Académique Documents
Professionnel Documents
Culture Documents
Liabilities
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
Brief
Exercises
3, 4, 5
3, 4
3, 4, 5
6, 7, 8,
9, 10
6, 7
11, 12, 13
6, 7, 8
8, 9, 10,
11, 16, 17,
18, 19
3A, 4A,
6A, 7A,
8A, 9A
14, 15
11, 12
3A, 4A,
10A
2B, 3B, 9B
16
10
13
5A
4B
17
11
14
3A, 4A, 5A
2B, 3B, 4B
20
12
15
18, 19
13
16, 17
6A, 7A
5B, 6B
Do It!
A
Problems
B
Problems
1A
1B
1, 2
1A, 2A
1B
1A
1B
Exercises
10-1
Study Objectives
Questions
Brief
Exercises
21, 22
14, 15
18, 19
23
16, 17
20, 21
Do It!
A
Exercises Problems
B
Problems
7B, 8B, 9B
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendices to the
chapter.
10-2
Description
Difficulty
Level
Time
Allotted (min.)
1A
Moderate
3040
2A
Moderate
3040
3A
Moderate
2030
4A
Moderate
1520
5A
Moderate
2030
*6A
Moderate
3040
*7A
Moderate
3040
*8A
Simple
3040
*9A
Simple
3040
*10A
Moderate
3040
1B
Moderate
3040
2B
Moderate
2030
3B
Moderate
1520
4B
Moderate
2030
*5B
Moderate
3040
10-3
Description
Difficulty
Level
Time
Allotted (min.)
Moderate
3040
*6B
*7B
Simple
3040
*8B
Simple
3040
*9B
Moderate
3040
10-4
WEYGANDT IFRS 1E
CHAPTER 10
LIABILITIES
Number
BE1
BE2
BE3
BE4
BE5
BE6
BE7
BE8
BE9
BE10
BE11
*BE12
*BE13
*BE14
*BE15
*BE16
*BE17
DI1
DI2
DI3
DI4
DI5
EX1
EX2
EX3
EX4
EX5
EX6
EX7
EX8
EX9
EX10
EX11
EX12
SO
1
2
3
3
4
5
5
5
6
7
8
9
10
11
11
12
12
3
4
5
6
7
2
2
3
3
3
4
4
5
5
5
5, 6
6
BT
C
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
C
C
AP
AP
AP
AN
AN
AP
AN
AP
C
AN
AP
AP
AP
AP
AP
Difficulty
Time (min.)
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Moderate
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Moderate
35
24
24
24
68
46
35
46
35
68
35
35
46
46
46
35
35
68
23
46
35
46
810
68
46
68
68
46
46
46
46
68
68
810
10-5
LIABILITIES (Continued)
Number
SO
BT
Difficulty
Time (min.)
EX13
EX14
*EX15
*EX16
*EX17
*EX18
*EX19
*EX20
*EX21
7
8
9
5, 10
5, 10
5, 11
5, 11
12
12
AP
AP
AP
AP
AP
AP
AP
AP
AP
Simple
Simple
Simple
Moderate
Moderate
Simple
Simple
Simple
Simple
68
35
46
810
810
68
68
810
35
P1A
P2A
P3A
P4A
P5A
*P6A
*P7A
*P8A
*P9A
*P10A
P1B
P2B
P3B
P4B
P5B
*P6B
*P7B
*P8B
*P9B
BYP1
BYP2
BYP3
BYP4
BYP5
BYP6
13
2
5, 6, 8
5, 6, 8
7, 8
5, 10
5, 10
5, 11
5, 11
6, 11
13
5, 6, 8
5, 6, 8
7, 8
5, 10
5, 10
5, 11
5, 11
5, 6, 11
1
3, 8
4
5, 6
4
5, 6
AN
AN
AP
AP
AP
AP
AP
AP
AP
AP
AN
AP
AP
AP
AP
AP
AP
AP
AP
AN
AP
C
AN
C
E
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Simple
Simple
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Simple
Simple
Moderate
Simple
Simple
Simple
Moderate
Simple
Simple
3040
3040
2030
1520
2030
3040
3040
3040
3040
3040
3040
2030
1520
2030
3040
3040
3040
3040
3040
510
1015
1015
1520
1015
1015
10-6
E10-18
E10-19
P10-3A
P10-4A
P10-6A
P10-7A
P10-8A
P10-9A
P10-5B
P10-6B
P10-5A
P10-2B
P10-3B
E10-15
E10-16
E10-17
P10-4B E10-14
BE10-16 E10-20
BE10-17 E10-21
Comparative
Analysis
BE10-11
P10-3A
P10-4A
BE10-12
BE10-13
P10-6A
P10-7A
P10-4B E10-13
BE10-9
DI10-4
P10-3A
P10-2B E10-8
P10-3B E10-9
P10-5B E10-10
P10-6B
P10-7B
P10-8B
P10-9B
E10-7
BE10-5
Q10-9
DI10-2
E10-6
Q10-12
BE10-6
BE10-7
BE10-8
DI10-3
E10-11
E10-16
E10-17
BE10-3 P10-1B
E10-4 E10-5
P10-1A
BE10-2 P10-1A
E10-2 P10-1B
P10-2A
Analysis
P10-1A
P10-1B
BE10-4
E10-3
E10-1
Application
Q10-5
Financial Reporting
Exploring the Web
Communication
Q10-21
Q10-20
Q10-18
Q10-19
Q10-17
Q10-14
Q10-15
Q10-11
Q10-13
Q10-6
Q10-7
Q10-8
Q10-3
Q10-4
DI10-1
Q10-2
Study Objective
Knowledge Comprehension
1. Explain a current liability, and identify
Q10-1
the major types of current liabilities.
BE10-1
Synthesis
Decision Making
Across the
Organization
Ethics Case
Evaluation
Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems
10-7
ANSWERS TO QUESTIONS
1.
