Chapter 15 Jawaban

CHAPTER 15
BONDS PAYABLE AND

INVESTMENTS IN BONDS
EXERCISES
Ex. 15–1
Bridger
Co.
a. Earnings before bond interest and income tax............................ $ 1,600,000
Bond interest............................................................................... 640,000
Balance........................................................................................ $ 960,000
Income tax.................................................................................. 384,000
Net income.................................................................................. $ 576,000
Dividends on preferred stock...................................................... 480,000
Earnings available for common stock......................................... $ 96,000
Earnings per share on common stock......................................... $ 0.48
b. Earnings before bond interest and income tax............................ $ 2,400,000
Bond interest............................................................................... 640,000
Balance........................................................................................ $ 1,760,000
Income tax.................................................................................. 704,000
Net income.................................................................................. $ 1,056,000
Earnings available for common stock......................................... $ 576,000
c. Earnings before bond interest and income tax............................ $ 4,000,000
Bond interest............................................................................... 640,000
Balance........................................................................................ $ 3,360,000
Income tax.................................................................................. 1,344,000
Net income.................................................................................. $ 2,016,000
Earnings available for common stock......................................... $ 1,536,000
Ex. 15–2
Factors other than earnings per share that should be considered in evaluating financing plans
include: bonds represent a fixed annual interest requirement, while dividends on stock do not;
bonds require the repayment of principal, while stock does not; and common stock represents a
voting interest in the ownership of the corporation, while bonds do not.
Ex. 15–3
Home Depot’s major source of financing is common stock. It has long-term debt, excluding
current installments, of $1,321,000,000, compared to stockholders’ equity of $19,802,000,000.
Ex. 15–4
a. $100,000 ÷ 1.05 = $95,238

$ 95,238 ÷ 1.05 = $90,703
$ 90,703 ÷ 1.05 = $86,384
b. $100,000 × 0.86384 = $86,384
Ex. 15–5
a. First Year:$50,000 × 0.94340 = $ 47,170.00

Second Year: $50,000 × 0.89000 = 44,500.00
Third Year: $50,000 × 0.83962 = 41,981.00
Fourth Year: $50,000 × 0.79209 = 39,604.50
Total present value $173,255.50
b. $50,000 × 3.46511 = $173,255.50
Ex. 15–6
$1,000,000 × 12.78336 = $12,783,360
Ex. 15–7
No. The present value of your winnings using an interest rate of 12% is $7,843,140 ($1,000,000 ×
7.84314), which is more than one-half of the present value of your winnings using an interest rate
of 6% ($12,783,360; see Ex. 15–6). This is because of the effect of compounding the interest.
That is, compound interest functions are not linear functions, but use exponents.
Ex. 15–8
Present value of $1 for 10 (semiannual)

periods at 6% (semiannual rate)....................................... 0.55840
Face amount of bonds............................................................ × $12,000,000$ 6,700,800
Present value of an annuity of $1
for 10 periods at 6%......................................................... 7.36009
Semiannual interest payment.................................................. × $480,000 3,532,843
Total present value (proceeds)............................................... $ 10,233,643
Ex. 15–9

periods at 5% (semiannual rate)....................................... 0.61391
Face amount of bonds............................................................ × $40,000,000 $ 24,556,400
Present value of an annuity of $1
for 10 periods at 5%......................................................... 7.72174
Semiannual interest payment.................................................. × $2,200,000 16,987,828
Total present value (proceeds)............................................... $ 41,544,228
Ex. 15–10
The bonds were selling at a premium. This is indicated by the selling price of
103.536, which is stated as a percentage of face amount and is more than par (100%). The market
rate of interest for similar quality bonds was lower than
2.125%, and this is why the bonds were selling at a premium.
Ex. 15–11
May 1 Cash................................................................................ 18,000,000

