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Transcript of online.sfsu.eduonline.sfsu.edu/sjhsieh/Chapter 14 Home… · Web view · 2009-02-17Bonds payable...
Exercise 14-1The DD Corp. bonds are appropriately priced to yield the market rate of
interest. The GG Corp. bonds are slightly underpriced at the stated price and therefore are the most attractive. The BB Corp. bonds are slightly overpriced and are the least attractive. Bonds are priced to yield the market rate, 10% in this case. When this rate is used to price the bonds, we get the prices shown below. Presumably, the market rate changed since the underwriters priced two of the bond issues.
BB Corp. bonds:Interest $ 5,500,000 ¥ x 17.15909 * = $ 94,374,995Principal $100,000,000 x 0.14205 ** = 14,205,000 Present value (price) of the bonds $108,579,995¥ [11÷2] % x $100,000,000* present value of an ordinary annuity of $1: n=40, i=5% (Table 4)** present value of $1: n=40, i=5% (Table 2)
DD Corp. bonds:Interest $ 5,000,000 ¥ x 17.15909 * = $ 85,795,450Principal $100,000,000 x 0.14205 ** = 14,205,000 Present value (price) of the bonds $100,000,450
Note: The result differs from $100,000,000 only because the present value factors in any present value table are rounded. Because the stated rate and the market rate are the same, the true present value is $100,000,000.
¥ [10÷2] % x $100,000,000* present value of an ordinary annuity of $1: n=40, i=5% (Table 4)** present value of $1: n=40, i=5% (Table 2)
GG Corp. bonds:Interest $ 4,500,000 ¥ x 17.15909 * = $77,215,905Principal $100,000,000 x 0.14205 ** = 14,205,000 Present value (price) of the bonds $91,420,905¥ [9÷2] % x $100,000,000* present value of an ordinary annuity of $1: n=40, i=5% (Table 4)** present value of $1: n=40, i=5% (Table 2)
Exercise 14-51. Liability at December 31, 2009
Bonds payable (face amount)...................................... $320,000,000Less: discount........................................................... 36,705,280Initial balance, January 1, 2009................................ $283,294,720June 30, 2009 discount amortization........................ 997,683*Dec. 31, 2009 discount amortization........................ 1,057,544**December 31, 2009 net liability............................... $285,349,947
2. Interest expense for year ended December 31, 2009
June 30, 2009 interest expense................................. $16,997,683*Dec. 31, 2009 interest expense................................. 17,057,544**Interest expense for 2009......................................... $34,055,227
3. Statement of cash flows for year ended December 31, 2009
Myriad would report the cash inflow of $283,294,720*** from the sale of the bonds as a cash inflow from financing activities in its statement of cash flows.
The $32,000,000 ($16,000,000* + 16,000,000**) cash interest paid is cash outflow from operating activities because interest is an income statement (operating) item.
Exercise 14-5 (concluded)
Calculations:
January 1, 2009***Cash (price given)....................................................... 283,294,720Discount on bonds (difference)................................... 36,705,280
Bonds payable (face amount).................................. 320,000,000
June 30, 2009*Interest expense (6% x $283,294,720).............................. 16,997,683
Discount on bonds payable (difference)................. 997,683Cash (5% x $320,000,000)........................................ 16,000,000
December 31, 2009**Interest expense (6% x [$283,294,720 + 997,683]).......... 17,057,544
Discount on bonds payable (difference)................. 1,057,544Cash (5% x $320,000,000)........................................ 16,000,000
Exercise 14-14Requirement 1
At January 1, 2009, the book value of the bonds was the initial issue price, $739,814,813. The liability, though, was increased when Federal recorded interest during 2009:
June 30, 2009
Interest expense (6% x $739,814,813)........................ 44,388,889Discount on bonds payable (difference)............ 388,889Cash (5.5% x $800,000,000)................................ 44,000,000
December 31, 2009
Interest expense (6% x [$739,814,813 + 388,889]).... 44,412,222Discount on bonds payable (difference)............ 412,222Cash (5.5% x $800,000,000)................................ 44,000,000
Reducing the discount increases the book value of the bonds:
Jan.1, 2009, book value $739,814,813Increase from discount amortization ($388,889 + 412,222) 801,111December 31, 2009, book value (amortized initial amount) $740,615,924
Comparing the amortized initial amount at December 31, 2009, with the fair value on that date provides the Fair value adjustment balance needed:
December 31, 2009, book value (amortized initial amount) $740,615,924December 31, 2009, fair value 730,000,000
Fair value adjustment balance needed: debit/(credit) $ 10,615,924
Federal would record the $10,615,924 as a gain in the 2009 income statement:
December 31, 2009Fair value adjustment 10,615,924
Unrealized holding gain 10,615,924
Note: A decrease in the value of an asset is a loss; a decrease in the value of a liability is a gain.