Jill is not correct. A current liability is a debt that can reasonably be expected to be paid: (a) from
existing current assets or through the creation of other current liabilities and (b) within one year or
the operating cycle, whichever is longer.
2.
In the statement of financial position, Notes Payable of Rs400,000 and Interest Payable of Rs9,000
(Rs400,000 X .09 X 3/12) should be reported as current liabilities. In the income statement, Interest
Expense of Rs9,000 should be reported under other income and expense.
3.
(a) Disagree. The company only serves as a collection agent for the taxing authority. It does not
report sales taxes as an expense; it merely forwards the amount paid by the customer to the
government.
(b) The entry to record the proceeds is:
Cash.................................................................................................................
7,400
Sales.......................................................................................................
7,000
Sales Taxes Payable...........................................................................
400
4.
800,000
800,000
160,000
160,000
5.
Liquidity refers to the ability of a company to pay its maturing obligations and meet unexpected
needs for cash. Two measures of liquidity are working capital (current assets current liabilities)
and the current ratio (current assets current liabilities).
6.
(a) Non-current liabilities are obligations that are expected to be paid after one year. Examples
include bonds, long-term notes, and lease obligations.
(b) A bond is a form of an interest-bearing notes payable used by corporations, universities, and
governmental agencies.
7.
10-8
(a) Secured bonds have specific assets of the issuer pledged as collateral. In contrast, unsecured bonds are issued against the general credit of the borrower. These bonds are called
debenture bonds.
(b) Term bonds mature at a single specified future date. In contrast, serial bonds mature in
installments.
(c) Registered bonds are issued in the name of the owner. In contrast, bearer (coupon) bonds are
issued to bearer and are unregistered. Holders of bearer bonds must send in coupons to receive
interest payments.
(d) Convertible bonds may be converted into ordinary shares at the bondholders option. In contrast,
callable bonds are subject to call and retirement at a stated dollar amount prior to maturity at the
option of the issuer.
9.
(a) Face value is the amount of principal due at the maturity date. (Face value is also called par value.)
(b) The contractual interest rate is the rate used to determine the amount of cash interest the borrower
pays and the investor receives. This rate is also called the stated interest rate because it is
the rate stated on the bonds.
(c) A bond indenture is a legal document that sets forth the terms of the bond issue.
(d) A bond certificate is a legal document that indicates the name of the issuer, the face value of the
bonds, and such other data as the contractual interest rate and maturity date of the bonds.
10.
The two major obligations incurred by a company when bonds are issued are the interest
payments due on a periodic basis and the principal which must be paid at maturity.
11.
Less than. Investors are required to pay more than the face value; therefore, the market interest
rate is less than the contractual rate.
12.
13.
$860,000. The balance of the Bonds Payable account minus the unamortized bond discount
(or plus the unamortized bond premium) equals the carrying value of the bonds.
14.
Debits:
Credits:
Bonds Payable (for the face value) and Premium on Bonds Payable (for the
unamortized balance).
Cash (for 97% of the face value) and Gain on Bond Redemption (for the difference
between the cash paid and the bonds carrying value).
15.
A convertible bond permits bondholders to convert it into ordinary shares at the option of the
bondholders.
(a) For bondholders, the conversion option gives an opportunity to benefit if the market price of
the shares increases substantially.
(b) For the issuer, convertible bonds usually have a higher selling price and a lower rate of
interest than comparable debt securities without the conversion option.
16.
No, Tim is not right. Each payment by Tim consists of: (1) interest on the unpaid balance of the
loan and (2) a reduction of loan principal. The interest decreases each period while the portion
applied to the loan principal increases each period.
10-9
The nature and the amount of each non-current liability should be presented in the statement of
financial position or in schedules in the accompanying notes to the statements. The notes
should also indicate the interest rates, maturity dates, conversion privileges, and assets pledged
as collateral.
*18.
Laura is probably indicating that since the borrower has the use of the bond proceeds over the
term of the bonds, the borrowing rate in each period should be the same. The effective-interest
method results in a varying amount of interest expense but a constant rate of interest on the
balance outstanding. Accordingly, it results in a better matching of expenses with revenues than
the straight-line method.
*19.
Decrease. Under the effective-interest method the interest charge per period is determined by
multiplying the carrying value of the bonds by the effective-interest rate. When bonds are issued
at a premium, the carrying value decreases over the life of the bonds. As a result, the interest
expense will also decrease over the life of the bonds because it is determined by multiplying the
decreasing carrying value of the bonds at the beginning of the period by the effective-interest rate.
*20. No, Tina is not right. The market price of any bond is a function of three factors: (1) The dollar
amounts to be received by the investor (interest and principal), (2) The length of time until the
amounts are received (interest payment dates and maturity date), and (3) The market interest rate.
*21. The straight-line method results in the same amortized amount being assigned to Interest
Expense each interest period. This amount is determined by dividing the total bond discount or
premium by the number of interest periods the bonds will be outstanding.
*22. $28,000. Interest expense is the interest to be paid in cash less the premium amortization for the
year. Cash to be paid equals 8% X $400,000 or $32,000. Total premium equals 5% of $400,000
or $20,000. Since this is to be amortized over 5 years (the life of the bonds) in equal amounts,
the amortization amount is $20,000 5 = $4,000. Thus, $32,000 $4,000 or $28,000 equals
interest expense for 2011.
*23. Three taxes commonly withheld by employers from employees gross pay are: (1) federal
income taxes (2) state income taxes, and (3) social security (FICA) taxes.
10-10
Dec. 31
Cash .............................................................................
Notes Payable ..................................................
80,000
4,000
80,000
4,000
Cash..............................................................................
Sales ....................................................................
Sales Taxes Payable ......................................