Bonds Payable............................................................ 18,000,000
Nov. 1 Interest Expense.............................................................. 630,000
Cash............................................................................ 630,000
Dec. 31 Interest Expense.............................................................. 210,000
Interest Payable.......................................................... 210,000
Ex. 15–12
a. 1. Cash...................................................................................... 7,095,482
Discount on Bonds Payable.................................................. 904,518
Bonds Payable................................................................. 8,000,000
2. Interest Expense.................................................................... 320,000
Cash................................................................................ 320,000
Cash................................................................................ 320,000
Discount on Bonds Payable............................................ 180,904
$904,518 ÷ 5 years = $180,904
b. Annual interest paid.................................................................... $ 640,000
Plus discount amortized.............................................................. 180,904
Interest expense for first year...................................................... $ 820,904
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.
periods at 5 1/2% (semiannual rate)............................... 0.58543
Face amount.................................................................... × $ 8,000,000 $ 4,683,440
Present value of annuity of $1 for 10
periods at 5 1/2%............................................................ 7.53763
Semiannual interest payment........................................... × $320,000 2,412,042
Total present value of bonds payable.............................. $ 7,095,482
Ex. 15–13
a. Cash...................................................................................... 7,789,543
Premium on Bonds Payable............................................ 289,543
Bonds Payable................................................................. 7,500,000
Note: The following data are in support of the determination of the proceeds of the bond
issue stated in the exercise:
periods at 5% (semiannual rate)...................................... 0.61391
Face amount.......................................................................... × $7,500,000 $ 4,604,325
Present value of an annuity of $1 for 10
periods at 5%.................................................................. 7.72174
Semiannual interest payment................................................. × $412,500 3,185,218
Proceeds................................................................................ $ 7,789,543
b. Interest Expense.................................................................... 383,546

Premium on Bonds Payable.................................................. 28,954*
Cash................................................................................ 412,500
*$289,543 ÷ 10 semiannual payments
Ex. 15–14
2006
Apr. 1 Cash................................................................................ 12,000,000
Bonds Payable............................................................ 12,000,000
Oct. 1 Interest Expense.............................................................. 480,000
Cash............................................................................ 480,000
2010
Oct. 1 Bonds Payable................................................................. 12,000,000
Loss on Redemption of Bonds........................................ 240,000
Cash............................................................................ 12,240,000
Ex. 15–15
2006
Jan. 1 Cash................................................................................ 18,000,000
Bonds Payable............................................................ 18,000,000
July 1 Interest Expense.............................................................. 810,000
Cash............................................................................ 810,000
2012
July 1 Bonds Payable................................................................. 18,000,000
Gain on Redemption of Bonds................................... 540,000
Cash............................................................................ 17,460,000
Ex. 15–16
1. The significant loss on redemption of the series X bonds should be reported in the Other
Income and Expense section of the income statement, rather than as an extraordinary loss.
2. The series Y bonds outstanding at the end of the current year should be reported as a
noncurrent liability on the balance sheet because they are to be paid from funds set aside in a
sinking fund.
Ex. 15–17
The discount of $811 ($1,000 – $189) is amortized as interest revenue over the life of the bonds,
using the straight-line method (illustrated in this chapter) or the interest method (illustrated in the
appendix to this chapter).
Ex. 15–18
a. Investment in Pierce Co. Bonds.................................................. 456,750

Interest Revenue......................................................................... 9,000
Cash...................................................................................... 465,750
b. Cash............................................................................................ 18,000
Interest Revenue................................................................... 18,000
c. Interest Revenue......................................................................... 540
Investment in Pierce Co. Bonds............................................ 540
d. Cash............................................................................................ 448,500
Loss on Sale of Investments....................................................... 8,250
Investment in Pierce Co. Bonds............................................ 453,750
Ex. 15–19
a. Investment in Theisen Co. Bonds............................................... 264,600

