Chapter14 Solutions

Chapter 14
Long-Term Liabilities
Review Questions
1. How does the current portion of long-term notes payable differ from the long-term portion?
The current portion of notes payable is the principal amount that will be paid within one year—a
current liability. The remaining portion is long-term.
2. What is an amortization schedule?
An amortization schedule details each loan payment’s allocation between principal and interest and
the beginning and ending loan balances.
3. How does long term notes payable differ from mortgage payable?
A bond payable is a long-term debt issued to multiple lenders called bondholders, usually in
increments of $1,000 per bond.
4. What is a bond payable?
A bond payable is a long-term debt issued to multiple lenders called bondholders, usually in
increments of $1,000 per bond.
5. List three types of bonds and briefly describe each of them.
A discount on bonds payable occurs when a bond’s issue price is less than the face value. This
occurs because the stated rate of interest is less than the market rate of interest.
6. When does a discount on bonds payable occur?
A discount on bonds payable occurs when a bond’s issue price is less than the face value. This
occurs because the stated rate of interest is less than the market rate of interest.
7. When does a premium on bonds payable occur?
A premium on bonds payable occurs when a bond’s issue price is greater than the face value. This
occurs because the stated rate of interest exceeds the market rate of interest.
8. What is the value of a bond at the maturity period?
A premium on bonds payable occurs when a bond’s issue price is greater than the face value. This
occurs because the stated rate of interest exceeds the market rate of interest.
© 2016 Pearson Education, Ltd. 14-1

9. What does the term ‘present value’ mean?
The amount the borrower must pay back to the bondholders on the maturity date is the face value of
the bond.
10. Define the term ‘leverage’.
The amount a person would invest now to receive a greater amount in the future is called present
value.
11. What are the advantages and disadvantages of issuing bonds?
Leverage occurs when a company earns more income on borrowed money than the related interest
expense.
12. What is the market price of a bond when the market interest rate is equal to the bond’s stated interest
rate?
Debt is a less expensive source of capital than stock, and bonds do not affect the percentage of
ownership of the corporation. However, the company may be unable to pay off the bonds and the
related interest.
13. What is the market price of a bond when the market interest rate is higher than the bond’s stated
interest rate?
The normal balance of the Discount on Bonds Payable is a debit, and it is subtracted from the Bonds
Payable account to determine the carrying amount.
14. Why does a company need to pay interest expense when it issues bond at a discount?
If the market interest rate is higher than the bond’s stated interest rate, the bonds will be sold at a
discount. The market price of the bonds will be less than the face value.
15. What does it mean when a company calls a bond?
When a company calls a bond, it means they pay it off before maturity at a specific price.
16. What are the two categories of liabilities reported on the balance sheet? Provide examples of each.
The two categories of liabilities reported on the balance sheet are current and long-term. Accounts
payable, payroll-related liabilities, or the current portion of long-term debt are all examples of a
current liability. An example of a long-term liability is mortgages payable or bonds payable.
17. What does the debt to equity ratio show, and how is it calculated?
The debt to equity ratio shows the relationship between total liabilities and total equity. It is
calculated by taking total liabilities and dividing them by total equity.

18A. Explain each of the key factors that time value of money depends on.
The time value of money depends on these key factors:

a. The principal amount (p)—the amount of the investment or borrowing.
b. The number of periods (n)—the length of time from the beginning of the investment until
termination.
c. The interest rate (i)—the percentage earned on the investment. The interest rate can be stated
annually or in days, months, or quarters.
19A. What is an annuity?
An annuity is a stream of equal cash payments made at equal time intervals.
20A. How does compound interest differ from simple interest?
Compound interest means that interest is calculated on the principal and on all previously earned
interest. Simple interest means that interest is calculated only on the principal amount.
21B. In regard to a bond discount or premium, what is the effective-interest amortization method?
The effective-interest amortization method calculates interest expense based on the current
carrying amount of the bond and the market interest rate at issuance, then amortizes the difference
between the cash interest payment and calculated interest expense as a decrease to the discount or
premium.

Short Exercises
Assume bonds payable are amortized using the straight-line amortization method unless stated
otherwise.
S14-1 Accounting for a long-term note payable

Learning Objective 1
On January 1, 2016, Locker-Farrell signed a $200,000, 10-year, 13% note. The loan required Locker-
Farrell to make annual payments on December 31 of $20,000 principal plus interest.
Requirements
1. Journalize the issuance of the note on January 1, 2016.
2. Journalize the first note payment on December 31, 2016.
SOLUTION
Requirement 1
Date Accounts and Explanation Debit Credit

2016
Jan. 1 Cash 200,000
Notes Payable 200,000
Received cash in exchange for a 10-year,
13% note.
Requirement 2

2016
Dec. 31 Notes Payable 20,000
Interest Expense ($200,000 × 0.13 × 1 year) 26,000
Cash 46,000
Paid principal and interest payment.

