Chapter 11 sample test
1. The First Corporation issued a $1,000, 6%, 10-year bond on January 1. Calculate the total cash amount the corporation will pay out over the life of the bond.
The key to this problem is to recognize that over the life of
a bond, a company's cash payments consist of the bond principal and
interest. The company's total cash
payments will be $1,600.
|
Bond principal |
$1,000 |
|
Bond interest ($1,000 x .06 x 10) |
$600 |
|
Total cash payments |
$1,600 |
See text exercise 11.1 for similar material.
2. Calculate the Second Corporation’s 3-year cost of borrowing for the following bond: $2,000 principal, 7% annual interest, 3-year life. Cash received by the corporation when it issued the bond was $2,000.
The key to this problem is to recognize that the total cost
of borrowing is the difference between the cash paid out over the life of a
bond and the cash received when the bond is issued. The company's 3-year cost of borrowing will be $420. Note the bond was issued at its principal
amount.
|
Cash receipts |
|
$2,000 |
|
Cash payments |
|
|
|
Bond principal |
$2,000 |
|
|
Bond interest ($2,000 x .07 x 3) |
$420 |
|
|
Total cash payments |
|
$2,420 |
|
3-year cost of borrowing |
|
$420 |
See text exercise 11.2 for similar material.
3. Calculate the Third Corporation’s 3-year cost of borrowing for the following bond: $3,000 principal, 7% annual interest, 3-year life. Cash received by the corporation when it issued the bond was $3,100.
The key to this problem is to recognize that the total cost
of borrowing is the difference between the cash paid out over the life of a
bond and the cash received when the bond is issued. The company's 3-year cost of borrowing will be $530. Note the bond was issued at a $100 premium.
|
Cash receipts |
|
$3,100 |
|
Cash payments |
|
|
|
Bond principal |
$3,000 |
|
|
Bond interest ($3,000 x .07 x 3) |
$630 |
|
|
Total cash payments |
|
$3,630 |
|
3-year cost of borrowing |
|
$530 |
See text exercise 11.2 for similar material.
4. Calculate the Fourth Corporation’s 3-year cost of borrowing for the following bond: $4,000 principal, 7% annual interest, 3-year life. Cash received by the corporation when it issued the bond was $3,800.
The key to this problem is to recognize that the total cost
of borrowing is the difference between the cash paid out over the life of a
bond and the cash received when the bond is issued. The company's 3-year cost of borrowing will be $1,040. Note the bond was issued at a $200 discount.
|
Cash receipts |
|
$3,800 |
|
Cash payments |
|
|
|
Bond principal |
$4,000 |
|
|
Bond interest ($4,000 x .07 x 3) |
$840 |
|
|
Total cash payments |
|
$4,840 |
|
3-year cost of borrowing |
|
$1,040 |
See text exercise 11.2 for similar material.
5. On May 1, the Fifth Corporation issued a $5,000, 12%, 5-year bond and received $5,000. Interest on the bond is to be paid every six months beginning on November 1.
Calculate the Fifth Corporation’s monthly cost of borrowing by issuing the bond.
The key to this problem is to recognize that the monthly cost
of borrowing is the total cost of borrowing divided by the number of months in
the life of the bond. The total cost of
borrowing is the difference between the cash paid out over the life of a bond
and the cash received when the bond is issued.
The company's monthly cost of borrowing will be $50. Note the bond was issued at its principal
amount.
|
Cash receipts |
|
$5,000 |
|
Cash payments |
|
|
|
Bond principal |
$5,000 |
|
|
Bond interest ($5,000 x .12 x 5) |
$3,000 |
|
|
Total cash payments |
|
$8,000 |
|
5-year cost of borrowing |
|
$3,000 |
|
|
|
|
|
Monthly cost of borrowing [($3,000 / (5 years x 12 months per year)] |
|
$50 |
See text exercise 11.3 for similar material.
6. On June 1, the Sixth Corporation issued a $6,000, 6%, 6-year bond and received $6,000. Interest on the bond is to be paid every six months beginning on December 1.
Prepare the journal entry the company would make on June 1.
