ch10 Financial Accounting Answer

CHAPTER 10 Liabilities ASSIGNMENT CLASSIFICATION TABLE

Study Objectives

Questions

Brief Exer Exerci cise ses s

* 1. Explain Explain a current current liability liability,, and identify the major types of current liabilities.

1

1

* 2. Describe Describe the the account accounting ing for notes payable.

2

2

* 3. Explain Explain the the accountin accounting g for other current liabilities.

3, 4, 5

3, 4

1

3, 4, 5

* 4. Explain Explain why why bonds bonds are issued, and identify the types of bonds.

6, 7, 8, 9, 10

5

2

6, 7

* 5. Prepare Prepare the the entries entries for for the issuance of bonds and interest expense.

11, 12, 13

6, 7, 8

3

8, 9, 10, 11, 16, 17, 18, 19

3A, 4A, 6A, 7A, 8A, 9A

2B, 3B, 5B, 6B, 7B, 8B, 9B

14, 15

9

4

11, 12

3A, 4A, 10A

2B, 3B, 9B

7. Describe Describe the the accoun accounting ting for for long-term notes payable.

16

10

5

13

5A

4B

8. Identify Identify the the methods methods for for the presentation and analysis of non-current liabilities.

17

11

14

3A, 4A, 5A

2B, 3B, 4B

*9. Compute Compute the market market price of of a bond.

20

12

15

18, 19

13

16, 17

6A, 7A

5B, 6B

*6. Describe Describe the the entries entries when bonds are redeemed.

*10. Apply Apply the effectiveeffective-inter interest est method of amortizing bond discount and bond premium.

Copyright © 2011 John Wiley & Sons, Inc.

Do It! It!

A Problems

B Problems

1A

1B

1, 2

1A, 2A

1B

1A

1B

Exer Exerci cise ses s

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

10-1

ASSIGNMENT CLASSIFICATION TABLE (Continued)

Study Objectives

Questions

Brief Exerc Exercise ises s

*11. Apply Apply the straightstraight-line line method method of of amortizing bond discount and bond premium.

21, 22

14, 15

18, 19

*12. Prepare Prepare entries entries for for payroll payroll and and payroll taxes under U.S. law

23

16, 17

20, 21

Do It!

A Exerci Exercises ses Problems

B Problems 7B, 8B, 9B

8A, 9A, 10A

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendices to the chapter.

10-2




ASSIGNMENT CHARACTERISTICS TABLE Problem Numb Number er

Desc Descri ript ptio ion n

Difficulty Level

Time Allotted (min.)

1A

Prep Prepar are e cur curre rent nt liab liabil ilit ity y ent entri ries es,, adj adjus usti ting ng entr entrie ies, s, and and current liabilities section.

Moderate

30–40

2A

Jour ournali nalize ze and and po post note tra transact sactio ion ns and and sho show statement of financial position presentation.

Moderate

30–40

3A

Prep Prepar are e ent entri ries es to reco record rd issu issuan ance ce of bond bonds, s, inte intere rest st accrual, and bond redemption.

Moderate

20–30

4A


Moderate

15–20

5A

Prep Prepar are e inst instal allm lmen entt paym paymen ents ts sche schedu dule le and and jour journa nall entries for a mortgage note payable.

Moderate

20–30

*6A *6A

Prep Prepar are e ent entri ries es to reco record rd issu issuan ance ce of bond bonds, s, paym paymen entt of interest, and amortization of bond premium using effective-interest effective-interest method.

Moderate

30–40

*7A *7A

Prep Prepar are e ent entri ries es to reco record rd issu issuan ance ce of bond bonds, s, paym paymen entt of of interest, and amortization of discount using effectiveinterest method. In addition, answer questions.

Moderate

30–40

*8A *8A

Prep Prepar are e ent entri ries es to reco record rd issu issuan ance ce of bond bonds, s, inte intere rest st accrual, and straight-line amortization for 2 years.

Simple

30–40

*9A *9A

Prep Prepar are e ent entri ries es to reco record rd issu issuan ance ce of bond bonds, s, inte intere rest st,, and straight-line amortization of bond premium and discount.

Simple

30–40

*10A *10A

Prep Prepar are e ent entri ries es to to reco record rd int inter eres estt paym paymen ents ts,, stra straig ight ht-l -lin ine e premium amortization, and redemption of bonds.

Moderate

30–40

1B

Prep Prepar are e cur curre rent nt liab liabil ilit ity y ent entri ries es,, adj adjus usti ting ng entr entrie ies, s, and and current liabilities section.

Moderate

30–40

2B


Moderate

20–30

3B


Moderate

15–20

4B

Prep Prepar are e inst instal allm lmen entt paym paymen ents ts sche schedu dule le and and jour journa nall entries for a mortgage note payable.

Moderate

20–30

*5B *5B

Prep Prepar are e ent entri ries es to reco record rd issu issuan ance ce of bond bonds, s, paym paymen entt of interest, and amortization of bond discount using effective-interest effective-interest method.

Moderate

30–40




10-3

ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number

Description

Difficulty Level

Time Allotted (min.)

Moderate

30–40

*6B *6B

Prep Prepar are e ent entri ries es to reco record rd issu issuan ance ce of bond bonds, s, paym paymen entt of of interest, and amortization of premium using effectiveinterest method. In addition, answer questions.

*7B *7B

Prep Prepar are e ent entri ries es to reco record rd issu issuan ance ce of bond bonds, s, inte intere rest st accrual, and straight-line amortization for two years.

Simple

30–40

*8B *8B

Prep Prepar are e entr entrie ies s to reco record rd issu issuan ance ce of bond bonds, s, inte intere rest st,, and and straight-line amortization of bond premium and discount.

Simple

30–40

*9B *9B

Prep Prepar are e entr entrie ies s to reco record rd inte intere rest st paym paymen ents ts,, stra straig ight ht-l -lin ine e discount amortization, and redemption of bonds.

Moderate

30–40

10-4




WEYGANDT IFRS 1E CHAPTER 10 LIABILITIES Number

SO

BT

Difficulty

Time (min.)

BE1

1

C

Simple

3–5

BE2

2

AP

Simple

2–4

BE3

3

AP

Simple

2–4

BE4

3

AP

Simple

2–4

BE5

4

AP

Simple

6–8

BE6

5

AP

Simple

4–6

BE7

5

AP

Simple

3–5

BE8

5

AP

Simple

4–6

BE9

6

AP

Simple

3–5

BE10

7

AP

Simple

6–8

BE11

8

AP

Simple

3–5

*BE12

9

AP

Simple

3–5

*BE13

10

AP

Simple

4–6

*BE14

11

AP

Simple

4–6

*BE15

11

AP

Simple

4–6

*BE16

12

AP

Simple

3–5

*BE17

12

AP

Simple

3–5

DI1

3

C

Simple

6–8

DI2

4

C

Simple

2–3

DI3

5

AP

Simple

4–6

DI4

6

AP

Simple

3–5

DI5

7

AP

Simple

4–6

EX1

2

AN

Moderate

8–10

EX2

2

AN

Simple

6–8

EX3

3

AP

Simple

4–6

EX4

3

AN

Simple

6–8

EX5

3

AP

Simple

6–8

EX6

4

C

Simple

4–6

EX7

4

AN

Simple

4–6

EX8

5

AP

Simple

4–6

EX9

5

AP

Simple

4–6

EX10

5

AP

Simple

6–8

EX11

5, 6

AP

Simple

6–8

EX12

6

AP

Moderate

8–10




10-5

LIABILITIES (Continued) Number

SO

BT

Difficulty

Time (min.)

EX13

7

AP

Simple

6–8

EX14

8

AP

Simple

3–5

*EX15

9

AP

Simple

4–6

*EX16

5, 10

AP

Moderate

8–10

*EX17

5, 10

AP

Moderate

8–10

*EX18

5, 11

AP

Simple

6–8

*EX19

5, 11

AP

Simple

6–8

*EX20

12

AP

Simple

8–10

*EX21

12

AP

Simple

3–5

P1A

1–3

AN

Moderate

30–40

P2A

2

AN

Moderate

30–40

P3A

5, 6, 8

AP

Moderate

20–30

P4A

5, 6, 8

AP

Moderate

15–20

P5A

7, 8

AP

Moderate

20–30

*P6A

5, 10

AP

Moderate

30–40

*P7A

5, 10

AP

Moderate

30–40

*P8A

5, 11

AP

Simple

30–40

*P9A

5, 11

AP

Simple

30–40

*P10A

6, 11

AP

Moderate

30–40

P1B

1–3

AN

Moderate

30–40

P2B

5, 6, 8

AP

Moderate

20–30

P3B

5, 6, 8

AP

Moderate

15–20

P4B

7, 8

AP

Moderate

20–30

P5B

5, 10

AP

Moderate

30–40

*P6B

5, 10

AP

Moderate

30–40

*P7B

5, 11

AP

Simple

30–40

*P8B

5, 11

AP

Simple

30–40

*P9B

5, 6, 11

AP

Moderate

30–40

BYP1

1

AN

Simple

5–10

BYP2

3, 8

AP

Simple

10–15

BYP3

4

C

Simple

10–15

BYP4

5, 6

AN

Moderate

15–20

BYP5

4

C

Simple

10–15

BYP6

5, 6

E

Simple

10–15

10-6




BLOOM’S TAXONOMY TABLE g n n e i o s k e i a h t a a t M i z C s n s s n i c o o a h i r g t s i c r E c A O e D

