CH 14 Self Study Solutions

CHAPTER14
Long-TermLiabilities
SOLUTIONSTO BRIEFEXERCISES
BRIEFEXERCISE14-1
Presentvalueof the principal
$500,000X .37689..............................................................................
Presentvalueof the interestpayments
$22,500X 12.46221............................................................................
Issueprice...............................................................................
BRIEFEXERCISE14-2
(a)
Cash......................................................................................
.............................................................................................
BondsPayable.............................................................
(b)
InterestExpense.....................................................................
Cash($300,000X 10%X 6/12).........................................
(c)
InterestPayable...........................................................
BRIEFEXERCISE14-3
(a)
Cash($300,000X 98%).............................................................
.............................................................................................
Discounton BondsPayable......................................................
BondsPayable.............................................................
(b)
Discounton BondsPayable
($6,000X 1/10 = $600).................................................
Cash($300,000X 10%X 6/12).........................................
(c)
($6,000X 1/10 = $600).................................................
BRIEFEXERCISE14-4
(a)
Cash($300,000X 103%)...........................................................
.............................................................................................
BondsPayable.............................................................
Premiumon BondsPayable...........................................
(b)
Premiumon BondsPayable
($9,000X 1/10 = $900)............................................................
Cash($300,000X 10%X 6/12).........................................
(c)
($9,000X 1/10 = $900)............................................................
$188,445
280,400
$468,845
300,000
300,000
15,000
15,000
15,000
15,000
294,000
6,000
300,000
15,600
600
15,000
15,600
600
15,000
309,000
300,000
9,000
14,100
900
15,000
14,100
900
BRIEFEXERCISE14-5
(a)
Cash......................................................................................
.............................................................................................
BondsPayable.............................................................
InterestExpense
($400,000X 6% X 4/12= $8,000)...................................
(b)
Cash($400,000X 6%X 6/12 = $12,000)............................
(c)
BRIEFEXERCISE14-6
(a)
Cash......................................................................................
.............................................................................................
Discounton BondsPayable......................................................
BondsPayable.............................................................
(b)
Cash...........................................................................
Discounton BondsPayable...........................................
($559,224X 8% X 6/12= $22,369)
($600,000X 7% X 6/12= $21,000)
(c)
15,000
408,000
400,000
8,000
12,000
12,000
12,000
12,000
559,224
40,776
600,000
22,369
21,000
1,369
22,424
($560,593X 8% X 6/12= $22,424)..................................
BRIEFEXERCISE14-7
(a)
Cash......................................................................................
.............................................................................................
BondsPayable.............................................................
Premiumon BondsPayable...........................................
(b)
Premiumon BondsPayable......................................................
Cash...........................................................................
($644,636X 6% X 6/12= $19,339)
($600,000X 7% X 6/12= $21,000)
(c)
Premiumon BondsPayable......................................................
InterestPayable
($642,975X 6% X 6/12= $19,289)..................................
BRIEFEXERCISE14-8
21,000
1,424
644,636
600,000
44,636
19,339
1,661
21,000
19,289
1,711
21,000
InterestExpense..................................................................................
Premiumon BondsPayable..................................................................
InterestPayable........................................................................
($644,636X 6% X 2/12= $6,446)
($600,000X 7% X 2/12= $7,000)
6,446
554
7,000
BRIEFEXERCISE14-9
Currentliabilities
BondInterestPayable...............................................................
Long-termliabilities
BondsPayable,due January1, 2021...........................................
Less: Discounton BondsPayable..............................................
BRIEFEXERCISE14-10
BondIssueExpense............................................................................
UnamortizedBondIssueCosts
($160,000X 1/10)....................................................................
BRIEFEXERCISE14-11
BondsPayable....................................................................................
Premiumon BondsPayable..................................................................
UnamortizedBondIssueCosts...................................................
Gainon Redemptionof Bonds....................................................
Cash.......................................................................................
BRIEFEXERCISE14-12
(a)
Cash......................................................................................
.............................................................................................
NotesPayable..............................................................
(b)
Cash($100,000X 10%= $10,000)....................................
BRIEFEXERCISE14-13
(a)
Cash......................................................................................
.............................................................................................
Discounton NotesPayable.......................................................
NotesPayable..............................................................
(b)
Discounton NotesPayable
($47,664X 12%).........................................................
BRIEFEXERCISE14-14
(a)
Equipment..............................................................................
Discounton NotesPayable.......................................................
80,000
$2,000,000
88,000
$1,912,000
16,000
16,000
500,000
15,000
5,250
14,750
495,000
100,000
100,000
10,000
10,000
47,664
27,336
75,000
5,720
5,720
31,495
8,505
(b)
NotesPayable..............................................................
Cash...........................................................................
Discounton NotesPayable............................................
($31,495X 12%= $3,779)
($40,000X 5% = $2,000)
BRIEFEXERCISE14-15
Cash..................................................................................................
..........................................................................................................
Discounton NotesPayable...................................................................
NotesPayable..........................................................................
UnearnedSalesRevenue
[$60,000 ($60,000X .63552)= $21,869]....................................
40,000
3,779
2,000
1,779
60,000
21,869
60,000
21,869
BRIEFEXERCISE14-16
(a) Fair Value BookValue= $17,500 $16,000= $1,500unrealizedholdingloss.
(b) UnrealizedHoldingGainor LossIncome......................................
..................................................................................................
NotesPayable..................................................................
1,500
1,500
SOLUTIONSTO EXERCISES
EXERCISE14-1 (1520minutes)
(a)
Currentliability if currentassetsare usedto satisfythe debt.
(b)
Valuation account relating to the long-term liability, bonds payable (sometimes referred to as an adjunct
account).The$3,000wouldcontinueto be reportedas long-term.
(c)
Currentliability, $250,000;long-termliability, $750,000.
(d)
Currentliability.
(e)
Probablynoncurrent, althoughif operatingcycle is greater than one year and current assets are used, this
itemwouldbe classifiedas current.
(f)
Currentliability.
(g)
Current liability unless (a) a fund for liquidation has been accumulated which is not classified as a current
assetor (b) arrangementshavebeenmadefor refinancing.
(h)
Currentliability.
(i)
Currentliability.
1.
DivacCompany:
(a) 1/1/12
Cash................................................................
.......................................................................
BondsPayable.......................................
300,000
300,000
(b)
(c)
7/1/12
12/31/12
InterestExpense
($300,000X 9% X 3/12).....................................
Cash.....................................................
InterestExpense...............................................
InterestPayable.....................................
6,750
6,750
6,750
6,750
2.
VerbitskyCompany:
(a) 6/1/12
Cash................................................................
210,000
.......................................................................
BondsPayable.......................................
200,000
InterestExpense
($200,000X 12%X 5/12)........................
10,000
(b) 7/1/12
12,000
Cash
($200,000X 12%X 6/12)........................
12,000
(c) 12/31/12
12,000
InterestPayable.....................................
12,000
Note to instructor: Somestudentsmaycredit Interest Payableon 6/1/12. If they do so, the entry on 7/1/12 will have
a debit to InterestPayablefor $10,000and a debit to InterestExpensefor $2,000.
(a)
1/1/13
Cash($800,000X 102%).............................................
BondsPayable...............................................
Premiumon Bonds
Payable......................................................
(b)
7/1/13
InterestExpense.......................................................
($16,000 40).........................................................
Cash
($800,000X 10%X 6/12)................................
(c)
12/31/13
InterestExpense.......................................................
Premiumon BondsPayable........................................
InterestPayable.............................................
(a)
1/1/13
Cash($800,000X 102%)..............................................
BondsPayable...............................................
Premiumon BondsPayable.............................
(b)
7/1/13
InterestExpense
($816,000X 9.7705%X 1/2).......................................
Premiumon BondsPayable........................................
Cash
($800,000X 10%X 6/12).................................
c)
12/31/13
InterestExpense
($815,864X 9.7705%X 1/2).....................................
Premiumon BondsPayable.....................................
InterestPayable...........................................
816,000
800,000
16,000
39,600
400
40,000
39,600
400
40,000
816,000
800,000
16,000
39,864
136
40,000
39,857
143
40,000
Carryingamountof bondsat July 1, 2013:

Carryingamountof bondsat January1, 2013
Amortizationof bondpremium
($40,000 $39,864)
Carryingamountof bondsat July 1, 2013
$816,000
(136)
$815,864
The effective-interestor yield rate is 12%.It is determinedthroughtrial and error usingTable6-2 for the discounted
value of the principal ($1,702,290) and Table 6-4 for the discountedvalue of the interest ($1,081,434); $1,702,290 plus
$1,081,434equalsthe proceedsof $2,783,724.(A financialcalculatormaybe usedto determinethe rate of 12%.)
Scheduleof DiscountAmortization
Effective-InterestMethod(12%)
CashPaid
Interest
Expense
Discount
Amortized
(2)
(3)
(4)
Year
(1)
Jan. 1, 2012
Dec. 31, 2012
Dec. 31, 2013
Dec. 31, 2014
Dec. 31, 2015
Dec. 31, 2016
$300,000
300,000
300,000
300,000
300,000
$334,046.88*
338,132.51
342,708.41
347,833.42
353,554.78**
$34,046.88
38,132.51
42,708.41
47,833.42
53,554.78
CarryingAmountof
Bonds
$2,783,724.00
2,817,770.88
2,855,903.39
2,898,611.80
2,946,445.22
3,000,000.00
*$334,046.88= $2,783,724X .12.

