CHAPTER 9 HOMEWORK SOLUTIONS

CHAPTER 9 HOMEWORK SOLUTIONS

9.27 (Huergo Dooley Corporation; accounting for bonds.)

a. $2,000,000 X .61391^a..................................................................... $ 1,227,820

$80,000 X 7.72173^b......................................................................... 617,738

$ 1,845,558

^aPresent value of $1 for 10 periods at 5%.

^bPresent value of an annuity for 10 periods at 5%.

b. Interest Expense (.05 X $1,845,558)................................ 92,278

Cash (.04 X $2,000,000).............................................................. 80,000

Bonds Payable (Plug)................................................................ 12,278

c. Interest Expense [.05 X ($1,845,558 + $12,278)].......... 92,892

Cash (.04 X $2,000,000).............................................................. 80,000

Bonds Payable (Plug)................................................................ 12,892

d. Bonds Payable [.20 X ($1,845,558 + $12,278 +

$12,892)]......................................................................... 374,146

Loss on Repurchase of Bonds........................................... 53,933

Cash............................................................................................ 428,079

$2,000,000 X .78941^a.................................................................... $ 1,578,820

$80,000 X 7.01969^b....................................................................... 561,575

$ 2,140,395

Total....................................................................................... X .20

Purchase Price.............................................................................. $ 428,079

^aPresent value of $1 for 8 periods at 3%.

^bPresent value of an annuity for 8 periods at 3%.

9.28 (O’Brien Corporation; computing the issue price of bonds and interest expense.)

a. $8,000,000 X .30656^a....................................................................... $ 2,452,480

$320,000 X 23.11477^b..................................................................... 7,396,726

Issue Price.................................................................................... $ 9,849,206

^aTable 2, 3-percent column and 40-period row.

^bTable 4, 3-percent column and 40-period row.

b. .03 X $9,849,206 = $295,476.

c. .03($9,849,206 + $295,476 – $320,000) = $294,740.

d. Book Value: ($9,849,206 + $295,476 – $320,000 +

$294,740 – $320,000).............. ............................................... $ 9,799,422

e. $8,000,000 X .32523^a..................................................................... $ 2,601,840

$320,000 X 22.49246^b.................................................................... 7,197,587

Present Value............................................................................ $ 9,799,427

^aTable 2, 3-percent column and 38-period row.

^bTable 4 3-percent column and 38-period row.

The difference between the book value in Part d. and the present value in Part e. results from rounding present value factors.

9.33 (Womack Company; amortization schedule for bonds.)

a. $100,000 X .67556^a ...................................................................... $ 67,556

$5,000 X 8.11090^b ........................................................................ 40,555

Issue Price ................................................................................. $ 108,111^c

^aTable 2, 4-percent column and 10-period row.

^bTable 4, 4-percent column and 10-period row.

^cAlso see Table 5.

Six- Liability Interest at Coupon Decrease in Liability

Month at Start 4 Percent at 5% Book Value at Endof

Period of Period for Period of Par of Liability Period

0 $ 108,111

1 $ 108,111 $ 4,324 $ 5,000 $ 676 107,435

2 107,435 4,297 5,000 703 106,732

3 106,732 4,269 5,000 731 106,001

4 106,001 4,240 5,000 760 105,241

5 105,241 4,210 5,000 790 104,451

6 104,451 4,178 5,000 822 103,629

7 103,629 4,145 5,000 855 102,774

8 102,774 4,111 5,000 889 101,885

9 101,885 4,075 5,000 925 100,960

10 100,960 4,040^a 5,000 960 100,000

Total................. $ 41,889 $ 50,000 $ 8,111

^aDoes not equal .04 X $100,960 due to rounding.

c. Book Value of Bonds: $10,363.

Bonds Payable .............................................................. 10,363

Extraordinary Gain on Bond Retirement ............ 63

Cash ........................................................................... 10,300

9.44 (Effects on statement of cash flows.)

a. The journal entry to record this transaction is:

Cash ................................................................................. 100,000

Bonds Payable ........................................................... 100,000

The debit to the Cash account results in an increase of $100,000 in Line (9). Issuing debit is a financing activity, so Line (6) increases by $100,000.

b. The journal entry for this transaction is:

Building ............................................................................ 100,000

Bonds Payable ........................................................... 100,000

The transaction does not affect the Cash account, so Line (9) does not change. This transaction does not affect net income, so Line (1) does not change. This transaction does not appear in the statement of cash flows but in a note to the financial statements.

c. The journal entry to record this transaction is:

Bonds Payable ................................................................ 100,000

Cash ............................................................................. 90,000

Extraordinary Gain on Bond Retirement ............. 10,000

The Cash account decreases, so Line (9) decreases by $90,000. Retiring bonds is a financing activity, so Line (7) increases by $90,000. The extraordinary gain increases net income, so Line (1) increases by $10,000. Because this gain does not provide an operating source of cash, Line (3) increases by $10,000 to offset the gain and result in a zero net effect on cash flow from operations.

d. The journal entry for this transaction is:

Bonds Payable ................................................................ 100,000

Extraordinary Loss on Bond Retirement .................. 5,000

Cash ............................................................................. 105,000

The Cash account decreases, so Line (9) decreases by $105,000. Calling bonds is a financing activity, so Line (7) increases by $105,000. The extraordinary loss reduces net income, so Line (1) decreases by $5,000. Because this loss does not use an operating cash flow, Line (2) increases by $5,000 to offset the loss and result in a zero net effect on cash flow from operations.

e. The journal entry to record this transaction is:

Interest Expense (= .06 X $90,000) ........................... 5,400

Cash (= .05 X $100,000) ........................................... 5,000

Bonds Payable ........................................................... 400

The Cash account decreases by $5,000, so Line (9) decreases by $5,000. Net income decreases by $5,400 for interest expense, so Line (1) decreases by $5,400. Because the firm uses only $5,000 cash for this expense, Line (2) increases by $400 for the portion of the expense that does not use cash.

f. The journal entry to record this transaction is:

Interest Expense (= .05 X $105,000) ......................... 5,250

Bonds Payable ................................................................ 750

Cash (= .06 X $100,000) ........................................... 6,000

The Cash account decreases by $6,000, so Line (9) decreases by $6,000. Net income decreases by $5,250, so Line (1) decreases by $5,250. Because the firm uses more cash than the amount of interest expense, Line (3) increases by $750. The total effect on cash flow from operations is $6,000 (= $5,250 + $750).