Boyd Co. produces and sells aviation equipment. On the first day of its fiscal year, Boyd Co. issued

Boyd Co. produces and sells aviation equipment. On the first day of its fiscal year, Boyd Co. issued $80,000,000 of five-year, 9% bonds at a market (effective) interest rate of 12%, with interest payable semiannually. Compute the following, presenting figures used in your computations.


a. The amount of cash proceeds from the sale of the bonds. Use the tables of present values in Exhibits 4 and 5. Round to the nearest dollar.

b. The amount of discount to be amortized for the first semiannual interest payment period, using the interest method. Round to the nearest dollar.

c. The amount of discount to be amortized for the second semiannual interest payment period, using the interest method. Round to the nearest dollar.

d. The amount of the bond interest expense for the first year.


Answer:

a. Present value of $1 for 10 semiannual
periods at 6.0% semiannual rate…………………………… 0.55839
Face amount of bonds…………………………………………… ×
Present value of an annuity of $1 for 10 semiannual
$80,000,000 $44,671,200
periods at 6.0% semiannual rate…………………………… 7.36009
Semiannual interest payment………………………………… × $ 3,600,000* 26,496,324
Proceeds of bond sale…………………………………………… $71,167,524
* $80,000,000 × 4.5%
b. 6.0% of carrying amount of $71,167,524…………………… $ 4,270,051
First semiannual interest payment…………………………… 3,600,000
Discount amortized……………………………………………… $ 670,051
c. 6.0% of carrying amount of $71,837,575*…………………… $ 4,310,255
Second semiannual interest payment………………………… 3,600,000
Discount amortized……………………………………………… $ 710,255
* $71,167,524 + $670,051
d. Annual interest paid…………………………………………… $ 7,200,000
Plus discount amortized*……………………………………… 1,380,306
Interest expense for first year………………………………… $ 8,580,306
* $670,051 + $710,255

Ware Co. produces and sells motorcycle parts. On the first day of its fiscal year, Ware Co. issued

Ware Co. produces and sells motorcycle parts. On the first day of its fiscal year, Ware Co. issued $35,000,000 of five-year, 12% bonds at a market (effective) interest rate of 10%, with interest payable semiannually. Compute the following, presenting figures used in your computations.

a. The amount of cash proceeds from the sale of the bonds. Use the tables of present values in Exhibits 4 and 5. Round to the nearest dollar.

b. The amount of premium to be amortized for the first semiannual interest payment period, using the interest method. Round to the nearest dollar.

c. The amount of premium to be amortized for the second semiannual interest payment period, using the interest method. Round to the nearest dollar.

d. The amount of the bond interest expense for the first year.


Answer:

a. Present value of $1 for 10 semiannual
periods at 5% semiannual rate……………………… 0.61391
Face amount of bonds……………………………………
Present value of an annuity of $1 for 10
× $35,000,000 $21,486,850
semiannual periods at 5% semiannual rate………… 7.72173
Semiannual interest payment…………………………… × $ 2,100,000 16,215,633
Proceeds of bond sale…………………………………… $37,702,483
b. First semiannual interest payment…………………… $ 2,100,000
5% of carrying amount of $37,702,483………………… 1,885,124
Premium amortized………………………………………… $ 214,876
c. Second semiannual interest payment………………… $ 2,100,000
5% of carrying amount of $37,487,607*………………… 1,874,380
Premium amortized………………………………………… $ 225,620
* $37,702,483 – $214,876
d. Annual interest paid……………………………………… $ 4,200,000
Less premium amortized*………………………………… 440,495
Interest expense for first year…………………………… $ 3,759,505
* $214,876 + $225,620

Shunda Corporation wholesales parts to appliance manufacturers. On January 1, 2014, Shunda Corporation

Shunda Corporation wholesales parts to appliance manufacturers. On January 1, 2014, Shunda Corporation issued $22,000,000 of five-year, 9% bonds at a market (effective) interest rate of 7%, receiving cash of $23,829,684. Interest is payable semiannually. Shunda Corporation’s fiscal year begins on January 1. The company uses the interest method.

a. Journalize the entries to record the following:

1. Sale of the bonds.

2. First semiannual interest payment, including amortization of premium. Round to the nearest dollar.

3. Second semiannual interest payment, including amortization of premium. Round to the nearest dollar.

b. Determine the bond interest expense for the first year.

c. Explain why the company was able to issue the bonds for $23,829,684 rather than for the face amount of $22,000,000.