S14-2 Accounting for mortgages payable
Elie purchased a building with a market value of $335,000 and land with a market value of $55,000 on
January 1, 2016. Elie paid $10,000 cash and signed a 15-year, 12% mortgage payable for the balance.
Requirements
1. Journalize the January 1, 2016, purchase.
2. Journalize the first monthly payment of $4,561 on January 31, 2016. (Round to the nearest dollar.)
SOLUTION
Requirement 1

2016
Jan. 1 Building 335,000
Land 55,000
Mortgages Payable 380,000
Cash 10,000
Purchased building and land with a
mortgages payable and cash payment.
Requirement 2

2016
Jan. 31 Mortgages Payable ($4,561 − $3,800) 761
Interest Expense (380,000 × .12 × 1/12) 3,800
Cash 4,561
Paid principal and interest payment.

S14-3 Determining bond prices
Bond prices depend on the market rate of interest, stated rate of interest, and time. Determine whether
the following bonds payable will be issued at face value, at a premium, or at a discount:
a. The market interest rate is 8%. Idaho issues bonds payable with a stated rate of 7.75%.
b. Austin issued 9% bonds payable when the market interest rate was 8.25%.
c. Cleveland’s Cars issued 10% bonds when the market interest rate was 10%.
d. Atlanta’s Tourism issued bonds payable that pay the stated interest rate of 8.5%. At issuance, the
market interest rate was 10.25%.
SOLUTION
a. discount
b. premium
c. face value
d. discount
S14-4 Pricing bonds

Bond prices depend on the market rate of interest, stated rate of interest, and time.
Requirements
1. Compute the price of the following 8% bonds of Allied Telecom.
a. $500,000 issued at 75.50
b. $500,000 issued at 102.75
c. $500,000 issued at 96.50
d. $500,000 issued at 102.50
2. Which bond will Allied Telecom have to pay the most to retire at maturity? Explain your answer.
SOLUTION
Requirement 1
Face Value × Issue Price = Market Price

a. $500,000 × 0.7550 = $377,500
b. $500,000 × 1.0275 = $513,750
c. $500,000 × 0.9650 = $482,500
d. $500,000 × 1.0250 = $512,500
Requirement 2
Allied Telecom will have to pay $500,000 at maturity for all four of the bonds. They all have the same
maturity value.

S14-5 Determining bond amounts
Quick Drive-Ins borrowed money by issuing $4,000,000 of 4% bonds payable at 96.5.
Requirements
1. How much cash did Quick receive when it issued the bonds payable?
2. How much must Quick pay back at maturity?
3. How much cash interest will Quick pay each six months?
SOLUTION
Requirement 1
Face value × Issue price = Cash received

$4,000,000 × 0.965 = $3,860,000
Requirement 2
Quick will have to pay back $4,000,000 at maturity.
Requirement 3
Quick will pay $80,000 in interest payments every six months.
Face value × Interest rate × Time period = Interest payment

$4,000,000 × 0.04 × 6/12 = $80,000

S14-6 Journalizing bond transactions
Piper Company issued a $800,000, 8%, 10-year bond payable at face value on January 1, 2016.
Requirements
1. Journalize the issuance of the bond payable on January 1, 2016.
2. Journalize the payment of semiannual interest on July 1, 2016.
SOLUTION
Requirement 1

2016
Jan. 1 Cash 800,000
Bonds Payable 800,000
Issued bonds at face value.
Requirement 2

2016
Jul. 1 Interest Expense 32,000
Cash ($800,000 × 0.08 × 6/12) 32,000
Paid semiannual interest.

Ogden issued a $70,000, 12%, 10-year bond payable at 90 on January 1, 2016.
Requirements
2. Journalize the payment of semiannual interest and amortization of the bond discount or premium on
July 1, 2016.
SOLUTION
Requirement 1

2016
Jan. 1 Cash ($70,000 × 0.90) 63,000
Discount on Bonds Payable ($70,000 – $63,000) 7,000
Issued bonds at a discount.
Requirement 2

2016
Jul. 1 Interest Expense ($4,200 + $350) 4,550
Discount on Bonds Payable ($7,000 × 1/20) 350
Cash ($70,000 × 0.12 × 6/12) 4,200
Paid semiannual interest and amortized discount.