The keys
to this problem are to recognize that the bond principal is recorded in the
bonds payable account while any difference between cash received and the bond
principal is recorded in an unamortized discount or unamortized premium
account. In this case, since the bond
was issued at its principal amount, there isn't any unamortized discount or
unamortized premium.
|
Date |
Description |
Debits |
Credits |
|
June 1 |
Cash |
6,000 |
|
|
|
Bonds Payable |
|
6,000 |
|
|
$6,000, 6%, 6-year bond issued |
|
|
See text exercise 11.3 for similar material.
7. On July 1, the Seventh Corporation issued a $7,000, 7%, 7-year bond and received $7,000. Interest on the bond is to be paid every six months beginning on January 1. On July 31, the corporation recorded its $41 monthly cost of borrowing.
Determine the monthly cost of borrowing effects on the company's resources and sources of resources on July 31.
The keys to this problem are to recognize that the company's
liabilities increase as the amount of interest it owes increases and
stockholder's equity decreases as a result of interest expense.
|
Total Resources |
= |
Sources of Borrowed
Resources |
+ |
Sources of Owner Invested Resources |
+ |
Sources of Management Generated Resources |
|
|||||
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
|||||||
|
|
|
+ $41 |
|
|
+ |
- $41 |
|
|||||
See text exercise 11.3 for similar material.
8. On August 1, the Eighth Corporation issued an $8,000, 9%, 8-year bond and received $8,000. Interest on the bond is to be paid every six months beginning on February 1.
Prepare the journal entry the company would make on August 31.
The key
to this problem is to recognize that the company will record its monthly
interest expense to reflect its monthly cost of borrowing. Interest payable increases each month
because the interest is only paid every six months.
|
Date |
Description |
Debits |
Credits |
|
Aug. 31 |
Interest Expense |
60 |
|
|
|
Interest Payable |
|
60 |
|
|
August interest |
|
|
The company's monthly cost of borrowing (interest expense)
will be $60. Note the bond was issued
at its principal amount.
|
Cash receipts |
|
$8,000 |
|
Cash payments |
|
|
|
Bond principal |
$8,000 |
|
|
Bond interest ($8,000 x .09 x 8) |
$5,760 |
|
|
Total cash payments |
|
$13,760 |
|
8-year cost of borrowing |
|
$5,760 |
|
|
|
|
|
Monthly cost of borrowing [($5,760 / (8 years x 12 months per year)] |
|
$60 |
See text exercise 11.3 for similar material.
9. On September 1, the Ninth Corporation issued a $9,000, 9%, 9-year bond and received $9,000. Interest on the bond is to be paid every six months beginning on March 1.
Prepare the journal entry the company would make on March 1.
The key
to this problem is to recognize that the company will pay its six-months
interest on March 1.
|
Date |
Description |
Debits |
Credits |
|
March 1 |
Interest Payable |
405 |
|
|
|
Cash |
|
405 |
|
|
Six-months interest payment |
|
|
Interest = principal x rate x time.
Six-months interest = $9,000 x .09 x 6/12 = $405.
See text exercise 11.3 for similar material.
10. On October 1, the Tenth Corporation issued a $10,000, 10%, 10-year bond and received $10,000. Interest on the bond is to be paid every six months beginning on April 1.
Prepare the journal entry the company would make at the end of ten years.
The key
to this problem is to recognize that the company will pay the bond principal at
the end of the life of the bond.
|
Date |
Description |
Debits |
Credits |
|
Oct. 1 |
Bonds Payable |
10,000 |
|
|
|
Cash |
|
10,000 |
|
|
Bond principal payment |
|
|
See text exercise 11.3 for similar material.
11. The Eleventh Corporation is considering a plan in which it would increase the size of its operations. As a result of the increased operations, without considering the cost of borrowing, the company expects income before taxes to increase by $3,000 per year for 5 years. To increase its operations the company would issue an $11,000, 11%, 5-year bond. The company expects to be able to issue the bond at its principal.
Calculate the Eleventh Corporation’s total expected 5-year increase in income before taxes after considering the cost of borrowing.
The key to this problem is to recognize that the cost of
borrowing will reduce the company's income before taxes. The company's expected increase in income
before taxes is $8,950.
|
Expected increase from operations ($3,000 x 5 years) |
$15,000 |
|
Less: Cost of borrowing |
$6,050 |
|
Increase in income before taxes |
$8,950 |
The total cost of borrowing is the difference between the
cash paid out over the life of a bond and the cash received when the bond is
issued. Note the bond is expected to be
issued at its principal amount.
|
Cash receipts |
|
$11,000 |
|
Cash payments |
|
|
|
Bond principal |
$11,000 |
|
|
Bond interest ($11,000 x .11 x 5) |
$6,050 |
|
|
Total cash payments |
|
$17,050 |
|
5-year cost of borrowing |
|
$6,050 |
See text exercise 11.5 for similar material.
