online.sfsu.eduonline.sfsu.edu/sjhsieh/Chapter 14 Home… · Web view · 2009-02-17Bonds payable (face amount) $ ... the book value of the bonds was the initial issue price, $739,814,813

Exercise 14-1The DD Corp. bonds are appropriately priced to yield the market rate of

interest. The GG Corp. bonds are slightly underpriced at the stated price and therefore are the most attractive. The BB Corp. bonds are slightly overpriced and are the least attractive. Bonds are priced to yield the market rate, 10% in this case. When this rate is used to price the bonds, we get the prices shown below. Presumably, the market rate changed since the underwriters priced two of the bond issues.

BB Corp. bonds:Interest $ 5,500,000 ¥ x 17.15909 * = $ 94,374,995Principal $100,000,000 x 0.14205 ** = 14,205,000 Present value (price) of the bonds $108,579,995¥ [11÷2] % x $100,000,000* present value of an ordinary annuity of $1: n=40, i=5% (Table 4)** present value of $1: n=40, i=5% (Table 2)

DD Corp. bonds:Interest $ 5,000,000 ¥ x 17.15909 * = $ 85,795,450Principal $100,000,000 x 0.14205 ** = 14,205,000 Present value (price) of the bonds $100,000,450

Note: The result differs from $100,000,000 only because the present value factors in any present value table are rounded. Because the stated rate and the market rate are the same, the true present value is $100,000,000.

¥ [10÷2] % x $100,000,000* present value of an ordinary annuity of $1: n=40, i=5% (Table 4)** present value of $1: n=40, i=5% (Table 2)

GG Corp. bonds:Interest $ 4,500,000 ¥ x 17.15909 * = $77,215,905Principal $100,000,000 x 0.14205 ** = 14,205,000 Present value (price) of the bonds $91,420,905¥ [9÷2] % x $100,000,000* present value of an ordinary annuity of $1: n=40, i=5% (Table 4)** present value of $1: n=40, i=5% (Table 2)

Exercise 14-51. Liability at December 31, 2009

Bonds payable (face amount)...................................... $320,000,000Less: discount........................................................... 36,705,280Initial balance, January 1, 2009................................ $283,294,720June 30, 2009 discount amortization........................ 997,683*Dec. 31, 2009 discount amortization........................ 1,057,544**December 31, 2009 net liability............................... $285,349,947

2. Interest expense for year ended December 31, 2009

June 30, 2009 interest expense................................. $16,997,683*Dec. 31, 2009 interest expense................................. 17,057,544**Interest expense for 2009......................................... $34,055,227

3. Statement of cash flows for year ended December 31, 2009

Myriad would report the cash inflow of $283,294,720*** from the sale of the bonds as a cash inflow from financing activities in its statement of cash flows.

The $32,000,000 ($16,000,000* + 16,000,000**) cash interest paid is cash outflow from operating activities because interest is an income statement (operating) item.

Exercise 14-5 (concluded)

Calculations:

January 1, 2009***Cash (price given)....................................................... 283,294,720Discount on bonds (difference)................................... 36,705,280

Bonds payable (face amount).................................. 320,000,000

June 30, 2009*Interest expense (6% x $283,294,720).............................. 16,997,683

Discount on bonds payable (difference)................. 997,683Cash (5% x $320,000,000)........................................ 16,000,000

December 31, 2009**Interest expense (6% x [$283,294,720 + 997,683]).......... 17,057,544

Discount on bonds payable (difference)................. 1,057,544Cash (5% x $320,000,000)........................................ 16,000,000

Exercise 14-14Requirement 1

At January 1, 2009, the book value of the bonds was the initial issue price, $739,814,813. The liability, though, was increased when Federal recorded interest during 2009:

June 30, 2009

Interest expense (6% x $739,814,813)........................ 44,388,889Discount on bonds payable (difference)............ 388,889Cash (5.5% x $800,000,000)................................ 44,000,000

December 31, 2009

Interest expense (6% x [$739,814,813 + 388,889]).... 44,412,222Discount on bonds payable (difference)............ 412,222Cash (5.5% x $800,000,000)................................ 44,000,000

Reducing the discount increases the book value of the bonds:

Jan.1, 2009, book value $739,814,813Increase from discount amortization ($388,889 + 412,222) 801,111December 31, 2009, book value (amortized initial amount) $740,615,924

Comparing the amortized initial amount at December 31, 2009, with the fair value on that date provides the Fair value adjustment balance needed:

December 31, 2009, book value (amortized initial amount) $740,615,924December 31, 2009, fair value 730,000,000

Fair value adjustment balance needed: debit/(credit) $ 10,615,924

Federal would record the $10,615,924 as a gain in the 2009 income statement:

December 31, 2009Fair value adjustment 10,615,924

Unrealized holding gain 10,615,924

Note: A decrease in the value of an asset is a loss; a decrease in the value of a liability is a gain.

Exercise 14-14 (continued)

In the balance sheet, the bonds are reported among long-term liabilities at their $730,000,000 fair value:

Bonds payable $800,000,000 Less: Discount on bonds payable (59,384,076 )

December 31, 2009, book value (amortized initial amount) $740,615,924 Less: Fair value adjustment (10,615,924 )

December 31, 2009, fair value $730,000,000

Requirement 2

If the fair value at December 31, 2010, is $736,000,000 a year later, Federal needs to compare that amount with the amortized initial measurement on that date. That amount was increased when Federal recorded interest during 2010:

June 30, 2010Interest expense (6% x [$739,814,813 + 388,889 + 412,222]) 44,436,955

Discount on bonds payable (difference).................... 436,955Cash (5.5% x $800,000,000)........................................ 44,000,000

December 31, 2010Interest expense (6% x [$739,814,813 + 388,889 + 412,222 + 436,955]) 44,463,173

Discount on bonds payable (difference).................... 463,173Cash (5.5% x $800,000,000)........................................44,000,000

Reducing the discount increases the book value of the bonds:

December 31, 2009, book value (amortized initial amount) $740,615,924Increase from discount amortization ($436,955 + 463,173) 900,128December 31, 2010, book value (amortized initial amount) $741,516,052


Comparing the amortized initial amount at December 31, 2010, with the fair value on that date provides the Fair value adjustment balance needed:

December 31, 2010, book value (amortized initial amount) $741,516,052 December 31, 2010, fair value (736,000,000 ) Fair value adjustment balance needed: debit/(credit) $ 5,516,052

Less: Current fair value adjustment debit/(credit) 10,615,924Change in fair value adjustment $ (5,099,872)

Federal records the $5,099,872 as a loss in the 2010 income statement:

December 31, 2010Unrealized holding loss 5,099,872

Fair value adjustment 5,099,872

Note: An increase in the value of an asset is a gain; an increase in the value of a liability is a loss.

In the balance sheet, the bonds are reported among long-term liabilities at their $736,000,000 fair value:

Bonds payable $800,000,000 Less: Discount on bonds payable (58,483,948 )

December 31, 2010, book value (amortized initial amount) $741,516,052 Less: Fair value adjustment (5,516,052 ) December 31, 2010, fair value $736,000,000

Exercise 14-16Requirement 1

If the bonds are not traded on a market exchange, their fair market value is not readily observable. As a result, the next most preferable way to determine fair value according to SFAS No. 157 is to calculate the fair value as the present value of the remaining cash flows discounted at the current interest rate. At December 31, 18 of the original 20 payments remain. If the current interest rate is 9% (4.5% semi-annually), as we’re assuming now, that present value would be $751,360:

Present Values Interest $ 32,000¥ x 12.15999* = $389,120

Principal $800,000 x 0.45280† = 362,240 Present value of the bonds $751,360

¥ (8% / 2) x $800,000* Present value of an ordinary annuity of $1: n = 18, i = 4.5%. (Table 4)† Present value of $1: n = 18, i = 4.5%. (Table 2)

Requirement 2

June 30, 2009

Interest expense (5% x $700,302) 35,015Discount on bonds payable (difference) 3,015Cash (4% x $800,000) 32,000

Requirement 3

December 31, 2009Interest expense (5% x [$700,302 + 3,015]) 35,166

Discount on bonds payable (difference) 3,166Cash (4% x $800,000) 32,000


Requirement 4

The interest entries increased the book value from $700,302 to $738,483:

$700,302 January 1 book value3,015 June 30 increase

3,166 December 31 increase$706,483 December 31 book value

To increase the book value to $751,360, Essence needs the following entry:

Unrealized holding loss 44,877 Fair value adjustment ($751,360 – $706,483) 44,877

Exercise 14-23

Requirement 1($ in millions)

Limbaugh (Issuer)Cash (104% x $30 million)...................................................... 31.2Discount on bonds payable (difference)................................ 3.6

Bonds payable (face amount)............................................. 30.0Paid-in capital – stock warrants outstanding ($8 x 20 warrants x [$30,000,000 ÷ $1,000] bonds)............... 4.8

Interstate (Investor)Investment in stock warrants ($4.8 million x 20%)................ 0.96Investment in bonds (20% x $30 million)............................... 6.00

Discount on bonds (difference)......................................... 0.72Cash (104% x $30 million x 20%)........................................ 6.24

Requirement 2($ in millions)

Limbaugh (Issuer)Cash (20% x 30,000 bonds x 20 warrants x $60)......................... 7.20Paid-in capital – stock warrants outstanding

($4.8 million x 20%)....................................................... 0.96Common stock (20% x 30,000 x 20 shares x $10 par)............ 1.20Paid-in capital – excess of par (to balance)....................... 6.96

Interstate (Investor)Investment in common stock (to balance)............................ 8.16

Investment in stock warrants ($4.8 million x 20%)............. .96Cash (20% x 30,000 x 20 warrants x $60).............................. 7.20

Problem 14-1Requirement 1

Interest $2,500,000¥ x 15.04630 * = $37,615,750Principal $50,000,000 x 0.09722 ** = 4,861,000 Present value (price) of the bond s $42,476,750¥ 5% x $50,000,000* present value of an ordinary annuity of $1: n=40, i=6% (Table 4)** present value of $1: n=40, i=6% (Table 2)

Cash (price determined above)...................................... 42,476,750Discount on bonds (difference)................................... 7,523,250

Bonds payable (face amount)..................................50,000,000

Requirement 2 Interest $ 2,500,000 x 18.40158 * = $46,003,950Principal $50,000,000 x 0.17193 ** = 8,596,500 Present value (price) of the bonds $54,600,450* present value of an ordinary annuity of $1: n=40, i=4.5% (Table 4)** present value of $1: n=40, i=4.5% (Table 2)

Cash (price determined above)...................................... 54,600,450Premium on bonds (difference)............................... 4,600,450Bonds payable (face amount)..................................50,000,000

Requirement 3 Investment in bonds (face amount).................................. 50,000,000Premium on bond investment .................................. 4,600,450

Cash (price calculated above)....................................54,600,450


Interest $3,600,000¥ x 6.46321 * = $23,267,556Principal $80,000,000 x 0.67684 ** = 54,147,200 Present value (price) of the bonds $77,414,756

¥ 4.5% x $80,000,000* present value of an ordinary annuity of $1: n=8, i=5% (Table 4)** present value of $1: n=8, i=5% (Table 2)

Requirement 2

(a) Cromley

Cash Effective Increase in OutstandingInterest Interest Balance Balance

4.5% x Face Amount 5% x Outstanding Balance Discount Reduction77,414,756

1 3,600,000 .05 (77,414,756) = 3,870,738 270,738 77,685,4942 3,600,000 .05 (77,685,494) = 3,884,275 284,275 77,969,7693 3,600,000 .05 (77,969,769) = 3,898,488 298,488 78,268,2574 3,600,000 .05 (78,268,257) = 3,913,413 313,413 78,581,6705 3,600,000 .05 (78,581,670) = 3,929,084 329,084 78,910,7546 3,600,000 .05 (78,910,754) = 3,945,538 345,538 79,256,2927 3,600,000 .05 (79,256,292) = 3,962,815 362,815 79,619,1078 3,600,000 .05 (79,619,107) = 3,980,893 * 380,893 80,000,000

28,800,000 31,385,244 2,585,244

* rounded.