n o i t a s l u m a v e E l

b o r s P i s e d h n t a n y s S e s A B B i 1 1 c - 1 - 5 e r i s 0 0 0 0 v i s 1 1 1 1 i e s t s P P P E x l y a y r l E a 3 a a A 0 1 2 3 4 5 6 7 8 9 B 2 - 2 A r n A p 4 7 8 9 1 1 1 1 1 n - 2 - 0 - 1 - - - 1 - 1 - 1 - 1 - 1 e A 1 - 1 - 0 1 0 A m t 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 E E o 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 p E E E E E E E E E E E E C P P B E P B E P E a h B B B B B B B B B B B B B B C 2 3 4 7 - 3 - 5 - 6 - 7 - 8 - 9 - 9 - 4 - 8 - 9 f 0 0 0 0 0 0 0 0 0 0 0 0 0 0 o 1 1 1 1 1 1 1 1 1 1 1 1 1 1 P P P P P P P P P P P P P P d n n i o A A E t 8 9 A A A A A A A 0 B 5 A A B B B B A A 0 0 1 a 1 1 3 4 6 7 8 9 4 1 2 5 5 2 3 5 6 8 9 c d i - - - - - - - - - - - - - - - - 1 - 2 - 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 n l 1 I 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 1 a p p E E P P P P P P P P P D P P P P P P P P P E E s A 0 1 2 3 4 5 6 7 e 4 5 7 8 9 1 1 1 2 6 8 1 2 1 1 6 7 A A A A A v - 1 - 1 3 4 - 1 1 1 2 i - 1 1 1 - 3 4 7 1 0 3 0 0 0 0 0 6 - 0 0 0 0 - 0 0 3 - 0 0 0 0 t 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 c 1 1 1 1 E I 1 1 1 E E 1 1 E E 1 1 1 E E E E 1 E E E I E 1 E 1 e j B E B Q B B B D E E E B D P Q B B P P B B P P Q B B B B E b g O n 2 n b 5 9 i 6 e t o y i 0 r 0 0 1 0 n d s o W 1 1 I 1 o i n p e t u Q Q D E t e e t h a R i c S h e l g n , r a n y p 1 i i u 1 3 4 5 0 8 9 1 c r m - 2 1 1 3 4 6 7 8 1 1 1 1 2 1 1 2 m m o n l 0 - - 0 - - - - - - o a p m o C 0 1 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 n 1 E 1 1 1 I 1 1 1 1 1 1 1 1 1 1 1 n i x o Q B Q Q Q D Q Q Q Q Q Q Q Q Q Q Q F E C o x e a g T d e 7 0 3 s l ’ 1 1 2 w 0 m o 0 0 n 1 1 1 o K Q Q Q o l y e . f B i . r e t d d d s s a c n o n i n e n n s e e t t o t g r e h d f a a o i d . d e b n , e i l u e i o e n n d d d h o a d a s n l t b s w d a r o n . o f e . t s n f m t o r i a w n i b h n e o u s n t a l o t l o e o e r a t s s a h f e u t l f n s e , t p e o d b i s n t e o h x n o l e f n i . e y c g r g r s r e m t e n t u h e e c r t n f y . i g y S o l v i e o r t v r i r l s . i i i o e i r i r w t p a t n b o s a t a s t i n d i i U t n c b u n a f f p s n c t . c e s s h j l a c u i e e i e i e d n e u l n s o s r - d r r e a t e d t l f e i i k . C b t o e o p o u d l o e r v n h s i b h d i r i d s f o t t s c c o n r a t o d e t n t n b g n . s n r n O n e c n c a c t o p b . i e s e a i a m c e n i e a y c i e u P e a o y r a o m i b e m a i y l i e r f r l d g a t s p m r e e e u u i e n p f t t d b t h e n i s i t e r y e y h e n u u h . h s e i o n t e b h i a t c t n x u t t t l h a z m e g a t h h e e e t h d r t e i i a o S t w t n m a o e . t a r e h i e e t l e s e t e e t h r r r t r r Y j e e e t b d b o t t z b l y n n y n l u i r i i r i r n u p y o p y t p a l g i a r b i n i f n n f i r m r i a c a a e o a e t r t o l d l d p r n e l l m c a l r o c e c p b n s m p m s d s m p e s y p r p n a n p o n e y i C e f e n e r e r e a e x x x e r o o p f o p o r a n h D p E t . . 1 2

u E c . 3

E d i . 4

Copyright © 2011 John Wiley Wiley & Sons, Inc.

P o . 5

e D r . 6

m e d e D t I p n C A o b A a b P p d a . . . . . . 9 0 1 2 7 8 o * r 1 1 1 * * * B

Weygandt, IFRS, 1/e, 1/e, Solu Solutio tions ns Manua Manuall

(For (For IInst nstruc ructor tor Use Only) Only)

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. Disagree. The The company company only serves serves as a collecti collection on agent agent for the taxing taxing authority. authority. It does does not report sales taxes as an expense; it merely forwards the amount paid by the customer to the government. (b) The entry entry to to reco record rd the the procee proceeds ds is: is: Cash.......... Cash.............. ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... ... 7,400 Sales. Sales... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. 7,000 7,000 Sale Sales s Taxe Taxes s Paya Payabl ble. e... .... ........ ...... .... ........ ...... .... .... ........ ...... .... .... ........ ...... .... ........ ...... .... .... ........ ...... .... ........ ...... .... .... 400 400

4.

(a) The entry entry whe when n the the ticke tickets ts are are sold sold is: Cash.......... Cash.............. ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... Unearned Fo Football Ti Ticket Re Revenue.. e...........................................

800,000

(b) (b) The The entr entry y afte afterr each each gam game e is: is: Unearned Football Football Ticket Revenue........ Revenue.......... ..... ...... ...... ..... ..... ...... ...... ..... ..... ...... ...... ...... ...... ...... ..... .. Footb ootbal alll Tick Ticke et Reve Reven nue.. ue..............................................................

160,000

800,000

160,00 ,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 Non-current liabilit liabilities ies are obligati obligations ons that are are expected expected to be paid paid after one one year. Exam Examples ples include bonds, long-term notes, and lease obligations. (b) A bond is a form form of an interest-be interest-bearing aring notes notes payable payable used used by corporatio corporations, ns, universiti universities, es, and governmental agencies.

7.

(a) (a) The The majo majorr adva advant ntag ages es are are:: (1) Shareholder Shareholder control is is not affected—bo affected—bondhol ndholders ders do not not have voting voting rights, rights, so current current shareholders retain full control of the company. (2) Tax saving savings s result—b result—bond ond interest is deductible deductible for tax purposes; purposes; divid dividends ends on ordi ordinary nary shares are not. (3) Earnings Earnings per share may be be higher—al higher—although though bond interest expense expense will reduce reduce net net income, income, earnings per share will often be higher under bond financing because no additional shares are issued. (b) The major major disadvantage disadvantages s in using using bonds bonds are that that interest interest must be paid paid on a periodic periodic basis basis and the principal (face value) of the bonds must be paid at maturity.

10-8




Questions Chapter 10 (Continued) 8.

(a) Secured bonds have have specific specific assets assets of the issuer pledged pledged as collateral. collateral. In contrast, unseunsecured bonds are issued against the general credit of the borrower. These bonds are called debenture bonds. (b) Term bonds bonds mature mature at a single single specified specified future future date. date. In contrast, contrast, serial serial bonds bonds mature in installments. (c) Registered Registered bonds bonds are are issued issued in the name of of the owner. owner. In contrast, bearer bearer (coupon) (coupon) bonds are issued to bearer and are unregistered. Holders of bearer bonds must send in coupons to receive interest payments. (d) Convertible Convertible bonds bonds may may be converted into ordinary ordinary shares at at the bondholders’ bondholders’ option. 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) (b)

Face value value is the amount amount of principa principall due at the maturity maturity date. date. (Face (Face value is also also called par value.) value.) The contractual contractual interest interest rate is the rate rate used to determine determine the amount of cash interest interest the borrower 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 inde indenture nture is is a legal legal document document that that sets forth forth the terms terms of the bond bond issue. issue. (d) A bond certificate is a legal legal documen documentt that indicates indicates the name name of the issuer, the face value value of the 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.

R$28,000. R$800,000 X 7% X 1/2 year = R$28,000.

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.

Debi Debits ts:: Cred Credits its::

Bonds Bonds Payab Payable le (for (for the the face face value) value) and Prem Premium ium on on Bonds Bonds Paya Payable ble (for (for the the unamortized balance). Cash (for 97% 97% of the the face valu value) e) and and Gain Gain on Bond Bond Redemp Redemption tion (for (for the the differen difference ce 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, bondholders, the conversion option gives an opportunity to benefit if the market price of the shares increases substantially. (b) (b) For the issuer, issuer, convertib convertible le bonds bonds usually usually have a higher higher selling selling price and and a lower rate of interest than comparable debt securities without the t he 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

Questions Chapter 10 (Continued) *17.

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




SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 10-1 (a) A note note payable payable due in in two years years is a non-c non-curre urrent nt liabili liability, ty, not not a curren currentt liability. (b) $30,000 $30,000 of the mortg mortgage age paya payable ble is a current current maturit maturity y of long-te long-term rm debt. debt. This amount should be reported as a current liability. (c) Interest Interest paya payable ble is is a current current liabili liability ty becaus because e it will will be paid paid out of of current current assets in the near future. (d) Account Accounts s payable payable is is a curren currentt liabilit liability y because because it it will be be paid out out of current assets in the near future.

BRIEF EXERCISE 10-2 July July 1 Dec. Dec. 31

Cash Cash ..... ...... .... .... .... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... ........ ...... .... .. Notes Payable ..................................................

80,000 80,000

Inter Interest est Expe Expens nse e ...................................................... Interest Payable (£80,000 X 10% X 1/2) .. ................................

4,00 4,000 0

80,000

4,000

BRIEF EXERCISE 10-3 Sales tax payable (1) (1) Sales Sales = $14 $14,8 ,800 00 = ($1 ($15,5 5,540 40 ÷ 1.0 1.05) 5) (2) (2) Sales Sales taxe taxes s paya payabl ble e = $740 $740 = ($1 ($14, 4,80 800 0 X 5%) 5%) Mar. 16

Cash.... Cash...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Sales .................................................................... Sales Taxes Payable ......................................



15,540


14,80 ,800 740

10-11

BRIEF EXERCISE 10-4 Cash ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... Unearned Ba Basketball Ti Ticket Re Revenue ......................... (To record sale of 4,000 season tickets)

720,000 720,0 00

Unearned Unearned Basketball Basketball Ticket Revenue.. Revenue.... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Basketball Ticket Revenue.. e........................................... (To record basketball ticket revenues earned)

60,000

720,000

60,000

BRIEF EXERCISE 10-5 Issue Shares

Issue Bond

Income before interest and taxes €2,000,000 X 8%) Interest ( € Income before income taxes Income tax expense (30%) Net income (a)

€700,000

€700,000

0 700,000 210,000 €490,000

160,000 540,000 162,000 €378,000

Outstanding shares (b) Earnings per share (a) ÷ (b)

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.

BRIEF EXERCISE 10-6 (a) (a) Jan. Jan. 1

(b) July 1 (c) Dec. 31

10-12

Cash. Cash........................................................... Bonds Payable (3,000 X $1,000) ........................

3,00 3,000, 0,00 000 0

Bond Int Interest Expense ....................... Cash ($3,000,000 X 8% X 1/2) ....

120,000

Bond Inte Interrest Expense ....................... Bond Interest Payable ($3,000,000 X 8% X 1/2) .........

120,000


3,000,000 120,000


120,000


BRIEF EXERCISE 10-7 (a) Jan. 1 (b) Jan. 1

€2,00 Cash ( € 2,000,0 0,000 00 X .97 .97)) ...................... Bonds Pa Payable ...............................

1,940 1,940,0 ,000 00

€2,000,000 X 1.04) .... Cash ( € ...... .... .... .... .... .... .... .... .. Bonds Pa Payable ...............................

2,080,000

1,940,000 2,080,000

BRIEF EXERCISE 10-8 1.

2. 3.

Jan. 1

July 1 Sept. 1

Cash (1,000 X $1,000) ......................... Bonds Pa Payable ...............................

1,000,000

Cash ($800,000 X 1.02) ....................... Bonds Payable .............................

816,000

Cash ($2 ($200,000 X .98) ......................... Bonds Payable .............................

196,00 ,000

1,000,000

816,000 196,000

BRIEF EXERCISE 10-9 Bonds Payable Payable .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Loss on Bond Redemption (£1,010,000 (£1,010,000 – £940,000)... £940,000)..... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Cash (£ (£1,000,000 X 10 101%) .....................................