**Rounded.
(a)
1.
June30, 2012
Cash...............................................................
......................................................................
BondsPayable......................................
Premiumon BondsPayable....................
2.
December31, 2012
InterestExpense
($5,376,150.00X 12%X 6/12)...........................
Premiumon BondsPayable..............................
3.
Cash
($5,000,000X 13%X 6/12)....................
June30, 2013
InterestExpense
[($5,376,150.00 $2,431.00)
X 12%X 6/12]...............................................
5,376,150.00
5,000,000.00
376,150.00
322,569.00
2,431.00
325,000.00
322,423.14
(b)
(c)
2,576.86
Cash....................................................
325,000.00
4.
December31, 2013
InterestExpense
[($5,376,150.00 $2,431.00
$2,576.86)X 12%X 6/12]...............................
322,268.53
2,731.47
Cash....................................................
325,000.00
Long-termLiabilities:
Bondspayable,13%(dueon June30, 2032).................................
$5,000,000.00
Premiumon BondsPayable*......................................................
368,410.67
Bookvalueof bondspayable.....................................................
$5,368,410.67
*($376,150) ($2,431.00+ $2,576.86+ $2,731.47)= $368,410.67
1.
Interestexpensefor the periodfrom
January1 to June30, 2013from(a) 3..............................
$322,423.14
Interestexpensefor the periodfrom
July 1 to December31, 2013from(a) 4............................
322,268.53
Amountof bondinterestexpense
reportedfor 2013..........................................................
$644,691.67
2.
The amount of bond interest expense reported in 2013 will be greater than the amount that
would be reported if the straight-line methodof amortizationwere used. Under the straight-line
method, the amortization of bond premiumis $18,808 ($376,150/20). Bond interest expense for
2013 is the difference between the amortized premium, $18,808, and the actual interest paid,
$650,000($5,000,000X 13%). Thus, the amountof bondinterestexpenseis $631,192,which is smaller
thanthe bondinterestexpenseunderthe effective-interestmethod.
3.
4.
Total interestto be paid for the bond

($5,000,000X 13%X 20).................................................
Less: Premium...............................................................
Total cost of borrowingover the life
of the bond..................................................................
$13,000,000
376,150
$12,623,850
Theywill be the same.
UnsecuredBonds
(1)
(2)
(3)
Maturityvalue
Numberof interest
periods
Statedrate per period
(4)
Effectiverate per period
(5)
(6)
Paymentamountper period
Presentvalue
$10,000,000
40
13%
)
4
12%
3% (
)
4
$325,000(a)
$10,577,900(c)
3.25%(
Zero-Coupon
Bonds
MortgageBonds
$25,000,000
10
$15,000,000
10
10%
12%
12%
0
$8,049,250
(d)
$1,500,000(b)
$13,304,880(e)
(a)
$10,000,000X 13%X 1/4 = $325,000