Watson Mutual Insurance Company issued a $65,000, 11%, 10-year bond payable at 109 on January 1,
2016.
Requirements
2. Journalize the payment of semiannual interest and amortization of the bond discount or premium on
July 1, 2016.
SOLUTION
Requirement 1

2016
Jan. 1 Cash ($65,000 × 1.09) 70,850
Premium on Bonds Payable ($70,850 – $65,000) 5,850
Issued bonds at a premium.
Requirement 2

2016
Jul. 1 Interest Expense ($3,575 − $293) 3,282
Premium on Bonds Payable ($5,850 × 1/20) 293
Cash ($65,000 × 0.11 × 6/12) 3,575
Paid semiannual interest and amortized premium.

S14-9 Journalizing bond transactions including retirement at maturity
Learning Objectives 3, 4
Deer issued a $125,000, 6.0%, 15-year bond payable. Journalize the following transactions for Deer, and
include an explanation for each entry:
a. Issuance of the bond payable at face value on January 1, 2016.
b. Payment of semiannual cash interest on July 1, 2016.
c. Payment of the bond payable at maturity. (Give the date.)
SOLUTION

2016
a. Jan. 1 Cash 125,000
Issued bonds at par.
b. July 1 Interest Expense 3,750

Cash ($125,000 × 0.06 × 6/12) 3,750
Paid semi-annual interest payment.
2031
c. Jan. 1 Bonds Payable 125,000
Cash 125,000
Retired bonds payable at maturity.

S14-10 Retiring bonds payable before maturity
On January 1, 2016, Patel issued $400,000 of 7%, five-year bonds payable at 109. Patel has extra cash
and wishes to retire the bonds payable on January 1, 2017, immediately after making the second
semiannual interest payment. To retire the bonds, Patel pays the market price of 95.
Requirements
1. What is Patel’s carrying amount of the bonds payable on the retirement date?
2. How much cash must Patel pay to retire the bonds payable?
3. Compute Patel’s gain or loss on the retirement of the bonds payable.
SOLUTION
Requirement 1
Face value × Issue price Market price or Premium on bond

Cash received
$400,000 × 1.09 $436,000 $36,000
Amortization of bond premium $36,000 / 10 periods = 3,600 per interest payment
Face value of the bonds being retired $ 400,000

Plus: Premium ($36,000 – ($3,600 × 2)) 28,800
Carrying amount of bonds payable on the retirement date 428,800
Requirement 2
Market price paid to retire the bonds ($400,000 × 0.95) 380,000
Requirement 3
Carrying amount of bonds payable 428,800

Gain on retirement of bonds payable $48,800

S14-11 Preparing the liabilities section of the balance sheet
Master Suites Hotels includes the following selected accounts in its general ledger at December 31,
2016:
Prepare the liabilities section of Master Suites’s balance sheet at December 31, 2016.
SOLUTION
MASTER SUITES HOTELS

Balance Sheet (Partial)
December 31, 2016
Liabilities
Current Liabilities
Accounts Payable $ 41,000
Salaries Payable 3,100
Sales Tax Payable 700
Interest Payable 1,700
Estimated Warranty Payable 1,500
Total Current Liabilities $ 48,000
Long-term Liabilities
Bonds Payable $ 450,000
Less: Discount on Bonds Payable (13,500) 436,500
Total Long-term Liabilities 686,500
Total Liabilities $ 734,500

S14-12 Computing the debt to equity ratio
Richards Corporation has the following amounts as of December 31, 2016.
Compute the debt to equity ratio at December 31, 2016.
SOLUTION
Debt to equity ratio = Total liabilities / Total equity

1.25 = $17,500 / $14,000

S14A-13 Using the time value of money
Appendix 14A
Your grandfather would like to share some of his fortune with you. He offers to give you money under
one of the following scenarios (you get to choose):
1. $8,000 per year at the end of each of the next five years
2. $50,250 (lump sum) now
3. $100,250 (lump sum) five years from now
Requirements
1. Calculate the present value of each scenario using an 8% discount rate. Which scenario yields the
highest present value?
2. Would your preference change if you used a 12% discount rate?
SOLUTION
Requirement 1
Present Amount of each cash Annuity PV factor for

Scenario 1 = ×
value inflow i =8%, n = 5
= $8,000 × 3.993
= $31,944
Present
Scenario 2 = Lump sum now
value
= $50,250
Present PV factor for

Scenario 3 = Future value ×
value i =8%, n = 5
= $100,250 × 0.681
= $68,270
Scenario 3 has the highest present value.