Answer:

a. 1. Cash 23,829,684
Premium on Bonds Payable 1,829,684
Bonds Payable 22,000,000
2.
 Interest Expense* 834,039
Premium on Bonds Payable 155,961
Cash** 990,000
* $23,829,684 × 3.5%
** $22,000,000 × 4.5%
3.
 Interest Expense* 828,580
Premium on Bonds Payable 161,420
Cash 990,000
* ($23,829,684 – $155,961) × 3.5%


b. Annual interest paid……………………………………… $1,980,000
Less premium amortized*……………………………… 317,381
Interest expense for first year………………………… $1,662,619
* $155,961 + $161,420

c. The bonds sell for more than their face amount because the market rate of
interest is less than the contract rate of interest. Investors are willing to pay
more for bonds that pay a higher rate of interest (contract rate) than the rate
they could earn on similar bonds (market rate).

On the first day of its fiscal year, Ebert Company issued $50,000,000 of 10-year, 7% bonds to finance

On the first day of its fiscal year, Ebert Company issued $50,000,000 of 10-year, 7% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 9%, resulting in Ebert Company receiving cash of $43,495,895. The company uses the interest method.

a. Journalize the entries to record the following:

1. Sale of the bonds.

2. First semiannual interest payment, including amortization of discount. Round to the nearest dollar.

3. Second semiannual interest payment, including amortization of discount. Round to the nearest dollar.

b. Compute the amount of the bond interest expense for the first year.

c. Explain why the company was able to issue the bonds for only $43,495,895 rather than for the face amount of $50,000,000.


Answer:

a. 1. Cash 43,495,895
Discount on Bonds Payable 6,504,105
Bonds Payable 50,000,000
2.
 Interest Expense* 1,957,315
Discount on Bonds Payable 207,315
Cash**
* $43,495,895 × 4.5%
** $50,000,000 × 3.5%


3. Interest Expense* 1,966,644
Discount on Bonds Payable 216,644
Cash 1,750,000
periods at 4.5% semiannual rate……………………………… 0.41464
Face amount of bonds…………………………………………… × $50,000,000
* ($43,495,895 + $207,315) × 4.5%
Note: The following data in support of the proceeds of the bond issue stated in
the exercise are presented for the instructor’s information. Students are not
required to make the computations.
Present value of $1 for 20 semiannual
Present value of annuity of $1
for 20 semiannual periods at 4.5% semiannual rate……… 13.00794
$20,732,000
Semiannual interest payment…………………………………… × $ 1,750,000 * 22,763,895
Total present value (proceeds)………………………………… $43,495,895
* $50,000,000 × 3.5%
b. Annual interest paid……………………………………………… $ 3,500,000
Plus discount amortized*………………………………………… 423,959
Interest expense for first year…………………………………… $ 3,923,959
* $207,315 + $216,644
c. The bonds sell for less than their face amount because the market rate of
interest is greater than the contract rate of interest. Investors are not
willing to pay the full face amount for bonds that pay a lower contract rate
of interest than the rate they could earn on similar bonds (market rate).

Roehm Co. issued $30,000,000 of four-year, 10% bonds, with interest payable semiannually, at a market (effective) interest rate

Roehm Co. issued $30,000,000 of four-year, 10% bonds, with interest payable semiannually, at a market (effective) interest rate of 8%. Determine the present value of the bonds payable, using the present value tables in Exhibits 4 and 5. Round to the nearest dollar.


Answer:

Present value of $1 for 8 semiannual
periods at 4.0% semiannual rate…………………………… 0.73069
Face amount of bonds…………………………………………
Present value of an annuity of $1
× $30,000,000 $21,920,700
for 8 semiannual periods at 4.0% semiannual rate……… 6.73274
Semiannual interest payment………………………………… × $ 1,500,000* 10,099,110
Total present value (proceeds)……………………………… $32,019,810
* $30,000,000 × 5%

Pinder Co. produces and sells high-quality video equipment. To finance its operations, Pinder Co

Pinder Co. produces and sells high-quality video equipment. To finance its operations, Pinder Co. issued $25,000,000 of five-year, 7% bonds, with interest payable semiannually, at a market (effective) interest rate of 9%. Determine the present value of the bonds payable, using the present value tables in Exhibits 4 and 5. Round to the nearest dollar.


Answer:

Present value of $1 for 10 semiannual
periods at 4.5% semiannual rate…………………………… 0.64393
Face amount of bonds………………………………………… × $25,000,000
Present value of an annuity of $1
for 10 periods at 4.5%……………………………………… 7.91272
$16,098,250
Semiannual interest payment………………………………… × $ 875,000* 6,923,630
Total present value (proceeds)……………………………… $23,021,880
* $25,000,000 × 3.5%

Assume the same data as in Appendix 1 Exercise 14–19, except that the current interest rate is 12%.