12. On December 1, the Twelfth Corporation issued a $12,000, 10%, 4-year bond and received $12,960. Interest on the bond is to be paid every six months beginning on June 1. On December 31, the corporation recorded its monthly cost of borrowing.
Determine the monthly cost of borrowing effects on the company's resources and sources of resources on December 31.
The keys to this problem are (1) to recognize that the
monthly cost of borrowing is the total cost of borrowing divided by the number
of months in the life of the bond and (2) since interest is to be paid only
every six months, each month the monthly cost of borrowing increases the
company's liabilities and decreases its sources of management-generated
resources.
The total cost of borrowing is the difference between the
cash paid out over the life of a bond and the cash received when the bond is
issued. The company's monthly cost of
borrowing will be $80. Note the bond
was issued at a $960 premium ($12,960 - $12,000).
|
Cash receipts |
|
$12,960 |
|
Cash payments |
|
|
|
Bond principal |
$12,000 |
|
|
Bond interest ($12,000 x .10 x 4) |
$4,800 |
|
|
Total cash payments |
|
$16,800 |
|
4-year cost of borrowing |
|
$3,840 |
|
|
|
|
|
Monthly cost of borrowing [($3,840 / (4 years x 12 months per year)] |
|
$80 |
|
|
Total Resources |
= |
Sources of Borrowed
Resources |
+ |
Sources of Owner Invested Resources |
+ |
Sources of Management Generated Resources |
|
||||||
|
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||||||||
|
|
|
|
+ $80 |
|
|
|
- $80 |
|
||||||
See text exercise 11.5 for similar material.
13. On January 1, the Thirteenth Corporation issued a $13,000, 7%, 6-year bond and received $13,350. Interest on the bond is to be paid every six months beginning on July 1.
Prepare the journal entry the company would make on January 1.
The keys
to this problem are to recognize that the bond principal is recorded in the
bonds payable account while any difference between cash received and the bond
principal is recorded in an unamortized discount or unamortized premium
account. In this case, the bond was
issued at a $350 premium.
|
Date |
Description |
Debits |
Credits |
|
January 1 |
Cash |
13,350 |
|
|
|
Bonds Payable |
|
13,000 |
|
|
Unamortized Premium on Bonds Payable |
|
350 |
|
|
$13,000, 7%, 6-year bond issued |
|
|
See text exercise 11.5 for similar material.
14. On February 1, the Fourteenth Corporation issued a $14,000, 9%, 5-year bond and received $14,600. Interest on the bond is to be paid every six months beginning on August 1.
Prepare the journal entry the company would make on February 28.
The key
to this problem is to recognize that the company will record its monthly
interest expense to reflect its monthly cost of borrowing. Interest payable increases each month
because the interest is only paid every six months. Since the bond was issued at a $600 premium, the unamortized
premium must be reduced each month.
|
Date |
Description |
Debits |
Credits |
|
Feb. 28 |
Interest Expense |
95 |
|
|
|
Unamortized Premium on Bonds Payable |
10 |
|
|
|
Interest Payable |
|
105 |
|
|
February interest |
|
|
The company's monthly cost of borrowing (interest expense)
will be $95. Note the bond was issued
at a $600 premium ($14,600 - $14,000).
|
Cash receipts |
|
$14,600 |
|
Cash payments |
|
|
|
Bond principal |
$14,000 |
|
|
Bond interest ($14,000 x .09 x 5) |
$6,300 |
|
|
Total cash payments |
|
$20,300 |
|
5-year cost of borrowing |
|
$5,700 |
|
|
|
|
|
Monthly cost of borrowing [($5,700 / (5 years x 12 months per year)] |
|
$95 |
Monthly interest payable liability = ($14,000 x .09) / 12
months = $105.
Monthly premium amortization = $600 / 60 months = $10.
See text exercise 11.5 for similar material.
15. On March 1, the Fifteenth Corporation issued a $15,000, 6%, 15-year bond and received $15,900. Interest on the bond is to be paid every six months beginning on September 1.