15,540
14,800
740
10-11
720,000
60,000
720,000
60,000
Issue Bond
700,000
0
700,000
210,000
490,000
700,000
160,000
540,000
162,000
378,000
700,000
0.70
500,000
0.76
Net income is higher if shares are used. However, earnings per share is
lower than earnings per share if bonds are used because of the additional
shares that are outstanding.
(b) July 1
(c) Dec. 31
10-12
Cash..........................................................
Bonds Payable
(3,000 X $1,000)........................
3,000,000
120,000
120,000
3,000,000
120,000
120,000
(b) Jan. 1
1,940,000
2,080,000
1,940,000
2,080,000
2.
3.
Jan. 1
July 1
Sept. 1
1,000,000
816,000
196,000
1,000,000
816,000
196,000
940,000
70,000
1,010,000
10-13
(A)
Semiannual
Interest
Period
Cash
Payment
Issue Date
1
Dec. 31
June 30
$48,145
$30,000
(C)
Reduction
of Principal
(A) (B)
(D)
Principal
Balance
(D) (C)
$18,145
$600,000
581,855
Cash .......................................................................
Mortgage Notes Payable ........................
600,000
30,000
18,145
600,000
48,145
CHF455,000
80,000
70,000
CHF605,000
i = 10%
?
$10,000
Discount rate from Table 16 A-1 is .46651 (8 periods at 10%). Present value
of $10,000 to be received in 8 periods discounted at 10% is therefore $4,665.10
($10,000 X .46651).
10-14
i = 8%
?
46,884
1,884
45,000
(b) Interest expense is greater than interest paid because the bonds sold
at a discount which must be amortized over the life of the bonds. The
bonds sold at a discount because investors demanded a market interest
rate higher than the contractual interest rate.
(c) Interest expense increases each period because the bond carrying value
increases each period. As the market interest rate is applied to this bond
carrying amount, interest expense will increase.
*BRIEF EXERCISE 10-14
(a) Jan. 1
(b) July 1
4,800,000
235,000
10,000
225,000
10-15
3,060,000
144,000
6,000
3,060,000
150,000
$640.00
168.00
$808.00
$808.00
$ 64.64
95.00
159.64
$648.36
Jan. 15
10-16
Wages Expense.........................................................
FICA Taxes Payable ($808 X 8%)................
Federal Income Taxes Payable ...................
Wages Payable .................................................
808.00
648.36
64.64
95.00
648.36
648.36
DO IT! 10-1
1.
2.
DO IT! 10-2
1.
2.
3.
4.
5.
False. Mortgage bonds and sinking fund bonds are both examples of
secured bonds.
False. Convertible bonds can be converted into ordinary shares at the
bondholders option; callable bonds can be retired by the issuer at a
set amount prior to maturity.
True.
True.
True.
DO IT! 10-3
(a) Cash................................................................................. 312,000,000
Bonds Payable ....................................................
312,000,000
(To record sale of bonds at a premium)
(b) Non-current liabilities
Bonds payable ....................................................
312,000,000
DO IT! 10-4
Loss on Bond Redemption ...............................................
Bonds Payable ......................................................................
Cash.................................................................................
(To record redemption of bonds at 99)
6,000
390,000
396,000
10-17
DO IT! 10-5
Cash .............................................................................................
Mortgage Notes Payable ..............................................
(To record mortgage loan)
Interest Expense ......................................................................
Mortgage Notes Payable .......................................................
Cash ....................................................................................
(To record semiannual payment on mortgage)
350,000
350,000
10,500*
7,357
17,857
10-18
SOLUTIONS TO EXERCISES
EXERCISE 10-1
July 1, 2011
Cash...................................................................................
Notes Payable.........................................................
50,000
November 1, 2011
Cash...................................................................................
Notes Payable.........................................................
60,000
50,000
60,000
3,000
Interest Expense
(60,000 X 10% X 2/12).............................................
Interest Payable .....................................................
1,000
February 1, 2012
Notes Payable.................................................................
Interest Payable .............................................................
Interest Expense (60,000 X 10% X 1/12)...............
Cash...........................................................................
60,000
1,000
500
April 1, 2012
Notes Payable.................................................................
Interest Payable .............................................................
Interest Expense (50,000 X 12% X 3/12)...............
Cash...........................................................................
50,000
3,000
1,500
3,000
1,000
61,500
54,500
10-19
EXERCISE 10-2
(a) June 1 Cash ....................................................................
Notes Payable ..........................................
90,000
900
90,000
90,000
900
5,400
95,400
(d) $5,400
EXERCISE 10-3
Apr. 10
15
10-20
KEMER COMPANY
Cash ...........................................................................
Sales..................................................................
Sales Taxes Payable....................................
BODRUM COMPANY
Cash ...........................................................................
Sales (TL23,540 1.07) ...............................
Sales Taxes Payable
(TL23,540 TL22,000)............................
31,500
30,000
1,500
23,540
22,000
1,540
EXERCISE 10-4
(a) Nov. 30
(b) Dec. 31
(c) Mar. 31
Cash .....................................................................
Unearned Subscriptions
(12,000 X $20) ......................................
240,000
20,000
60,000
240,000
20,000
60,000
EXERCISE 10-5
(a) Current ratio
2008
$9,598 $5,839 = 1.64:1
2007
$9,838 $5,362 = 1.83:1
Working capital
2008
$9,598 $5,839 = $3,759 million
2007
$9,838 $5,362 = $4,476 million
(b) Current ratio
$9,298 $5,539 = 1.68:1
Working capital
$9,298 $5,539 = $3,759 million
It would make its current ratio increase slightly, but its working capital
would remain the same.
10-21
EXERCISE 10-6
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
True.
True.
False. When seeking long-term financing, an advantage of issuing bonds
over issuing ordinary shares is that tax savings result.
True.
False. Unsecured bonds are also known as debenture bonds.