Problem 14-5 (continued)

(b) Barnwell

Cash Effective Increase in OutstandingInterest Interest Balance Balance

4.5% x Face Amount 5% x Outstanding Balance Discount Reduction77,415

1 3,600 .05 (77,415) = 3,871 271 77,6862 3,600 .05 (77,686) = 3,884 284 77,9703 3,600 .05 (77,970) = 3,899 299 78,2694 3,600 .05 (78,269) = 3,913 313 78,5825 3,600 .05 (78,582) = 3,929 329 78,9116 3,600 .05 (78,911) = 3,946 346 79,2577 3,600 .05 (79,257) = 3,963 363 79,6208 3,600 .05 (79,620) = 3,980 * 380 80,000

28,800 31,385 2,585*rounded

Requirement 3

February 1, 2009 (Cromley)Cash (price determined above)................................. 77,414,756Discount on bonds payable (difference)................ 2,585,244

Bonds payable (face amount).............................80,000,000

February 1, 2009 (Barnwell)Bond investment (face amount)............................. 80,000

Discount on bond investment (difference)......... 2,585Cash (price paid)................................................ 77,415


Requirement 4

July 31, 2009 (Cromley)Interest expense (from schedule) ................................ 3,870,738

Discount on bonds payable (from schedule) ...... 270,738Cash (from schedule) ......................................... 3,600,000

July 31, 2009 (Barnwell)Cash (from schedule).............................................. 3,600Discount on bond investment (from schedule)........ 271

Interest revenue (from schedule)............................. 3,871

December 31, 2009 (Cromley)Interest expense (5/6 x $3,884,275)............................. 3,236,896

Discount on bonds payable (5/6 x $284,275)...... 236,896Interest payable (5/6 x $3,600,000)..................... 3,000,000

December 31, 2009 (Barnwell)Interest receivable (5/6 x $3,600)........................... 3,000Discount on bond investment (5/6 x $284)............ 237

Interest revenue (5/6 x $3,884)............................... 3,237

January 31, 2010 (Cromley)Interest expense (1/6 x $3,884,275)............................. 647,379Interest payable (from adjusting entry above)............. 3,000,000

Discount on bonds payable (1/6 x $284,275)...... 47,379Cash (stated rate x face amount)............................ 3,600,000

January 31, 2010 (Barnwell)Cash (stated rate x face amount)............................... 3,600Discount on bond investment (1/6 x $284)............ 47

Interest receivable (from adjusting entry above). . . 3,000Interest revenue (1/6 x $3,884)............................... 647

Problem 14-5 (concluded)July 31, 2010 (Cromley)Interest expense (from schedule) ................................ 3,898,488

Discount on bonds payable (from schedule) ...... 298,488Cash (from schedule) ......................................... 3,600,000

July 31, 2010 (Barnwell)Cash (from schedule).............................................. 3,600Discount on bond investment (from schedule)........ 299

Interest revenue (from schedule)............................. 3,899

December 31, 2010 (Cromley)Interest expense (5/6 x $3,913,413)............................. 3,261,177

Discount on bonds payable (5/6 x $313,413)...... 261,177Interest payable (5/6 x $3,600,000)..................... 3,000,000

December 31, 2010 (Barnwell)Interest receivable (5/6 x $3,600)........................... 3,000Discount on bond investment (5/6 x $313)............ 261

Interest revenue (5/6 x $3,913)............................... 3,261

January 31, 2011 (Cromley)Interest expense (1/6 x $3,913,413)............................. 652,236*Interest payable (from adjusting entry above)............. 3,000,000

Discount on bonds payable (1/6 x $313,413)...... 52,236*Cash (stated rate x face amount)............................ 3,600,000

January 31, 2011 (Barnwell)Cash (stated rate x face amount)............................... 3,600Discount on bond investment (1/6 x $313)............ 52

Interest receivable (from adjusting entry above). . . 3,000Interest revenue (1/6 x $3,913)............................... 652

*rounded


April 1, 2009 (Western)Cash ($29,300,000 + [1/12 x 12% x $30,000,000])....... 29,600,000Discount on bonds payable ($30 million - $29.3 million) 700,000

Bonds payable (face amount).............................30,000,000Interest payable (1/12 x 12% x $30,000,000)........ 300,000

April 1, 2009 (Stillworth)Bond investment (face amount)............................. 30,000Interest receivable (1/12 x 12% x $30,000).............. 300

Discount on bond investment ($30,000 - $29,300) 700Cash ($29,300 + [1/12 x 12% x $30,000]).............. 29,600

Alternative: Some accountants prefer to credit (debit) interest expense (revenue), rather than interest payable (receivable), when bonds are sold (purchased).

