Advantages and Disadvantages of Communication Technology

CHAPTER 15 Long-Term Liabilities ANSWERS TO QUESTIONS 1. (a) Long-term liabilities are obligations that are expected to be paid after one year. Examples include bonds, long-term notes, and lease obligations. (b) Bonds are a form of interest-bearing notes payable used by corporations, universities, and governmental agencies. 2. (a) The major advantages are: (1) Stockholder control is not affected—bondholders do not have voting rights, so current stockholders retain full control of the company. (2) Tax savings result—bond interest is deductible for tax purposes; dividends on stock are not. 3) Earnings per share may be higher—although bond interest expense will reduce net income, earnings per share on common stock will often be higher under bond financing because no additional shares of common stock are issued. (b) The major disadvantages in using bonds are that interest must be paid on a periodic basis and the principal (face value) of the bonds must be paid at maturity. 3. (a) Secured bonds have specific assets of the issuer pledged as collateral. In contrast, unsecured bonds are issued against the general credit of the borrower. These bonds are called debenture bonds. (b) Term bonds mature at a single specified future date.

In contrast, serial bonds mature in installments. (c) Registered bonds are issued in the name of the owner. In contrast, bearer (coupon) bonds are not registered. Holders of bearer bonds must send in coupons to receive interest payments. (d) Convertible bonds may be converted into common stock at the bondholders’ option. Callable bonds are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer. 4. (a) Face value is the amount of principal due at the maturity date. (b) The contractual interest rate is the rate used to determine the amount of cash interest the borrower pays and the investor receives.

This rate is also called the stated interest rate because it is the rate stated on the bonds. (c) A bond indenture is a legal document that sets forth the terms of the bond issue. (d) A bond certificate is a legal document that indicates the name of the issuer, the face value of the bonds, the contractual interest rate and maturity date of the bonds. 5. 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. 6. Less than.

Investors are required to pay more than the face value; therefore, the market interest rate is less than the contractual rate. 7. $28,000. $800,000 X 7% X 1/2 year = $28,000. Copyright © 2010 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 15-1 Questions Chapter 15 (Continued) *8. $860,000. The balance of the Bonds Payable account minus the balance of the Discount on Bonds Payable account (or plus the balance of the Premium on Bonds Payable account) equals the carrying value of the bonds. *9. Debits: Credits:

Bonds Payable (for the face value) and Premium on Bonds Payable (for the unamortized balance). Cash (for 97% of the face value) and Gain on Bond Redemption (for the difference between the cash paid and the bonds’ carrying value). *10. A convertible bond permits bondholders to convert it into common stock at the option of the bondholders. (a) For bondholders, the conversion option gives an opportunity to benefit if the market price of the common stock increases substantially. (b) For the issuer, convertible bonds usually have a higher selling price and a lower rate of interest than comparable debt securities without the conversion option. 11. 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. *12. (a) A lease agreement is a contract in which the lessor gives the lessee the right to use an asset for a specified period in return for one or more periodic rental payments. The lessor is the owner of the property and the lessee is the renter or tenant. (b) The two most common types of leases are operating leases and capital leases. c) In an operating lease, the property is rented by the lessee and the lessor retains all ownership risks and responsibilities. A capital lease transfers substantially all the benefits and risks of ownership from the lessor to the lessee, so that the lease is in effect a purchase of the property. *13. This lease would be reported as an operating lease. In an operating lease, each payment is debited to Rent Expense. Neither a leased asset nor a lease liability is capitalized. *14. In a capital lease agreement, the lessee records the present value of the lease payments as an asset and a liability.