False. Bonds that mature in installments are called serial bonds.
True.
True.
True.
True.
EXERCISE 10-7
Plan One
Issue Shares
800,000
800,000
240,000
560,000
150,000
3.73
Plan Two
Issue Bonds
800,000
270,000
530,000
159,000
371,000
90,000
4.12
EXERCISE 10-8
(a) Jan. 1
(b) July 1
(c) Dec. 31
10-22
Cash.................................................................
Bonds Payable ....................................
500,000
25,000
25,000
500,000
25,000
25,000
EXERCISE 10-9
(a) Jan. 1
(b) July 1
(c) Dec. 31
Cash .................................................................
Bonds Payable .....................................
300,000
12,000
12,000
300,000
12,000
12,000
EXERCISE 10-10
(a) 1.
2.
Cash............................................................................
Bonds Payable ................................................
Semiannual interest payments
($20,000* X 10) ....................................................
Plus: bond discount..............................................
Total cost of borrowing........................................
485,000
485,000
$200,000
15,000
$215,000
$500,000
200,000
700,000
(485,000)
$215,000
10-23
2.
Cash ............................................................................
Bonds Payable ................................................
525,000
525,000
$200,000
25,000
$175,000
OR
Principal at maturity ..............................................
Semiannual interest payments
($20,000 X 10) ......................................................
Cash to be paid to bondholders ........................
Cash received from bondholders .....................
Total cost of borrowing ........................................
$500,000
200,000
700,000
(525,000)
$175,000
EXERCISE 10-11
(a) Jan. 1
(b) Jan
(c) July 1
10-24
72,000
600,000
24,000
45,000
72,000
624,000
45,000
EXERCISE 10-12
1.
2.
June 30
June 30
117,500
151,000
15,100
132,600
4,000
147,000
10-25
EXERCISE 10-13
Dec. 31
June 30
Dec. 31
2011
Issuance of Note
Cash ........................................................................
Mortgage Notes Payable .........................
2012
First Installment Payment
Interest Expense
($240,000 X 10% X 6/12) ...............................
Mortgage Notes Payable ..................................
Cash ...............................................................
Second Installment Payment
Interest Expense
[($240,000 $8,000) X 10% X 6/12] ...........
Mortgage Notes Payable ..................................
Cash ...............................................................
240,000
240,000
12,000
8,000
20,000
11,600
8,400
20,000
EXERCISE 10-14
Non-current liabilities
Bonds payable, due 2016..........................
Lease liability ................................................
Total.........................................................
HK$212,000
89,500
HK$301,500
*EXERCISE 10-15
Present value of principal ($200,000 X .61391)..............
Present value of interest ($8,000 X 7.72173) ..................
Market price of bonds ............................................................
10-26
$122,782
61,774
$184,556
*EXERCISE 10-16
(a) Jan. 1
(b) July 1
(c) Dec. 31
Cash ................................................................
Bonds Payable ....................................
Bond Interest Expense
(562,613 X 5%) .......................................
Bonds Payable ....................................
Cash (600,000 X 9% X 1/2).............
Bond Interest Expense
[(562,613 + 1,131) X 5%] ...................
Bonds Payable ....................................
Bond Interest Payable ......................
562,613
562,613
28,131
1,131
27,000
28,187
1,187
27,000
10-27
10-28
Issue date
1
2
27,000
27,000
28,131
28,187
1,131
1,187
562,613
563,744
564,931
(B)
Interest Expense
(C)
to Be Recorded
(A)
Discount
(D)
(5% X Preceding
Interest to
Semiannual
Bond
Bond Carrying Value) Amortization
Be Paid
Interest
(B) (A)
Carrying Value
(E X .05)
(4.5% X 600,000)
Periods
(b), (c)
*EXERCISE 10-17
(a) Jan. 1
(b) July 1
(c) Dec. 31
Cash ..................................................................
Premium on Bonds Payable.............
318,694
318,694
15,935
565
15,906
594
16,500
16,500
10-29
10-30
Issue date
1
2
16,500
16,500
15,935
15,906
565
594
318,694
318,129
317,535
(B)
Interest Expense
(C)
to Be Recorded
(A)
Premium
(D)
(5.0% X Preceding
Interest to
Semiannual
Bond
Bond Carrying Value) Amortization
Be Paid
Interest
(A) (B)
Carrying Value
(E X .05)
(5.5% X $300,000)
Periods
(b), (c)
*EXERCISE 10-18
(a) Jan. 1
(b) July 1
(c) Dec. 31
(d) Jan.
412,000
17,700
300
17,700
300
2031
Bonds Payable ............................................
Cash .......................................................
412,000
18,000
18,000
400,000
400,000
*EXERCISE 10-19
(a)
Dec. 31
(b)
June 30
(c)
Dec. 31
(d)
Dec. 31
2010
Cash ................................................................
Bonds Payable ...................................
2011
Bond Interest Expense .............................
Bonds Payable ($70,000 20) .......
Cash ($800,000 X 11% X 1/2)..........
2011
Bond Interest Expense .............................
Bonds Payable ...................................
Cash ($800,000 X 11% X 1/2)..........
2020
Bonds Payable ............................................
Cash .......................................................
730,000
730,000
47,500
3,500
44,000
47,500
3,500
44,000
800,000
800,000
10-31
*EXERCISE 10-20
(a) Net pay = Gross pay FICA taxes Federal income tax
Net pay = $1,780 $135.73 $301.63
Net pay = $1,342.64
(b) Salaries Expense .................................................................. 1,780.00
FICA Taxes Payable......................................................
135.73
Federal Income Taxes Payable .................................
301.63
Salaries Payable.............................................................
1,342.64
(c) Salaries Payable.................................................................... 1,342.64
Cash ...................................................................................
1,342.64
*EXERCISE 10-21
Payroll Tax Expense ............................................................