$15,000,000X 10%= $1,500,000
(c)
Presentvalueof an annuityof $325,000
discountedat 3% per periodfor
40 periods($325,000X 23.11477)=..............................................
Presentvalueof $10,000,000discounted
at 3% per periodfor 40 periods
($10,000,000X .30656)=.............................................................
(b)
$ 7,512,300
3,065,600
$10,577,900
(d)
at 12%for 10 periods
($25,000,000X .32197)=.............................................................
(e)
Presentvalueof an annuityof $1,500,000discounted
at 12%for 10 periods
($1,500,000X 5.65022)=.............................................................
at 12%for 10 years
($15,000,000X .32197)...............................................................
Reacquisitionprice($1,000,000X 101%)..........................................
Less: Net carryingamountof bondsredeemed:
Par value.........................................................................
Unamortizeddiscount.......................................................
Unamortizedbondissuecosts...........................................
Losson redemption
Calculationof unamortizeddiscount
Originalamountof discount:
$1,000,000X 3% = $30,000
$30,000/10= $3,000amortizationper year
Amountof discountunamortized:
$3,000X 5 = $15,000
Calculationof unamortizedissuecosts
Originalamountof costs:
$24,000X $1,000,000/$1,500,000= $16,000
$16,000/10= $1,600amortizationper year
Amountof costsunamortized:
$1,600X 5 = $8,000
January2, 2012
BondsPayable...........................................................................
Losson Redemptionof Bonds.....................................................
UnamortizedBondIssueCosts........................................
Discounton BondsPayable.............................................
Cash.............................................................................
Cash($7,000,000X 98%)..............................................................
$ 8,049,250
$ 8,475,330
4,829,550
$13,304,880
$1,010,000
$1,000,000
(15,000)
(8,000)
977,000
$ 33,000
1,000,000
33,000
8,000
15,000
1,010,000
6,860,000
.................................................................................................
Discounton BondsPayable(.02 X $7,000,000)................................
BondsPayable................................................................
(To recordissuanceof 10%bonds)
BondsPayable.........................................................................
Losson Redemptionof Bonds....................................................
Cash($5,000,000X 1.02).................................................
Discounton BondsPayable............................................
UnamortizedBondIssueCosts........................................
(To recordretirementof 11%bonds)
Reacquisitionprice...................................................................
Par value....................................................................
Unamortizedbonddiscount..........................................
Unamortizedbondissuecosts......................................
Losson redemptionof bonds.....................................................
Reacquisitionprice($500,000X 104%)..........................................
Par value.....................................................................
Unamortizeddiscount...................................................
Losson redemptionof bonds......................................................
BondsPayable...........................................................................
Losson Redemptionof Bonds.....................................................
Discounton BondsPayable............................................
Cash............................................................................
(To recordredemptionof bonds
payable)
Cash.........................................................................................
................................................................................................
UnamortizedBondIssueCosts....................................................
Premiumon BondsPayable............................................
BondsPayable..............................................................
(To recordissuanceof newbonds)
(a)
1.
January1, 2013
Land.......................................................................
..............................................................................
Discounton NotesPayable........................................
NotesPayable...............................................
(The$300,000capitalizedland
cost representsthe present
valueof the notediscounted
140,000
7,000,000
5,000,000
250,000
5,100,000
120,000
30,000
$5,100,000
$5,000,000
(120,000)
(30,000)
4,850,000
$ 250,000
$520,000
$500,000
(10,000)
490,000
$ 30,000
500,000
30,000
10,000
520,000
512,000
3,000
15,000
500,000
300,000.00
205,518.00
505,518.00
2.
(b)
1.
2.
for five yearsat 11%.)