Assume the same data as in Appendix 1 Exercise 14–19, except that the current interest rate is 12%.

Will the present value of your winnings using an interest rate of 12% be more than the present value of your winnings using an interest rate of 7%? Why or why not?


Answer:
No. The present value of your winnings using an interest rate of 12% is $42,376,650 ($7,500,000 × 5.65022), which is less than the present value of your winnings using an interest rate of 7% ($52,676,865; see Appendix 1 Ex. 14–19). This is because the winnings are affected by the higher interest rate.

On January 1, 2014, you win $75,000,000 in the state lottery.

On January 1, 2014, you win $75,000,000 in the state lottery. The $75,000,000 prize will be paid in equal installments of $7,500,000 over 10 years. The payments will be made on December 31 of each year, beginning on December 31, 2014. If the current interest rate is 7%, determine the present value of your winnings. Use the present value tables in Appendix A.


Answer:
$7,500,000 × 7.02358 = $52,676,850

Determine the present value of $200,000 to be received at the end of each of four years, using an interest

Determine the present value of $200,000 to be received at the end of each of four years, using an interest rate of 7%, compounded annually, as follows:

a. By successive computations, using the present value table in Exhibit 4.

b. By using the present value table in Exhibit 5.

c. Why is the present value of the four $200,000 cash receipts less than th $800,000 to be received in the future?


Answer:

a. First Year: $200,000 × 0.93458 =
Second Year: $200,000 × 0.87344 =
Third Year: $200,000 × 0.81630 =
Fourth Year: $200,000 × 0.76290 =
Total present value

b. $200,000 × 3.38721 = $677,442*
*$2 difference between a. and b. is due to rounding.
$186,916
$174,688
$163,260
$152,580
$677,444

c. Cash on hand today can be invested to earn income. If each of the $200,000 of cash receipts is invested at 7%, it will be worth $677,444 at the end of four years.

Tommy John is going to receive $1,000,000 in three years. The current market rate of interest is 10%.

Tommy John is going to receive $1,000,000 in three years. The current market rate of interest is 10%.

a. Using the present value of $1 table in Exhibit 4, determine the present value of this amount compounded annually.

b. Why is the present value less than the $1,000,000 to be received in the future?


Answer:
$1,000,000 × 0.75131 = $751,310

Cash on hand today can be invested to earn income. If $751,315 is invested at 10%, it will be worth $1,000,000 at the end of three years.

Iacouva Company reported the following on the company’s income statement for 2014 and 2013:

Iacouva Company reported the following on the company’s income statement for 2014 and 2013:


2014 2013
Interest expense $5,000,000 $5,000,000
Income before income tax 3,500,000 6,000,000

a. Determine the number of times interest charges are earned for 2014 and 2013. Round to one decimal place.

b. What conclusions can you draw?


Answer:

a. Number of times interest charges earned:
$3,500,000 + $5,000,000 2014: = 1.7 $5,000,000
$6,000,000 + $5,000,000 2013: = 2.2 $5,000,000

b. The number of times interest charges are earned has decreased from 2.2 in 2013 to 1.7 in 2014. Although the company has enough earnings to pay interest in 2014, the deterioration in this ratio is a cause for concern to debtholders.

Loomis, Inc. reported the following on the company’s income statement in 2014 and 2013:

Loomis, Inc. reported the following on the company’s income statement in 2014 and 2013:


2014 2013
Interest expense $ 13,500,000 $ 16,000,000
Income before income tax expense 310,500,000 432,000,000


a. Determine the number of times interest charges were earned for 2014 and 2013. Round to one decimal place.

b. Is the number of times interest charges are earned improving or declining?


Answer:

a. Number of times interest charges earned:
2014:
2013:
$310,500,000 + $13,500,000
$13,500,000
$432,000,000 + $16,000,000
$16,000,000
= 24.0
= 28.0

b. The number of times interest charges are earned has decreased from 28.0 in 2013 to 24.0 in 2014. Although Loomis has adequate earnings to pay interest, the decline in this ratio may cause concern among debtholders.

The following data were taken from recent annual reports of Southwest Airlines, which operates a low-fare airline service

The following data were taken from recent annual reports of Southwest Airlines, which operates a low-fare airline service to over 50 cities in the United States:


Current Year Preceding Year
Interest expense $167,000,000 $186,000,000
Income before income tax 745,000,000 164,000,000


a. Determine the number of times interest charges are earned for the current and preceding years. Round to one decimal place.

b. What conclusions can you draw?