940,000 70,000 1,010,000


10-13

BRIEF EXERCISE 10-10 (A) Semiannual Interest Period

Cash Payment

Issue Date 1 Dec. Dec. 31 June June 30

(B) Interest Expense (D) X 5%

$48,145

$30,000

(C) Reduction of Principal (A) – (B)

(D) Principal Balance (D) – (C)

$18,145

$600,000 581,855

Cash Cash .... ...... .... ........ ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... ....... ... Mortgage Notes Payable ........................

600,000 600,000

Inte Intere rest st Expe Expens nse e ................................................ Mortga Mortgage ge Notes Notes Payabl Payable e .... ...... .... .... .... .... .... ........ ...... .... .... .... .... .... .. Cash ..............................................................

30,00 30,000 0 18,145 18,145

600,000

48,145

BRIEF EXERCISE 10-11 Non-current liabilities Bonds payable, due 2013 ............................... Notes payable, due 2016 .. ................................ Lease liability.. y..................................................... Total .............................................................

CHF455,000 80,000 70,000 CHF605,000

*BRIEF EXERCISE 10-12 (a)

i = 10% ?

0

$10,000

1

2

3

4

5

6

7

8

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




*BRIEF EXERCISE 10-12 (Continued) (b)

i = 8% ?

0

$20,000 $20,000 $20,000 $20,000 $20,000 $20,000

1

2

3

4

5

6

Discount rate from Table 11 A-2 is 4.62288 (6 periods at 8%). Present value of 6 payments of $20,000 each discounted at 8% is therefore $92,457.60 ($20,000 X 4.62288). *BRIEF EXERCISE 10-13 (a) Interest Interest Expense.. Expense.... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Bonds Payable ........................................................ Cash.. h............................................................................

46,884 1,884 45,000

(b) Interest Interest expens expense e is greate greaterr than interest interest paid paid becaus because e the bonds 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 expense incr increase eases s each each period period becau because se the the bond bond carryi carrying ng value 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) (a) Jan. Jan. 1

(b) (b) July July 1

Cash Cash (.96 (.96 X HK$5 HK$5,0 ,000 00,0 ,000 00)) ...................... 4,80 4,800, 0,00 000 0 Bonds Payable.. e................................... Bond Bond Inte Intere rest st Expen xpense. se.............................. Bonds Payable (HK$200,000 ÷ 20) .. ......................... Cash (HK$5,000,000 X 9% X 1/2) .. ....



4,800,000

235, 235,00 000 0 10,000 225,000


10-15

*BRIEF EXERCISE 10-15 (a) Cash Cash (1.02 (1.02 X $3,000 $3,000,000 ,000)) .... ...... .... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... .. Bonds Payable..................................................

3,060,0 3,060,000 00

(b) Bond Bond Intere Interest st Expens Expense e ... ....... ...... .... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... .. Bond Bonds s Payab ayable le ($60 ($60,0 ,000 00 ÷ 10) 10) .............................. Cash ($3,000,000 X 10% X 1/2) ....................

144,00 144,000 0 6,00 6,000 0

3,060,000

150,000

*BRIEF EXERCISE 10-16 Gross earnings: Regular pay (40 X $16) .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Overtim Overtime e pay (7 X $24)... $24)......... ...... .... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... .... Gro Gross earn earnin ing gs.. s.......................................................................... Less: FICA taxes payable payable ($808 X 8%).. 8%) .... .... .... .... .... .... .... .... .... .... .... .... .... .... Fede Federa rall inco income me taxe taxes s paya payabl ble e ................................ Net Net pay pay .........................................................................................

$640.00 168.00 168.00

$808.0 $808.00 0 $808 $808.0 .00 0

$ 64.64 95.0 95.00 0

159. 159.64 64 $648 $648.3 .36 6

*BRIEF EXERCISE 10-17 Jan. Jan. 15

Jan. Jan. 15

10-16

Wages Wages Expens Expense.. e.... .... .... .... .... .... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ........ .... FICA Taxes Payable ($808 X 8%) ................ Federal Income Taxes Payable .. ................... Wages Pay Payable .................................................

808.00 808.00

Wages Wages Payabl Payable e ... ....... ...... .... .... .... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ........ .... Cash .....................................................................

648.36 648.36



64.64 95.00 648.36 648.36 .36


SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 10-1 1. 2.

$42,000/1.05 = $40,000; $40,000 X 5% = $2,000 1,000 X $12 X 9/12 = $9,000

DO IT! 10-2 1. 2. 3. 4. 5.

False. False. Mortga Mortgage ge bonds bonds and and sink sinking ing fund fund bond bonds s are are both both exam example ples s of secured bonds. False False.. Conver Convertib tible le bond bonds s can can be con conver verted ted into into ordin ordinary ary shar shares es at at the bondholder’s 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... Cash ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... 312,000,000 312,0 00,000 Bonds Pay Payable .................................................... 312,000,000 (To record sale of bonds at a premium) (b) (b) NonNon-cu curr rren entt liab liabil ilit itie ies s Bonds pa payable ....................................................

312,000,000

DO IT! 10-4 Loss on Bond Loss Bond Rede Redemp mptio tion n ............................................... Bonds Payable .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Cash.. h................................................................................. (To record redemption of bonds at 99)



6,00 6,000 0 390,000 396,000


10-17

DO IT! 10-5 Cash Cas h .......... ............... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ........ ... Mortgage Notes Payable .............................................. (To record mortgage loan)

350,00 350 ,000 0

Interest Intere st Expense ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... Mortgage Mortgage Notes Payable Payable .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Cash .................................................................................... (To record semiannual payment on mortgage)

10,500* 10,500 * 7,357

350,000

17,85 ,857

*Interest expense = R$350,000 X 6% X 6/12

10-18




SOLUTIONS TO EXERCISES EXERCISE 10-1 July 1, 2011 Cash.. Cash .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Notes Payable.. e.........................................................

50,000

November 1, 2011 Cash.. Cash .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Notes Pa Payable.. e.........................................................

60,000

50,000

60,000

December 31, 2011 Interest Expense €50,000 ( € 50,000 X 12% X 6/12). 6/12)....... .......... ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... .... Interest Payable .....................................................

3,000 3,000

Interest Expense €60,000 ( € 60,000 X 10% X 2/12). 2/12)....... .......... ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... .... Interest Payable .....................................................

1,000 1,000

February 1, 2012 Notes Payable... Payable..... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Intere Interest st Payable Payable .... ...... .... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... .... Interest Expense ( € )............... €60,000 X 10% X 1/12).. Cash.. h...........................................................................

60,000 1,000 1,000 500

April 1, 2012 Notes Payable... Payable..... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Intere Interest st Payable Payable .... ...... .... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... .... €50,000 X 12% X 3/12).. Interest Expense ( € )............... Cash.. h...........................................................................

50,000 3,000 3,000 1,500



3,000

1,000

61,500


54,500

10-19

EXERCISE 10-2 (a) June 1 Cash .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Notes Payable.. e..........................................

90,000

(b) June June 30 Interes Interestt Expens Expense e ..... .......... ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... ..... Interest Payable [($90,000 X 12%) X 1/12] ..................

900

(c) Dec. Dec. 1 Notes Notes Payabl Payable e .... ...... .... .... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ..... Interest Payable ($90 ($90,0 ,000 00 X 12% 12% X 6/12). 6/12)............................... Cash ............................................................

90,000 90,000

90,000

900

5,400 5,400 95,400

(d) $5,400

EXERCISE 10-3 Apr. 10

15

10-20

KEMER COMPANY Cash .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Sales les.................................................................. Sales Taxes Payable.. e.................................... BODRUM COMPANY Cash .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Sales (TL23,540 ÷ 1.07) .. ............................... Sales Taxes Payable (TL23,540 – TL22,000) ..............................


31,500 30,000 000 1,500

23,540


22,000 1,540


EXERCISE 10-4 (a) Nov. Nov. 30

(b) (b) Dec. Dec. 31

(c) (c) Mar. ar. 31

Cash Cash .... .......... ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ........ ...... Unearned Subscriptions (12,000 X $2 $20) ......................................

240,00 240,000 0

Unea Unearn rned ed Sub ubsc scri rip ption tions s ............................... Subscription Revenue ($240,000 X 1/12).................................

20,0 20,000 00

Unea Unearn rned ed Sub ubsc scrripti iption ons s ................................ Subscription Revenue ($240,000 X 3/12).................................

60,0 60,000 00

240,000

20,000

60,000

EXERCISE 10-5 (a) Current ra 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. False. When seeking seeking long-te long-term rm financ financing ing,, an advanta advantage ge of of issuin issuing g bonds over issuing ordinary shares is that tax savings result. True. False. Unsecured bonds are also known as debenture bonds. Fals False. e. Bond Bonds s that that matu mature re in ins insta tallm llmen ents ts are are calle called d serial bonds. True. True. True. True.

EXERCISE 10-7

Income before interest and taxes Interest (¥2,700,000 X 10%) Income before taxes Income tax expense (30%) Net income Outstanding shares Earnings per share

Plan One Issue Shares

Plan Two Issue Bonds

¥800,000 — 800,000 240,000 ¥560,000 150,000 ¥3.73

¥800,000 270,000 530,000 159,000 ¥371,000 90,000 ¥4.12

EXERCISE 10-8 (a) (a) Jan. Jan. 1

(b) (b) July July 1

(c) (c) Dec. Dec. 31

10-22

Cash.. Cash.................................................................. Bonds Payable ....................................

500,0 500,000 00

Bond Bond Inte Intere rest st Expen xpense.. se............................... Cash ($500,000 X 10% X 1/2) ...........

25,0 25,000 00

Bon Bond Inte Intere rest st Expen xpense.. se............................... Bond Interest Payable .. ......................

25,0 25,000 00


500,000

25,000


25,000


EXERCISE 10-9 (a) (a) Jan. Jan. 1

(b) (b) July July 1

(c) (c) Dec. Dec. 31

Cash Cash ................................................................. Bonds Payable.. e.....................................

300, 300,00 000 0

Bond Bond Inte Intere rest st Expe Expens nse. e................................ Cash (R$300,000 X 8% X 1/2)...........

12,0 12,000 00

Bond Bond Inte Intere rest st Expe Expens nse. e................................ Bond Interest Payable .. .......................

12,0 12,000 00

300,000

12,000

12,000

EXERCISE 10-10 (a) 1. 2.

Cash. Cash....... ...... .... .... .... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ...... Bonds Payable.. e................................................ Semiannual interest payments ($20,00 ,000* X 10) .................................................... Plus: bond discount.. t.............................................. Total cost of borrowing.. g........................................

485,00 485,000 0 485,000 $200,00 ,000 15,000 $215,000

*($500,000 X .08 X 6/12) OR Principal at maturity.. y.............................................. Semiannual interest payments ($20,00 ,000 X 10).. )...................................................... Cash to be paid to bondholders........................ Cash received from bondholders.. s..................... Total cost of borrowing.. g........................................



$500,000 200,000 700,000 (485,000) $215,000


10-23

EXERCISE 10-10 (Continued) (b) 1. 2.

Cash Cash .... ...... .... .... ........ ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ........ ...... .. Bonds Payable ................................................

525,000 525,000 525,000

Semiannual interest payments ($20, 20,000 X 10) ...................................................... Less: bond premium ............................................. Total cost of borrowing ........................................