Prepare the journal entry the company would make on September 1.
The key
to this problem is to recognize that the company will pay its six-months'
interest on September 1.
|
Date |
Description |
Debits |
Credits |
|
Sept. 1 |
Interest Payable |
450 |
|
|
|
Cash |
|
450 |
|
|
Six-months interest payment |
|
|
Interest = principal x rate x time.
Six-months' interest = $15,000 x .06 x 6/12 = $450.
See text exercise 11.5 for similar material.
16. On April 1, the Sixteenth Corporation issued a $16,000, 8%, 7-year bond and received $16,672. Interest on the bond is to be paid every six months beginning on October 1.
Prepare the journal entry the company would make at the end of seven years.
The key
to this problem is to recognize that the company will pay the bond principal at
the end of the life of the bond.
|
Date |
Description |
Debits |
Credits |
|
April 1 |
Bonds Payable |
16,000 |
|
|
|
Cash |
|
16,000 |
|
|
Bond principal payment |
|
|
See text exercise 11.5 for similar material.
17. The Seventeenth Corporation is considering a plan in which it would increase the size of its operations. As a result of the increased operations, without considering the cost of borrowing, the company expects income before taxes to increase by $2,000 per year for five years. To increase its operations the company would issue a $17,000, 10%, 5-year bond. The company expects to be able to issue the bond for $17,800.
Calculate the Eleventh Corporation’s total expected 5-year increase in income before taxes after considering the cost of borrowing.
The key to this problem is to recognize that the cost of
borrowing will reduce the company's income before taxes. The company's expected increase in income
before taxes is $2,300.
|
Expected increase from operations ($2,000 x 5 years) |
$10,000 |
|
Less: Cost of borrowing |
$7,700 |
|
Increase in income before taxes |
$2,300 |
The total cost of borrowing is the difference between the
cash paid out over the life of a bond and the cash received when the bond is
issued. Note the bond is expected to be
issued at an $800 premium ($17,800 - $17,000).
|
Cash receipts |
|
$17,800 |
|
Cash payments |
|
|
|
Bond principal |
$17,000 |
|
|
Bond interest ($17,000 x .10 x 5) |
$8,500 |
|
|
Total cash payments |
|
$25,500 |
|
5-year cost of borrowing |
|
$7,700 |
See text exercise 11.6 for similar material.
18. On June 1, the Eighteenth Corporation issued an $18,000, 6%, 4-year bond and received $17,280. Interest on the bond is to be paid every six months beginning on December 1. On June 30, the corporation recorded its monthly cost of borrowing.
Determine the monthly cost of borrowing effects on the company's resources and sources of resources on June 30.
The keys to this problem are (1) to recognize that the
monthly cost of borrowing is the total cost of borrowing divided by the number
of months in the life of the bond and (2) since interest is to be paid only
every six months, each month the monthly cost of borrowing increases the
company's liabilities and decreases its sources of management-generated
resources.
The total cost of borrowing is the difference between the
cash paid out over the life of a bond and the cash received when the bond is
issued. The company's monthly cost of
borrowing will be $105. Note the bond
was issued at a $720 discount ($18,000 - $17,280).
|
Cash receipts |
|
$17,280 |
|
Cash payments |
|
|
|
Bond principal |
$18,000 |
|
|
Bond interest ($18,000 x .06 x 4) |
$4,320 |
|
|
Total cash payments |
|
$22,320 |
|
4-year cost of borrowing |
|
$5,040 |
|
|
|
|
|
Monthly cost of borrowing [($5,040 / (4 years x 12 months per year)] |
|
$105 |
See text exercise 11.3 for similar material.
|
|
Total Resources |
= |
Sources of Borrowed
Resources |
+ |
Sources of Owner Invested Resources |
+ |
Sources of Management Generated Resources |
|
||||||
|
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||||||||
|
|
|
|
+ $105 |
|
|
|
- $105 |
|
||||||
See text exercise 11.7 for similar material.
20. On July 1, the Nineteenth Corporation issued a $14,000, 7%, 4-year bond and received $13,424. Interest on the bond is to be paid every six months beginning on January 1.
Prepare the journal entry the company would make on July 1.
