- •Chapter 14 Bonds and Long-Term Notes
- •1. Price of the bonds at January 1, 2011
- •1. June 30, 2011
- •4. June 30, 2011
- •4. June 30, 2011
- •2011 Adjusting entry:
- •1. January 1, 2011
- •2. Amortization schedule
- •3. December 31, 2011
- •1. Disclosure requirements for maturities of long-term debt:
- •2. How to estimate the value of a note when a note having no ready market and no interest rate is exchanged for a noncash asset without a readily available fair value:
- •3. When the straight-line method can be used as an alternative to the interest method of determining interest:
- •Interstate (Investor)
- •Interstate (Investor)
- •1. January 1, 2011
- •2. December 31, 2012
- •3. December 31, 2013
- •1. January 1, 2011
- •2. December 31, 2011
- •3. December 31, 2012
- •1. Liabilities at September 30, 2011
- •2. Interest expense for year ended September 30, 2011
- •3. Statement of cash flows for year ended September 30, 2011
- •If alternate method of recording accrued interest is used:
- •1. Interest expense for year ended December 31, 2011
- •2. Liabilities at December 31, 2011
- •3. Interest expense for year ended December 31, 2012
- •4. Liabilities at December 31, 2012
- •1. Issuance of the bonds.
- •2. December 31, 2011
- •3. June 30, 2012
- •4. Call of the bonds
- •Suggested Grading Concepts and Grading Scheme:
- •Intent and Ability to Refinance on a Long-Term Basis
- •470 Debt
- •10 Overall
- •45 Other Presentation Matters
4. June 30, 2011
Interest expense(3.5% x $579,377)20,278 Discount on bonds payable (difference) 2,278 Cash(3% x $600,000) 18,000
December 31, 2011**
Interest expense(3.5% x [$579,377 + 2,278])20,358 Discount on bonds payable (difference) 2,358 Cash(3% x $600,000) 18,000
5. Liability at December 31, 2011
Bonds payable (face amount) $600,000
Less: discount (20,623)
Initial balance, January 1, 2011 $579,377
June 30, 2011 discount amortization 2,278
Dec. 31, 2011 discount amortization 2,358
December 31, 2011 net liability $584,013
6. Interest expense for year ended December 31, 2011
June 30, 2011 interest expense $20,278
Dec. 31, 2011 interest expense 20,358
Interest expense for 2011 $40,636
7. December 31, 2014
Interest expense(3.5% x 597,099)20,901* Discount on bonds payable (difference) 2,901 Cash(3% x $600,000) 18,000
* rounded value from amortization schedule
Bonds payable600,000 Cash 600,000
Exercise 14-10
1. Price of the bonds at January 1, 2011
Interest $22,500¥ x 6.46321 * = $145,422 Principal $500,000 x 0.67684 ** = 338,420 Present value (price) of the bonds $483,842
¥ 4.5% x $500,000
* present value of an ordinary annuity of $1: n=8, i=5% (Table 4)
** present value of $1: n=8, i=5% (Table 2)
2. January 1, 2011
Cash(price determined above) 483,842 Discount on bonds payable (difference) 16,158 Bonds payable (face amount) 500,000
3. Amortization schedule
Cash Effective Increase in Outstanding Payment Interest Balance Balance 4.5% x Face Amount 5% x Outstanding Balance Discount Reduction
483,842
1 22,500 .05 (483,842) = 24,192 1,692 485,534
2 22,500 .05 (485,534) = 24,277 1,777 487,311
3 22,500 .05 (487,311) = 24,366 1,866 489,177
4 22,500 .05 (489,177) = 24,459 1,959 491,136
5 22,500 .05 (491,136) = 24,557 2,057 493,193
6 22,500 .05 (493,193) = 24,660 2,160 495,353
7 22,500 .05 (495,353) = 24,768 2,268 497,621
8 22,500 .05 (497,621) = 24,879* 2,379 500,000
180,000 196,158 16,158
* rounded.
Exercise 14-10 (concluded)
4. June 30, 2011
Interest expense(5% x $483,842)24,192 Discount on bonds payable (difference) 1,692 Cash(4.5% x $500,000) 22,500
5. December 31, 2014
Interest expense(5% x $497,621)24,879* Discount on bonds payable (difference) 2,379 Cash(4.5% x $500,000) 22,500
* rounded value from amortization schedule
Bonds payable500,000 Cash 500,000
Exercise 14-11
Cash(price given) 731,364 Discount on bonds payable (difference) 68,636 Bonds payable (face amount) 800,000
2. July 31, 2011
Interest expense(5% x $731,364)36,568 Discount on bonds payable (difference) 568 Cash(4.5% x $800,000) 36,000
3. December 31, 2011
Interest expense(5/6x 5% x [$731,364 + 568]) 30,497 Discount on bonds payable (difference) 497 Interest payable(5/6x 4.5% x $800,000) 30,000
4. January 31, 2012
Interest expense(1/6x 5% x [$731,364 + 568]) 6,100* Interest payable(from adjusting entry) 30,000 Discount on bonds payable (difference) 100 Cash (4.5% x $800,000) 36,000
* rounded
Exercise 14-12
1. March 1, 2011
Cash(price given) 294,000 Discount on bonds payable (difference) 6,000 Bonds payable (face amount) 300,000
2. August 31, 2011
Interest expense($21,000 + 150)21,150 Discount on bonds payable ($6,000 ÷ 40) 150 Cash(7% x $300,000) 21,000
3. December 31, 2011
Interest expense(4/6x $21,150) 14,100 Discount on bonds payable (4/6x $150) 100 Interest payable(4/6x $21,000) 14,000
4. February 28, 2012
Interest expense(2/6x $21,150) 7,050 Interest payable(4/6x $21,000) 14,000 Discount on bonds payable (2/6x $150) 50 Cash (7% x $300,000) 21,000
Exercise 14-13
1. January 1, 2011
Cash(price given) 739,814,813 Discount on bonds (difference) 60,185,187 Bonds payable (face amount) 800,000,000
2. June 30, 2011
Interest expense(6% x $739,814,813)44,388,889 Discount on bonds payable (difference) 388,889 Cash(5.5% x $800,000,000) 44,000,000
3. December 31, 2011
Interest expense(6% x [$739,814,813 + 388,889])44,412,222 Discount on bonds payable (difference) 412,222 Cash(5.5% x $800,000,000) 44,000,000
4. December 31, 2011
Federal will report the bonds among its liabilities in the December 31, 2011, balance sheet at $740,615,924:
Balance Jan. 1 $739,814,813
June 30 increase 388,889
Dec. 31 increase 412,222
$740,615,924
Exercise 14-14
1. National Equipment Transfer Corporation
Cash(priced at par) 200,000,000 Bonds payable (face amount) 200,000,000
IgWig
Cash(99% x $350 million) 346,500,000 Discount on notes (difference) 3,500,000 Notes payable (face amount) 350,000,000
2. National Equipment Transfer Corporation
Interest expense7,460,000 Cash([7.46% ÷ 2] x $200 million) 7,460,000
IgWig
Interest expense([6.56% ÷ 2] x$346,500,000)11,365,200 Discount on notes payable (difference) 60,200 Cash([6.46% ÷ 2] x $350 million) 11,305,000
Exercise 14-15
The 2011 interest expense is overstated by the extra interest recorded in February. Similarly, retained earnings is overstated the same amount because 2010 interest expense was understated when the accrued interest was not recorded.
To correct the error:
Retained earnings 61,000 Interest expense ($73,200 – 12,200*) 61,000
*$73,200 x 1/6