Interest Revenue......................................................................... 2,250
Cash...................................................................................... 266,850
b. Cash............................................................................................ 6,750
c. Investment in Theisen Co. Bonds............................................... 450
Interest Revenue................................................................... 450
d. Cash............................................................................................ 274,500
Investment in Theisen Co. Bonds......................................... 267,250
Gain on Sale of Investments................................................. 2,750
Ex. 15–20
a. Current year:
$392,682,000  $106,023,000
Number of times interest charges earned: 4.7 =
$106,023,000
Preceding year:
$827,659,0 00  $69,827,00 0
Number of times interest charges earned: 12.6 =
$69,827,00 0
b. The number of times interest charges earned has declined from 12.6 to 4.7 in the current year.
Although Southwest Airlines has adequate earnings to pay interest, the decline in this ratio
would potentially cause concern among debt-holders.
Appendix Ex. 15–21
a. 1. Cash...................................................................................... 7,095,482
Discount on Bonds Payable.................................................. 904,518
Bonds Payable................................................................. 8,000,000
Cash................................................................................ 320,000
Cash................................................................................ 320,000
Discount on Bonds Payable............................................ 144,367
Computations:
$7,095,482 × 0.055 = $390,252
$390,252 – $320,000 = $70,252 first semiannual amortization
$7,095,482 + $70,252 = $7,165,734
$7,165,734 × 0.055 = $394,115
$394,115 – $320,000 = $74,115 second semiannual amortization
$70,252 + $74,115 = $144,367 amortization for first year
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.
periods at 5 1/2% (semiannual rate)..................................... 0.58543
Face amount.......................................................................... × $8,000,000 $ 4,683,440
Present value of annuity of $1 for
10 periods at 5 1/2%............................................................. 7.53763
Total present value of bonds payable.................................... $ 7,095,482
b. Annual interest paid.................................................................... $640,000

Plus discount amortized.............................................................. 144,367
Interest expense for first year...................................................... $784,367
a. 1. Interest Expense.................................................................... 412,500

Cash................................................................................ 412,500
Cash................................................................................ 412,500
3. Premium on Bonds Payable.................................................. 47,197
Interest Expense.............................................................. 47,197
Computations:
$7,789,543 × 5% = $389,477
$412,500 – $389,477 = $23,023 first semiannual amortization
$7,789,543 – $23,023 = $7,766,520
$7,766,520 × 5% = $388,326
$412,500 – $388,326 = $24,174 second semiannual amortization
$23,023 + $24,174 = $47,197 first year amortization
b. Annual interest paid.................................................................... $825,000
Less premium amortized............................................................. 47,197
Interest expense for first year
$777,803
a. Present value of $1 for 10 (semiannual)

periods at 5 1/2% (semiannual rate)............................... 0.58543
Face amount.......................................................................... × $32,500,000 $19,026,475
Present value of annuity of $1 for 10
periods at 5 1/2%............................................................ 7.53763
Semiannual interest payment................................................. × $1,950,000 14,698,378
Proceeds of bond sale........................................................... $33,724,853
b. First semiannual interest payment......................................... $ 1,950,000
5 1/2% of carrying amount of $33,724,853.......................... 1,854,867
Premium amortized............................................................... $ 95,133
c. Second semiannual interest payment..................................... $ 1,950,000
5 1/2% of carrying amount of $33,629,720*........................ 1,849,635
Premium amortized............................................................... $ 100,365
*$33,724,853 – $95,133 = $33,629,720
d. Annual interest paid.............................................................. $ 3,900,000
Less premium amortized....................................................... 195,498*
Interest expense for first year................................................ $ 3,704,502
*$95,133 + $100,365 = $195,498

a. Present value of $1 for 10 (semiannual)
Face amount.......................................................................... × $17,500,000 $ 9,772,000
Present value of annuity of $1 for 10 periods at 6%.................. 7.36009
Proceeds of bond sale........................................................... $16,212,079
b. 6% of carrying amount of $16,212,079................................ $ 972,725
First semiannual interest payment......................................... 875,000
Discount amortized............................................................... $ 97,725
c. 6% of carrying amount of $16,309,804*.............................. $ 978,588
Second semiannual interest payment..................................... 875,000
Discount amortized............................................................... $ 103,588
*$16,212,079 + $97,725 = $16,309,804
d. Annual interest paid.............................................................. $ 1,750,000
Plus discount amortized........................................................ 201,313*
Interest expense first year..................................................... $ 1,951,313
*$97,725 + $103,588 = $201,313
PROBLEMS
Prob. 15–1A
1. Plan 1 Plan 2 Plan 3