Therefore, Rondelli Company would debit Leased Asset-Equipment for $186,300 and credit Lease Liability for the same amount. *15. The nature and the amount of each long-term liability should be presented in the balance sheet 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. *16. 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. When the difference between the straight-line method of amortization and the effective interest method is material, GAAP requires the use of the effective interest method. *17. 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 15-2 Copyright © 2010 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) Questions Chapter 15 (Continued) 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. *18. 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. *19. 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. *20. $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 2010. 21. PepsiCo redeemed (paid) $579 million of long-term debt. Copyright © 2010 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 15-3 SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 15-1 Issue Stock Outstanding shares (b) Earnings per share (a) ? (b) $700,000 0 700,000 210,000 $490,000 $700,000 60,000 540,000 162,000 $378,000 700,000 $0. 70 Income before interest and taxes Interest ($2,000,000 X 8%) Income before income taxes Income tax expense (30%) Net income (a) Issue Bond 500,000 $0. 76 Net income is higher if stock is used. However, earnings per share is lower than earnings per share if bonds are used because of the additional shares of stock that are outstanding. BRIEF EXERCISE 15-2 (a) Jan. 1 (b) July 1 (c) Dec. 31 15-4 Cash ................................................. Bonds Payable (3,000 X $1,000) ................... 3,000,000 Bond Interest Expense ................... Cash ($3,000,000 X 8% X 1/2)....... 20,000 Bond Interest Expense ................... Bond Interest Payable ($3,000,000 X 8% X 1/2)....... 120,000 Copyright © 2010 John Wiley & Sons, Inc. 3,000,000 120,000 Weygandt, Accounting Principles, 9/e, Solutions Manual 120,000 (For Instructor Use Only) BRIEF EXERCISE 15-3 (a) Jan. 1 (b) Jan. 1 Cash ($2,000,000 X . 97)................... Discount on Bonds Payable........... Bonds Payable ......................... 1,940,000 60,000 Cash ($2,000,000 X 1. 04)................. Bonds Payable ......................... Premium on Bonds Payable ..... 2,080,000 2,000,000 2,000,000 80,000 BRIEF EXERCISE 15-4 1. 2. 3. Jan. 1 July 1

Sept. 1 Cash (1,000 X $1,000)...................... Bonds Payable ......................... 1,000,000 Cash ($800,000 X 1. 02).................... Bonds Payable ......................... Premium on Bonds Payable ..... 816,000 Cash ($200,000 X . 98) ...................... Discount on Bonds Payable........... Bonds Payable ......................... 196,000 4,000 1,000,000 800,000 16,000 200,000 BRIEF EXERCISE 15-5 Bonds Payable.......................................................... Loss on Bond Redemption ($1,010,000 – $940,000) ........................................ Discount on Bonds Payable ............................

Cash ($1,000,000 X 101%) ................................ Copyright © 2010 John Wiley & Sons, Inc. 1,000,000 Weygandt, Accounting Principles, 9/e, Solutions Manual 70,000 60,000 1,010,000 (For Instructor Use Only) 15-5 BRIEF EXERCISE 15-6 (A) Semiannual Interest Period Issue Date 1 Dec. 31 June 30 Cash Payment $48,145 (B) Interest Expense (D) X 5% $30,000 (C) Reduction of Principal (A) – (B) (D) Principal Balance (D) – (C) $18,145 $600,000 581,855 Cash ............................................................. Mortgage Notes Payable..................... 600,000 Interest Expense .........................................

Mortgage Notes Payable ............................ Cash...................................................... 30,000 18,145 600,000 48,145 BRIEF EXERCISE 15-7 1. 2. Rent Expense ......................................................... Cash................................................................. 80,000 Leased Asset—Building ........................................ Lease Liability................................................. 700,000 80,000 700,000 BRIEF EXERCISE 15-8 Long-term liabilities Bonds payable, due 2012 ...................................... Less: Discount on bonds payable .......................

Notes payable, due 2015........................................ Lease liability.......................................................... Total long-term liabilities ............................... 15-6 Copyright © 2010 John Wiley & Sons, Inc. $500,000 45,000 $455,000 80,000 70,000 $605,000 Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) *BRIEF EXERCISE 15-9 (b) i = 10% ? $10,000 0 1 2 3 4 5 6 7 8 Discount rate from Table 15 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). (b) = 8% ? 0 $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 1 2 3 4 5 6 Discount rate from Table 15 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 15-10 (a) Interest Expense ..................................................... Discount on Bonds Payable........................... Cash ................................................................. 46,884 1,884 45,000 (b) Interest expense is greater than interest paid because the bonds sold at a discount which must be amortized over the life of the bonds.