Exercise 14-14 (continued)
In the balance sheet, the bonds are reported among long-term liabilities at their $730,000,000 fair value:
Bonds payable $800,000,000 Less: Discount on bonds payable (59,384,076 )
December 31, 2009, book value (amortized initial amount) $740,615,924 Less: Fair value adjustment (10,615,924 )
December 31, 2009, fair value $730,000,000
Requirement 2
If the fair value at December 31, 2010, is $736,000,000 a year later, Federal needs to compare that amount with the amortized initial measurement on that date. That amount was increased when Federal recorded interest during 2010:
June 30, 2010Interest expense (6% x [$739,814,813 + 388,889 + 412,222]) 44,436,955
Discount on bonds payable (difference).................... 436,955Cash (5.5% x $800,000,000)........................................ 44,000,000
December 31, 2010Interest expense (6% x [$739,814,813 + 388,889 + 412,222 + 436,955]) 44,463,173
Discount on bonds payable (difference).................... 463,173Cash (5.5% x $800,000,000)........................................44,000,000
Reducing the discount increases the book value of the bonds:
December 31, 2009, book value (amortized initial amount) $740,615,924Increase from discount amortization ($436,955 + 463,173) 900,128December 31, 2010, book value (amortized initial amount) $741,516,052
Exercise 14-14 (concluded)
Comparing the amortized initial amount at December 31, 2010, with the fair value on that date provides the Fair value adjustment balance needed:
December 31, 2010, book value (amortized initial amount) $741,516,052 December 31, 2010, fair value (736,000,000 ) Fair value adjustment balance needed: debit/(credit) $ 5,516,052
Less: Current fair value adjustment debit/(credit) 10,615,924Change in fair value adjustment $ (5,099,872)
Federal records the $5,099,872 as a loss in the 2010 income statement:
December 31, 2010Unrealized holding loss 5,099,872
Fair value adjustment 5,099,872
Note: An increase in the value of an asset is a gain; an increase in the value of a liability is a loss.