S14A-13, cont.
Requirement 2
Present Amount of each cash Annuity PV factor for

Scenario 1 = ×
value inflow i =12%, n = 5
= $8,000 × 3.605
= $28,840
Present
Scenario 2 = Lump sum now
value
= $50,250
Present PV factor for i =12%,

Scenario 3 = Future value ×
value n=5
= $100,250 × 0.567
= $56,842
Using a 12% discount rate would not change the preference in this problem.

S14A-14 Determining the present value of bond at issuance
Appendix 14A
On December 31, 2016, when the market interest rate is 14%, McCann Realty issues $400,000 of
11.25%, 10-year bonds payable. The bonds pay interest semiannually. Determine the present value of
the bonds at issuance.
SOLUTION
Present value of principal:

Present value = Future value × PV factor for
i = 7% (14% / 2),
n = 20 (10 years x 2)
= $400,000 × 0.258
= $103,200
Present value of stated interest:

Present value = Amount of each cash flow × Annuity PV factor for
i = 7% (14% / 2),
n = 20 (10 years x 2)
= ($400,000 × 0.1125 × 6/12) ×
= $22,500 × 10.594
= $238,365
Present value of bonds payable:

Present value = PV of principal + PV of stated interest
= $103,200 + $238,365
= $341,565
S14B-15 Using the effective-interest amortization method

Appendix 14B
On December 31, 2016, when the market interest rate is 10%, Timmony Realty issues $450,000 of
7.25%, 10-year bonds payable. The bonds pay interest semiannually. The present value of the bonds at
issuance is $372,936.
Requirements
1. Prepare an amortization table using the effective interest amortization method for the first two
semiannual interest periods. (Round all numbers to the nearest whole dollar.)
2. Using the amortization table prepared in Requirement 1, journalize issuance of the bonds and the
first two interest payments.

SOLUTION
Requirement 1
Cash Paid Interest Discount Carrying

Expense Amortized Amount
12/31/2016 $ 372,936
06/30/2017 $ 16,313 $ 18,647 $ 2,334 375,270
12/31/2017 16,313 18,764 2,451 377,721
Stated interest
Cash Paid = Face value × rate × Time
$16,313 $450,000 × 0.0725 × 6/12
Interest Carrying Market

Expense = Amount × interest rate × Time
$18,647 = $372,936 × 0.10 × 6/12
$18,764 $375,270 × 0.10 × 6/12
Requirement 2

2016
Dec. 31 Cash 372,936
Discount on Bonds Payable ($450,000 − $372,936) 77,064
Issued bonds at discount.
2017
Jun. 30 Interest Expense 18,647
Discount on Bonds Payable 2,334
Cash 16,313
Paid semi-annual interest payment and amortized
discount.
Dec. 31 Interest Expense 18,764

Cash 16,313
discount.

S14B-16 Using the effective-interest amortization method
Appendix 14B
On December 31, 2016, when the market interest rate is 16%, Bryant Realty issues $700,000 of 17.25%,
10-year bonds payable. The bonds pay interest semiannually. Bryant Realty received $743,262 in cash at
issuance.
Requirements
1. Prepare an amortization table using the effective interest amortization method for the first two
semiannual interest periods. (Round all numbers to the nearest whole dollar.)
2. Using the amortization table prepared in Requirement 1, journalize issuance of the bonds and the
first two interest payments.
SOLUTION
Requirement 1
Cash Paid Interest Premium Carrying

12/31/2016 $ 743,262
06/30/2017 $ 60,375 $ 59,461 $ 914 742,348
12/31/2017 60,375 59,388 987 741,361
Stated interest
$60,375 = $700,000 × 0.1725 × 6/12

$59,461 = $743,262 × 0.16 × 6/12
$59,388 = $742,348 × 0.16 × 6/12

S14B-16, cont.
Requirement 2

2016
Dec. 31 Cash 743,26
2
Premium on Bonds Payable ($743,262 − $700,000) 43,262
Issued bonds at premium.
2017
Jun. 30 Interest Expense 59,461
Premium on Bonds Payable 914
Cash 60,375
premium.
Dec. 31 Interest Expense 59,388

Premium on Bonds Payable 987
Cash 60,375
premium.
Exercises
Assume bonds payable are amortized using the straight-line amortization method unless stated
otherwise.
E14-17 Accounting for long-term notes payable transactions

2. Total Liabilities $52,680
Consider the following note payable transactions of Caldwell Video Productions.
Requirements
1. Journalize the transactions for the company.
2. Considering the given transactions only, what are Caldwell Video Productions’ total liabilities on
December 31, 2017?