April 1, 2009 (Western)Cash ($29,300,000 + [1/12 x 12% x $30,000,000])...... 29,600,000Discount on bonds payable ($30 million - $29.3 million) 700,000

Bonds payable (face amount).............................30,000,000Interest expense (1/12 x 12% x $30,000,000)....... 300,000

April 1, 2009 (Stillworth)Bond investment (face amount)............................. 30,000Interest revenue (1/12 x 12% x $30,000).................... 300

Discount on bond investment ($30,000 - $29,300) 700Cash ($29,300 + [1/12 x 12% x $30,000]).............. 29,600

If the alternate entries are used, entries at the next interest date would require simply a debit (credit) to interest expense (revenue) for the full interest. The interest accounts would then reflect the same net debit of five months' interest.


Requirement 2

The original maturity of the bonds was 3 years, or 36 months. But since the bonds weren’t sold until one month after they were dated, they are outstanding for only 35 months. Straight-line amortization, then, is $700,000 ÷ 35 months = $20,000 per month for Western (and $700 ÷ 35 months = $20 per month for Stillworth’s investment).

August 31, 2009 (Western)Interest expense ($1,800,000 + 100,000 – 300,000) . . 1,600,000Interest payable (accrued interest from above)........... 300,000

Discount on bonds payable ($20,000 x 5 months) 100,000Cash ($30,000,000 x 12% x 6/12) ......................... 1,800,000

August 31, 2009 (Stillworth)Cash ($30,000 x 12% x 6/12) .................................. 1,800Discount on bond investment ($20 x 5 months) ..... 100

Interest receivable (accrued interest from above). . 300Interest revenue ($1,800 + 100 – 300).................... 1,600

If alternate method of recording accrued interest is used:

August 31, 2009 (Western)Interest expense ($1,800,000 + $100,000) ................. 1,900,000



Interest revenue ($1,800 + $100)............................ 1,900

Problem 14-6 (continued)December 31, 2009 (Western)Interest expense ($1,200,000 + $80,000).................... 1,280,000

Discount on bonds payable ($20,000 x 4 months) 80,000Interest payable ($30,000,000 x 12% x 4/12)........ 1,200,000

December 31, 2009 (Stillworth)Interest receivable ($30,000 x 12% x 4/12).............. 1,200Discount on bond investment ($20 x 4 months)..... 80

Interest revenue ($1,200 + $80).............................. 1,280

February 28, 2010 (Western)Interest expense ($1,800,000 + 40,000 – 1,200,000) . 640,000Interest payable (from adjusting entry).................... 1,200,000


February 28, 2010 (Stillworth)Cash ($30,000 x 12% x 6/12)................................... 1,800Discount on bond investment ($20 x 2 months)..... 40

Interest receivable (from adjusting entry)............ 1,200Interest revenue ($1,800 + 40 – 1,200) .................. 640

August 31, 2010 (Western)Interest expense ($1,800,000 + $120,000)................. 1,920,000




December 31, 2010 (Western)Interest expense ($1,200,000 + $80,000).................... 1,280,000


Problem 14-6 (continued)December 31, 2010 (Stillworth)Interest receivable ($30,000 x 12% x 4/12).............. 1,200Discount on bond investment ($20 x 4 months)..... 80


February 28, 2011 (Western)Interest expense ($1,800,000 + 40,000 – 1,200,000) . 640,000Interest payable (from adjusting entry).................... 1,200,000


February 28, 2011 (Stillworth)Cash ($30,000 x 12% x 6/12)................................... 1,800Discount on bond investment ($20 x 2 months)..... 40


August 31, 2011 (Western)Interest expense ($1,800,000 + $120,000) ................. 1,920,000




December 31, 2011 (Western)Interest expense ($1,200,000 + $80,000).................... 1,280,000


December 31, 2011 (Stillworth)Interest receivable ($30,000 x 12% x 4/12).............. 1,200Discount on bond investment ($20 x 4 months)..... 80