Equipment...............................................................
Discounton NotesPayable........................................
NotesPayable...............................................
*Computationof the discounton
notespayable:
Maturityvalue...........................................
Presentvalueof $400,000duein
8 yearsat 11%$400,000
X .43393.................................................
Presentvalueof $24,000
payableannuallyfor 8 years
at 11%annually$24,000
X 5.14612...............................................
Presentvalueof the note............................
Discount..................................................
297,078.88
102,921.12*
400,000.00
$400,000.00
$173,572.00
123,506.88
InterestExpense..................................................
Discounton NotesPayable
($300,000X .11)......................................
InterestExpense
($297,078.88X .11).............................................
Discounton NotesPayable.........................
Cash($400,000X .06).................................
(297,078.88)
$102,921.12
33,000.00
33,000.00
32,678.68
At December31, 2012, disclosureswouldbe as follows:
Maturitiesandsinkingfundrequirementson long-termdebt are as follows:
2013
$
0
2014
2,500,000
2015
4,500,000
($2,000,000+ $2,500,000)
2016
8,500,000
($6,000,000+ $2,500,000)
2017
2,500,000
SOLUTIONSTO PROBLEMS
PROBLEM14-5
1. SanfordCo.
Scheduleof BondDiscountAmortization
Effective-InterestMethod
10%BondsSoldto Yield 12%
8,678.68
24,000.00
CashPaid
Date
3/1/12
9/1/12
3/1/13
9/1/13
3/1/14
9/1/14
3/1/15
9/1/15
$25,000
25,000
25,000
25,000
25,000
25,000
25,000
Interest
Expense
$28,325
28,525
28,736
28,961
29,198
29,450
29,715*
Discount
Amortized
CarryingAmount
of Bonds
$472,090
475,415
478,940
482,676
486,637
490,835
495,285
500,000
$3,325
3,525
3,736
3,961
4,198
4,450
4,715
*Rounded$2
3/1/12
Cash..............................................................................
.....................................................................................
Discounton BondsPayable.............................................
BondsPayable.....................................................
*Maturityvalueof bondspayable........................................................
Presentvalueof $500,000duein 7 periodsat 6%
($500,000X .66506)........................................................................
Presentvalueof interestpayablesemiannually
($25,000X 5.58238)........................................................................
Proceedsfromsale of bonds.............................................................
Discounton bondspayable...............................................................
9/1/12
InterestExpense.........................................................
Discounton BondsPayable..............................
Cash...............................................................
12/31/12
($3,525X 4/6)................................................
InterestPayable($25,000X 4/6)..........................
3/1/13
InterestPayable..........................................................
($3,525X 2/6)................................................
Cash...............................................................
9/1/13
Discounton BondsPayable..............................
Cash...............................................................
12/31/13
($3,961X 4/6)................................................
InterestPayable...............................................
2. TitaniaCo.
472,090
27,910*
500,000
$500,000
$332,530
139,560
(472,090)
$ 27,910
28,325*
3,325
25,000
19,017
2,350
16,667
9,508
16,667
1,175
25,000
28,736
3,736
25,000
19,308
2,641
16,667
CashPaid
Date
6/1/12
12/1/12
6/1/13
12/1/13
6/1/14
12/1/14
6/1/15
12/1/15
6/1/16
$24,000
24,000
24,000
24,000
24,000
24,000
24,000
24,000
*$.50adjustmentdue to rounding.
Interest
Expense
$21,293
21,157
21,015
20,866
20,709
20,545
20,372
20,190*
Premium
Amortized
$2,707
2,843
2,985
3,134
3,291
3,455
3,628
3,810
CarryingAmount
of Bonds
$425,853
423,146
420,303
417,318
414,184
410,893
407,438
403,810
400,000
6/1/12
Cash..............................................................................
.....................................................................................
Premiumon BondsPayable...................................
BondsPayable.....................................................
Maturityvalueof bondspayable.........................................................
Presentvalueof $400,000due in 8 periodsat 5%
($400,000X .67684).........................................................................
Presentvalueof interestpayablesemiannually
($24,000X 6.46321).........................................................................
Proceedsfromsale of bonds..............................................................
Premiumon bondspayable................................................................
12/1/12
Premiumon BondsPayable.........................................
Cash($400,000X .12 X 6/12)..............................
12/31/12
InterestExpense($21,157X 1/6)....................................
($2,843X 1/6)...........................................................
InterestPayable($24,000X 1/6)..........................
6/1/13
InterestExpense($21,157X 5/6)....................................
($2,843X 5/6)...........................................................
Cash...............................................................
10/1/13
InterestExpense
($21,015X .3* X 4/6)..................................................
($2,985X .3 X 4/6).....................................................
Cash...............................................................
*$120,000 $400,000= .3
10/1/13
BondsPayable...........................................................
Premiumon BondsPayable.........................................
Gainon Redemptionof Bonds...........................
Cash...............................................................
*Reacquisitionprice
$126,000 ($120,000X 12%X 4/12)
Net carryingamountof bondsredeemed:
Par value
Unamortizedpremium
[.3 X ($25,853 $2,707 $2,843)] $597
Gainon redemption
12/1/13
InterestExpense($21,015X .7*)....................................
($2,985X .7).............................................................
Cash($24,000X .7)...........................................
425,853
25,853
400,000
$400,000
$270,736
155,117
(425,853)
$ 25,853
21,293*
2,707
24,000
3,526
474
4,000
17,631
4,000
2,369
24,000
4,203
597
4,800
120,000
5,494
4,294*
121,200
$121,200
$120,000
5,494
(125,494)
$ (4,294)
14,711
2,089
16,800
*($400,000 $120,000) $400,000= .7

12/31/13
6/1/14
12/1/14
InterestExpense($20,866X .7 X 1/6).............................
($3,134X .7 X 1/6).....................................................
InterestPayable
($24,000X .7 X 1/6).........................................
InterestExpense($20,866X .7 X 5/6).............................
($3,134X .7 X 5/6).....................................................
Cash($24,000X .7)...........................................
InterestExpense($20,709X .7).....................................
($3,291X .7).............................................................
Cash($24,000X .7)...........................................
2,434
366
2,800
12,172
2,800
1,828
16,800
14,496
2,304
16,800

CH 14 Self Study Solutions

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CH 14 Self Study Solutions

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CHAPTER14

Carryingamountof bondsat July 1, 2013:

*$334,046.88= $2,783,724X .12.

Total interestto be paid for the bond

Theywill be the same.

Effectiverate per period

$10,000,000X 13%X 1/4 = $325,000

for five yearsat 11%.)

*($400,000 $120,000) $400,000= .7

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