SOLUTION
Requirement 1

2016
Apr. 1 Equipment 56,000
Purchased equipment by issuing an 7-year,
13% note.
Dec. 31 Interest Expense ($56,000 × 0.13 × 9/12) 5,460

Recognized accrued interest.
2017
Apr. 1 Interest Expense ($56,000 × 0.13 × 3/12) 1,820
Notes Payable 8,000
Cash 15,280
Paid first installment of note.

Recognized accrued interest.
Requirement 2
Dec. 31, 2017

Interest Payable $ 4,680
Total liabilities $ 52,680

E14-18 Recording mortgage payable entries and reporting liabilities
Learning Objective 1, 5
2. Long-term liability $685,920
Inchirah Company borrowed $750,000 on January 1, 2012, by issuing $800,000, 8% mortgage note
payable. The terms call for semiannual installment payments of $60,000 on June 30 and December 31.
Requirements
1. Prepare the journal entries to record the mortgage loan and the first two instalment payments.
2. Indicate the amount of mortgage note payable to be reported as a current liability and as a long-term
liability at December 31, 2012.
SOLUTION
Requirement 1
January 1, 2012
Cash.............................................................................................. 800,000
Mortgage Payable................................................................. 800,000
June 30, 2012

Interest Expense
($800,000 × 8% × 6/12)............................................................. 32,000
Mortgage Payable ......................................................................... 28,000
Cash...................................................................... 60,000
December 31, 2012

Interest Expense
($772,000 × 8% × 6/12)............................................................. 30,880
Mortgage Payable ......................................................................... 29,120
Cash...................................................................... 60,000
Requirement 2
Current: $56,960
[$60,000 – ($742,880 × 8% × 6/12)] + [$60,000 – ($681,122 × 8% × 6/12)]
Long-term: $685,920 [($800,000 – $28,000 – $29,120) – $56,960]
E14-19 Analyzing alternative plans to raise money

AF Electronics is considering two plans for raising $3,000,000 to expand operations. Plan A is to issue
7% bonds payable, and plan B is to issue 100,000 shares of common stock. Before any new financing,
AF has net income of $250,000 and 200,000 shares of common stock outstanding. Management believes
the company can use the new funds to earn additional income of $500,000 before interest and taxes. The
income tax rate is 30%. Analyze the AF Electronics situation to determine which plan will result in
higher earnings per share. Use Exhibit 14-6 as a guide.

SOLUTION
Plan A: Plan B:
Issue $3,000,000 of 7% Issue $3,000,000 of
Bond Payable Common Stock
Net income before new project $ 250,000 $ 250,000
Expected income on the new project before $ 500,000 $ 500,000
interest and income tax expenses
Less: Interest expense ($3,000,000 × 0.07) 210,000 0
Project income before income tax 290,000 500,000
Less: Income tax expense (30%) 87,000 150,000
Project net income 203,000 350,000
Net income with new project $ 453,000 $ 600,000
Earnings per share with new project:
Plan A ($453,000 / 200,000 shares) $ 2.27
Plan B ($600,000 / 300,000 shares) $ 2.00
Plan A will have higher earnings per share.
E14-20 Determining bond prices and interest expense

2. Market price $404,200
Nooks is planning to issue $470,000 of 5%, 10-year bonds payable to borrow for a major expansion. The
owner, Simon Nooks, asks your advice on some related matters.
Requirements
1. Answer the following questions:
a. At what type of bond price will Nooks have total interest expense equal to the cash interest
payments?
b. Under which type of bond price will Nooks’ total interest expense be greater than the cash
interest payments?
c. If the market interest rate is 7%, what type of bond price can Nooks expect for the bonds?
2. Compute the price of the bonds if the bonds are issued at 86.
3. How much will Nooks pay in interest each year? How much will Nooks’ interest expense be for the
first year?

SOLUTION
Requirement 1
a. Face Value
b. Discount
c. Discount
Requirement 2
Face value × Issue price Market price or

Cash received
$470,000 × 0.86 $404,200
Requirement 3
Cash paid each year Interest expense – 1st year

$470,000 × 0.05 = $23,500 [($470,000 − $404,200) / 10] + $23,500 = $30,080
E14-21 Journalizing bond issuance and interest payments

1. Bonds Payable $5,000,000
On January 1, 2012, Primo Corporation issued 8%, 20-year bonds with a face amount of $5,000,000 at
101. Interest is payable semiannually on June 30 and December 31.
Requirements
1. Prepare the entry to record the issuance of the bonds
2. Prepare the entry to record the first semiannual interest payment assuming that the company uses
straight-line amortization.
SOLUTION
Jan. 1 Cash........................................................................................ 5,050,000