Problem 14-6 (concluded)

February 28, 2012 (Western)Interest expense ($1,800,000 + 40,000 – 1,200,000). 640,000Interest payable (from adjusting entry).................... 1,200,000


Bonds payable .................................................... 30,000,000Cash ................................................................30,000,000

February 28, 2012 (Stillworth)Cash ($30,000 x 12% x 6/12)................................... 1,800Discount on bond investment ($20 x 2 months)...... 40


Cash .................................................................... 30,000Investment in bonds ....................................... 30,000

Problem 14-10Requirement 1 Interest $ 32,000 x 17.15909 = $549,091 Principal $800,000 x 0.14205 = 113,640 $662,731 4% x $800,000 = $32,000

January 1Cash 662,731Discount on bonds payable 137,269

Bonds payable 800,000

Requirement 2

June 30Interest expense (5% x $662,731) 33,137


Requirement 3

December 31Interest expense (5% x [$662,731 + 1,137]) 33,193


Requirement 4

The interest entries increased the book value from $662,731 to $665,061. To increase the book value to $668,000, NFB needed the following entry:

Unrealized holding loss 2,939 Fair value adjustment ($668,000 – 665,061) 2,939


Land ............................................................................. 600,000Notes payable (face amount).......................................600,000

Interest expense (12% x $600,000).................................. 72,000Cash (12% x $600,000)............................................... 72,000

Requirement 2 Office equipment (price given)....................................... 94,643 Discount on notes payable (difference).......................... 5,357

Notes payable (face amount).......................................100,000

The discount rate that “equates” the present value of the debt ($94,643) and its future value ($100,000 + $6,000) is the effective rate of interest:

$94,643 ÷ $106,000 = .8929 – the Table 2 value for n = 1, i = ?

In row 1 of Table 2, the value .8929 is in the 12% column. So, this is the effective interest rate. A financial calculator will produce the same rate.

PROOF:

Interest $6,000¥ x 0.89286 * = $ 5,357Principal $100,000 x 0.89286 ** = 89,286 Present value (price) of the bonds $94,643¥ 6% x $100,000* present value of an ordinary annuity of $1: n=1, i=12% (Table 4)** present value of $1: n=1, i=12% (Table 2)

Interest expense (12% x $94,643).................................... 11,357Discount on note payable (determined above)............. 5,357Cash (6% x $100,000).................................................. 6,000


Not required, but recorded at the same date (may be combined with interest entry):

Note payable (face amount)............................................ 100,000Cash..........................................................................100,000

Requirement 3

$1,000,000 x 2.40183 = $2,401,830installment (from Table 4) presentpayments n=3, i=12% value

Building (implicit price).................................................. 2,401,830Note payable (present value determined above)..............2,401,830

Interest expense (12% x $2,401,830)................................ 288,220Note payable (difference)............................................... 711,780

Cash (given)...............................................................1,000,000


Interest expense (7% x $19,000,000)..................................... 1,330,000Discount on bonds payable (difference)..................... 130,000Cash (6% x $20,000,000).............................................. 1,200,000

Requirement 2

Bonds payable (face amount).......................................... 20,000,000Loss on early extinguishment (to balance)..................... 1,270,000

Discount on bonds payable ($1,000,000 – 130,000)..... 870,000Cash (redemption price)..............................................20,400,000


($ in millions)Convertible Bonds – 1996 issueCash (97.5% x $200 million)........................................................ 195Discount on bonds (difference).................................................. 5

Convertible bonds payable (face amount).............................. 200

Bonds With Warrants – 2000 issueCash (102% x $50 million)........................................................... 51Discount on bonds payable (difference)..................................... 3

Bonds payable (face amount).................................................. 50Paid-in capital – stock warrants outstanding (given)............. 4

Requirement 2 ($ in millions)

Convertible bonds payable (90% x $200 million)....................... 180Discount on bonds payable (90% x $2 million)...................... 1.8Common stock (90% x [200,000 x 40 shares] x $1 par).............. 7.2Paid-in capital – excess of par (to balance)............................ 171.0

Convertible bonds payable (10% x $200 million)....................... 20.0Loss on early extinguishment (to balance)................................. .4