FICA Taxes Payable......................................................
Federal Unemployment Taxes Payable..................
State Unemployment Taxes Payable ......................
10-32
352.16
198.40
19.84
133.92
SOLUTIONS TO PROBLEMS
PROBLEM 10-1A
(a) Jan. 5
12
14
20
21
25
(b) Jan. 31
Cash......................................................................
Sales (22,680 108%) ..........................
Sales Taxes Payable
(22,680 21,000) .............................
22,680
10,000
7,700
43,200
Cash......................................................................
Notes Payable...........................................
18,000
Cash......................................................................
Sales (12,420 108%) ..........................
Sales Taxes Payable
(12,420 11,500) .............................
12,420
40
21,000
1,680
10,000
7,700
40,000
3,200
18,000
11,500
920
40
10-33
10-34
18,000
52,000
6,000
5,800
40
81,840
PROBLEM 10-2A
(a) Jan.
Feb.
Mar. 31
Apr.
July
Sept. 30
Oct.
Dec.
Dec. 31
Merchandise Inventory or
Purchases.....................................................
Accounts Payable..................................
Accounts Payable ..........................................
Notes Payable.........................................
Interest Expense
($30,000 X 9% X 2/12)................................
Interest Payable .....................................
30,000
30,000
30,000
30,000
450
450
Notes Payable..................................................
Interest Payable ..............................................
Cash ...........................................................
30,000
450
Equipment.........................................................
Cash ...........................................................
Notes Payable.........................................
51,000
Interest Expense
($40,000 X 10% X 3/12) .............................
Interest Payable .....................................
30,450
11,000
40,000
1,000
1,000
Notes Payable..................................................
Interest Payable ..............................................
Cash ...........................................................
40,000
1,000
Cash ....................................................................
Notes Payable.........................................
15,000
Interest Expense
($15,000 X 8% X 1/12)................................
Interest Payable .....................................
41,000
15,000
100
100
10-35
4/1
10/1
3/31
9/30
12/31
12/31 Bal.
Notes Payable
30,000 2/1
40,000 7/1
12/1
12/31 Bal.
30,000
40,000
15,000
15,000
Interest Payable
450 3/31
1,000 9/30
12/31
12/31 Bal.
450
1,000
100
100
Interest Expense
450
1,000
100
1,550
$15,000
100
$15,100
10-36
PROBLEM 10-3A
(a)
May 1
(b) Dec. 31
2011
Cash .............................................................
Bonds Payable .................................
Bond Interest Expense...........................
Bond Interest Payable
(CHF600,000 X 9% X 2/12) ........
600,000
600,000
9,000
9,000
$600,000
Current Liabilities
Bond Interest Payable........................................
(d)
May 1
(e) Nov. 1
(f)
Nov. 1
2012
Bond Interest Payable ............................
Bond Interest Expense
(CHF600,000 X 9% X 4/12).................
Cash.....................................................
9,000
18,000
27,000
27,000
Bonds Payable..........................................
Loss on Bond Redemption...................
Cash (CHF600,000 X 1.02) ............
600,000
12,000
9,000
27,000
612,000
10-37
PROBLEM 10-4A
(a)
Jan. 1
2011
Cash ($500,000 X 1.04)..........................
Bonds Payable ...............................
520,000
520,000
$518,000*
Current Liabilities
Bond interest payable
($500,000 X 10% X 1/2) .........................................
$ 25,000
2013
Bonds Payable ........................................
Loss on Bond Redemption .................
Cash ($500,000 X 1.05).................
516,000
9,000*
525,000
*($525,000 $516,000)
10-38
PROBLEM 10-5A
(a)
Semiannual
Interest Period
Issue Date
1
2
3
4
(b)
Dec. 31
June 30
Dec. 31
Cash
Payment
R$29,433
29,433
29,433
29,433
Interest
Expense
Reduction of
Principal
R$16,000
15,463
14,904
14,323
R$13,433
13,970
14,529
15,110
R$57,042
2010
Cash ................................................................
Mortgage Notes Payable .................
400,000
2011
Interest Expense .........................................
Mortgage Notes Payable ..........................
Cash .......................................................
16,000
13,433
(c)
Principal
Balance
R$400,000
386,567
372,597
358,068
342,958
400,000
29,433
15,463
13,970
29,433
12/31/11
Non-current Liabilities
Mortgage notes payable, due 2020
R$342,958*
Current Liabilities
Current portion of mortgage notes payable
R$ 29,639**
10-39
*PROBLEM 10-6A
(a)
July 1
(b)
2011
Cash...........................................................
Bonds Payable ..............................
2,271,813
ATWATER CORPORATION
Bond Premium Amortization
Effective-Interest MethodSemiannual Interest Payments
10% Bonds Issued at 8%
(A)
Semiannual
Interest
Interest
to Be
Periods
Paid
Issue date
1
$100,000
100,000
2
3
100,000
(c) Dec. 31
(d)
July 1
(e) Dec. 31
10-40
2,271,813
(B)
(C)
Premium
AmorInterest tization
Expense (A) (B)
(D)
$90,873
90,507
90,128
Bond
Carrying
Value
$2,271,813
2,262,686
2,253,193
2,243,321
$9,127
9,493
9,872
90,873
9,127
100,000
90,507
9,493
100,000
90,128
9,872
100,000
*PROBLEM 10-7A
(a) 1.
July 1
2.
Dec. 31
3.
July 1
4.
Dec. 31
2011
Cash...................................................... 3,501,514
Bonds Payable .........................
Bond Interest Expense
(3,501,514 X 5%).........................
Bonds Payable .........................
Bond Interest Payable
(4,000,000 X 4%)................
2012
Bond Interest Expense
[(3,501,514 + 15,076) X 5%].....
Bonds Payable .........................
Cash.............................................