$200,000 25,000 $175,000

OR Principal at maturity .............................................. Semiannual interest payments ($20, 20,000 X 10) ...................................................... Cash to be paid to bondholders .. ........................ Cash received from bondholders ..................... Total cost of borrowing ........................................

$500,000 200,00 ,000 700,000 (525,000) $175,000

EXERCISE 10-11 (a) Jan. 1

(b) (b) Jan Jan

1

(c) July 1

10-24

Bond Inte Interrest Payable. le................................ Cash.. h........................................................

72,00 ,000

Bond Bonds s Paya Payab ble ............................................. Loss Lo ss on Bond Bond Rede Redemp mptio tion n ...................... Cash ($600,000 X 1.04) ......................

600, 600,00 000 0 24,00 24,000 0

Bond Int Interest Expense .............................. Cash ($1,000,000 X 9% X 6/2) .........

45,00 ,000


72,000

624,000


45,000


EXERCISE 10-12 1.

2.

June June 30

Jun June 30

Bond Bonds s Payab ayable le ........................................... Loss on Bond Redemption (£132, (£132,600 600 – £117,50 £117,500). 0)... .... .... .... .... .... ........ ...... .... .... .... .... Cash (£130,000 X 102%) .. .................

117, 117,50 500 0

Bond Bonds s Payab ayable le ........................................... Gain on Bond Redemption (£151,000 – £147,000) .. .................. Cash (£150,000 X 98%)....................

151, 151,00 000 0



15,100 15,100 132,600

4,000 147,000


10-25

EXERCISE 10-13

Dec. Dec. 31

June 30

Dec. 31

2011 Issuance of Note Cash Cash .... ...... .... ........ ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ........ .... Mortgage No Notes Pa Payable ......................... 2012 First Installment Payment Interest Expense ($24 ($240,0 0,000 00 X 10% 10% X 6/1 6/12) 2) ............................... Mortga Mortgage ge Notes Notes Payabl Payable e .... ...... .... .... .... .... .... ........ ...... .... .... .... .... .... .... Cash ............................................................... Second Installment Payment Interest Expense [($2 [($240 40,0 ,000 00 – $8, $8,00 000) 0) X 10% 10% X 6/1 6/12] 2] ........... Mortga Mortgage ge Notes Notes Payabl Payable e .... ...... .... .... .... .... .... ........ ...... .... .... .... .... .... .... Cash ...............................................................

240,000 240,000 240,000

12,00 12,000 0 8,000 8,000 20,000

11,6 11,600 00 8,400 8,400 20,000

EXERCISE 10-14 Non-current liabilities Bonds pa payable, du due 20 2016 .......................... Lease liability.. y................................................ 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 of bo bonds ............................................................

10-26



$122,782 61,774 $184,556


*EXERCISE 10-16 (a) (a) Jan. Jan. 1

(b) July 1

(c) Dec. 31

Cash Cash ................................................................ Bonds Payable .. .................................... Bond Interest Expense ( € ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... €562,613 X 5%) .... Bonds Payable .. .................................... €600,000 X 9% X 1/2) ............. Cash ( € Bond Interest Expense €562,613 + €1,13 [( € ,131) X 5%] ................... Bonds Payable .. .................................... Bond Interest Payable .. ......................



562, 562,61 613 3 562,613

28,131 1,131 27,000

28,18 ,187


1,187 27,000

10-27

*EXERCISE 10-16 (Continued)

e u l a V d ) n g D n ( o i B y r r a C n o t i n t ) a A ( ) u z o i – C ( c t r ) s o i B ( D m A ) e u e d g l s e n a i n d e r d V ) g 5 p o e n . ) x c c i e y 0 E e r B ( t R P r r X s E e e X a ( r C B e % t o 5 d n n I t ( o B ) 0 0 0 , o t d 0 t i ) s a 0 6 e P A ( r € e e X t B n I % 5 . 4 ( l a u t s ) n s d c e o ( n r , a e i ) r i t b n e ( m e I P S

10-28

Copyri Copyright ght © 2011 2011 John John Wile Wiley y & Son Sons, s, Inc. Inc.

3 4 1 1 4 3 6 , 7 , 9 , 2 3 4 6 6 6 5 5 5

1 7 3 8 1 , 1 , 1 1

1 7 3 8 1 , 1 , 8 8 2 2

0 0 0 0 0 , 0 , 7 7 2 2

e t a d e 1 2 u s s I

Weyga Weygandt ndt,, IFRS, 1/e, 1/e, Solu Solutio tions ns Man Manual ual


*EXERCISE 10-17 (a) Jan. Jan. 1

(b) July 1

(c) Dec. 31

Cash Cash .................................................................. Premium on Bonds Payable ...............

318,69 318,694 4 318,694

Bond Interest Expense ($318,694 ($318,694 X 5%).. 5%) .... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... Bonds Payable Payable.. .... .... ........ ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... Cash ($300,000 X 11% X 1/2) .. ............

15,935 565

Bond Interest Expense [($318,694 [($318,694 – $565) X 5%] .... ...... .... ........ ...... .... .... .... .... .... Bonds Payable Payable.. .... .... ........ ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... Bond Interest Payable .. ........................

15,906 594



16,500


16,500

10-29

*EXERCISE 10-17 (Continued)

e u l a V d ) n g D n ( o i B y r r a C n o i m t ) u a B ) i z ( i – C t ( m r ) e r o A ( P m A ) e u e d g l n a s e i n d d e r e V ) p o c g 5 n 0 e i ) x c r E e P y . B ( t R r X s X r a E e e ( r C B e % t o 0 . d n t n I 5 ( o B ) 0 0 0 , o t d 0 i t ) s a 0 3 e P A ( r $ e e X t n B % I 5 . 5 ( l a u t s n s d e o n r ) a e i r c i t ( e n P , m I ) e b ( S

10-30


4 9 5 9 2 3 6 , 1 , 5 , 8 8 7 1 1 1 3 3 3

5 4 6 9 5 5

5 6 3 0 9 , 9 , 5 5 1 1

0 0 0 0 5 , 5 , 6 6 1 1

e t a d e 1 2 u s s I

Weygan Weygandt, dt, IFRS, 1/e, 1/e, Solu Solutio tions ns Man Manual ual


*EXERCISE 10-18 (a) Jan. 1 (b) (b) July July 1

(c) Dec. 31

(d) (d) Jan. Jan.

1

Cash ( €400,00 400,000 0 X 103%).. 103%).... .... .... .... .... .... ........ ...... .... .... .... .... .. Bonds Payable.. e.....................................

412,00 412,000 0

Bond Bond Inte Intere rest st Expen xpense. se................................ Bonds Payable ( €12,0 12,000 00 X 1/40 1/40)) .............. Cash ( €400,000 X 9% X 1/2) ..............

17,7 17,700 00 300 300

Bond Interest Expense ............................. Bonds Payable Payable .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Bond Interest Payable......................

17,70 ,700 300

2031 Bond Bonds s Payab ayable le ............................................ Cash.. h.......................................................

412,000

18,000

18,000 400, 400,00 000 0 400,000

*EXERCISE 10-19 (a) Dec. Dec. 31 (b) Jun June 30

(c) Dec. Dec. 31

(d) Dec. Dec. 31

2010 Cash Cash .... ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ........ ...... Bonds Payable ................................... 2011 Bond Bond Inte Intere rest st Expen xpense se ............................. Bonds Payable ($70,000 ÷ 20) .. ....... Cash ($800,000 X 11% X 1/2) .......... 2011 Bond Bond Inte Intere rest st Expen xpense se ............................. Bonds Payable ................................... Cash ($800,000 X 11% X 1/2) .......... 2020 Bond Bonds s Paya Payabl ble e ............................................ Cash.. h.......................................................



730,00 730,000 0 730,000 47,5 47,500 00 3,500 44,000 47,5 47,500 00 3,500 44,000 800, 800,00 000 0


800,000

10-31

*EXERCISE 10-20 (a) Net pay = Gross Gross pay – FICA FICA taxe taxes s – Fede Federal ral income income tax Net pay = $1,780 – $135.73 – $301.63 Net pay = $1,342.64 (b) Salaries Expense .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. 1,780.00 FICA ICA Taxes Payable.. e...................................................... 135.73 .73 Federal In Income Ta Taxes Pa Payable ................................. 301.63 Sala Salari ries es Paya Payabl ble. e.............................................................. 1,34 1,342. 2.64 64 (c) Salaries Salari es Payable.... Payabl e....... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... 1,342.64 1,342 .64 Cash.. Cash.................................................................................... 1,342 1,342.6 .64 4 *EXERCISE 10-21 Payroll Tax Expense.. Expense .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. FICA ICA Taxes Payable.. e...................................................... Federal Unemployment Taxes Payable .................. State Unemployment Taxes Payable ......................

10-32



352.16 198.40 .40 19.84 133.92


SOLUTIONS TO PROBLEMS PROBLEM 10-1A

(a) (a) Jan. Jan. 5

12 14 20

21 25

(b) (b) Jan. Jan. 31

Cash. Cash....................................................................... Sales (£22,680 ÷ 108%) .. .......................... Sales Taxes Payable (£22,680 – £21,000) .. .............................

22,6 22,680 80

Unea Unearn rned ed Serv Servic ice e Rev Reven enue ue............................ Service Revenue.. e......................................

10,0 10,000 00

Sale Sales s Taxe Taxes s Paya Payabl ble e ....................................... Cash.. h.............................................................

7,700 7,700

Acco Accoun unts ts Rece Receiva ivabl ble e ...................................... Sales ............................................................ Sales Taxes Payable (800 X £50 X 8%) ..................................

43,2 43,200 00

Cash.... Cash...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Notes Payable.. e...........................................

18,000

Cash.... Cash...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Sales (£12,420 ÷ 108%) .. .......................... Sales Taxes Payable (£12,420 – £11,500) .. .............................

12,420

Inte Intere rest st Expe Expens nse e .............................................. Interest Payable ....................................... (£18,000 X 8% X 1/12 = (£120; £120 X 1/3)

40



21,000 1,680 10,000 7,700 40,000 3,200 18,000 11,500 920


40

10-33

PROBLEM 10-1A (Continued) (c) (c) Curr Curren entt lia liabi bili liti ties es Notes payable payabl e ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... Accounts payable.. payable .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Unearn Unearned ed servic service e revenu revenue e (£16,00 (£16,000 0 – £10,000 £10,000)) .... ...... .... .... .... .... .... .... Sales Sales taxes taxes payabl payable e (£1,680 (£1,680 + £3,200 £3,200 + £920) £920) .... ...... ........ ...... .... .... .... .... Interest Inter est payable payabl e ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... Total current liabilities .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..

10-34



£18,000 £18,00 0 52,000 6,000 6,000 5,800 5,800 40 £81,840


PROBLEM 10-2A

(a) Jan.

Feb. Feb.

2

1

Mar. 31

Apr. Apr.

July July

1

1

Sept. 30

Oct. Oct.

Dec. Dec.