Premium on Bonds Payable.......................................... 50,000
Bonds Payable............................................................... 5,000,000
($5,000,000 × 1.01 = $5,050,000)
June 30 Interest Expense..................................................................... 198,750

Premium on Bonds Payable................................................... 1,250
Cash............................................................................... 200,000
($5,000,000 × .08 ÷ 2 = $200,000)
($50,000 ÷ 40 = $1,250)

1. June 30 Discount DR $7,200
On June 30, Danver Limited issues 5%, 20-year bonds payable with a face value of $120,000. The
bonds are issued at 94 and pay interest on June 30 and December 31.
Requirements
1. Journalize the issuance of the bonds on June 30.
2. Journalize the semiannual interest payment and amortization of bond discount on December 31.
SOLUTION
Requirement 1
June 30 Cash ($120,000 × 0.94) 112,800

Discount on Bonds Payable ($120,000 – $112,800) 7,200
Issued bonds at a discount.
Requirement 2
Dec. 31 Interest Expense ($3,000 + $180) 3,180

Cash ($120,000 × 0.05 × 6/12) 3,000
Paid semiannual interest and amortized discount.
E14-23 Journalizing bond transactions

2. Interest Expense DR $3,440
Franklin issued $80,000 of 10-year, 8% bonds payable on January 1, 2016. Franklin pays interest each
January 1 and July 1 and amortizes discount or premium by the straight-line amortization method. The
company can issue its bonds payable under various conditions.
Requirements
1. Journalize Franklin’s issuance of the bonds and first semiannual interest payment assuming the
bonds were issued at face value. Explanations are not required.
bonds were issued at 94. Explanations are not required.
bonds were issued at 103. Explanations are not required.
4. Which bond price results in the most interest expense for Franklin? Explain in detail.

SOLUTION
Requirement 1

2016
Jan. 1 Cash 80,000
July 1 Interest Expense 3,200

Cash ($80,000 × 0.08 × 6/12) 3,200
Requirement 2

2016
Jan. 1 Cash ($80,000 × 0.94) 75,200
July 1 Interest Expense ($240 + $3,200) 3,440

Cash ($80,000 × 0.08 × 6/12) 3,200
Requirement 3

2016
Jan. 1 Cash ($80,000 × 1.03) 82,400
July 1 Interest Expense ($3,200 − $120) 3,080

Cash ($80,000 × 0.08 × 6/12) 3,200
Requirement 4
The bond issue at a discount results in a higher interest expense for the company. The discount needs to
be amortized over the life of the bond, resulting in interest expense greater than the amount of interest
actually paid.

1. Premium CR $3,600
On January 1, 2016, Dave Unlimited issues 10%, 20-year bonds payable with a face value of $180,000.
The bonds are issued at 102 and pay interest on June 30 and December 31.
Requirements
1. Journalize the issuance of the bonds on January 1, 2016.
2. Journalize the semiannual interest payment and amortization of bond premium on June 30, 2016.
3. Journalize the semiannual interest payment and amortization of bond premium on December 31,
2016.
4. Journalize the retirement of the bond at maturity. (Give the date.)
SOLUTION
Requirement 1
2016
Jan. 1 Cash ($180,000 × 1.02) 183,600
Requirement 2
2016
Jun. 30 Interest Expense ($9,000 − $90) 8,910
Cash ($180,000 × 0.10 × 6/12) 9,000
Requirement 3
2016
Dec. 31 Interest Expense ($9,000 − $90) 8,910
Cash ($180,000 × 0.10 × 6/12) 9,000
Requirement 4
2035
Dec. 31 Bonds Payable 180,000
Cash 180,000

E14-25 Retiring bonds payable before maturity
2. Cash CR $696,900
Parkview Magazine issued $690,000 of 15-year, 5% callable bonds payable on July 31, 2016, at 95. On
July 31, 2019, Parkview called the bonds at 101. Assume annual interest payments.
Requirements
1. Without making journal entries, compute the carrying amount of the bonds payable at July 31, 2019.
2. Assume all amortization has been recorded properly. Journalize the retirement of the bonds on July
31, 2019. No explanation is required.
SOLUTION
Requirement 1
Face value $690,000 – Carrying Value $655,500 ($690,000 × .95) = Discount $34,500
Discount $34,500 / 15 years = $2,300 amortized per year
Discount Carrying
Amortized Amount
07/31/2016 $ 655,500
07/31/2016 $ 2,300 657,800
07/31/2017 2,300 660,100
07/31/2018 2,300 662,400
Requirement 2

2019
July 31 Bonds Payable 690,000
Loss on Retirement of Bonds Payable 34,500
Discount on Bonds Payable
($34,500 – (3 × $2,300)) 27,600
Cash ($690,000 × 1.01) 696,900
Face value of the bonds being retired $ 690,000