Earnings before interest and income tax..................... $ 15,000,000 $ 15,000,000 $ 15,000,000
Deduct interest on bonds............................................ — — 1,000,000
Income before income tax.......................................... $ 15,000,000 $ 15,000,000 $ 14,000,000
Deduct income tax...................................................... 6,000,000 6,000,000 5,600,000
Net income................................................................. $ 9,000,000 $ 9,000,000 $ 8,400,000
Dividends on preferred stock..................................... — 600,000 300,000
Available for dividends on common stock.................. $ 9,000,000 $ 8,400,000 $ 8,100,000
Shares of common stock outstanding......................... ÷ 4,000,000 ÷ 2,000,000 ÷ 1,000,000
Earnings per share on common stock......................... $ 2.25 $ 4.20 $ 8.10

Income before income tax.......................................... $ 1,600,000 $ 1,600,000 $ 600,000
Deduct income tax...................................................... 640,000 640,000 240,000
Net income................................................................. $ 960,000 $ 960,000 $ 360,000
Dividends on preferred stock..................................... — 600,000 300,000
Available for dividends on common stock.................. $ 960,000 $ 360,000 $ 60,000
Shares of common stock outstanding......................... ÷ 4,000,000 ÷ 2,000,000 ÷ 1,000,000
Prob. 15–1A Concluded
The principal advantage of Plan 1 is that it involves only the issuance of common stock, which
does not require a periodic interest payment or return of principal, and a payment of preferred
dividends is not required. It is also more attractive to common shareholders than is Plan 2 or 3 if
earnings before interest and income tax is $1,600,000. In this case, it has the largest EPS ($0.24).
The principal disadvantage of Plan 1 is that it requires an additional investment by present
common shareholders to retain their current interest in the company. Also, if earnings before
interest and income tax is $15,000,000, this plan offers the lowest EPS ($2.25) on common stock.
The principal advantage of Plan 3 is that little additional investment would need to be made be
common shareholders for them to retain their current interest in the company. Also, it offers the
largest EPS ($8.10) if earnings before interest and income tax is $15,000,000. Its principal
disadvantage is that the bonds carry a fixed annual interest charge and require the payment of
principal. It also requires a dividend payment to preferred stockholders before a common dividend
can be paid. Finally, Plan 3 provides the lowest EPS ($0.06) if earnings before interest and income
tax is $1,600,000.
Plan 2 provides a middle ground in terms of the advantages and disadvantages described in the
preceding paragraphs for Plans 1 and 3.
Prob. 15–2A
1. Cash...................................................................................... 10,121,603*
Premium on Bonds Payable............................................ 1,121,603
Bonds Payable................................................................. 9,000,000
*Present value of $1 for 20 (semiannual)
Face amount.......................................................................... × $9,000,000 $ 3,392,010
periods at 5%.................................................................. 12.46221
Proceeds of bond issue.......................................................... $ 10,121,603
2. a. Interest Expense.............................................................. 483,920