Bond Interest Expense
[(3,516,590 + 15,830) X 5%].....
Bonds Payable .........................
Bond Interest Payable .............
3,501,514
175,076
15,076
160,000
175,830
15,830
160,000
176,621
16,621
160,000
3,549,041*
10-41
Thank you for asking me to clarify some points about the bonds issued by
Rossillon Company.
1.
2.
3.
4.
3,200,000
498,486
3,698,486
The total bond interest expense over the life of the bonds is the same
under either method of amortization.
10-42
*PROBLEM 10-8A
(a)
Jan. 1
2011
Cash ($3,000,000 X 1.04)......................
Bonds Payable ...............................
3,120,000
3,120,000
Dec. 31
Jan. 1
July 1
Dec. 31
2011
Bond Interest Expense.........................
Bonds Payable ($120,000 20) .........
Cash...................................................
Bond Interest Expense.........................
Bonds Payable........................................
Bond Interest Payable .................
2012
Bond Interest Payable ..........................
Cash...................................................
144,000
6,000
150,000
144,000
6,000
150,000
150,000
150,000
144,000
6,000
144,000
6,000
150,000
150,000
10-43
$3,096,000
Current Liabilities
Bond interest payable ......................................
$ 150,000
10-44
Issue date
1
2
3
4
$150,000
150,000
150,000
150,000
$144,000
144,000
144,000
144,000
$6,000
6,000
6,000
6,000
$3,120,000
3,114,000
3,108,000
3,102,000
3,096,000
(A)
(B)
(C)
(D)
Semiannual
Interest to
Interest Expense
Premium
Bond
Interest
Be Paid
to Be Recorded
Amortization
Carrying Value
Periods
(5% X $3,000,000)
(A) (C)
($120,000 20) [$3,000,000 (C)]
(b)
10-45
*PROBLEM 10-9A
(a)
July 1
Dec. 31
(b)
July 1
Dec. 31
2011
Cash (Rs2,500,000 X 104%)...............
Bonds Payable .............................
Bond Interest Expense .......................
Bonds Payable (Rs100,000 20).....
Bond Interest Payable
(Rs2,500,000 X 8% X 1/2) ......
2011
Cash (Rs2,500,000 X 98%) .................
Bonds Payable .............................
Bond Interest Expense .......................
Bonds Payable
(Rs50,000 20) ........................
Bond Interest Payable
(Rs2,500,000 X 8% X 1/2) ......
2,500,000
2,500,000
95,000
5,000
100,000
2,450,000
2,450,000
102,500
2,500
100,000
(c) Premium
Non-current Liabilities
Bonds payable, due 2021..........................
Rs2,595,000
Discount
Non-current Liabilities
Bonds payable, due 2021..........................
10-46
Rs2,452,500
*PROBLEM 10-10A
(a)
Jan. 1
(b) July 1
(c) July 1
2012
Bond Interest Payable ........................
Cash.................................................
Bond Interest Expense.......................
Bonds Payable
($200,000 20)..................................
Cash.................................................
Bonds Payable......................................
Gain on Bond Redemption ......
($1,276,000 $1,212,000)
Cash ($1,200,000 X 101%) ........
105,000
105,000
95,000
10,000
105,000
1,276,000*
64,000
1,212,000
57,000
6,000**
63,000
$114,000
= $6,000 or $10,000 X .60.
19
10-47
PROBLEM 10-1B
(a) Jan. 1
12
14
20
25
(b) Jan. 31
10-48
9,000
5,800
400
5,800
10,000
9,000
30,000
46,800
1,872
18,000
720
200
200
30,000
42,500
6,000
2,992
200
81,692
10-49
PROBLEM 10-2B
(a)
June 1
(b) Dec. 31
2011
Cash............................................................
Bonds Payable ...............................
Bond Interest Expense .........................
Bond Interest Payable
($1,500,000 X 8% X 1/12) ...........
1,500,000
1,500,000
10,000
10,000
$1,500,000
Current Liabilities
Bond Interest Payable.....................................
(d)
June 1
(e) Dec. 1
(f)
10-50
Dec. 1
2012
Bond Interest Payable...........................
Bond Interest Expense
($1,500,000 X 8% X 5/12) ....................
Cash ...................................................
10,000
50,000
60,000
60,000
1,500,000
30,000
10,000
60,000
1,530,000
PROBLEM 10-3B
(a)
Jan. 1
2011
Cash (R$600,000 X 1.05) ........................
Bonds Payable .................................
630,000
630,000
(b)
Non-current Liabilities
Bond Payable, due 2021 ...................................
R$627,000*
Current Liabilities
Bond Interest Payable (R$600,000 X 9% X 1/2).......
R$27,000
2013
Bonds Payable..........................................
Loss on Bond Redemption...................
Cash (R$600,000 X 1.05) ...............
624,000
6,000*
630,000
*(R$630,000 R$624,000)
10-51
PROBLEM 10-4B
(a)
Semiannual
Interest Period
Issue Date
1
2
3
4
(b)
Dec. 31
June 30
Dec. 31
Cash
Payment
$36,791
36,791
36,791
36,791
Interest
Expense
$20,000
19,328
18,630
17,903
Reduction
of Principal
Principal
Balance
$500,000
483,209
465,746
447,585
428,697
$16,791
17,463
18,161
18,888
$71,303
2011
Cash ..............................................................
Mortgage Notes Payable................
500,000
2012
Interest Expense .......................................
Mortgage Notes Payable ........................
Cash .....................................................
20,000
16,791
(c)
500,000
36,791
19,328
17,463
36,791
12/31/12
Non-current Liabilities
Mortgage notes payable......................................
$428,697*
Current Liabilities
Current portion of mortgage notes payable ....
$ 37,049***
**($465,746 $37,049)
**($18,161 + $18,888)
10-52
*PROBLEM 10-5B
(a)
July 1
(b)
2011
Cash .........................................................