In the balance sheet, the bonds are reported among long-term liabilities at their $736,000,000 fair value:
Bonds payable $800,000,000 Less: Discount on bonds payable (58,483,948 )
December 31, 2010, book value (amortized initial amount) $741,516,052 Less: Fair value adjustment (5,516,052 ) December 31, 2010, fair value $736,000,000
Exercise 14-16Requirement 1
If the bonds are not traded on a market exchange, their fair market value is not readily observable. As a result, the next most preferable way to determine fair value according to SFAS No. 157 is to calculate the fair value as the present value of the remaining cash flows discounted at the current interest rate. At December 31, 18 of the original 20 payments remain. If the current interest rate is 9% (4.5% semi-annually), as we’re assuming now, that present value would be $751,360:
Present Values Interest $ 32,000¥ x 12.15999* = $389,120
Principal $800,000 x 0.45280† = 362,240 Present value of the bonds $751,360
¥ (8% / 2) x $800,000* Present value of an ordinary annuity of $1: n = 18, i = 4.5%. (Table 4)† Present value of $1: n = 18, i = 4.5%. (Table 2)
Requirement 2
June 30, 2009
Interest expense (5% x $700,302) 35,015Discount on bonds payable (difference) 3,015Cash (4% x $800,000) 32,000
Requirement 3
December 31, 2009Interest expense (5% x [$700,302 + 3,015]) 35,166
Discount on bonds payable (difference) 3,166Cash (4% x $800,000) 32,000
Exercise 14-16 (concluded)
Requirement 4
The interest entries increased the book value from $700,302 to $738,483:
$700,302 January 1 book value3,015 June 30 increase
3,166 December 31 increase$706,483 December 31 book value
To increase the book value to $751,360, Essence needs the following entry:
Unrealized holding loss 44,877 Fair value adjustment ($751,360 – $706,483) 44,877
Exercise 14-23
Requirement 1($ in millions)
Limbaugh (Issuer)Cash (104% x $30 million)...................................................... 31.2Discount on bonds payable (difference)................................ 3.6
Bonds payable (face amount)............................................. 30.0Paid-in capital – stock warrants outstanding ($8 x 20 warrants x [$30,000,000 ÷ $1,000] bonds)............... 4.8
Interstate (Investor)Investment in stock warrants ($4.8 million x 20%)................ 0.96Investment in bonds (20% x $30 million)............................... 6.00
Discount on bonds (difference)......................................... 0.72Cash (104% x $30 million x 20%)........................................ 6.24
Requirement 2($ in millions)
Limbaugh (Issuer)Cash (20% x 30,000 bonds x 20 warrants x $60)......................... 7.20Paid-in capital – stock warrants outstanding
($4.8 million x 20%)....................................................... 0.96Common stock (20% x 30,000 x 20 shares x $10 par)............ 1.20Paid-in capital – excess of par (to balance)....................... 6.96
Interstate (Investor)Investment in common stock (to balance)............................ 8.16
Investment in stock warrants ($4.8 million x 20%)............. .96Cash (20% x 30,000 x 20 warrants x $60).............................. 7.20
Problem 14-1Requirement 1
Interest $2,500,000¥ x 15.04630 * = $37,615,750Principal $50,000,000 x 0.09722 ** = 4,861,000 Present value (price) of the bond s $42,476,750¥ 5% x $50,000,000* present value of an ordinary annuity of $1: n=40, i=6% (Table 4)** present value of $1: n=40, i=6% (Table 2)
Cash (price determined above)...................................... 42,476,750Discount on bonds (difference)................................... 7,523,250
Bonds payable (face amount)..................................50,000,000
Requirement 2 Interest $ 2,500,000 x 18.40158 * = $46,003,950Principal $50,000,000 x 0.17193 ** = 8,596,500 Present value (price) of the bonds $54,600,450* present value of an ordinary annuity of $1: n=40, i=4.5% (Table 4)** present value of $1: n=40, i=4.5% (Table 2)
Cash (price determined above)...................................... 54,600,450Premium on bonds (difference)............................... 4,600,450Bonds payable (face amount)..................................50,000,000
Requirement 3 Investment in bonds (face amount).................................. 50,000,000Premium on bond investment .................................. 4,600,450
Cash (price calculated above)....................................54,600,450
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 OutstandingInterest 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.
Problem 14-5 (continued)
(b) Barnwell
Cash Effective Increase in OutstandingInterest 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, 2009 (Cromley)Cash (price determined above)................................. 77,414,756Discount on bonds payable (difference)................ 2,585,244
Bonds payable (face amount).............................80,000,000
February 1, 2009 (Barnwell)Bond investment (face amount)............................. 80,000
Discount on bond investment (difference)......... 2,585Cash (price paid)................................................ 77,415
Problem 14-5 (continued)
Requirement 4
July 31, 2009 (Cromley)Interest expense (from schedule) ................................ 3,870,738
Discount on bonds payable (from schedule) ...... 270,738Cash (from schedule) ......................................... 3,600,000
July 31, 2009 (Barnwell)Cash (from schedule).............................................. 3,600Discount on bond investment (from schedule)........ 271
Interest revenue (from schedule)............................. 3,871
December 31, 2009 (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, 2009 (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, 2010 (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, 2010 (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
Problem 14-5 (concluded)July 31, 2010 (Cromley)Interest expense (from schedule) ................................ 3,898,488
Discount on bonds payable (from schedule) ...... 298,488Cash (from schedule) ......................................... 3,600,000
July 31, 2010 (Barnwell)Cash (from schedule).............................................. 3,600Discount on bond investment (from schedule)........ 299
Interest revenue (from schedule)............................. 3,899
December 31, 2010 (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, 2010 (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, 2011 (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, 2011 (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
Problem 14-6Requirement 1
April 1, 2009 (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, 2009 (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, 2009 (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, 2009 (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.
