ASSIGNMENT #1

SOLUTIONS

Question 1.1
(a) The present value of the future cash flows totals $1,546,084.25. The applicable
Excel formula follows:

Present value of the principal

$1,500,000 X .38554 (PV10, 10%) $ 578,310

Present value of the interest payments

$157,500* X 6.14457 (PVOA10, 10%) 967,770

Present value (selling price of the bonds) $1,546,080

*$1,500,000 X 10.5% = $157,500

Cash ($1,546,080 – 50,000) ............................................ 1,496,080

Unamortized Bond Issue Costs.......................................... 50,000
Bonds Payable ....................................................... 1,500,000
Premium Bonds Payable........................................ 46,080

(b)
Premium Carrying
Cash Interest Amortization Amount of
Date Payment Expense Bonds
Jan 1,2009 $1,546,080
Dec 31,2009 $157,500 $154,608 $2,892 1,543,188
Dec 31,2010 157,500 154,319 3,181 1,540,007
Dec 31,2011 157,500 154,001 3,499 1,536,508
Dec 31,2012 157,500 153,651 3,849 1,532,659
Dec 31,2013 157,500 153,266 4,234 1,528,425
(c)
Carrying value of Bond Issue costs on purchase:
Bond issue costs $ 50,000
Amortization per year (10 years) $ 5,000
Number of years amortized 4 $ (20,000)
Book value at July 1, 2012 $ 30,000
½ bonds redeemed $15,000

Reacquisition price based on 6 years remaining at 12%

Present value of the principal

$1,500,000 X .50663 (PV6, 12%) $759,945

Present value of the interest payments

$157,500* X 4.1114 (PVOA6, 12%) $647,546
$1,407,491
x½ $703,746

December 31, 2013

Interest Expense 153,651
Premium on Bonds Payable 3,849
Cash 157,500

Entry for reacquisition

Bonds Payable (1/2 x 1,500,000) 750,000

Premium on Bonds Payable 16,330*

Amortization of bond issue cost 15,000
Gain on Redemption of Bonds 62,584
Bond Issue Costs 15,000
Cash 703,746

*Premium as of 7/1/02 to be written off

($1,532,659 – $1,500,000) X 1/2 = $16,330
(d)

October 31st, 2009

Interest Expense 154,608 x 10/12 128,840
Premium on Bonds Payable 2,892 x 10/12 2,410
Interest Payable 157,500 x 10/12 131,250

Amortization of bond issue cost 4,167

Bond issue costs 4,167
(50,000-10) x 10/12

December 31st, 2009

Interest Expense 154,608 x 2/12 25,768
Premium on Bonds Payable 2,892 x 2/12 482
Interest Payable 157,500 x 2/12 131,250

Cash 157,500

Amortization of bond issue cost 833

Bond issue costs 833
(50,000-10) x 2/12
Question #1.2

Price of bond:
P $30,000 (PV, 4%, 6) = $30,000 × (.79031)..................... $23,709
I $900 (PVa, 4%, 6) = $900 × (5.24214) .......................... 4,718
$28,427

Interest Interest Discount Unamortized Carrying

Date Payment Expense Amortization Discount value

$1,573 $28,427
31 May. 2010 $900 $1,137 $237 1,336 28,664
30 Nov. 2010 $900 1,147 247 1,089 28,911
31 May. 2011 $900 1,156 256 833 29,167
30 Nov. 2011 $900 1,167 267 566 29,434
31 May. 2012 $900 1,177 277 289 29,711
30 Nov. 2012 $900 1,189* 289 0 30,000
*rounded

February 28, 2010

Cash 28,546 + 450 28,996

Bond discount $30,000 - 28,546 1,454
Interest payable/Deposit 30,000 x 6% x 3/12 450
Bonds payable 30,000

May 31, 2010

Interest payable/deposit 450

Interest expense (plug) 568
Discount on bonds payable 1454 - 1336 118
Cash 30,000 x 6% x 6/12 900
Question # 1.3

a. Note disclosure will be necessary.

The amount that will be negotiated is not known, so no provision can be made
despite the fact that it is likely that they will incur a loss. The amount will be
material serves to identify the importance of disclosing the case, but unless the
company chooses to document their expected settlement, the financial position
will not be effected at year end.

b. GAAP requires that all guarantees must be disclosed in the notes. Since there is no real
probability that the loan will be called, there is no recording of an obligation required. The
nature of the guarantee and the potential exposure of $5 million should be disclosed.

c. No action is required for this situation. As of the year end there is no known obligation.

d. The company would disclose the PST appeal in the notes to the financial statements
(including the $785,000). As they feel that they will win the appeal, no provision is
required.

e. This is a commitment requiring disclosure in the notes only. The nature and extent of the
commitment should be disclosed.

f. Since Z admits fault to the extent of $1.5 million, they should record a provision for that
amount.

Dr. Loss on litigation $1,500,000

Cr. Litigation Liability $1,500,000

The details of the remaining suit should be noted, indicating that the outcome is
not determinable and that a reasonable estimate cannot be made.