Bonds Payable .............................
2,531,760
2,531,760
MATLOCK SATELLITES
Bond Discount Amortization
Effective-Interest MethodSemiannual Interest Payments
9% Bonds Issued at 10%
(A)
(B)
(C)
Interest Discount
Expense
Amorto Be
tization
Recorded (B) (A)
Semiannual
Interest
Interest
to Be
Periods
Paid
Issue date
1
121,500 126,588
121,500
126,842
2
127,110
3
121,500
(c) Dec. 31
(d)
July 1
(e) Dec. 31
5,088
5,342
5,610
(D)
Bond
Carrying
Value
2,531,760
2,536,848
2,542,190
2,547,800
126,588
5,088
121,500
126,842
5,342
121,500
127,110
5,610
121,500
10-53
*PROBLEM 10-6B
(a) 1.
July 1
2.
Dec. 31
3.
July 1
4.
Dec. 31
2011
Cash ..................................................... 3,407,720
Bonds Payable ........................
Bond Interest Expense
($3,407,720 X 4%) ........................
Bonds Payable .................................
Bond Interest Payable
($3,000,000 X 5%) ...............
2012
Bond Interest Expense
[($3,407,720 $13,691) X 4%]....
Bonds Payable .................................
Cash ............................................
Bond Interest Expense
[($3,394,029 $14,239) X 4%]....
Bonds Payable .................................
Bond Interest Payable...........
3,407,720
136,309
13,691
150,000
135,761
14,239
150,000
135,192
14,808
150,000
$3,364,982*
10-54
Thank you for asking me to clarify some points about the bonds issued by
Posadas Chemical Company.
1.
2.
3.
4.
$3,000,000
407,720
$2,592,280
The total bond interest expense over the life of the bonds is the
same under either method of amortization.
10-55
*PROBLEM 10-7B
(a)
2011
Jan. 1
3,840,000
2011
July 1
Dec. 31
184,000
184,000
4,000
180,000
4,000
180,000
2012
Jan. 1
July 1
Dec. 31
10-56
180,000
184,000
184,000
180,000
4,000
180,000
4,000
180,000
3,856,000
Current Liabilities
Bond interest payable....................................
180,000
10-57
10-58
Issue date
1
2
3
4
R180,000
180,000
180,000
180,000
R184,000
184,000
184,000
184,000
R4,000
4,000
4,000
4,000
(C)
(A)
(B)
Discount
Interest to
Interest Expense
Semiannual
Amortization
Be Paid
to Be Recorded
Interest
(R160,000 40)
(4.5% X R4,000,000)
(A) + (C)
Periods
(b)
R3,840,000
3,844,000
3,848,000
3,852,000
3,856,000
Bond
Carrying Value
(D)
*PROBLEM 10-8B
(a) Jan. 1
July 1
Dec. 31
(b) Jan. 1
July 1
Dec. 31
192,500
7,500
192,500
7,500
200,000
200,000
210,000
210,000
5,150,000
5,000,000
10,000
200,000
10,000
200,000
10-59
$5,135,000
Current Liabilities
Bond interest payable ..................................
$ 200,000
Discount
10-60
Non-current Liabilities
Bonds payable, due 2021 ............................
$4,820,000
Current Liabilities
Bond interest payable ..................................
$ 200,000
*PROBLEM 10-9B
(a) Jan. 1
(b) July 1
(c) July 1
84,000
88,500
771,500*
36,500
84,000**
4,500**
84,000**
808,000**
(d) Dec. 31
59,000
3,000**
56,000**
10-61
(a)
3,000
241,100
3. Cash ............................................................................
Sales...................................................................
Sales Taxes Payable.....................................
477,000
250,000
230,000
3,000
6. Insurance Expense.................................................
Prepaid Insurance..........................................
5,600
10,200
17,000
91,000
3,000
Bonds Payable.........................................................
Cash ...................................................................
Gain on Bond Redemption .........................
50,000
10-62
3,000
241,100
450,000
27,000
250,000
230,000
3,000
5,600
10,200
17,000
91,000
3,000
48,000
2,000
93,600
93,600
Adjusting Entries
12. Insurance Expense ($10,200 X 5/12) .................
Prepaid Insurance ..........................................
4,250
7,000
26,445
(b)
4,250
7,000
26,445
ABER CORPORATION
Trial Balance
12/31/2011
Account
Cash .......................................................................
Merchandise Inventory ....................................
Prepaid Insurance .............................................
Equipment............................................................
Accumulated Depreciation .............................
Accounts Payable..............................................
Sales Tax Payable .............................................
Income Tax Payable..........................................
Bonds Payable....................................................
Share CapitalOrdinary .................................
Retained Earnings .............................................
Sales.......................................................................
Cost of Goods Sold...........................................
Depreciation Expense ......................................
Insurance Expense............................................
Other Operating Expenses .............................
Bond Interest Expense ....................................
Gain on Bond Redemption .............................
Income Tax Expense ........................................
Debit
$195,900
16,850
5,950
38,000
Credit
7,000
24,850
10,000
26,445
93,600
20,000
13,100
450,000
250,000
7,000
9,850
91,000
6,000
2,000
26,445
$646,995
$646,995
10-63
Bal.
Bal.
3,000
230,000
3,000
10,200
17,000
91,000
3,000
48,000
195,900
Merchandise Inventory
Bal.
25,750
250,000
241,100
Bal.
16,850
Bonds Payable
50,000 Bal.
Bal.
Prepaid Insurance
5,600
10,200
5,950
Bal.
Bal.
5,600
4,250
Equipment
38,000
Bal.
Accumulated Depreciation
7,000
50,000
93,600
93,600
Share CapitalOrdinary
Bal.
20,000
Retained Earnings
Bal.