The keys
to this problem are to recognize that the bond principal is recorded in the
bonds payable account while any difference between cash received and the bond
principal is recorded in an unamortized discount or unamortized premium
account. In this case, the bond was
issued at a discount.
|
Date |
Description |
Debits |
Credits |
|
July 1 |
Cash |
13,424 |
|
|
|
Unamortized Discount on Bonds Payable |
576 |
|
|
|
Bonds Payable |
|
14,000 |
|
|
$14,000, 7%, 4-year bond issued |
|
|
See text exercise 11.7 for similar material.
20. On August 1, the Twentieth Corporation issued a $19,000, 6%, 5-year bond and received $18,040. Interest on the bond is to be paid every six months beginning on Febuary 1.
Prepare the journal entry the company would make on August 31.
The key
to this problem is to recognize that the company will record its monthly
interest expense to reflect its monthly cost of borrowing. Interest payable increases each month
because the interest is only paid every six months. Since the bond was issued at a discount, the unamortized discount
must be reduced each month.
|
Date |
Description |
Debits |
Credits |
|
Aug. 31 |
Interest Expense |
111 |
|
|
|
Interest Payable |
|
95 |
|
|
Unamortized Discount on Bonds Payable |
|
16 |
|
|
August interest |
|
|
The company's monthly cost of borrowing (interest expense)
will be $111. Note the bond was issued
at a $960 discount ($19,000 - $18,040).
|
Cash receipts |
|
$18,040 |
|
Cash payments |
|
|
|
Bond principal |
$19,000 |
|
|
Bond interest ($19,000 x .06 x 5) |
$5,700 |
|
|
Total cash payments |
|
$24,700 |
|
5-year cost of borrowing |
|
$6,660 |
|
|
|
|
|
Monthly cost of borrowing [($6,660 / (5 years x 12 months per year)] |
|
$111 |
Monthly interest payable liability = ($19,000 x .06) / 12
months = $95.
Monthly discount amortization = $960 / 60 months = $16.
See text exercise 11.7 for similar material.
21. On September 1, the Twenty-first Corporation issued a $21,000, 8%, 3-year bond and received $20,100. Interest on the bond is to be paid every six months beginning on March 1.
Prepare the journal entry the company would make on March 1.
The key
to this problem is to recognize that the company will pay its six-months
interest on September 1.
|
Date |
Description |
Debits |
Credits |
|
March 1 |
Interest Payable |
840 |
|
|
|
Cash |
|
840 |
|
|
Six-months' interest payment |
|
|
Interest = principal x rate x time.
Six-months' interest = $21,000 x .08 x 6/12 = $840.
See text exercise 11.7 for similar material.
22. On October 1, the Twenty-second Corporation issued a $22,000, 9%, 7-year bond and received $20,992. Interest on the bond is to be paid every six months beginning on April 1.
Prepare the journal entry the company would make at the end of seven years.
The key
to this problem is to recognize that the company will pay the bond principal at
the end of the life of the bond.
|
Date |
Description |
Debits |
Credits |
|
Oct. 1 |
Bonds Payable |
22,000 |
|
|
|
Cash |
|
22,000 |
|
|
Bond principal payment |
|
|
See text exercise 11.7 for similar material.
23. The Twenty-third Corporation is considering a plan in which it would increase the size of its operations. As a result of the increased operations, without considering the cost of borrowing, the company expects income before taxes to increase by $4,000 per year for five years. To increase its operations the company would issue a $23,000, 9%, 5-year bond. The company expects to be able to issue the bond for $21,500.
Calculate the Twenty-third Corporation’s total expected 5-year increase in income before taxes after considering the cost of borrowing.
The key to this problem is to recognize that the cost of
borrowing will reduce the company's income before taxes. The company's expected increase in income
before taxes is $8,150.
|
Expected increase from operations ($4,000 x 5 years) |
$20,000 |
|
Less: Cost of borrowing |
$11,850 |
|
Increase in income before taxes |
$8,150 |
The total cost of borrowing is the difference between the
cash paid out over the life of a bond and the cash received when the bond is
issued. Note the bond is expected to be
issued at a $1,500 discount ($23,000 - $21,500).
|
Cash receipts |
|
$21,500 |
|
Cash payments |
|
|
|
Bond principal |
$23,000 |
|
|
Bond interest ($23,000 x .09 x 5) |
$10,350 |
|
|
Total cash payments |
|
$33,350 |
|
5-year cost of borrowing |
|
$11,850 |
See text exercise 11.8 for similar material.