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, 2009 (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, 2009 (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, 2009 (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, 2009 (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
Problem 14-6 (continued)December 31, 2009 (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, 2009 (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, 2010 (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, 2010 (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, 2010 (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, 2010 (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, 2010 (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
Problem 14-6 (continued)December 31, 2010 (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, 2011 (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, 2011 (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, 2011 (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, 2011 (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, 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
Problem 14-6 (concluded)
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
Bonds payable .................................................... 30,000,000Cash ................................................................30,000,000
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
Cash .................................................................... 30,000Investment in bonds ....................................... 30,000
Problem 14-10Requirement 1 Interest $ 32,000 x 17.15909 = $549,091 Principal $800,000 x 0.14205 = 113,640 $662,731 4% x $800,000 = $32,000
January 1Cash 662,731Discount on bonds payable 137,269
Bonds payable 800,000
Requirement 2
June 30Interest expense (5% x $662,731) 33,137
Discount on bonds payable (difference) 1,137Cash (4% x $800,000) 32,000
Requirement 3
December 31Interest expense (5% x [$662,731 + 1,137]) 33,193
Discount on bonds payable (difference) 1,193Cash (4% x $800,000) 32,000
Requirement 4
The interest entries increased the book value from $662,731 to $665,061. To increase the book value to $668,000, NFB needed the following entry:
Unrealized holding loss 2,939 Fair value adjustment ($668,000 – 665,061) 2,939
Problem 14-12Requirement 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 bonds $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
Problem 14-12 (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
Problem 14-17Requirement 1
Interest expense (7% x $19,000,000)..................................... 1,330,000Discount on bonds payable (difference)..................... 130,000Cash (6% x $20,000,000).............................................. 1,200,000
Requirement 2
Bonds payable (face amount).......................................... 20,000,000Loss on early extinguishment (to balance)..................... 1,270,000
Discount on bonds payable ($1,000,000 – 130,000)..... 870,000Cash (redemption price)..............................................20,400,000
Problem 14-22Requirement 1
($ in millions)Convertible Bonds – 1996 issueCash (97.5% x $200 million)........................................................ 195Discount on bonds (difference).................................................. 5
Convertible bonds payable (face amount).............................. 200
Bonds With Warrants – 2000 issueCash (102% x $50 million)........................................................... 51Discount on bonds payable (difference)..................................... 3
Bonds payable (face amount).................................................. 50Paid-in capital – stock warrants outstanding (given)............. 4
Requirement 2 ($ in millions)
Convertible bonds payable (90% x $200 million)....................... 180Discount on bonds payable (90% x $2 million)...................... 1.8Common stock (90% x [200,000 x 40 shares] x $1 par).............. 7.2Paid-in capital – excess of par (to balance)............................ 171.0
Convertible bonds payable (10% x $200 million)....................... 20.0Loss on early extinguishment (to balance)................................. .4
Discount on bonds payable (10% x $2 million)...................... .2Cash (101% x 10% x $200 million)........................................... 20.2
Requirement 3 ($ in millions)
Convertible bonds payable (90% x $200 million)....................... 180Conversion expense (90% x 200,000 bonds x $150)..................... 27
Discount on bonds payable (90% x $2 million)...................... 1.8Common stock (90% x [200,000 x 40 shares] x $1 par).............. 7.2Paid-in capital – excess of par (to balance)............................ 171.0Cash (90% x 200,000 bonds x $150).......................................... 27.0
Problem 14-22 (concluded)
Requirement 4 ($ in millions)
Convertible bonds payable (90% x $200 million)....................... 180.0Conversion expense (90% x [200,000 x (45 – 40) shares] x $32)................................. 28.8
Discount on bonds payable (90% x $2 million)...................... 1.8Common stock (90% x [200,000 x 45 shares] x $1 par).............. 8.1Paid-in capital – excess of par (to balance)............................ 198.9
Requirement 5
($ in millions)Cash (40% x 50,000 x 40 warrants x $25)....................................... 20.0Paid-in capital – stock warrants outstanding (40% x $4 million)1.6
Common stock (40% x 50,000 x 40 shares x $1 par)................... .8Paid-in capital – excess of par (to balance)............................ 20.8
Requirement 6
Paid-in capital will increase under each of the first two scenarios (Requirements 3 and 4) by $178.2 million. By the third scenario (Requirement 5), paid-in capital will increase by $207 million.