Premium on Bonds Payable ($1,121,603 ÷ 20).............. 56,080
Cash.......................................................................... 540,000
b. Interest Expense.............................................................. 483,920
Cash.......................................................................... 540,000
3. $483,920
4. Yes. Investors will be willing to pay more than the face amount of the bonds when the
interest payments they will receive from the bonds exceed the amount of interest that they
could receive from investing in other bonds.
This solution is applicable only if the P.A.S.S. Software that accompanies the text is used.
REST-IN-PEACE CORPORATION
Balance Sheet
June 30, 2007
Assets
Cash...............................................................................................$ 10,434,403
Accounts receivable......................................................................... 602,200
Merchandise inventory.................................................................... 809,300
Prepaid insurance............................................................................ 46,400
Supplies ........................................................................................ 85,000
Total current assets.......................................................................... $11,977,303
Equipment....................................................................................... $ 1,132,900
Accumulated depreciation—equipment.......................................... (69,000)
Total plant assets............................................................................. 1,063,900
Total assets...................................................................................... $13,041,203
Liabilities
Accounts payable............................................................................ $ 835,100
Bonds payable................................................................................. $ 9,000,000
Premium on bonds payable.............................................................. 1,009,443
Total long-term liabilities................................................................. 10,009,443
Total liabilities................................................................................. $ 10,844,543
Stockholders’ Equity
Paid-in capital:
Preferred stock........................................................................ $ 600,000
Excess of issue price over par—preferred stock..................... 75,000
Common stock........................................................................ 400,000
Excess of issue price over par—common stock...................... 200,000
From sale of treasury stock..................................................... 11,000
Total paid-in capital......................................................................... $ 1,286,000
Retained earnings............................................................................ 931,660
Total................................................................................................ $ 2,217,660
Less treasury stock.......................................................................... 21,000
Total stockholders’ equity............................................................... 2,196,660
Total liabilities and equity................................................................ $13,041,203
Prob. 15–3A
1. Cash...................................................................................... 10,623,552*
Discount on Bonds Payable.................................................. 1,376,448
Bonds Payable................................................................. 12,000,000
Face amount.......................................................................... × $12,000,000 $ 3,741,600
periods at 6%.................................................................. 11.46992
$10,623,552

Discount on Bonds Payable
($1,376,448 ÷ 20)..................................................... 68,822
Cash.......................................................................... 600,000
Discount on Bonds Payable...................................... 68,822
Cash.......................................................................... 600,000
3. $668,822
4. Yes. Investors will not be willing to pay the face amount of the bonds when the interest
payments they will receive from the bonds are less than the amount of interest that they could
receive from investing in other bonds.
Prob. 15–4A
1.
2005
July 1 Cash......................................................................... 7,382,236
Discount on Bonds Payable..................................... 617,764
Bonds Payable................................................... 8,000,000
Dec. 31 Interest Expense...................................................... 320,000
Cash................................................................... 320,000
31 Interest Expense...................................................... 61,776
Discount on Bonds Payable............................... 61,776
31 Income Summary..................................................... 381,776
Interest Expense................................................ 381,776
2006
June 30 Interest Expense...................................................... 320,000
Cash................................................................... 320,000
Dec. 31 Interest Expense...................................................... 320,000
Cash................................................................... 320,000
31 Interest Expense...................................................... 123,552
31 Income Summary..................................................... 763,552
2007
June 30 Bonds Payable......................................................... 8,000,000
Loss on Redemption of Bonds................................ 290,660
Cash................................................................... 7,920,000
2. a. 2005: $381,776
b. 2006: $763,552
3. Initial carrying amount of bonds................................................. $7,382,236

Discount amortized on December 31, 2005................................ 61,776
Discount amortized on December 31, 2006................................ 123,552
Carrying amount of bonds, December 31, 2006......................... $7,567,564
PRAIRIE RENAISSANCE INC.