13,100
Sales
450,000
Accounts Payable
230,000 Bal.
13,750
241,100
Bal.
24,850
10-64
Depreciation Expense
7,000
Bal.
Insurance Expense
5,600
4,250
9,850
(c)
ABER CORPORATION
Income Statement
For the Year Ending 12/31/11
Sales .......................................................................
Cost of goods sold ............................................
Gross profit ..........................................................
Operating expenses
Insurance expense....................................
Depreciation expense ..............................
Other operating expenses......................
Total operating expenses ................................
Income from operations...................................
Other income and expense
Gain on bond redemption.......................
Bond interest expense......................................
Income before taxes..........................................
Income tax expense..................................
Net income............................................................
$450,000
250,000
200,000
$9,850
7,000
91,000
107,850
92,150
2,000
6,000
88,150
26,445
$ 61,705
(For Instructor Use Only)
10-65
$13,100
61,705
74,805
$74,805
ABER CORPORATION
Statement of Financial Position
12/31/2011
Property, Plant, and Equipment
Equipment ...................................................
Accumulated depreciation.....................
Current Assets
Prepaid insurance.....................................
Merchandise inventory............................
Cash...............................................................
Total assets ..........................................
Equity
Share capitalordinary ..........................
Retained earnings.....................................
$ 38,000
7,000
5,950
16,850
195,900
$20,000
74,805
Non-current liabilities
Bonds payable ...........................................
Current Liabilities
Accounts payable .....................................
Income taxes payable..............................
Sales tax payable ......................................
Total equity and liabilities...............................
10-66
$ 31,000
218,700
$249,700
94,805
93,600
24,850
26,445
10,000
61,295
$249,700
(a)
Paris
Company
Plant and Equipment
Accumulated Depreciation (2.)
Merchandise Inventory
Accounts Receivable (1.)
Allowance for Doubtful Accounts
Cash
Total Assets
Equity
Non-current Liabilities
Current Liabilities (3.)
Total Equity and Liabilities
CHF 255,300
(188,375)
517,000
309,700
(13,600)
17,200
CHF897,225
Troyer
Company
CHF257,300
(189,850)
520,200
312,500
(20,000)
48,400
CHF928,550
CHF379,025*
78,000
440,200
CHF897,225
CHF412,050**
84,000
432,500
CHF928,550
10-67
BYP 10-1
(a) Total current liabilities at December 31, 2008, 3,388 million. Cadburys
total current liabilities decreased by 1,226 (3,388 4,614) million over
the prior year.
(b) The components of current liabilities for December 31, 2008 are:
Short-term borrowings and overdrafts ......................... 1,189,000,000
Trade and other payables .................................................. 1,551,000,000
Tax payable............................................................................. 328,000,000
(c) At December 31, 2008, Cadburys non-current debt was 1,876 million.
There was a 657 million decrease (1,876 2,533) in non-current
debt during the year. The statement of financial position indicates that
non-current debt consists of borrowings (1,194).
10-68
BYP 10-2
(a) Cadburys largest current liability was trade and other payables at
1,551 million. Its total current liabilities were 3,388 million. Nestls
largest current liability was financial liabilities at CHF15,383 million.
Its total current liabilities were CHF33,223 million.
(b)
(in millions)
Cadbury
Nestl
2,635
3,388 = .78:1
CHF33,048
= .99:1
CHF33,223
(c) Based on this information, it appears that both companies are illiquid.
Additional analysis should be done to assess the reason for the
negative working capital and low current ratio.
(d)
1. Debt to total
assets
2. Times interest
earned
Cadbury
5,361
= 60.3%
8,895
366 + 30 + 50
= 8.92 times
50
Nestl
CHF51,299
CHF106,215
= 48.3%
(e) The higher the percentage of debt to total assets, the greater the risk
that a company may be unable to meet its maturing obligations.
Cadburys 2008 debt to total assets ratio was 25% higher than Nestls.
The times interest earned ratio provides an indication of a companys
ability to meet interest payments. Both times interest earned ratios are
excellent and, therefore, both companies will have no difficulty meeting
these interest payments.
10-69
BYP 10-3
(a) In 1909, Moodys introduced the first bond ratings as part of Moodys
Analyses of Railroad Investments.
(b) Moodys tracks more than $35 trillion worth of debt securities.
(c) The ultimate value of a rating agencys contribution to that market
efficiency depends on its ability to provide ratings that are clear,
credible, accurate risk opinions based on a fundamental understanding
of credit risk. To provide a reliable frame of reference for investment
decisions, the agencys ratings should offer broad coverage and also
be based on a globally consistent rating process, supported by rating
committees with a multi-national perspective.
10-70
BYP 10-4
$6,000,000
5,760,000
$ 240,000
$6,000,000
$240,000
96,000
144,000
$5,856,000
856,000*
5,000,000
*$5,856,000 $5,000,000
2. Cash.......................................................................
Bonds Payable ..........................................
(To record sale of 10-year, 11%
bonds at par)
5,000,000
5,000,000
10-71
2.
$550,000
(480,000)
$ 70,000
These comparisons hold for only the 3-year remaining life of the 8%,
5-year bonds. The company must acknowledge either redemption of
the 8% bonds at maturity, January 1, 2014, or refinancing of that issue
at that time and consider what interest rates will be in 2014 in
evaluating a redemption and issuance in 2011.
Sincerely,
10-72
BYP 10-5
COMMUNICATION ACTIVITY
To:
Ken Robson
From:
I. M. Student
Subject:
Bond Financing
2.
3.
2.
3.
4.
5.
(c) State laws grant corporations the power to issue bonds after formal
approval by the board of directors and shareholders. The terms of the
bond issue are set forth in a legal document called a bond indenture. After
the bond indenture is prepared, bond certificates are printed.
10-73
BYP 10-6
ETHICS CASE
10-74