24. The Twenty-fourth Corporation is considering retiring one of its bond issues. The bond is a $24,000, 8%, 4-year bond, issued three years ago at par.
Calculate the gain or loss the company would recognize if it retired the bond for $24,400. Assume that all appropriate interest payments will be made on the bond before it is retired.
The key to this problem is to
recognize that a gain or loss on the early retirement of debt is the difference
between the liability eliminated (retired) and the total resources used up in
eliminating the liability. In this
case, the loss on early retirement of the bond is $400.
|
Liability eliminated: |
|
|
Bonds payable |
$24,000 |
|
Resources (cash) used to retire debt |
$24,400 |
|
Loss on early retirement of debt (bonds) |
$400 |
See text exercise 11.9 for similar material.
25. The Twenty-fifth Corporation retired one of its bonds on January 25 by paying $24,200. The bond was a $25,000, 9%, 6-year bond, issued four years ago at par.
Prepare the journal entry the company would make when it retired the bond.
The key to this problem is to
recognize that a gain or loss on the early retirement of debt is the difference
between the liability eliminated (retired) and the total resources used up in
eliminating the liability. In this
case, the gain on early retirement of the bond is $800.
|
Liability eliminated: |
|
|
Bonds Payable |
$25,000 |
|
Resources (cash) used to retire debt |
$24,200 |
|
Gain on early retirement of debt (bonds) |
$800 |
|
Date |
Description |
Debits |
Credits |
|
Jan. 25 |
Bonds Payable |
25,000 |
|
|
|
Cash |
|
24,200 |
|
|
Gain on Early Retirement of Debt |
|
800 |
|
|
$25,000 bond retirement |
|
|
See text exercise 11.9 for similar material.
26. The Twenty-sixth Corporation is considering retiring one of its bonds. The bond is a $26,000, 6%, 7-year bond, issued two years ago at a $672 premium.
Calculate the gain or loss the company would recognize if it retired the bond for $26,100. Assume that all appropriate interest payments will be made on the bond before it is retired.
The key to this problem is to
recognize that a gain or loss on the early retirement of debt is the difference
between the liability eliminated (retired) and the total resources used up in
eliminating the liability. Since the
bond was issued at a premium, when the bond is retired the amounts related to
the bond would have to be eliminated from both the bonds payable account and
the unamortized premium on bonds payable account. The bonds payable account reports $26,000 just before the bond is
retired. The unamortized premium on
bonds payable account reports $480 just before the bond is retired. In this case, the gain on early retirement
of the bond is $380.
|
Liability eliminated: |
|
|
|
Bonds payable |
$26,000 |
|
|
Plus: Unamortized premium on
bonds payable |
$480 |
$26,480 |
|
Resources (cash) used to retire debt |
|
$26,100 |
|
Gain on early retirement of debt (bonds) |
|
$380 |
The unamortized premium on bonds payable would have been reduced by $192 during the first two years. $672 premium / 7 years = $96 premium amortization per year. $96 x 2 years = $192. At the end of two years, before the bond is retired, the unamortized premium on bonds payable would be $480 ($672 - $192 = $480).
See text exercise 11.10 for similar material.
27. The Twenty-seventh Corporation is considering retiring one of its bonds. The bond is a $27,000, 8%, 5-year bond, issued three years ago at a $600 discount.
Calculate the gain or loss the company would recognize if it retired the bond for $26,500. Assume that all appropriate interest payments will be made on the bond before it is retired.
The key to this problem is to
recognize that a gain or loss on the early retirement of debt is the difference
between the liability eliminated (retired) and the total resources used up in
eliminating the liability. Since the
bond was issued at a discount, when the bond is retired the amounts related to
the bond would have to be eliminated from both the bonds payable account and
the unamortized discount on bonds payable account. The bonds payable account reports $27,000 just before the bond is
retired. The unamortized discount on
bonds payable account reports $240 just before the bond is retired. In this case, the gain on early retirement
of the bond is $260.
|
Liability eliminated: |
|
|
|
Bonds payable |
$27,000 |
|
|
Less: Unamortized discount on
bonds payable |
$240 |
$26,760 |
|
Resources (cash) used to retire debt |
|
$26,500 |
|
Gain on early retirement of debt (bonds) |
|
$260 |
The unamortized discount on bonds payable would have been reduced by $360 during the first two years. $600 discount / 5 years = $120 discount amortization per year. $120 x 3 years = $360. At the end of three years, before the bond is retired, the unamortized discount on bonds payable would be $240 ($600 - $360 = $240).
