bonds payable (face amount).............................18,000,000

Requirement 2

The discount rate that “equates” the present value of the debt ($5,795,518) and its future value ($18,000,000) is the effective rate of interest:

$5,795,518 ÷ $18,000,000 = .32197 – the Table 2 value for n = 10, i = ?

In row 10 of Table 2, the value .32197 is in the 12% column. So, this is the effective interest rate. A financial calculator will produce the same rate.

Requirement 3

Interest expense (12% x $5,795,518).......................... 695,462Discount on bonds payable ............................ 695,462

Requirement 4

Interest expense (12% x [$5,795,518 + $695,462]).... 778,918Discount on bonds payable ............................ 778,918

Requirement 5

Bonds payable..................................................... 18,000,000Cash ................................................................18,000,000

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Problem 14-10Requirement 1

Land ............................................................................. 600,000Notes payable (face amount).......................................600,000

Interest expense (12% x $600,000).................................. 72,000Cash (12% x $600,000)................................................ 72,000

Requirement 2 Office equipment (price given)....................................... 94,643 Discount on notes payable (difference).......................... 5,357

Notes payable (face amount).......................................100,000

The discount rate that “equates” the present value of the debt ($94,643) and its future value ($100,000 + $6,000) is the effective rate of interest:

$94,643 ÷ $106,000 = .8929 – the Table 2 value for n = 1, i = ?

In row 1 of Table 2, the value .8929 is in the 12% column. So, this is the effective interest rate. A financial calculator will produce the same rate.

PROOF:

Interest $6,000¥ x 0.89286 * = $ 5,357Principal $100,000 x 0.89286 ** = 89,286 Present value (price) of the note $94,643¥ 6% x $100,000* present value of an ordinary annuity of $1: n=1, i=12% (Table 4)** present value of $1: n=1, i=12% (Table 2)

Interest expense (12% x $94,643).................................... 11,357Discount on note payable (determined above)............. 5,357Cash (6% x $100,000).................................................. 6,000

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Problem 14-10 (concluded)

Not required, but recorded at the same date (may be combined with interest entry):

Note payable (face amount)............................................ 100,000Cash..........................................................................100,000

Requirement 3

$1,000,000 x 2.40183 = $2,401,830installment (from Table 4) presentpayments n=3, i=12% value

Building (implicit price).................................................. 2,401,830Note payable (present value determined above)..............2,401,830

Interest expense (12% x $2,401,830)................................ 288,220Note payable (difference)............................................... 711,780

Cash (given)...............................................................1,000,000

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Problem 14-11Requirement 1

Interest $ 6,000 x 3.79079 * = $ 22,745Principal $150,000 x 0.62092 ** = 93,138 Present value (price) of the note $115,883* present value of an ordinary annuity of $1: n=5, i=10% (Table 4)** present value of $1: n=5, i=10% (Table 2)

Equipment (fair value )................................................... 115,883Discount on notes payable (difference).......................... 34,117

Note payable (face amount)........................................150,000

Requirement 2

December 31, 2011Interest expense (10% x $115,883)........................................ 11,588

Discount on notes payable (difference)...................... 5,588Cash (given)............................................................... 6,000

Requirement 3

December 31, 2012Interest expense (10% x [$115,883 + 5,588])........................ 12,147

Discount on notes payable (difference)...................... 6,147Cash (given)............................................................... 6,000

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Problem 14-12Requirement 1

$6,074,700 ÷ $2,000,000 = 3.03735 present installment present valuevalue payment table amount

This is the Table 4 value for n = 4, i = ? In row 4 of Table 4, the number 3.03735 is in the 12% column. So, 12% is the implicit interest rate.

Requirement 2

Machine (fair value)....................................................... 6,074,700 Notes payable (present value)......................................6,074,700

Requirement 3

Interest expense (12% x outstanding balance)....................... 728,964Notes payable (difference).............................................. 1,271,036

Cash (given)...............................................................2,000,000

Requirement 4

Interest expense (12% x [$6,074,700 – 1,271,036]).............. 576,440Note payable (difference)............................................... 1,423,560

Cash (given)...............................................................2,000,000

Requirement 5

$2,000,000 x 3.10245 = $6,204,900installment (from Table 4) presentpayment n=4, i=11% value

Machine........................................................................ 6,204,900Notes payable...........................................................6,204,900

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