The bonds sold at a discount because investors demanded a market interest rate higher than the contractual interest rate. (c) Interest expense increases each period because the bond carrying value increases each period. As the market interest rate is applied to this bond carrying amount, interest expense will increase. Copyright © 2010 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 15-7 *BRIEF EXERCISE 15-11 (a) Jan. 1 (b) July 1 Cash (. 96 X $5,000,000) ................... Discount on Bonds Payable ........... Bonds Payable ......................... ,800,000 200,000 Bond Interest Expense .................... Discount on Bonds Payable ($200,000 ? 20) ...................... Cash ($5,000,000 X 9% X 1/2) ........ 235,000 5,000,000 10,000 225,000 *BRIEF EXERCISE 15-12 (a) Cash (1. 02 X $3,000,000)................................... Bonds Payable........................................... Premium on Bonds Payable ..................... 3,060,000 (b) Bond Interest Expense ..................................... Premium on Bonds Payable ($60,000 ? 10)................................................. Cash ($3,000,000 X 10% X 1/2) ................. 144,000 15-8

Copyright © 2010 John Wiley & Sons, Inc. 3,000,000 60,000 6,000 Weygandt, Accounting Principles, 9/e, Solutions Manual 150,000 (For Instructor Use Only) SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 15-1 1. 2. 3. 4. 5. False. Mortgage bonds and sinking fund bonds are both examples of secured bonds. False. Convertible bonds can be converted into common stock 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! 15-2 (a) Cash ........................................................................ Bonds Payable ...............................................

Premium on Bonds Payable.......................... (To record sale of bonds at a premium) 312,000 300,000 12,000 (b) Long-term liabilities Bonds payable................................................ Plus: Premium on bonds payable ............... $300,000 12,000 $312,000 DO IT! 15-3 Loss on Bond Redemption........................................... Bonds Payable............................................................... Discount on Bonds Payable ................................. Cash ........................................................................ (To record redemption of bonds at 99)

Copyright © 2010 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual 6,000 400,000 10,000 396,000 (For Instructor Use Only) 15-9 DO IT! 15-4 Cash ................................................................................ Mortgage Notes Payable........................................ (To record mortgage loan) Interest Expense ............................................................ Mortgage Notes Payable ............................................... Cash ........................................................................ (To record semiannual payment on mortgage) 50,000 350,000 10,500* 7,357 17,857 *Interest expense = $350,000 X 6% X 6/12 DO IT! 15-5 (a) Leased Asset—Equipment ....................................... Lease Liability.................................................... (To record leased asset and lease liability) 192,000 192,000 (b) The debt to total assets ratio = $1,100,000 ? $1,800,000 = 61%. This ratio means that 61% of the total assets were provided by creditors. The higher the percentage of debt to total assets, the greater the risk that the company may be unable to meet its maturing obligations. 15-10 Copyright © 2010 John Wiley & Sons, Inc.

Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) SOLUTIONS TO EXERCISES EXERCISE 15-1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. True. True. False. When seeking long-term financing, an advantage of issuing bonds over issuing common stock is that tax savings result. True. False. Unsecured bonds are also known as debenture bonds. False. Bonds that mature in installments are called serial bonds. True. True. True. True. EXERCISE 15-2 Plan One Issue Stock 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 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 15-3 (a) Jan. 1 (b) July 1 (c) Dec. 31 Cash........................................................ Bonds Payable ............................... 500,000 Bond Interest Expense ......................... Cash ($500,000 X 10% X 1/2)......... 25,000 Bond Interest Expense ......................... Bond Interest Payable ................... 25,000 Copyright © 2010 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual 500,000 25,000 25,000 For Instructor Use Only) 15-11 EXERCISE 15-4 (a) Jan. 1 (b) July 1 (c) Dec. 31 Cash ........................................................ Bonds Payable ............................... 300,000 Bond Interest Expense .......................... Cash ($300,000 X 8% X 1/2) ........... 12,000 Bond Interest Expense .......................... Bond Interest Payable ................... 12,000 300,000 12,000 12,000 EXERCISE 15-5 (a) Jan. 1 2010 Cash....................................................... Bonds Payable .............................. 400,000 400,000 (b) July 1 Bond Interest Expense.........................

Cash ($400,000 X 9% X 1/2).......... 18,000 Bond Interest Expense......................... Bond Interest Payable .................. 18,000 18,000 (c) Dec. 31 (d) Jan. 15-12 1 2020 Bonds Payable...................................... Cash ............................................... Copyright © 2010 John Wiley & Sons, Inc. 18,000 400,000 Weygandt, Accounting Principles, 9/e, Solutions Manual 400,000 (For Instructor Use Only) EXERCISE 15-6 At 100 (a) (1) Cash .............................................................. 1,000,000 Bonds Payable....................................... 1,000,000 At 98 (2)