1

1

Dec. 31

Merchandise Inventory or Purchases.... Purchases...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Accounts Pa Payable.................................. Acco Accoun unts ts Paya Payabl ble e .......................................... Notes Payable.. e......................................... Interest Ex Expense ($30 ($30,0 ,000 00 X 9% X 2/12 2/12). )................................. Interest Payable .....................................

30,000 30,000 30,0 30,000 00 30,000 450 450 450

Note Notes s Paya Payabl ble.. e................................................... Interest Interest Payable Payable .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Cash... h...........................................................

30,00 30,000 0 450

Equi Equipm pmen ent.. t.......................................................... Cash... h........................................................... Notes Payable.. e.........................................

51,00 51,000 0

Interest Expense ($40 ($40,0 ,000 00 X 10% 10% X 3/12) 3/12) ............................. Interest Payable .....................................

30,450 11,000 40,000 1,000 1,000 1,000

Note Notes s Paya Payabl ble.. e................................................... Interest Payable .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Cash... h...........................................................

40,00 40,000 0 1,000

Cash Cash .... ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... ........ ...... .... .... Notes Payable.. e.........................................

15,000 15,000

Interest Expense ($15 ($15,0 ,000 00 X 8% X 1/12 1/12). )................................. Interest Payable .....................................



41,000 15,000 100 100


100

10-35

PROBLEM 10-2A (Continued) (b) 4/1 10/1

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

(c) (c) Curr Curren entt lia liabi bili liti ties es Notes payable .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Interes Interestt payabl payable... e......... ...... .... .... .... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ....

$15,000 100

$15,10 $15,100 0

(d) (d) To Tota tall int inter eres estt is is $1, $1,55 550. 0.

10-36




PROBLEM 10-3A (a) May May 1

(b) Dec. 31

2011 Cash Cash ............................................................. Bonds Payable .. ................................. Bond Interest Expense.. e........................... Bond Interest Payable (CHF600,000 X 9% X 2/12) ........

600, 600,00 000 0 600,000 9,000 9,000

(c) (c) NonNon-cu curr rren entt Lia Liabi bili liti ties es Bonds Payable, due 2016..................................

$600,000

Current Liabilities Bond Interest Payable.. e........................................ (d) May 1

(e) Nov. 1

(f)

Nov. 1

2012 Bond Interest Payable ............................ Bond Interest Expense (CHF600,00 ,000 X 9% X 4/12).. )................. Cash.....................................................

$ 9,000 18,00 ,000

27,000

Bond Interest Expense.. e........................... Cash (CHF600,000 X 9% X 1/2) ...

27,000

Bonds Payable.. le.......................................... Loss on on Bo Bond Re Redemption. ion.................... Cash (CHF600,000 X 1.02) ............

600,000 12,00 ,000



9,000

27,000

612,000


10-37

PROBLEM 10-4A

(a) Jan. Jan. 1

2011 Cash Cash ($50 ($500, 0,00 000 0 X 1.04 1.04). )........................... Bonds Payable ...............................

520, 520,00 000 0 520,000

(b) Non-current Liabilities Bonds pa payable, du due 20 2021 ..................................

$518,000*

Current Liabilities Bond interest payable ($500,000 X 10% X 1/2) .........................................

$ 25,000

*$500,000 + [$20,000 – ($20,000 X 1/10)] (c) Jan. Jan. 1

2013 Bond Bonds s Paya Payabl ble e ........................................ Loss on on Bo Bond Re Redemption ................. Cash ($500,000 X 1.05) .................

516, 516,00 000 0 9,000* 525,000

*($525,000 – $516,000) $516,000)

10-38




PROBLEM 10-5A

(a)

Semiannual Interest Period Issue Date 1 2 3 4

(b) Dec. Dec. 31

June June 30

Dec. 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

Principal Balance R$400,000 386,567 372,597 358,068 342,958

2010 Cash.... Cash...... .... .... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ..... Mortgage Notes Payable .. .................

400,00 400,000 0

2011 Inter Interes estt Expe Expens nse e ......................................... Mortga Mortgage ge Notes Notes Payabl Payable e ... ....... ...... .... ........ ...... .... .... .... .... .. Cash.. h.......................................................

16,00 16,000 0 13,433 13,433

Inte Intere rest st Expe Expens nse e ......................................... Mortga Mortgage ge Notes Notes Payabl Payable e ... ....... ...... .... ........ ...... .... .... .... .... .. Cash.. h.......................................................

(c)

400,000

29,433 15,4 15,463 63 13,970 13,970 29,433 12/31/11

Non-current Liabilities Mortgage notes payable, due 2020

R$342,958*

Current Liabilities Curr Curren entt po port rtio ion n of mort mortga gage ge no note tes s paya payabl ble e

R$ 29,6 29,639 39** **

*(R$372,597 – R$14,529 – R$15,110) **(R$14,529 + R$15,110)




10-39

*PROBLEM 10-6A (a) July July 1

(b)

2011 Cash Cash .... ...... .... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... Bonds Pa Payable ..............................

2,271,813

ATWATER CORPORATION Bond Premium Amortization Effective-Interest Method—Semiannual Interest Payments 10% Bonds Issued at 8% (A) Semiannual Interest Periods

Interest to Be Paid

Issue date 1 $100,000 2 100,000 3 100,000 (c) Dec. 31

(d) July 1

(e) Dec. 31

10-40

2,271,8 2,271,813 13

(B)

(C) Premium AmorInterest tization Expense (A) – (B) $90,873 90,507 90,128

$9,127 9,493 9,872

Bond Interest Expense ($2, ($2,27 271, 1,81 813 3 X 4%) 4%) .............................. Bonds Bonds Payabl Payable e .... ...... ........ ...... .... .... .... .... .... .... .... ........ ...... .... .... .... Bond Interest Payable ($2,000,000 X 5%) ..................... 2012 Bond Interest Expense [($2,271,813 – $9,127) X 4%].. ].......... Bonds Bonds Payabl Payable e .... ...... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... .... Cash.. h.................................................. Bond Interest Expense [($2,262,686 – $9,493) X 4%].. ].......... Bonds Bonds Payabl Payable e .... ...... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... .... Bond Interest Payable.................


(D) Bond Carrying Value $2,271,813 2,262,686 2,253,193 2,243,321

90,8 90,873 73 9,127 9,127 100,000

90,507 9,493 9,493 100,000 90,128 9,872 9,872


100,000


*PROBLEM 10-7A

(a) 1. July 1 2.

Dec. 31

3. July 1

4.

Dec. 31

2011 Cash... Cash..... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... 3,501,514 3,501,514 Bonds Payable .. ......................... Bond Interest Expense ( €3,501,5 3,501,514 14 X 5%).... 5%).......... ...... .... ........ ...... .... .... .... Bonds Payable .. ......................... Bond Interest Payable ( €4,000,000 X 4%) ................ 2012 Bond Interest Expense [( €3,501,514 + €15,07 ,076) X 5%]..... Bonds Payable .. ......................... Cash............................................. Bond Interest Expense [( €3,516,590 + €15,83 ,830) X 5%].. %]..... Bonds Payable .. ......................... Bond Interest Payable .. .............

(b) Bonds payable payabl e ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... ..

3,501,514

175,076 175,076 15,076 160,000

175, 175,83 830 0 15,830 160,000 176,62 ,621 16,621 160,000

€3,549,041*

*( €3,501,514 + €15,076 + €15,830 + €16,621)




10-41

*PROBLEM 10-7A (Continued) (c) Dear

:

Thank you for asking me to clarify some points about the bonds issued by Rossillon Company. 1.

The amoun amountt of inte interes restt expen expense se repo reporte rted d for for 2012 2012 rela related ted to the these se bonds is €352,451 ( €175,830 + €176,621).

2.

When the bo bonds nds are sold at a discou discount, nt, the effecti effective-i ve-inter nterest est method method will result in less interest expense reported than the straight-line method in 2012. Straight-line interest expense for 2012 is €369,848 [ €160,000 + €160,000 + ( €24,924 + €24,924)].

3.

The Th e tota totall cos costt of of bo borrow rrowin ing g is €3,698,486 as shown below: Semiannual interest payments ( €4,000,000 X 4%) = €160,000; €160,000 X 20 .... ...... .... .... .... Add: bond discount ( €4,000,000 – €3,50 3,501, 1,51 514) 4)............. Total Tot al cost c ost of o f borrowi bor rowing ng .......... ............... .......... .......... .......... .......... .......... .......... .......

4.

€3,200,000

498, 498,48 486 6 €3,698,486

The total total bond bond intere interest st exp expens ense e over over the the life life of the the bon bonds ds is is the same same under either method of amortization.

If you have other questions, please contact me. Sincerely,

10-42




*PROBLEM 10-8A

(a) Jan. Jan. 1

2011 Cash Cash ($3, ($3,00 000, 0,00 000 0 X 1.04 1.04). )....................... Bonds Payable .. ...............................

3,12 3,120, 0,00 000 0 3,120,000

(b) See pa page 10 10-45. (c) July July 1

Dec. Dec. 31

Jan. Jan. 1 July July 1

Dec. Dec. 31

2011 Bond Bond Inte Intere rest st Expe Expens nse. e.......................... Bond Bonds s Paya Payabl ble e ($12 ($120, 0,00 000 0 ÷ 20) 20) ......... Cash................................................... Bond Bond Inte Intere rest st Expe Expens nse. e.......................... Bonds Payable.. Payable .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Bond Interest Payable .. ................. 2012 Bond Bond Inte Intere rest st Paya Payabl ble e .......................... Cash...................................................

144, 144,00 000 0 6,00 6,000 0 150,000 144, 144,00 000 0 6,000 150,000

150, 150,00 000 0 150,000

Bond Bond Inte Intere rest st Expe Expens nse. e.......................... Bonds Payable.. Payable .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Cash...................................................

144, 144,00 000 0 6,000

Bond Bond Inte Intere rest st Expe Expens nse. e.......................... Bonds Payable.. Payable .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Bond Interest Payable .. .................

144, 144,00 000 0 6,000



150,000

150,000


10-43

*PROBLEM 10-8A (Continued) (d) (d) NonNon-cu curr rren entt Liab Liabil ilit itie ies s Bonds pa payable, du due 20 2021.. 1................................

$3,096,000

Current Liabilities Bond interest payable.. e......................................