Answer:

a. Number of times interest charges earned:
Current year:
Preceding year:
$745,000,000 + $167,000,000
$167,000,000
$164,000,000 + $186,000,000
$186,000,000
= 5.5
= 1.9


b. The number of times interest charges are earned has increased from 1.9 in the prior year to 5.5 in the current year. Although Southwest Airlines had enough earnings to pay interest in the preceding year, the improvement in this ratio will be welcomed by the debtholders.

At the beginning of the current year, two bond issues (Simmons Industries 7% 20 year bonds and Hunter Corporation 8% 10-year bonds

At the beginning of the current year, two bond issues (Simmons Industries 7% 20 year bonds and Hunter Corporation 8% 10-year bonds) were outstanding. During the year, the Simmons Industries bonds were redeemed and a significant loss on the redemption of bonds was reported as an extraordinary item on the income statement. At the end of the year, the Hunter Corporation bonds were reported as a noncurrent liability. The maturity date on the Hunter Corporation bonds was early in the following year.

Identify the flaws in the reporting practices related to the two bond issues.


Answer:
1. The significant loss on redemption of the Simmons Industries bonds should be reported in the Other Income and Expense section of the income statement, rather than as an extraordinary loss.


2. The Hunter Corporation bonds outstanding at the end of the current year should be reported as a current liability on the balance sheet because they mature within one year.

On January 1, 2014, Parker Company obtained a $125,000, four-year, 6% installment note from Clark Bank.

On January 1, 2014, Parker Company obtained a $125,000, four-year, 6% installment note from Clark Bank. The note requires annual payments of $36,074, beginning on December 31, 2014.

a. Prepare an amortization table for this installment note, similar to the one presented in Exhibit 3.

b. Journalize the entries for the issuance of the note and the four annual note payments.

c. Describe how the annual note payment would be reported in the 2014 income statement.


Answer:

a. Amortization of Installment Notes
A B C D E
Decrease Dec. 31
For the January 1 Note Interest Expense in Notes Carrying
Year Carrying Payment (6% of January 1 Payable Amount
Ending Amount (Cash Paid) Note Carrying Amount) (B – C) (A – D)
Dec. 31, 2014 $125,000 $ 36,074 $ 7,500 (6% of $125,000) $ 28,574 $96,426
Dec. 31, 2015 96,426 36,074 5,786 (6% of $96,426) 30,288 66,138
Dec. 31, 2016 66,138 36,074 3,968 (6% of $66,138) 32,106 34,032
Dec. 31, 2017 34,032 36,074 2,042 (6% of $34,032) 34,032 0
$144,296 $19,296 $125,000

b.
 2014
Jan. 1 Cash 125,000
Notes Payable 125,000
Dec. 31 Interest Expense 7,500
Notes Payable 28,574
Cash 36,074
2015
Dec. 31 Interest Expense 5,786
Notes Payable 30,288
Cash 36,074
2016
Dec. 31 Interest Expense 3,968
Notes Payable 32,106
Cash 36,074
2017
Dec. 31 Interest Expense 2,042
Notes Payable 34,032
Cash 36,074

c. Interest expense of $7,500 would be reported on the income statement.

On January 1, 2014, O’Brien Company issued a $210,000, six-year, 9% installment note to Bulldog Bank.

On January 1, 2014, O’Brien Company issued a $210,000, six-year, 9% installment note to Bulldog Bank. The note requires annual payments of $46,813, beginning on December 31, 2014. Journalize the entries to record the following:

2014
Jan. 1. Issued the notes for cash at their face amount.
Dec. 31. Paid the annual payment on the note, which consisted of interest of $18,900 and principal of $27,913.

2017
Dec. 31. Paid the annual payment on the note, included $10,665 of interest. The remainder of the payment reduced the principal balance on the note.


Answer:

2014
Jan. 1 CasQh 210,000
Notes Payable 210,000
Dec. 31 Interest Expense 18,900
Notes Payable 27,913
Cash 46,813
2017
Dec. 31 Interest Expense 10,665
Notes Payable* 36,148
Cash 46,813
*$46,813 – $10,665

On the first day of the fiscal year, Nash Company borrowed $50,000 by giving a six-year, 5% installment note to Buffet Bank

On the first day of the fiscal year, Nash Company borrowed $50,000 by giving a six-year, 5% installment note to Buffet Bank. The note requires annual payments of $9,851, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $2,500 and principal repayment of $7,351.

a. Journalize the entries to record the following:
1. Issued the installment note for cash on the first day of the fiscal year.
2. Paid the first annual payment on the note.

b. Explain how the notes payable would be reported on the balance sheet at the end of the first year.