Cash .............................................................. Discount on Bonds Payable ....................... Bonds Payable....................................... 980,000 20,000 1,000,000 At 103 (3) Cash .............................................................. 1,030,000 Bonds Payable....................................... 1,000,000 Premium on Bonds Payable................. 30,000 Retirement of bonds at maturity (b) Bonds Payable ............................................ Cash....................................................... 1,000,000 1,000,000 Retirement of bonds before maturity at 98 (c)

Bonds Payable ............................................. 1,000,000 Premium on Bonds Payable........................ 9,000 Cash........................................................ Gain on Bond Redemption ................... 980,000 29,000 Conversion of bonds into common stock (d) Bonds Payable ............................................ Common Stock ..................................... Paid-in Capital in Excess of Par Value.... Copyright © 2010 John Wiley & Sons, Inc. 1,000,000 Weygandt, Accounting Principles, 9/e, Solutions Manual 300,000 700,000 (For Instructor Use Only) 15-13 EXERCISE 15-7 (a) (1) 2) Cash................................................................. Discount on Bonds Payable .......................... Bonds Payable ......................................... 485,000 15,000 500,000 Semiannual interest payments ($20,000* X 10) ............................................ Plus: Bond discount...................................... Total cost of borrowing.................................. $200,000 15,000 $215,000 *($500,000 X . 08 X 6/12) OR Principal at maturity ....................................... Semiannual interest payments ($20,000 X 10)..............................................

Cash to be paid to bondholders.................... Cash received from bondholders.................. Total cost of borrowing.................................. (b) (1) (2) Cash................................................................. Bonds Payable ......................................... Premium on Bonds Payable ................... $500,000 200,000 700,000 485,000 $215,000 525,000 Semiannual interest payments ($20,000 X 10).............................................. Less: Bond Premium..................................... Total cost of borrowing.................................. 500,000 25,000 $200,000 25,000 $175,000

OR Principal at maturity ....................................... Semiannual interest payments ($20,000 X 10).............................................. Cash to be paid to bondholders.................... Cash received from bondholders.................. Total cost of borrowing.................................. 15-14 Copyright © 2010 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual $500,000 200,000 700,000 525,000 $175,000 (For Instructor Use Only) EXERCISE 15-8 (a) Jan. 1 (b) Jan 1 (c) July 1 Bond Interest Payable........................... Cash................................................ 2,000 Bonds Payable....................................... Loss on Bond Redemption................... Cash ($600,000 X 1. 04) .................. 600,000 24,000 Bond Interest Expense ......................... Cash ($1,000,000 X 9% X 1/2)........ 45,000 72,000 624,000 45,000 EXERCISE 15-9 1. 2. 3. June 30 June 30 Dec. 31 Bonds Payable ..................................... Loss on Bond Redemption ($132,600 – $117,500)....................... Discount on Bonds Payable ($130,000 – $117,500) ............... Cash ($130,000 X 102%)............... 130,000 Bonds Payable .....................................

Premium on Bonds Payable................ Gain on Bond Redemption ($151,000 – $147,000) ............... Cash ($150,000 X 98%)................. 150,000 1,000 Bonds Payable ..................................... Common Stock ($5 X 20* X 30)........................... Paid-in Capital in Excess of Par Value ................................... 20,000 15,100 12,500 132,600 4,000 147,000 3,000 17,000 *($20,000 ? $1,000) Note: As per the textbook, the market value of the stock is ignored in the conversion. Copyright © 2010 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 5-15 EXERCISE 15-10 Dec. 31 June 30 Dec. 31 2010 Issuance of Note Cash .............................................................. Mortgage Notes Payable...................... 2011 First Installment Payment Interest Expense ($240,000 X 10% X 6/12) ........................... Mortgage Notes Payable ............................. Cash....................................................... Second Installment Payment Interest Expense [($240,000 – $8,000) X 10% X 6/12] ......... Mortgage Notes Payable ............................. Cash....................................................... 240,000 240,000 12,000 ,000 20,000 11,600 8,400 20,000 EXERCISE 15-11 (a) January 1, 2010 Cash ....................................................................... Mortgage Notes Payable ............................. 300,000 300,000 June 30, 2010 Interest Expense ($300,000 X 8% X 6/12)...................................... Mortgage Notes Payable ...................................... Cash .............................................................. 12,000 8,000 20,000 December 31, 2010 Interest Expense ($292,000 X 8% X 6/12)...................................... Mortgage Notes Payable ......................................