Less: Discount 27,600
Carrying amount of bonds payable 662,400
Loss on retirement of bonds payable $ (34,500)

E14-26 Reporting current and long-term liabilities
Learning Objectives 2, 3, 5
The adjusted trial balance for Louma Corporation at the end of 2012 contained the following accounts:
Requirements
1. Prepare the long-term liabilities section of the balance sheet.
2. Indicate the proper balance sheet classification for the accounts listed above that do not belong in the
long-term liabilities section.
SOLUTION
Requirement 1
Long-term liabilities
Bonds payable 10% $700,000
Less: bond discount 40,000 $660,000
Mortgage payable 9% 90,000
Total long-term liabilities $750,000
Requirement 2
Bond interest payable and accounts payable should be classified as current liabilities.
E14-27 Reporting liabilities

Total Liabilities $358,000
At December 31, MediAssist Precision Instruments owes $51,000 on Accounts Payable, Salaries
Payable of $12,000, and Income Tax Payable of $10,000. MediAssist also has $280,000 of Bonds
Payable that were issued at face value that require payment of a $50,000 installment next year and the
remainder in later years. The bonds payable require an annual interest payment of $5,000, and
MediAssist still owes this interest for the current year. Report MediAssist’s liabilities on its classified
balance sheet.

SOLUTION
MEDIASSIST PRECISION INSTRUMENTS

December 31
Liabilities
Current Liabilities
Current Portion of Bonds Payable 50,000
Income Tax Payable 10,000
E14-28 Computing the debt to equity ratio

Nina Corporation has the following data as of December 31, 2016:
Compute the debt to equity ratio at December 31, 2016.
SOLUTION
Present value of principal ($600,000 × .61391)....................................... $368,346

Present value of interest ($24,000 × 7.72173)......................................... 185,322
Market price of bonds.............................................................................. $553,668
E14A-29 Determining the present value of bonds payable

Appendix 14A
Present value $368,346
Rabih Corporation is issuing $600,000 of 8%, 5-year bonds when potential bond investors want a return
of 10%. Interest is payable semiannually. The present value factors are 4%, 0.67556 and 5%, 0.61391.
The present value of an annuity factors are 4%, 8.1109 and 5%, 7.72173.
Requirements
Compute the market price (present value) of the bonds.

SOLUTION
(a) $760,000 ($800,000  0.95)
(b) $36,000 ($800,000  0.09  6/12)
(c) $38,000 ($760,000  0.1  6/12)
(d) $762,000 (760,000 + ($38,000 – $36,000))
E14B-30 Journalizing bond transactions using the effective-interest amortization method

Appendix 14B
2. Interest Expense DR $6,208
Journalize issuance of the bond and the first semiannual interest payment under each of the following
three assumptions. The company amortizes bond premium and discount by the effective-interest
amortization method. Explanations are not required.
1. Ten-year bonds payable with face value of $86,000 and stated interest rate of 14%, paid
semiannually. The market rate of interest is 14% at issuance. The present value of the bonds at
issuance is $86,000.
2. Same bonds payable as in assumption 1, but the market interest rate is 16%. The present value of the
bonds at issuance is $77,594.
3. Same bonds payable as in assumption 1, but the market interest rate is 8%. The present value of the
bonds at issuance is $121,028.

SOLUTION
Requirement 1
Cash 86,000
Issued bonds at face value.
Interest Expense 6,020

Cash 6,020
Paid semi-annual interest payment.
Requirement 2
Cash 77,594
Issued bonds at discount.

Discount on Bonds Payable 188
Cash 6,020
discount.

Beginning $ 77,594
1st pmt $ 6,020 $ 6,208 $188 77,782

$6,208 = $77,594 × 0.16 × 6/12

E14B-30, cont.
Requirement 3
Cash 121,02
8
Issued bonds at premium.

Premium on Bonds Payable 1,179
Cash 6,020
premium.

Beginning $ 121,028
1st pmt $ 6,020 $ 4,841 $ 1,179 119,849

$4,841 = $121,028 × 0.08 × 6/12

Problems (Group A)
P14-31A Journalizing liability transactions and reporting them on the balance sheet
1. Mar. 1, 2017, Mortgage Payable DR $4,710
The following transactions of Smith Pharmacies occurred during 2016 and 2017:
Requirements
1. Journalize the transactions in the Smith Pharmacies general journal. Round all answers to the nearest
dollar. Explanations are not required.
2. Prepare the liabilities section of the balance sheet for Smith Pharmacies on March 1, 2017 after all
the journal entries are recorded.