$ 150,000

10-44




*PROBLEM 10-8A (Continued)

] ) e C u ( 0 0 0 0 0 l a – 0 0 0 0 0 V 0 0 d , 0 , 0 , 0 , 0 , ) n g 0 0 4 8 2 6 D 0 0 9 n 0 ( o i , 2 1 1 B y 0 1 , 1 , , 1 , 0 , 0 3 3 3 r 3 3 r 0 , $ a 3 C $ [ ) n 0 o 2 i m t ÷ 0 0 0 0 a 0 u 0 0 0 0 ) i z i 0 0 C , 0 , , 0 , 0 t m ( e r 0 , 6 6 6 6 r o 0 $ 2 P m A 1 $ ( e d s e n d e r ) p o C ) x c ( E e – B ( t R ) s A e e ( r e B t o n t I

0 0 0 0 0 0 0 0 0 , 0 , 0 , 0 , 4 4 4 4 4 4 4 4 1 1 1 1 $

) 0 0 0 , o 0 0 0 0 t d 0 0 0 0 0 t i 0 0 ) s a 0 , 0 , 0 , 0 , , e P A 0 0 0 0 3 ( r e 5 5 5 5 e $ t 1 1 1 1 B n X $ I % 5 ( l a e t u t s a n s d d e n r i o a e r e 1 2 3 4 i t e u n P s m I ) e s I b ( S


Weygan Weygandt, dt, IFRS, 1/e, 1/e, Sol Soluti utions ons Man Manual ual


10-45

*PROBLEM 10-9A

(a) July 1 Dec. 31

(b) July 1 Dec. Dec. 31

2011 Cash (Rs2,50 ,500,000 X 104%).. )............... Bonds Pa Payable ............................. Bond Interest Expense ....................... Bond Bonds s Paya Payab ble (Rs1 (Rs100 00,0 ,000 00 ÷ 20).. 20)...... Bond Interest Payable (Rs2,500,000 X 8% X 1/2) ...... 2011 Cash (Rs2,50 ,500,000 X 98%)... )................. Bonds Pa Payable ............................. Bond Bond Inte Interrest est Expen xpense.. se........................ Bonds Payable (Rs50,000 ÷ 20) .. ........................ Bond Interest Payable (Rs2,500,000 X 8% X 1/2) ......

2,500,00 ,000 2,500,000 95,000 5,00 5,000 0 100,000 2,450,00 ,000 2,450,000 102, 102,50 500 0 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. Jan. 1

(b) July 1

(c) (c) July July 1

2012 Bond Bond Inte Intere rest st Payab ayable.. le......................... Cash................................................. Bond Interest Expense.. e....................... Bonds Payable ($200, ($200,000 000 ÷ 20)... 20)..... .... .... .... .... .... .... .... .... .... ........ ...... .... .... .. Cash................................................. Bond Bonds s Payab ayable. le....................................... Gain on Bond Redemption ........ ($1,276,000 – $1,212,000) Cash ($1,200,000 X 101%) .. ........

105, 105,00 000 0 105,000 95,000 10,000 10,000 105,000 1,27 1,276, 6,00 000* 0* 64,000 1,212,000

*($200,000 – $10,000) X .40 = $76,000 (d) Dec. 31

Bond Interest Expense.. e....................... Bonds Payable Payable.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Bond Interest Payable ($1,800,000 X 7% X 1/2) ........

**$200,000 – $10,000 – $76,000 = $114,000;


$114,000 19


57,000 6,000** 6,000** 63,000 = $6,000 or $10,000 X .60.


10-47

PROBLEM 10-1B

(a) Jan. Jan. 1 5

12 14 20

25

(b) (b) Jan. Jan. 31

10-48

Cash Cash .... ...... .... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... ........ ...... .... .... .... Notes Payable .............................................

30,000 30,000 30,000

Cash .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. 10,400 Sales (¥10,400 ÷ 104%) ............................ Sales Taxes Payable (¥10,400 – ¥10,000)............................... Unea Unearn rned ed Serv Service ice Reven Revenue.. ue.............................. Service Revenue ........................................

9,000 9,000

Sales Sales Taxes Taxes Payabl Payable.. e.... ........ ...... .... .... .... ........ ...... .... .... .... .... .... .... .... ....... ... Cash ...............................................................

5,800 5,800 5,800

Cash .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. 18,720 Sales (¥18,720 ÷ 104%) ............................ Sales Taxes Payable (¥18,720 – ¥18,000)................................



400 9,000

Accoun Accounts ts Receivabl Receivable.. e.... .... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ....... ... 48,672 48,672 Sales ales................................................................ Sales Taxes Payable (900 X ¥52 X 4%) ....................................

Inte Intere rest st Expe Expens nse e ................................................. Interest Payable (¥30,000 X 8% X 1/12) .............................

10,000

46,8 46,800 00 1,872 18,000 720

200 200 200


PROBLEM 10-1B (Continued) (c) (c) Cur Current rent liab liabil ilit itie ies s Notes payable payable .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Accoun Accounts ts payabl payable e ... ....... ...... .... ........ ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... Unearned service ice revenue (¥15,00 ,000 – ¥9,000) ........... Sales les taxes xes payable (¥4 (¥400 + ¥1,872 + ¥720) ............... Intere Interest st payabl payable e ... ....... ...... .... .... .... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... Tota To tall curr curren entt liabil liabiliti ities. es...............................................



¥30,000 42,500 42,500 6,00 ,000 2,99 ,992 200 ¥81,6 ¥81,692 92


10-49

PROBLEM 10-2B

(a) June 1 (b) Dec. 31

2011 Cash..... Cash....... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Bonds Payable ............................... Bond Inte Interrest est Expense ......................... Bond Interest Payable ($1,500,000 X 8% X 1/12) ...........

1,500,000 1,500,000 1,500,000 10,00 ,000 10,000

(c) (c) NonNon-cu curr rren entt Lia Liabi bili liti ties es Bond Bonds s Paya Payabl ble. e....................................................

$1,5 $1,500 00,0 ,000 00

Current Liabilities Bond Interest Payable.. e..................................... (d) June June 1

(e) Dec. 1 (f) (f)

10-50

Dec. Dec. 1

2012 Bond Bond Inte Intere rest st Paya Payabl ble. e............................ Bond Interest Expense ($1, ($1,50 500, 0,00 000 0 X 8% X 5/1 5/12).. 2)..................... Cash .. ...................................................

$

10,0 10,000 00 50,0 50,000 00 60,000

Bond Interest Expense ......................... Cash ($1,500,000 X 8% X 1/2) .. ....

60,000

Bond Bonds s Paya Payabl ble e ........................................ Loss on Bond Redemption Redemption .... ...... .... .... .... .... .... .... Cash ($1,500,000 X 1.02) .. .............

1,50 1,500, 0,00 000 0 30,000


10,000

60,000


1,530,000


PROBLEM 10-3B

(a) Jan. Jan. 1

2011 Cash Cash (R$6 (R$600 00,,000 000 X 1.05 1.05)) ........................ Bonds Payable.. e.................................

630, 630,00 000 0 630,000

(b) Non-current Liabilities Bond Pa Payable, du due 20 2021 ...................................

R$627,000*

Current Liabilities Bond Interest Payable (R$600,000 X 9% X 1/2).......

R$27,000

*R$600,000 + R$30,000 – (R$30,000 ÷ 10) (c) Jan. Jan. 1

2013 Bond Bonds s Paya Payabl ble e .......................................... Loss Lo ss on Bond Bond Rede Redemp mpti tion.. on.................... Cash (R$600,000 X 1.05) .. ...............

624, 624,00 000 0 6,00 6,000* 0* 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. Dec. 31

June June 30

Dec. 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 Cash .............................................................. Mortgage Notes Payable................

500,0 500,000 00

2012 Inte Intere rest st Expe Expens nse e ....................................... Mort Mortga gage ge Note Notes s Paya Payabl ble e ........................ Cash .....................................................

20,0 20,000 00 16,79 16,791 1

Inte Intere rest st Expen xpense se ....................................... Mort Mortga gage ge Note Notes s Paya Payabl ble e ........................ Cash .....................................................

(c)

500,000

36,791 19,3 19,328 28 17,46 17,463 3 36,791 12/31/12

Non-current Liabilities Mortgage Mortgage notes payable payable .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..

$428,697* $428,697*

Current Liabilities Curr Curre ent po port rtio ion n of mort mortg gage age no note tes s paya ayable ble ....

$ 37,04 37,049* 9****

**($465,746 – $37,049) **($18,161 + $18,888)

10-52




*PROBLEM 10-5B

(a) July July 1

(b)

2011 Cash Cash ......................................................... Bonds Pa Payable ...............................

2,531 2,531,7 ,760 60 2,531,760

MATLOCK SATELLITES Bond Discount Amortization Effective-Interest Method—Semiannual Interest Payments 9% Bonds Issued at 10% (A) Semiannual Interest Periods

Interest to Be Paid

(B) (C) Interest Discount Expense Amorto Be tization Recorded (B) – (A)

Issue date 1 £121,500 £126,588 2 121,500 126,842 3 121,500 127,110 (c) Dec. 31

(d) July 1

(e) Dec. 31

£5,088 5,342 5,610

Bond Interest Expense (£2,53 (£2,531,76 1,760 0 X 5%).. 5%).... .... .... .... .... .... .... .... .... .... ........ ...... .. Bonds Payable .. .............................. Bond Interest Payable (£2,700,000 X 9% X 1/2) ......... 2012 Bond Interest Expense [(£2 [(£2,5 ,531 31,7 ,760 60 + £5,0 £5,088 88)) X 5%] 5%] ........ Bonds Payable .. .............................. Cash................................................. Bond Interest Expense [(£2 [(£2,5 ,536 36,8 ,848 48 + £5,3 £5,342 42)) X 5%] 5%] ........ Bonds Payable .. .............................. Bond Interest Payable .................



(D) Bond Carrying Value £2,531,760 2,536,848 2,542,190 2,547,800

126,588 126,588 5,088 121,500

126, 126,84 842 2 5,342 121,500 127, 127,11 110 0 5,610 121,500


10-53

*PROBLEM 10-6B

(a) 1. July 1 2.

Dec. 31

3. July 1

4.

Dec. 31

2011 Cash.. Cash .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... 3,407,720 3,407,720 Bonds Payable ........................ Bond Interest Expense ($3,407,720 X 4%) .... ...... .... .... .... .... .... .... .... .... .... .. Bond Bonds s Paya Payabl ble e ................................. Bond Interest Payable ($3,000,000 X 5%) ................. 2012 Bond Interest Expense [($3, [($3,40 407,7 7,720 20 – $13,6 $13,691) 91) X 4%].... 4%].... Bond Bonds s Paya Payabl ble e ................................. Cash.. h............................................ Bond Interest Expense [($3 [($3,3 ,39 94,0 4,029 – $1 $14,2 4,239) 39) X 4%]. 4%]..... Bond Bonds s Paya Payabl ble e ................................. Bond Interest Payable ...........

3,407,720

136,309 13,69 13,691 1 150,000

135,761 135,761 14,23 14,239 9 150,000 135, 135,19 192 2 14,80 14,808 8

(b) Bonds pa payable. le...............................................................

150,000 $3,36 ,364,982*

*($3,407,720 – $13,691 – $14,239 – $14,808)

10-54




*PROBLEM 10-6B (Continued) (c) Dear

:

Thank you for asking me to clarify some points about the bonds issued by Posadas Chemical Company. 1.

The amoun The amountt of inte intere rest st expen expense se repo reporte rted d for for 2012 2012 rela related ted to thes these e bonds is $270,953 ($135,761 + $135,192).

2.

When When the the bonds bonds are sold sold at a premi premium um,, the the effec effectiv tivee-int interes erestt metho method d will result in more interest expense reported than the straight-line method in 2012. Straight-line interest expense for 2012 is $259,228 [$150,000 [$150,000 + $150,000 $150,000 – ($20,386 + $20,386)].

3.