Cash .............................................................. 15-16 Copyright © 2010 John Wiley & Sons, Inc. 11,680 8,320 Weygandt, Accounting Principles, 9/e, Solutions Manual 20,000 (For Instructor Use Only) EXERCISE 15-11 (Continued) (b) Current: $17,652 [$20,000 – ($283,680 X 8% X 6/12)] + [$20,000 – ($275,027 X 8% X 6/12)] Long-term: $266,028 [($300,000 – $8,000 – $8,320) – $17,652] EXERCISE 15-12 (a) Car Rental Expense............................... Cash................................................ (b) Jan. 1 500 Leased Asset-Equipment ..................... Lease Liability ................................ 4,606 500 74,606 EXERCISE 15-13 Long-term liabilities Bonds payable, due 2015 ............................... $180,000 Add: Premium on bonds payable ................. 32,000 Lease liability .................................................. Total long-term liabilities ........................ $212,000 89,500 $301,500 Note: Bond Interest Payable is a current liability EXERCISE 15-14 (a) Total assets ............................................................. Less: Total liabilities ............................................. Total stockholders’ equity ..................................... (b) Debt to total assets ratio $1,000,000 620,000 $ 380,000 Total liabilities $620,000 = = 62% Total assets $1,000,000 (c) Times interest earned ratio = Net income + Income tax expense + Interest expense Interest expense = Copyright © 2010 John Wiley & Sons, Inc. $150,000 + $100,000 + $7,000 = 36. 7 times $7,000 Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 15-17 *EXERCISE 15-15 Present value of principal ($200,000 X . 61391) ........... Present value of interest ($8,000 X 7. 72173) ............... Market price of bonds.................................................... $122,782 61,774 $184,556 *EXERCISE 15-16 a) Jan. 1 (b) July 1 (c) Dec. 31 15-18 Cash ....................................................... Discount on Bonds Payable ................ Bonds Payable .............................. Bond Interest Expense ($562,613 X 5%)................................. Discount on Bonds Payable......... Cash ($600,000 X 9% X 1/2) .......... Bond Interest Expense [($562,613 + $1,131) X 5%] ............... Discount on Bonds Payable......... Bond Interest Payable .................. Copyright © 2010 John Wiley & Sons, Inc. 562,613 37,387 600,000 28,131 1,131 27,000 28,187 Weygandt, Accounting Principles, 9/e, Solutions Manual ,187 27,000 (For Instructor Use Only) Weygandt, Accounting Principles, 9/e, Solutions Manual *EXERCISE 15-16 (Continued) Copyright © 2010 John Wiley & Sons, Inc. (b), (c) Semiannual Interest Periods Issue date 1 2 (A) Interest to Be Paid (4. 5% X $600,000) 27,000 27,000 (B) Interest Expense to Be Recorded (5% X Preceding Bond Carrying Value) (E X . 05) 28,131 28,187 (C) Discount Amortization (B) – (A) 1,131 1,187 (D) Unamortized (E) Discount Bond (D) – (C) Carrying Value 37,387 36,256 35,069 562,613 563,744 564,931 (For Instructor Use Only) 15-19 *EXERCISE 15-17 (a) Jan. (b) July 1 1 (c) Dec. 31 15-20

Cash ......................................................... Premium on Bonds Payable........... Bonds Payable ................................ Bond Interest Expense ($318,694 X 5%)................................... Premium on Bonds Payable .................. Cash ($300,000 X 11% X 1/2)................ Bond Interest Expense [($318,694 – $565) X 5%] .................... Premium on Bonds Payable .................. Bond Interest Payable .................... Copyright © 2010 John Wiley & Sons, Inc. 318,694 18,694 300,000 15,935 565 16,500 15,906 594 Weygandt, Accounting Principles, 9/e, Solutions Manual 6,500 (For Instructor Use Only) Weygandt, Accounting Principles, 9/e, Solutions Manual (B) Interest Expense (A) to Be Recorded (C) (D) Semiannual Interest to (5. 0% X Preceding Premium Unamortized (E) Interest Be Paid Bond Carrying Value) Amortization Premium Bond Periods (5. 5% X $300,000) (E X . 05) (A) – (B) (D) – (C) Carrying Value Issue date 1 2 16,500 16,500 15,935 15,906 565 594 18,694 18,129 17,535 318,694 318,129 317,535 *EXERCISE 15-17 (Continued) Copyright © 2010 John Wiley & Sons, Inc. (b), (c) (For Instructor Use Only) 15-21 *EXERCISE 15-18 (a) Jan. 1 (b) July 1 (c) Dec. 31 (d) Jan. 1