Balance Sheet
June 30, 2007
Assets
Cash...............................................................................................$ 10,206,812
Accounts receivable......................................................................... 1,352,200
Merchandise inventory.................................................................... 809,300
Prepaid insurance............................................................................ 46,400
Supplies ........................................................................................ 85,000
Total current assets.......................................................................... $12,499,712
Equipment....................................................................................... $ 1,882,900
Accumulated depreciation—equipment.......................................... (69,000)
Total plant assets............................................................................. 1,813,900
Total assets...................................................................................... $ 14,313,612
Liabilities
Paid-in capital:
Preferred stock........................................................................ $ 4,600,000
Excess of issue price over par—preferred stock..................... 1,075,000
Common stock........................................................................ 4,400,000
Excess of issue price over par—common stock...................... 1,200,000
Retained earnings............................................................................ 2,213,512
Total................................................................................................ $ 13,499,512
Total liabilities and equity................................................................ $14,313,612
Prob. 15–5A
2005
Sept. 1 Investment in Sheehan Company Bonds......................... 494,750
Interest Revenue ($480,000 × 8% × 2/12)..................... 6,400
Cash............................................................................ 501,150
Dec. 31 Cash................................................................................ 19,200
Interest Revenue......................................................... 19,200
31 Interest Revenue............................................................. 500
Investment in Sheehan Company Bonds.................... 500
2011
June 30 Cash................................................................................ 19,200
Aug. 31 Interest Revenue............................................................. 500
31 Cash................................................................................ 247,600*
Gain on Sale of Investments....................................... 1,525
Investment in Sheehan Company Bonds.................... 242,875
*($240,000 × 1.02) + ($240,000 × 8% × 2/12) – $400
Dec. 31 Cash................................................................................ 9,600
31 Interest Revenue............................................................. 750
Appendix Prob. 15–6A
1. a. Interest Expense.................................................................... 506,080

Premium on Bonds Payable
[$540,000 – (5% × $10,121,603)]........................................ 33,920
Cash................................................................................ 540,000
[$540,000 – (5% × $10,087,683)]........................................ 35,616
Cash................................................................................ 540,000
2. $506,080
Appendix Prob. 15–7A

[($10,623,552 × 6%) – $600,000].................................. 37,413
Cash................................................................................ 600,000
[($10,660,965 × 6%) – $600,000].................................. 39,658
Cash................................................................................ 600,000
2. $637,420
Prob. 15–1B

Deduct income tax...................................................... 1,800,000 1,800,000 1,260,000
Net income................................................................. $ 2,700,000 $ 2,700,000 $ 1,890,000
Dividends on preferred stock..................................... — 1,080,000 720,000
Available for dividends on common stock.................. $ 2,700,000 $ 1,620,000 $ 1,170,000
Shares of common stock outstanding......................... ÷ 1,800,000 ÷ 900,000 ÷ 450,000

Deduct income tax...................................................... 1,080,000 1,080,000 540,000
Net income................................................................. $ 1,620,000 $ 1,620,000 $ 810,000
Dividends on preferred stock..................................... — 1,080,000 720,000
Available for dividends on common stock.................. $ 1,620,000 $ 540,000 $ 90,000
Shares of common stock outstanding......................... ÷ 1,800,000 ÷ 900,000 ÷ 450,000
Prob. 15–1B Concluded
3. The principal advantage of Plan 1 is that it involves only the issuance of common stock,
which does not require a periodic interest payment or return of principal, and a payment of
preferred dividends is not required. It is also more attractive to common shareholders than is
Plan 2 or 3 if earnings before interest and income tax is $2,700,000. In this case, it has the
largest EPS ($0.90). The principal disadvantage of Plan 1 is that it requires an additional
investment by present common shareholders to retain their current interest in the company.
Also, if earnings before interest and income tax is $4,500,000, this plan offers the lowest EPS
($1.50) on common stock.
The principal advantage of Plan 3 is that little additional investment would need to be made
by common shareholders for them to retain their current interest in the company. Also, it
offers the largest EPS ($2.60) if earnings before interest and income tax is $4,500,000. Its
principal disadvantage is that the bonds carry a fixed annual interest charge and require the
payment of principal. It also requires a dividend payment to preferred stockholders before a
common dividend can be paid. Finally, Plan 3 provides the lowest EPS ($0.20) if earnings
before interest and income tax is $2,700,000.
Plan 2 provides a middle ground in terms of the advantages and disadvantages described in
the preceding paragraphs for Plans 1 and 3.
Prob. 15–2B
1. Cash................................................................................... 21,246,231*
Premium on Bonds Payable......................................... 1,246,231
Bonds Payable.............................................................. 20,000,000
periods at 5% (semiannual rate)................................... 0.37689
Face amount....................................................................... × $20,000,000 $ 7,537,800
periods at 5%............................................................... 12.46221
Semiannual interest payment.............................................. × $1,100,000 13,708,431
Proceeds of bond issue....................................................... $ 21,246,231
2. a. Interest Expense.............................................................. 1,037,688