Problem 14-23Requirement 1
($ in millions)Land.............................................................................. 3
Gain on disposal ...................................................... 3
Note payable................................................................. 20Accrued interest payable.............................................. 2
Land ......................................................................... 16Gain on debt restructuring........................................ 6
Requirement 2
Analysis: Carrying amount: $20 million + $2 million = $22,000,000 Future payments: ($1 million x 4) + $15 million = 19,000,000 Gain to debtor $ 3,000,000
($ in millions)(a) January 1, 2009Accrued interest payable ............................................. 2Note payable *.............................................................. 1
Gain on debt restructuring........................................ 3
* establishes a balance in the note account equal to the total cash payments under the new agreement ($20 million – 1 million = $19 million)
(b) December 31, 2009, 2010, 2011, and 2012 revised “interest” paymentsNote payable................................................................. 1
Cash ......................................................................... 1
Note: No interest expense should be recorded after the restructuring. All subsequent cash payments result in reductions of principal.
(c) December 31, 2012 revised principal paymentNote payable................................................................. 15
Cash ..................................................................................... 15
Problem 14-23 (continued)
Requirement 3
Analysis: Carrying amount: $20,000,000 + $2,000,000 = $22,000,000 Future payments: 27,775,000 Interest $ 5,775,000
Calculation of the new effective interest rate:
• $22,000,000 ÷ $27,775,000 = .79208 – the Table 2 value for n = 4, i = ?
• In row 4 of Table 2, the number .79209 is in the 6% column. So, this is the new effective interest rate.
(a) January 1, 2009
[Since the total future cash payments are not less than the carrying amount of the debt, no reduction of the existing debt is necessary and no entry is required at the time of the debt restructuring.]
Amortization Schedule (not required)
Cash Effective Increase in OutstandingDec.31 Interest Interest Balance Balance
6% x Outstanding Balance22,000,000
2009 0 .06 (22,000,000) = 1,320,000 1,320,000 23,320,0002010 0 .06 (23,320,000) = 1,399,200 1,399,200 24,719,2002011 0 .06 (24,719,200) = 1,483,152 1,483,152 26,202,3522012 0 .06 (26,202,352) = 1,572,648* 1,572,648 27,775,000
0 5,775,000 5,775,000* rounded
Problem 14-23 (concluded)
(b) December 31, 2009Interest expense................................................... 1,320,000
Interest payable............................................... 1,320,000
December 31, 2010Interest expense................................................... 1,399,200
Interest payable............................................... 1,399,200
December 31, 2011Interest expense................................................... 1,483,152
Interest payable............................................... 1,483,152
December 31, 2012Interest expense................................................... 1,572,648
Interest payable............................................... 1,572,648
(c) December 31, 2012 revised paymentInterest payable ($2,000,000 + 4 years’ interest above) 7,775,000Note payable....................................................... 20,000,000
Cash................................................................. 27,775,000