Discount on bonds payable (10% x $2 million)...................... .2Cash (101% x 10% x $200 million)........................................... 20.2


Convertible bonds payable (90% x $200 million)....................... 180Conversion expense (90% x 200,000 bonds x $150)..................... 27

Discount on bonds payable (90% x $2 million)...................... 1.8Common stock (90% x [200,000 x 40 shares] x $1 par).............. 7.2Paid-in capital – excess of par (to balance)............................ 171.0Cash (90% x 200,000 bonds x $150).......................................... 27.0



Convertible bonds payable (90% x $200 million)....................... 180.0Conversion expense (90% x [200,000 x (45 – 40) shares] x $32)................................. 28.8

Discount on bonds payable (90% x $2 million)...................... 1.8Common stock (90% x [200,000 x 45 shares] x $1 par).............. 8.1Paid-in capital – excess of par (to balance)............................ 198.9

Requirement 5

($ in millions)Cash (40% x 50,000 x 40 warrants x $25)....................................... 20.0Paid-in capital – stock warrants outstanding (40% x $4 million)1.6

Common stock (40% x 50,000 x 40 shares x $1 par)................... .8Paid-in capital – excess of par (to balance)............................ 20.8

Requirement 6

Paid-in capital will increase under each of the first two scenarios (Requirements 3 and 4) by $178.2 million. By the third scenario (Requirement 5), paid-in capital will increase by $207 million.


($ in millions)Land.............................................................................. 3

Gain on disposal ...................................................... 3

Note payable................................................................. 20Accrued interest payable.............................................. 2

Land ......................................................................... 16Gain on debt restructuring........................................ 6

Requirement 2

Analysis: Carrying amount: $20 million + $2 million = $22,000,000 Future payments: ($1 million x 4) + $15 million = 19,000,000 Gain to debtor $ 3,000,000

($ in millions)(a) January 1, 2009Accrued interest payable ............................................. 2Note payable *.............................................................. 1

Gain on debt restructuring........................................ 3

* establishes a balance in the note account equal to the total cash payments under the new agreement ($20 million – 1 million = $19 million)

(b) December 31, 2009, 2010, 2011, and 2012 revised “interest” paymentsNote payable................................................................. 1

Cash ......................................................................... 1

Note: No interest expense should be recorded after the restructuring. All subsequent cash payments result in reductions of principal.

(c) December 31, 2012 revised principal paymentNote payable................................................................. 15

Cash ..................................................................................... 15


Requirement 3

Analysis: Carrying amount: $20,000,000 + $2,000,000 = $22,000,000 Future payments: 27,775,000 Interest $ 5,775,000

Calculation of the new effective interest rate:

• $22,000,000 ÷ $27,775,000 = .79208 – the Table 2 value for n = 4, i = ?

• In row 4 of Table 2, the number .79209 is in the 6% column. So, this is the new effective interest rate.

(a) January 1, 2009

[Since the total future cash payments are not less than the carrying amount of the debt, no reduction of the existing debt is necessary and no entry is required at the time of the debt restructuring.]

Amortization Schedule (not required)

Cash Effective Increase in OutstandingDec.31 Interest Interest Balance Balance

6% x Outstanding Balance22,000,000

2009 0 .06 (22,000,000) = 1,320,000 1,320,000 23,320,0002010 0 .06 (23,320,000) = 1,399,200 1,399,200 24,719,2002011 0 .06 (24,719,200) = 1,483,152 1,483,152 26,202,3522012 0 .06 (26,202,352) = 1,572,648* 1,572,648 27,775,000

0 5,775,000 5,775,000* rounded


(b) December 31, 2009Interest expense................................................... 1,320,000

Interest payable............................................... 1,320,000

December 31, 2010Interest expense................................................... 1,399,200






(c) December 31, 2012 revised paymentInterest payable ($2,000,000 + 4 years’ interest above) 7,775,000Note payable....................................................... 20,000,000

Cash................................................................. 27,775,000

Documents

online.sfsu.eduonline.sfsu.edu/sjhsieh/Chapter 14 Home… · Web view · 2009-02-17Bonds payable (face amount) $ ... the book value of the bonds was the initial issue price, $739,814,813