Premium on Bonds Payable ($1,246,231 ÷ 20).............. 62,312
Cash.......................................................................... 1,100,000
b. Interest Expense.............................................................. 1,037,688
Cash.......................................................................... 1,100,000
3. $1,037,688
4. Yes. Investors will be willing to pay more than the face amount of the bonds when the
interest payments they will receive from the bonds exceed the amount of interest that they
could receive from investing in other bonds.
FRONTIER INC.
Balance Sheet
June 30, 2006
Assets
Cash......................................................................... $ 23,784,131
Accounts receivable................................................. 228,950
Merchandise inventory............................................ 2,681,650
Prepaid insurance.................................................... 139,650
Supplies ................................................................ 182,950
Total current assets.................................................. $ 27,017,331
Equipment............................................................... $ 1,390,000
Accumulated depreciation—equipment.................. (109,600) $ 1,280,400
Building................................................................... $ 5,405,000
Accumulated depreciation—building...................... (672,000) 4,733,000
Total plant assets..................................................... 6,013,400
Total assets.............................................................. $ 33,030,731
Liabilities
Bonds payable................................................................................. $ 20,000,000
Premium on bonds payable.............................................................. 1,121,607
Total long-term liabilities................................................................. 21,121,607
Total liabilities................................................................................. $ 21,153,607
Paid-in capital:
Preferred stock........................................................................ $ 2,100,000
Common stock........................................................................ 4,500,000
Total................................................................................................ $ 12,097,124
Total liabilities and equity................................................................ $ 33,030,731
Prob. 15–3B
1. Cash...................................................................................... 16,878,410*
Discount on Bonds Payable.................................................. 1,121,590
Bonds Payable................................................................. 18,000,000
Face amount.......................................................................... × $18,000,000 $ 6,784,020
periods at 5%.................................................................. 12.46221
Proceeds of bond issue.......................................................... $ 16,878,410

($1,121,590 ÷ 20)..................................................... 56,080
Cash.......................................................................... 810,000
Discount on Bonds Payable...................................... 56,080
Cash.......................................................................... 810,000
3. $866,080
4. Yes. Investors will not be willing to pay the face amount of the bonds when the interest
payments they will receive from the bonds are less than the amount of interest that they could
receive from investing in other bonds.
Prob. 15–4B
1.
2005
July 1 Cash......................................................................... 16,104,095
Premium on Bonds Payable............................... 1,104,095
Bonds Payable................................................... 15,000,000
Dec. 31 Interest Expense...................................................... 1,050,000
Cash................................................................... 1,050,000
31 Premium on Bonds Payable..................................... 110,409
31 Income Summary..................................................... 939,591
2006
June 30 Interest Expense...................................................... 1,050,000
Cash................................................................... 1,050,000
Dec. 31 Interest Expense...................................................... 1,050,000
Cash................................................................... 1,050,000
31 Premium on Bonds Payable..................................... 220,818
31 Income Summary..................................................... 1,879,182
Interest Expense................................................ 1,879,182
2007
July 1 Bonds Payable......................................................... 15,000,000
Premium on Bonds Payable..................................... 662,459
Gain on Redemption on Bonds......................... 512,459
Cash................................................................... 15,150,000
2. a. 2005: $939,591
b. 2006: $1,879,182
3. Initial carrying amount of bonds................................................. $16,104,095