The Th e tot total al cost cost of bo borr rrow owin ing g is is as as sho shown wn belo below: w: Semiannual interest payments ($3,000 ($3,000,00 ,000 0 X 10% 10% X 1/2) = $150, $150,000 000 X 20.... 20.......... .......... ...... .... .. Less Less:: bond bond premi premium um ($3,4 ($3,407 07,72 ,720 0 – $3,0 $3,000 00,00 ,000) 0)........... Total cost of borrowing.. borrowing .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ....

4.

$3,000 $3,000,000 ,000 407,7 407,720 20 $2,592,280

The total total bond bond intere interest st expe expense nse over over the the life life of of the the bond bonds s is the same under either method of amortization.

If you have other questions, please contact me. Sincerely,




10-55

*PROBLEM 10-7B

(a)

2011 Jan. Jan. 1

Cash Cash (¥4,000 (¥4,000,00 ,000 0 X 96%) 96%) ..... ...... .... ........ ...... .... .... .... .... .... .. 3,840,0 3,840,000 00 Bonds Payable ...................................

3,840,000

(b) See page 10 10-58. (c)

2011 July July 1

Dec. Dec. 31

Bond Bond Interes Interestt Expens Expense e .... ...... .... .... .... ........ ...... .... .... .... .... .... .. Bonds Payable (¥160,000 ÷ 40) ..... Cash (¥4,000,000 X 9% X 1/2) ........

184,00 184,000 0

Bond Bond Intere Interest st Expens Expense e .... ...... .... .... .... ........ ...... .... .... .... .... .... .. Bonds Payable ................................... Bond Interest Payable......................

184,00 184,000 0

4,000 180,000 4,000 180,000

2012 Jan. Jan. 1 July July 1

Dec. Dec. 31

10-56

Bond Bond Interes Interestt Payabl Payable. e....... ...... .... .... .... ........ ...... .... .... .... .... .... Cash.. h......................................................

180,00 180,000 0

Bond Bond Inter Interes estt Expe Expens nse e ............................ Bonds Payable .................................. Cash (¥4,000,000 X 9% X 1/2) .. .......

184, 184,00 000 0

Bond Bond Inter Interes estt Expe Expens nse e ............................ Bonds Payable .................................. Bond Interest Payable.....................

184, 184,00 000 0


180,000 4,000 180,000


4,000 180,000


*PROBLEM 10-7B (Continued) (d) (d) NonNon-cu curr rren entt Liab Liabil ilit itie ies s Bonds payable .................................................

¥3,856,000

Current Liabilities Bond interest payable....................................

¥ 180,000




10-57

*PROBLEM 10-7B (Continued)

e u 0 0 0 0 0 l a 0 0 0 0 0 V 0 d , 0 , 0 , 0 , 0 , ) 0 4 8 2 6 n g D o n 4 4 4 5 5 ( 8 B i , 8 , 8 , 8 , 8 , y 3 r 3 3 3 3 r R a C ) n 0 o 4 t i n t ÷ a ) u z 0 o 0 i C 0 ( c t r , s o 0 i 6 D m 1 A R (

0 0 0 0 0 0 0 0 0 , 0 , 0 , 0 , 4 4 4 4 R

e d s e n d e r ) p o C ) x c ( E e + B ( t R ) s A e e r B ( e t o n t I

0 0 0 0 0 0 0 0 0 , 0 , 0 , 0 , 4 4 4 4 8 8 8 8 1 1 1 1 R

) 0 0 0 , 0 o 0 0 0 0 t d 0 0 0 0 0 t i 0 0 ) s a , , 0 , 0 , 0 , 4 e P A 0 0 0 ( r R 8 8 8 0 8 e e 1 1 1 1 t X B n R I % 5 . 4 ( l a e u t s t a s n e d d n r i o a e r e 1 2 3 4 i t e u n m s ) e I P I s b ( S

10-58


Weyga Weygandt ndt,, IFRS, 1/e, 1/e, Solu Solutio tions ns Man Manual ual

(For (For Instr Instruct uctor or Use Only) Only)

*PROBLEM 10-8B

(a) (a) Jan. Jan. 1 July July 1

Dec. Dec. 31

(b) (b) Jan. Jan. 1

July July 1

Dec. Dec. 31

Cash Cash ($5, ($5,00 000, 0,00 000 0 X 103% 103%). )........................ 5,15 5,150, 0,00 000 0 Bonds Payable .................................. Bond Bond Intere Interest st Expens Expense e ... ....... .......... ...... .... .... .... .... .... ....... ... Bonds Payable ($150,000 ÷ 20).. 20) .... .... .... .... .... .... Cash ($5,000,000 X 8% X 1/2) .. .......

192,50 192,500 0 7,500

Bond Bond Intere Interest st Expens Expense e ... ....... .......... ...... .... .... .... .... .... ....... ... Bonds Payable ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... Bond Interest Payable.....................

192,50 192,500 0 7,500

200,000

200,000

Cash Cash ($5, ($5,00 000, 0,00 000 0 X 96%). 96%).......................... 4,80 4,800, 0,00 000 0 Bonds Payable ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... 200,000 200,0 00 Bonds Payable .................................. Bond Bond Inte Intere rest st Expe Expens nse e ............................ Bonds Payable ($200,000 ÷ 20) .... Cash.. h......................................................

210,0 210,000 00

Bond Bond Intere Interest st Expens Expense e ... ....... .......... ...... .... .... .... .... .... ....... ... Bonds Payable .................................. Bond Interest Payable.....................

210,000 210,000



5,150,000

5,000,000 10,000 200,000 10,000 200,000


10-59

*PROBLEM 10-8B (Continued) (c) Premium Non-current Liabilities Bonds payable, due 2021 .. ............................

$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) (c) July July 1

Bond Interest Payable ........................... Cash.. h....................................................

84,000

Bond Interest Expense .......................... Bonds Payable ( €90,000 ÷ 20) .... Cash ( €2,400,000 X 7% X 1/2) ......

88,500

Bond Bonds s Payab ayable le ......................................... Loss Lo ss on Bond Bond Redem Redempt ptio ion n .................. Cash ( €800,000 X 101%) .. ...............

771, 771,50 500* 0* 36,50 36,500 0

84,000**

4,500** 84,000**

808,000**

* €800,000 – [( €90,000 – €4,500) X 1/3] = €771,500

(d) Dec. 31

Bond Interest Expense .......................... Bonds Payable ................................ Bond Interest Payable...................

59,00 ,000 3,000** 56,000**

*( €90,000 – €4,500) X 2/3 = €57,000; *( €57,000 ÷ 19 = €3,000 or *( €4,500 X 2/3 = €3,000 **( €2,400,000 – €800,000 = €1,600,000; **( €1,600,000 X 7% X 1/2 = €56,000)




10-61

COMPREHENSIVE PROBLEM SOLUTION 10–1

(a)

1. Bond Interest Interest Payable Payable.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Cash Cash ............................................... ................................................................... ....................

3,000

2. Merchandise Merchan dise Inventory Invent ory ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. Account Acc ounts s Payable Paya ble .......... ............... .......... .......... .......... .......... .......... ....... ..

241,100

3. Cash Cas h .......... ............... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ....... Sales................................................................... Sales Taxes Payable.....................................

477,000

Cost Cos t of Goods Goo ds Sold .......... ............... .......... .......... .......... .......... .......... .......... ........ ... Merchan Merc handis dise e Invent Inv entory ory .......... ............... .......... .......... .......... ....... ..

250,000

4. Account Payable Payabl e ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. Cash Cash ............................................... ................................................................... ....................

230,000

5. Bond Interes I nterestt Expense.... Expen se....... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. Cash Cash ............................................... ................................................................... ....................

3,000

6. Insurance Insura nce Expense... Expense ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... Prepaid Prep aid Insuran Ins urance......... ce.............. .......... .......... .......... .......... .......... ........ ...

5,600

7. Prepaid Insuranc I nsurance e ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. Cash Cash ............................................... ................................................................... ....................

10,200

8. Sales Taxes Payable Payabl e ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... Cash Cash ............................................... ................................................................... ....................

17,000

9. Other Operating Expenses .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Cash Cash ............................................... ................................................................... ....................

91,000

10. Bond Interest Inte rest Expense.... Expen se....... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. Cash Cash ............................................... ................................................................... ....................

3,000

Bonds Payable......................................................... Cash Cash ............................................... ................................................................... .................... Gain on Bond Redemption Redempt ion ...... ......... ...... ...... ...... ...... ...... .....

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


COMPREHENSIVE PROBLEM SOLUTION (Continued) 11. Cash ($90,000 X 104%) ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... Bonds Bond s Payable Paya ble .......... ............... .......... .......... .......... .......... .......... .......... ........ ...

93,600 93,600

Adjusting Entries 12. Insurance Insurance Expense Expense ($10,200 X 5/12) .... ...... .... .... .... .... .... .... Prepaid Prep aid Insura Ins urance nce .......... ............... .......... .......... .......... .......... .......... ....... ..

4,250

13. Depreciat Depreciation ion Expens Expense e ($38,00 ($38,000 0 – $3,00 $3,000) 0) ÷ 5.. 5 .... .... .... Accumulated Depreciation..........................

7,000

14. Income Tax Expense Expen se ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... Income Inc ome Tax Ta x Payable Paya ble .......... ............... .......... .......... .......... .......... ........ ...

26,445

(b)

4,250 7,000 26,445

ABER CORPORATION Trial Balance 12/31/2011 Account Cash .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Merc Mercha hand ndis ise e Inve Invent ntor ory y .................................... Prep Prepai aid d Ins Insur uran ance ce ............................................. Equipm Equipment.. ent.... .... .... .... .... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... ........ ...... .... .... .... .... .... .. Accumulated Depreciation .. ............................. Accounts Payable.............................................. Sales Tax Payable ............................................. Income Tax Payable .......................................... Bonds Payable.................................................... Share Capital—Ordinary ................................. Retained Earnings ............................................... Sales....................................................................... Cost Cost of Goods Goods Sold. Sold... .... .... .... ........ ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .. Depr Deprec ecia iati tion on Expe Expens nse e ...................................... Insu Insura ranc nce e Expe Expens nse. e............................................. Othe Otherr Op Oper erat atin ing g Expe Expens nses.. es.............................. Bond Bond Inte Intere rest st Exp Expen ense se .................................... Gain on Bond Redemption ............................. Income Income Tax Expens Expense e .... ...... ........ ...... .... .... .... .... .... .... .... ........ ...... .... .... .... ..


Debit $195,900 16,8 16,850 50 5,95 5,950 0 38,000 38,000

Credit

$

7,000 24,850 10,000 26,445 93,600 20,000 13,100 450,000

250,000 250,000 7,00 7,000 0 9,85 9,850 0 91,0 91,000 00 6,00 6,000 0 2,000 26,445 26,445 $646,995


$646,995


10-63

COMPREHENSIVE PROBLEM SOLUTION (Continued) (a) and (b) Optional T accounts Cash 30,500 477,000 93,600

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

Bond Interest Payble 3,000 Bal. 3,000 Bal. 0 Sales Tax Payable 17,000 27,000 Bal. 10,000 Income Tax Payable 26,445

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 Capital—Ordinary 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




COMPREHENSIVE PROBLEM SOLUTION (Continued) (a) and (b) (Continued) Cost of Goods Sold 250,000

Bond Interest Expense 3,000 3,000 Bal. 6,000

Depreciation Expense 7,000

Bal.