Cash ($400,000 X 103%) ........................ Premium on Bonds Payable.......... Bonds Payable ............................... 412,000 Bond Interest Expense .......................... Premium on Bonds Payable ($12,000 X 1/40) .................................. Cash ($400,000 X 9% X 1/2) ........... 17,700 Bond Interest Expense......................... Premium on Bonds Payable ................ Bond Interest Payable .................. 17,700 300 2030 Bonds Payable...................................... Cash ............................................... 12,000 400,000 300 18,000 18,000 400,000 400,000 *EXERCISE 15-19 (a) Dec. 1 (b) June 30 (c) Dec. 31 (d) Dec. 31 15-22 2009 Cash....................................................... Discount on Bonds Payable ................ Bonds Payable .............................. 2010 Bond Interest Expense......................... Discount on Bonds Payable ($70,000 ? 20) ............................ Cash ($800,000 X 11% X 1/2)........ 2010 Bond Interest Expense......................... Discount on Bonds Payable ........ Cash ($800,000 X 11% X 1/2)........ 2019 Bonds Payable...................................... Cash ............................................... Copyright © 2010 John Wiley & Sons, Inc. 30,000 70,000 800,000 47,500 3,500 44,000 47,500 3,500 44,000 800,000 Weygandt, Accounting Principles, 9/e, Solutions Manual 800,000 (For Instructor Use Only) SOLUTIONS TO PROBLEMS PROBLEM 15-1A (a) May 1 (b) Dec. 31 2010 Cash..................................................... Bonds Payable ............................ Bond Interest Expense ...................... Bond Interest Payable ($600,000 X 9% X 2/12)............ 600,000 600,000 9,000 9,000 (c) Current Liabilities Bonds Interest Payable................................ $ Long-term Liabilities Bonds Payable, due 2015 ............................ (d) May 1 e) Nov. 1 (f) Nov. 1 2011 Bond Interest Payable........................ Bond Interest Expense ($600,000 X 9% X 4/12) ..................... Cash............................................. 9,000 $600,000 9,000 18,000 27,000 Bond Interest Expense ...................... Cash ($600,000 X 9% X 1/2)........ 27,000 Bonds Payable.................................... Loss on Bond Redemption................ Cash ($600,000 X 1. 02) ............... 600,000 12,000 Copyright © 2010 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual 27,000 612,000 (For Instructor Use Only) 15-23 PROBLEM 15-2A (a) Jan. 2010 Cash ($500,000 X 1. 04) ...................... Bonds Payable ........................... Premium on Bonds Payable ....... 520,000 500,000 20,000 (b) Current Liabilities Bond interest payable ($500,000 X 10% X 1/2) ............................ Long-term Liabilities Bonds payable, due 2020............................ Add: Premium on bonds payable ............. (c) Jan. 1 2012 Bonds Payable ................................... Premium on Bonds Payable ............. Loss on Bond Redemption ............... Cash ($500,000 X 1. 05) ...................... $ 25,000 $500,000 18,000 $518,000 500,000** 16,000** 9,000* 25,000 *($525,000 – $516,000) 15-24 Copyright © 2010 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) PROBLEM 15-3A (a) Semiannual Interest Period Cash Payment Issue Date 1 2 3 4 (b) Dec. 31 June 30 Dec. 31 $29,433 29,433 29,433 29,433 Interest Expense $16,000 15,463 14,904 14,323 Reduction of Principal Principal Balance $13,433 13,970 14,529 15,110 $400,000 386,567 372,597 358,068 342,958 2009 Cash ....................................................... Mortgage Notes Payable............... 400,000 2010 Interest Expense ...................................

Mortgage Notes Payable ...................... Cash................................................ 16,000 13,433 Interest Expense ................................... Mortgage Notes Payable ...................... Cash................................................ (c) 400,000 29,433 15,463 13,970 29,433 12/31/10 Current Liabilities Current portion of mortgage notes payable $ 29,639** Long-term Liabilities Mortgage notes payable, due 2019 $342,958** **($14,529 + $15,110) **($372,597 – $14,529 – $15,110) Copyright © 2010 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 9/e, Solutions Manual (For Instructor Use Only) 15-25