Premium amortized on December 31, 2005................................ (110,409)
Premium amortized on December 31, 2006................................ (220,818)
Carrying amount of bonds, December 31, 2006......................... $15,772,868
ABSAROKA CO.
Balance Sheet
July 1, 2007
Assets
Cash...................................................................... $ 2,931,604
Accounts receivable.............................................. 728,950
Merchandise inventory......................................... 4,681,650
Prepaid insurance................................................. 139,650
Supplies ............................................................. 182,950
Total current assets............................................... $ 8,664,804
Equipment............................................................ $ 2,390,000
Accumulated depreciation—equipment............... (109,600) $ 2,280,400
Building................................................................ $ 7,405,000
Accumulated depreciation—building................... (772,018) 6,632,982
Total plant assets.................................................. 8,913,382
Total assets........................................................... $ 17,578,186
Liabilities
Paid-in capital:
Preferred stock........................................................................ $ 4,100,000
Common stock........................................................................ 6,500,000
Total................................................................................................ $ 17,766,186
Total liabilities and equity................................................................ $ 17,578,186
Prob. 15–5B
2005
Sept. 1 Investment in Churchill Company Bonds........................ 385,720
Interest Revenue ($400,000 × 9% × 2/12)..................... 6,000
Cash............................................................................ 391,720
Dec. 31 Cash................................................................................ 18,000
31 Investment in Churchill Company Bonds........................ 240
Interest Revenue......................................................... 240
2010
June 30 Cash................................................................................ 18,000
Oct. 31 Investment in Churchill Company Bonds........................ 300
31 Cash................................................................................ 198,600*
Loss on Sale of Investments........................................... 2,120
Investment in Churchill Company Bonds................... 194,720
*($200,000 × 0.965) + ($200,000 × 9% × 4/12) – $400
Dec. 31 Cash................................................................................ 9,000
31 Investment in Churchill Company Bonds........................ 360
Appendix Prob. 15–6B
1. a. Interest Expense.................................................................... 1,062,312

[$1,100,000 – (5% × $21,246,231)]..................................... 37,688
Cash................................................................................ 1,100,000
b. Interest Expense.................................................................... 1,060,427
[$1,100,000 – (5% × $21,208,543)]..................................... 39,573
Cash................................................................................ 1,100,000
2. $1,062,312
Appendix Prob. 15–7B

[($16,878,410 × 5%) – $810,000].................................. 33,921
Cash................................................................................ 810,000
[($16,912,331 × 5%) – $810,000].................................. 35,617
Cash................................................................................ 810,000
2. $843,921

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CHAPTER 15

BONDS PAYABLE AND

a. $100,000 ÷ 1.05 = $95,238

b. $100,000 × 0.86384 = $86,384

a. First Year:$50,000 × 0.94340 = $ 47,170.00

b. $50,000 × 3.46511 = $173,255.50

$1,000,000 × 12.78336 = $12,783,360

Present value of $1 for 10 (semiannual)

Present value of $1 for 10 (semiannual)

May 1 Cash................................................................................ 18,000,000

Total present value of bonds payable.............................. $ 7,095,482

b. Interest Expense.................................................................... 383,546

a. Investment in Pierce Co. Bonds.................................................. 456,750

a. Investment in Theisen Co. Bonds............................................... 264,600

b. Annual interest paid.................................................................... $640,000

Appendix Ex. 15–22

a. 1. Interest Expense.................................................................... 412,500

Appendix Ex. 15–23

a. Present value of $1 for 10 (semiannual)

Appendix Ex. 15–24

1. Plan 1 Plan 2 Plan 3

2. Plan 1 Plan 2 Plan 3

Prob. 15–1A Concluded

2. a. Interest Expense.............................................................. 483,920

Prob. 15–2A Concluded

2. a. Interest Expense.............................................................. 668,822

3. Initial carrying amount of bonds................................................. $7,382,236

PRAIRIE RENAISSANCE INC.

Appendix Prob. 15–6A

1. a. Interest Expense.................................................................... 506,080

1. a. Interest Expense.................................................................... 637,413

1. Plan 1 Plan 2 Plan 3

2. Plan 1 Plan 2 Plan 3

Prob. 15–1B Concluded

2. a. Interest Expense.............................................................. 1,037,688

2. a. Interest Expense.............................................................. 866,080

3. Initial carrying amount of bonds................................................. $16,104,095

1. a. Interest Expense.................................................................... 1,062,312

Appendix Prob. 15–7B

1. a. Interest Expense.................................................................... 843,921

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