Problem 1

(a) (3 marks)

August 1, 2017:
PV of principle: $800,000 x 0.5584= $446,720
PV of annuity: $64,000 x 7.3601= $471,046.40
Issuance price: $917,766.40

Dr. Cash 917,766.40

Cr. Bonds payable $800,000
Cr. Premium on bonds payable $117,766.40

(b) (5 marks)

December 31, 2017:

Dr. Interest expense $22,944.16*

Dr. Premium on Bond Payable $3,722.51
Cr. Interest payable $26,666.67**

*Interest expense = $917,766.40 x 6% x 5/12= 55,065.984 x 5/12 = $22,944.16

** Interest Payable = $800,000 x 8% x 5/12 = 64,000 x 5/12 = $26,666.67

July 31, 2018:

Dr. Interest expense $32,121.82*

Dr. Interest payable $26,666.67
Dr. Premium on bonds payable $5,211.51
Cr. Cash $64,000

*Interest expense= 917,766.40 x 6% x 7/12=$32,121.82

(c) (i) (3.5 marks)
Cash paid for redemption= 108% x $800,000 x 40%=$345,600
Carrying amount = ($917,766.40 - $3,722.51 - $5,211.51) x 40%=$363,532.95
Gain = Carrying amount - Cash paid for redemption = $17,932.95
Bonds redeemed = $800,000 x 40% = $320,000

Dr. Bond payable $320,000

Dr. Premium on bonds payable $43,532.95
Cr. Gain on bond redemption $17,932.95
Cr. Cash $345,600
(c) (ii) (5.5 marks)

Statement of Financial Position:

…
Non-current liabilities:
Bonds payable $480,000
Premium on bonds payable $65,299.43
Bonds payable, net $545,299.43

Statement of Earnings:
Non-operating activities and Gains/Losses:
Gain on redemption $17,932.95

Cash flow statement:

Cash flow from financing activities:
Redemption of bonds payable ($345,600)

(d): (1 mark)
Total interest expense = interest paid throughout bond life – total premium amortization
= (64,000 x 10) - 117,766.40 = $522,233.60

Problem 2: (16 marks)

1. (13.5 marks)
a) April 1, 2016

Cash Proceeds from bond issue:

Principal: $12,000,000 x 0.3118 = $3,741,600
Interest: ($12,000,000 x 0.11 x ½) x 11.4699 = 7,570,134
Cash proceeds $11,311,734

Cash 11,311,734
Discount on Bonds Payable 688,266
Bonds Payable 12,000,000

b) October 1, 2016

Interest Expense 678,704

Discount on Bonds Payable 18,704
Cash 660,000

Interest expense = $11,311,734 x 0.12 x 6/12 ;

Cash = $12,000,000 x 0.11 x 6/12
c) December 31, 2017

Interest Expense 339,913

Discount on Bonds Payable 9,913
Interest Payable 330,000

Interest expense = $11,330,438* x 0.12 x 3/12

Interest payable = $12,000,000 x 0.11 x 3/12
* $11,330,438 = ($11,311,734 + $18,704)

d) January 31, 2017

To update accounts before redemption of bonds:

Interest Expense 113,304
Discount on Bonds Payable 3,304
Interest Payable 110,000

Interest expense = $11,330,438* x 0.12 /12

*$11,330,438 = $11,311,734 + $18,704

To record the bond redemption

Bond Payable 12,000,000
Loss on Bond Redemption 776,345
Discount on Bonds Payable 656,345
Cash 12,120,000

Cash = $12,000,000 x 1.01 = 12,120,000

Discount on bond payable = $688,266 – 18,704 – 9,913 – 3,304 = $656,345
Loss on bond redemption = $12,120,000 – (12,000,000 – 656,345) = $776,345

2. (2.5 marks)

The reason TR Corp. may decide to call the bonds early and face a loss of $776,245 in the
process if the market interest rate decreased significantly. By calling the bonds, TR can issue
new ones at a lower coupon rate.

TR might also pay it back to decrease the liabilities in its statements of financial position, thus
improving its financial strength and ratios.
Problem 3 (3.5 marks)

Income Tax Solution:

2014:

Income tax Expense* ……………………… 7,500

Deferred income tax liability+.…….……………….. 500

Income tax payable +++……………………………….. 7,000

* = ($30,000*25%)
+
= ($2,000*25%)
+++
= [($30,000-2,000)*25%]

2015:

Income tax Expense ($34,000*25%)……………………… 8,500

Deferred income tax liability ($2,000*25%)……...……….. 500

Income tax payable [($34,000+2,000)*25%]………………….. 9,000

Problem 4:

Req. 1

Annual interest payments = $600,000*5% = $30,000

PVface = $600,000* 0.5083 = $304,980

PVannuity = $30,000* 7.0236 = $210,708

PVbond = $304,980 + $210,708 = $515,688

Discount on bond = $600,000 - $515,688 = $84,312

Discount on Bond Payable………………………………………. 84,312

Cash ……………………………………………………………...515,688

Bond Payable………………………………………………… 600,000

Req. 2

December 31, 2016

Interest Expense………………………………………………… 27,074

Interest Payable……………….…………………………………. 22,500

Discount on bond payable…………………………………….. 4,574

Calculation Marks:

Interest Expense for 1 year = $515,688*7% = $36,098

Interest Expense for the period= ($515,688*7%)*9/12= $27,074

Interest Payable = $30,000*9/12 = $22,500

Discount on bond payable for the period= $27,074 - $22,500 = $4,574 or = $6,098 * 9/12 =
$4,574

$6,098= $36,098-$30,000=Annual discount amortized = Interest expense – interest payable

March 31, 2017

Interest Expense………………………………………………… 9,025

Interest Payable…………………………...………………………. 22,500

Discount on bond payable…………………………………….. 1,525

Cash …………………….……..……………………………….. 30,000

Calculation Marks:

Interest Expense for the period= $36,098.16 *3/12= $ 9,024.54 (rounded = 9,025) OR
36,098.16 - 27,073.62

Discount on bond payable for the period= $6,098.16*3/12 = $1,524.54 (rounded = 1,525) OR
30,000 – (22,500+ 9,024.54)

Req. 3

Cash = 60%*1.05*$600,000 = $378,000

Bond Payable = 60%*600,000 = $360,000
Unamortized discount = $84,312 - $6,098 = $78,214
Discount on bond payable = 60%*$($84,312 - $6,098 ) = $46,928
Loss on redemption = $378,000 + $46,928 - $360,000 = $64,928

Dr. Bond Payable………………………………………………… 360,000

Dr. Loss on redemption of bond...…………………………………. 64,928
Cr. Discount on bond payable…………………………..…………….. 46,928
Cr. Cash ………………….……………………………….………….. 378,000

Micros Corporation
Statement of Financial Position
At March 31, 2017

Non-current liabilities
Bond Payable............................................................ 240,000
Discount on Bond Payables………………………. (31,285.54)
Bond, carrying amount……………………………...208,714

*Calculations:
Bond Payable = $600,000*40% = $240,000
Discount on bond payable= 40%*$78,214 = $31,286

Micros Corporation
Statement of Earnings
For Period Ended March 31, 2017

Other Gains/Losses (Or Non-Operating Items)

Loss on redemption………………………………… 64,928

Micros Corporation
Statement of Cash Flows
For Period Ended March 31, 2017
Cash from financing activities
Redemption of bonds payable…..………………….. (378,000)