See text exercise 11.10 for similar material.
28. There are several differences between the accounting methods the Twenty-eighth Corporation uses in the preparation of its financial statements and in the preparation of its federal income taxes return. For the month ended March 31, the company’s taxable income on its income statement was $28,000, while it was $25,000 for income taxes purposes. The company’s income taxes rate is 35%.
Calculate the amount of deferred income taxes payable the company would record on March 31.
The key to this problem is to recognize that deferred taxes
are postponed taxes. Income taxes
expense is based on the company's income statement, while income taxes payable
is based on the company's income taxes return.
The company's deferred income taxes payable for March would be $1,050.
|
Income taxes expense ($28,000 x .35) |
$9,800 |
|
Income taxes payable ($25,000 x .35) |
$8,750 |
|
Deferred income taxes payable |
$1,050 |
See text exercise 11.11 for similar material.
29. For the month ended April 30, the Twenty-ninth Corporation’s taxable income on its income statement was $29,000, while it was $27,000 for income taxes purposes. The company’s income taxes rate was 35% and taxes were not paid until May.
Prepare the journal entry the company would make to record it income taxes on April 30.
The key to this problem is to recognize that deferred taxes
are postponed taxes. Income taxes
expense is based on the company's income statement, while income taxes payable
is based on the company's income taxes return.
The company's deferred income taxes payable for April would be $700.
|
Income taxes expense ($29,000 x .35) |
$10,150 |
|
Income taxes payable ($27,000 x .35) |
$9,450 |
|
Deferred income taxes payable |
$700 |
|
Date |
Description |
Debits |
Credits |
|
Apr. 30 |
Income Taxes Expense |
10,150 |
|
|
|
Income Taxes Payable |
|
9,450 |
|
|
Deferred Income Taxes Payable |
|
700 |
|
|
April income taxes |
|
|
See text exercise 11.1 for similar material.
30. The Thirtieth Corporation acquired equipment through a 6-year capital lease. The first monthly lease payment of $30,000 represents $20,000 principal and $10,000 interest.
Determine how the $30,000 lease payment effects on the company's resources and sources of resources.
The key to this problem is to recognize that a capital lease
payment reduces the company's resources (assets), reduces the company's capital
lease liability, and results in an expense (reduces sources of management
generated resources).
|
|
Total Resources |
= |
Sources of Borrowed
Resources |
+ |
Sources of Owner Invested Resources |
+ |
Sources of Management Generated Resources |
|
||||||
|
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||||||||
|
|
- $30,000 |
|
- $20,000 |
|
|
|
- $10,000 |
|
||||||
See text exercise 11.2 for similar material.
31. The Thirty-first Corporation acquired equipment through a 7-year capital lease. The July lease payment of $31,000 represents $5,000 principal and $26,000 interest.
Prepare the journal entry the company would make to record the July lease payment.
The key to this problem is to recognize that a capital lease
payment reduces the company's resources (assets), reduces the company's capital
lease liability, and results in an expense (reduces sources of management
generated resources).
|
Date |
Description |
Debits |
Credits |
|
July 31 |
Obligations Under Capital Lease |
5,000 |
|
|
|
Interest Expense |
26,000 |
|
|
|
Cash |
|
31,000 |
|
|
July lease payment |
|
|
See text exercise 11.12 for similar material.
32. The following information is from the records of the Thirty-second Corporation.
|
|
Year 1 |
|
Sales |
$32,000 |
|
Cost of Goods Sold |
$14,000 |
|
Gross Profit |
$18,000 |
|
Operating Expenses |
$10,000 |
|
Income from Operations |
$8,000 |
|
Other Revenues and (Expenses) |
|
|
Interest Expense |
($500) |
|
Income Before Taxes |
$7,500 |
|
Income Taxes Expense |
$2,600 |
|
Net Income |
$4,900 |
Calculate the corporation's interest coverage ratio for Year 1.
The key to this problem is to recognize that the interest
coverage ratio = (income before taxes + interest expense) / interest expense.
Interest coverage ratio = ($7,500 + $500) / $500 = 16.
See text exercise 11.13 for similar material.