Answer:

a. 1. Cash 50,000
Notes Payable 50,000
2.
 Interest Expense* 2,500
Notes Payable 7,351
Cash
* $50,000 × 0.05

b. Notes payable are reported as liabilities on the balance sheet. The portion of the note payable that is due within one year is reported as a current liability. The remaining portion of the note payable that is not due within one year is reported as a long-term liability. For this company, the current and noncurrent portions of the note payable would be reported as follows:



Current liabilities:
Notes payable*……………………………………………………………………… $ 7,719
* The principal repayment portion of the next installment payment. See computation below.
Noncurrent liabilities:
Notes payable**…………………………………………………………………… $34,930
** Original note payable…………………………………………………………… $50,000
Less principal repayment from year 1……………………………………… 7,351
Note payable balance at the end of year 1………………………………… $42,649
Annual payment on note……………………………………………………… $ 9,851
Second year interest payment ($42,649 × 0.05)…………………………… 2,132
Principal repayment portion of next installment………………………… $ 7,719
Note payable balance at the end of year 1………………………………… $42,649
Current portion of note payable (due within one year)………………… 7,719
Noncurrent portion of note payable………………………………………… $34,930

Robbins Corp. produces and sells wind-energy-driven engines. To finance its operations

Robbins Corp. produces and sells wind-energy-driven engines. To finance its operations, Robbins Corp. issued $30,000,000 of 20-year, 10% callable bonds on March 1, 2014, with interest payable on March 1 and September 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions:

2014

Mar. 1. Issued the bonds for cash at their face amount.

Sept. 1. Paid the interest on the bonds.

2020

Sept. 1. Called the bond issue at 98, the rate provided in the bond indenture.
(Omit entry for payment of interest.)


Answer:

2014
Mar. 1 Cash 30,000,000
Bonds Payable 30,000,000
Sept. 1 Interest Expense 1,500,000
Cash 1,500,000
2020
Sept. 1 Bonds Payable 30,000,000
Gain on Redemption of Bonds 600,000
Cash* 29,400,000
* $30,000,000 × 0.98

Polders Corp., a wholesaler of office equipment, issued $40,000,000 of 10-year, 8% callable bonds on April 1, 2014

Polders Corp., a wholesaler of office equipment, issued $40,000,000 of 10-year, 8% callable bonds on April 1, 2014, with interest payable on April 1 and October 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions:

2014

Apr. 1. Issued the bonds for cash at their face amount.

Oct. 1. Paid the interest on the bonds.

2018

Oct. 1. Called the bond issue at 104, the rate provided in the bond indenture. (Omit entry for payment of interest.)


Answer:

2014
Apr. 1 Cash 40,000,000
Bonds Payable 40,000,000
Oct. 1 Interest Expense 1,600,000
Cash 1,600,000
2018
Oct. 1 Bonds Payable 40,000,000
Loss on Redemption of Bonds 1,600,000
Cash* 41,600,000
* $40,000,000 × 1.04

Yang Corporation wholesales repair products to equipment manufacturers. On May 1, 2014, Yang Corporation

Yang Corporation wholesales repair products to equipment manufacturers. On May 1, 2014, Yang Corporation issued $20,000,000 of 10-year, 9% bonds at a market (effective) interest rate of 7%, receiving cash of $22,842,560. Interest is payable semiannually on May 1 and November 1. Journalize the entries to record the following:

a. Issuance of bonds on May 1, 2014.

b. First interest payment on November 1, 2014, and amortization of bond premium for six months, using the straight-line method. (Round to the nearest dollar.)

c. Explain why the company was able to issue the bonds for $22,842,560 rather than for the face amount of $20,000,000.


Answer:

a. Cash 22,842,560
Premium on Bonds Payable 2,842,560
Bonds Payable 20,000,000
b. Interest Expense 757,872
Premium on Bonds Payable* 142,128
Cash** 900,000

b. Annual interest paid………………………………………………………………… $ 960,000
Plus discount amortized………………………………………………………… 149,546
Interest expense for first year…………………………………………………… $1,109,546
c. The bonds sell for less than their face amount because the market rate of
interest is greater than the contract rate of interest. Investors are not willing to
pay the full face amount for bonds that pay a lower contract rate of interest than
the rate they could earn on similar bonds (market rate).
* $2,842,560 ÷ 20 semiannual payments
** $20,000,000 × 9% × 6/12


c. The bonds sell for more than their face amount because the market rate of interest is less than the contract rate of interest. Investors are willing to pay more for bonds that pay a higher rate of interest (contract rate) than the rate they could earn on similar bonds (market rate).