Insurance Expense 5,600 4,250 9,850

Income Tax Expense 26,445

Gain on Bond Redemption 2,000

Other Operating Expenses 91,000

(c)

ABER CORPORATION Income Statement For the Year Ending 12/31/11 Sales ....................................................................... Cost of goods sold ............................................ Gross profit .......................................................... Operating expenses Insu Insura ranc nce e expe expens nse.. e..................................... Depr Deprec ecia iati tion on exp expense.. ense............................... Othe Otherr op oper erat atin ing g expe expens nses. es....................... 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 $9,8 $9,850 50 7,00 7,000 0 91,0 91,000 00 107,850 92,150 2,000 6,000 88,150 26,445 $ 61,705 (For Instructor Use Only)

10-65

COMPREHENSIVE PROBLEM SOLUTION (Continued) ABER CORPORATION Retained Earnings Statement For the Year Ending 12/31/11 Reta Retain ined ed earn earnin ings gs,, 1/1/ 1/1/11. 11.................................................... Add: Add: Net Net inc incom ome. e.................................................................. Less Less:: Divi Divide dend nds s ................................................................... Reta Retain ined ed earn earnin ings gs,, 12/3 12/31/ 1/11.. 11...............................................

$13, $13,10 100 0 61,7 61,705 05 74,805 – $74, $74,80 805 5

ABER CORPORATION Statement of Financial Position 12/31/2011 Property, Plant, and Equipment Equipm Equipment ent ..... .......... ...... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ........ ...... .... Accumulated depreciation.. n..................... Current Assets Prep Prepaid aid insu insura ranc nce.. e...................................... Merchandise inventory.. y............................ Cash Cash................................................................ Total assets .. .......................................... Equity Shar Share e cap capit ital al— —ordi ordina nary ry .......................... Retained earnings.. s.....................................

$ 38,000 38,000 7,000 5,95 5,950 0 16,850 195, 195,90 900 0

$20, $20,00 000 0 74,805

Non-current liabilities Bonds payable .. ........................................... Current Liabilities Acco Accoun unts ts paya payabl ble e ..................................... Inco Income me taxe taxes s payab ayable. le............................... Sales tax payable ...................................... Total equity and liabilities ...............................

10-66


$ 31,000

218, 218,70 700 0 $249,700

94,805 93,600

24,8 24,850 50 26,4 26,445 45 10,000


61,295 $249,700


COMPREHENSIVE PROBLEM SOLUTION 10–2

(a) 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

Paris Company

Troyer Company

CHF 255,300 (188,375) 517,000 309,700 (13,600) 17,200 CHF897,225

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

**CHF454,750 – CHF75,725 (CHF188,375 – CHF112,650) change in accumulated depreciation. **CHF432,050 – CHF20,000 allowance for doubtful accounts. (b) Based Based on a revie review w of the the compan companies ies and and revisio revision n of financ financial ial statestatements for purposes of comparability, it can be seen that Troyer Company is in a better financial position. However, this claim to the better position is a tenuous one. The amounts within each category in the statement of financial position of each company are quite similar. In terms of short-term liquidity, Troyer Company is in a little stronger financial position. Total current assets for Paris Company are CHF830,300 versus CHF861,100 for Troyer. Comparing these to the current liabilities, Troyer has a current ratio of 1.99 (CHF861,100 ÷ CHF432,500) versus 1.89 (CHF830,300 ÷ CHF440,200) for Paris.




10-67

BYP 10-1

FINANCIAL REPORTING PROBLEM

(a) Total Total current current liabi liabiliti lities es at Decemb December er 31, 2008, 2008, £3,388 £3,388 millio million. n. Cadbur Cadbury’s y’s total current liabilities decreased by £1,226 (£3,388 – £4,614) million over the prior year. (b) The compo componen nents ts of curre current nt liabilit liabilities ies for for Decembe Decemberr 31, 2008 2008 are: Short-term borrowings and overdrafts .... ...... .... .... .... .... .... .... .... .... .... .... £1,189,000,000 Trade and other payables payable s ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. £1,551,000, £1,551 ,000,000 000 Tax payabl pay able....... e............ .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ..... £ 328,00 328 ,000,0 0,000 00 (c) At Dece Decembe mberr 31, 2008, 2008, Cadb Cadbur ury’s y’s non non-cu -curre rrent nt deb debtt was £1,876 million. mill ion. 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

COMPARATIVE ANALYSIS PROBLEM

(a) (a) Cadbur Cadbury’s y’s larges largestt current current liabil liability ity was was “trade “trade and othe otherr payables payables” ” at £1,551 million. Its total current liabilities were £3,388 million. Nestlé’s largest current liability was “financial liabilities” at CHF15,383 million. Its total current liabilities were CHF33,223 million. (b)

(in millions)

Cadbury

Nestlé

(1) Working capital

£2,635 – £3,388 = (£ (£753)

CHF33,048 – CHF33,223 = (CHF175)

(1) Current ratio

£2,635 £3,388 = .78:1

CHF33,048 = .99:1 CHF33,223

(c) Based Based on this this inform informatio ation, n, it appea appears rs that that both both compan companies ies are are illiquid illiquid.. Additional analysis should be done to assess the reason for the negative working capital and low current ratio. (d)

Cadbury 1. Debt to total assets 2. Times interest earned

£5,361 = 60.3% £8,895 £366 + £30 + £50 = 8.92 times £50

Nestlé CHF51,299 CHF106,215

= 48.3%

CHF19,051 + CHF3,787 + CHF1,247 = 19.3 times CHF1,247

(e) The higher higher the the percenta percentage ge of debt to total total assets, assets, the greate greaterr the risk that a company may be unable to meet its maturing obligations. Cadbury’s 2008 debt to total assets ratio was 25% higher than Nestlé’s. The times interest earned ratio provides an indication of a company’s 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

EXPLORING THE WEB

(a) In 1909, 1909, Moody’s Moody’s introduce introduced d the first bond ratings ratings as part of Moody Moody’s ’s Analyses of Railroad Investments. (b) Moody’ Moody’s s tracks tracks more more than than $35 trill trillion ion wort worth h of debt debt secur securitie ities. s. (c) (c) The ultimat ultimate e value value of a rating rating agency’s agency’s contribu contribution tion to that that market 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 agency’s ratings should offer broad coverage and also be based on a globally consistent rating process, supported by rating committees committees with a multi-national multi -national perspective.

10-70




BYP BYP 1010-4 4

DECI DECISI SION ON MAKI MAKING NG ACRO ACROS SS THE THE ORGAN RGANIZ IZAT ATIO ION N

*(a) Face val value of bo bonds .................................................. Proceeds from sale of bonds ($6,000,000 X .96) ................................................... Discount on bonds payable ....................................

$6,000,000 5,760,000 $ 240,000

Bond discount amortization per year: $240,000 ÷ 5 = $48,000 Face va value of of bo bonds .................................................. $6,000,000 Amount of original original discount...... discount........ .... .... .... .... .... .... .... .... .... .... .... .... .... .... $240,000 Less: Amortization through through January 1, 2011 (2-year) .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. 96,000 144,000 Carrying value of bonds, January 1, 2011.......... $5,856,000 (b) 1. Bonds Payable Payable .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. 5,856,000 5,856,000 Gain on Bond Redemption....................... Cash.. h................................................................. (To record redemption of 8% bonds)

856,000* 5,00 ,000,000

*$5,856,000 – $5,000,000 2. Cash..... Cash....... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Bonds Payable .. .......................................... (To record sale of 10-year, 11% bonds at par)



5,000,000 5,000,000


10-71

BYP 10-4 (Continued) (c) (c) Dear Dear Pres Presid iden entt Bail Bailey ey:: The early redemption of the 8%, 5-year bonds results in recognizing a gain of $856,000 that increases current year net income by the aftertax effect of the gain. The amount of the liabilities on the statement of financial position will be lowered by the issuance of the new bonds and retirement of the 5-year bonds. 1.

The cash cash flow flow of the the company company as it relates relates to bonds bonds paya payable ble will be adversely affected as follows: Annual interest payments on the new issue ($5,000,000 ($5,000,000 X .11) .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Annual interest payments on the 5-year bonds ($6,000 ($6,000,000 ,000 X .08) .08) ..... .......... ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .. Addi Additio tiona nall cash cash ou outfl tflow ows s per per year.. year....................................

2.

$550,000 $550,000 (480,00 (480,000) 0) $ 70,0 70,000 00

The amount amount of inte interes restt expen expense se show shown n on on the the incom income e state statemen mentt will be higher as a result of the decision to issue new bonds: Annual interest expense on new bonds .......... $550,000 Annual interest expense on 8% bonds: Interest payment .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. $480,000 Discount Discount amortization.. amortization.... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. 48,000 (528,000) (528,000) Additional interest expense per year ................... $ 22,000

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

(a) The advanta advantages ges of bond bond financin financing g over over equity equity financi financing ng includ include: e: 1.

Shar Shareh ehold older er cont contro roll is no nott affe affect cted ed..

2.

Tax savings result.

3.

Earnin Earnings gs per share share of ordina ordinary ry shares shares may be higher higher..

(b) The types types of bonds bonds that that may be issued issued are: are: 1.

Secured Secured or unse unsecure cured d bond bonds. s. Secur Secured ed bond bonds s have have speci specific fic assets assets of the issuer pledged as collateral. Unsecured bonds are issued against the general credit of the borrower.

2.

Term Term or serial serial bond bonds. s. Term Term bond bonds s mature mature at at a single single spe specifi cified ed date date,, while serial bonds mature in installments.

3.

Regist Registere ered d or beare bearerr bonds bonds.. Regist Register ered ed bond bonds s are issue issued d in the the name name of the owner, while bearer bonds are not.

4.

Conver Convertibl tible e bonds bonds,, which which can be conv converte erted d by the bondho bondholder lder into ordinary shares.

5.

Callable Callable bonds, bonds, which which are are subjec subjectt to early early retire retirement ment by the the issu issuer er at a stated amount.

(c) State State laws laws grant grant corpor corporatio ations ns the the power power to issue issue bonds bonds after after form formal al 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

(a) (a) Th The e stak stakeh ehol olde ders rs in in the the Gale Galena na cas case e are: are:      

Sam Farr, president, founder, and majority shareholder. Jill Hutton, minority shareholder. Other minority shareholders. Existing creditors (debt holders). Future bondholders. Employees, suppliers, and customers.

(b) (b) Th The e eth ethic ical al issu issues es:: The desires of the majority shareholder (Sam Farr) versus the desires of the minority shareholders (Jill Hutton Hutton and others). Doing what is right for the company and others versus doing what is best for oneself. Questions: Is what Sam wants to do legal? Is it unethical? Is Sam’s action brash and irresponsible? irresponsible? Who may benefit/suffer if Sam arranges a high-risk bond issue? Who may benefit/suffer benefit/s uffer if Jill Hutton H utton gains control of Galena? (c) The ration rationale ale provid provided ed by the studen studentt will be more more importa important nt than than the the specific position because this is a borderline case with no right answer.

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ch10 Financial Accounting Answer

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