SOLUTION
Requirement 1

2016
Mar. 1 Cash 240,000
Dec. 1 Cash 150,000



2017 Interest Payable 1,375

Jan. 1 Mortgages Payable ($6,000 − $1,375) 4,625
Cash 6,000
Feb. 1 Interest Expense 1,333

Mortgages Payable ($6,000 − $1,333) 4,667
Cash 6,000
Mar. 1 Interest Expense 1,290

Cash 6,000
Mar. 1 Interest Payable 14,000

Interest Expense($240,000 × 0.07 × 2/12) 2,800
Cash 46,800

P14-31A
Requirement 1, cont.
Sawyer Bank Interest Calculations
Beginning Principal Interest Total Ending

Balance Payment Expense Payment Balance
12/01/2016 $ 150,000
01/01/2017 $ 150,000 $ 4,625 1,375 $ 6,000 145,375
02/01/2017 145,375 4,667 1,333 6,000 140,708
03/01/2017 140,708 4,710 1,290 6,000 135,998

$1,375 = $150,000 × 0.11 × 1/12
1,333 = 145,375 × 0.11 × 1/12
1,290 = 140,708 × 0.11 × 1/12
Requirement 2
SMITH PHARMACIES
March 1, 2017
Liabilities
Current Liabilities
Current Portion of Notes Payable $ 30,000
Current Portion of Mortgages Payable
(See table) 60,004

P14-31A
Requirement 2, cont.
Beginning Principal Interest Total Ending

Balance Payment Expense Payment Balance
12/01/2016 $ 150,000
01/01/2017 $ 150,000 $ 4,625 1,375 $ 6,000 145,375
02/01/2017 145,375 4,667 1,333 6,000 140,708
03/01/2017 140,708 4,710 1,290 6,000 135,998
04/01/2017 135,998 4,753 1,247 6,000 131,245
05/01/2017 131,245 4,797 1,203 6,000 126,448
06/01/2017 126,448 4,841 1,159 6,000 121,607
07/01/2017 121,607 4,885 1,115 6,000 116,722
08/01/2017 116,722 4,930 1,070 6,000 111,792
09/01/2017 111,792 4,975 1,025 6,000 106,817
10/01/2017 106,817 5,021 979 6,000 101,796
11/01/2017 101,796 5,067 933 6,000 96,729
12/01/2017 96,729 5,113 887 6,000 91,616
01/01/2018 91,616 5,160 840 6,000 86,456
02/01/2018 86,456 5,207 793 6,000 81,249
03/01/2018 81,249 5,255 745 6,000 75,994
Principal portion of mortgage over next 12 months (4/1/2017 through 3/1/2018)

$60,004 = 4,753 + 4,797 + 4,841 + 4,885 + 4,930 + 4,975 + 5,021 + 5,067 + 5,113 +
5,160 + 5,207 + 5,255

P14-32A Analyzing, journalizing, and reporting bond transactions
2. Discount CR $4,500
Bob’s Hamburgers issued 8%, 10-year bonds payable at 70 on December 31, 2016. At December 31,
2018, Billy reported the bonds payable as follows:
Bob’s pays semiannual interest each June 30 and December 31.
Requirements
1. Answer the following questions about Bob’s bonds payable:
a. What is the maturity value of the bonds?
b. What is the carrying amount of the bonds at December 31, 2018?
c. What is the semiannual cash interest payment on the bonds?
d. How much interest expense should the company record each year?
2. Record the June 30, 2018, semiannual interest payment and amortization of discount.
SOLUTION
Requirement 1
a. $300,000
b. $228,000
c. $300,000 × 0.08 × 12/12 = $24,000; $24,000 × 1/2 = $12,000
semiannual cash payment
d. $300,000 – ($300,000 × 0.70) = $90,000 Discount / 10 years =
$9,000 per year plus $24,000 = $33,000 interest expense per year
Requirement 2

2018
Jun. 30 Interest Expense ($12,000 + $4,500) 16,500
Discount on Bonds Payable ($90,000 × 1/20) 4,500
Cash ($300,000 × 0.08 × 6/12) 12,000
discount.

P14-33A Analyzing and journalizing bond transactions
3. June 30, 2016, Interest Expense DR $16,400
On January 1, 2016, Teacher Credit Union (TCU) issued 8%, 20-year bonds payable with face value of
$400,000. The bonds pay interest on June 30 and December 31.
Requirements
1. If the market interest rate is 6% when TCU issues its bonds, will the bonds be priced at face value, at
a premium, or at a discount? Explain.
2. If the market interest rate is 9% when TCU issues its bonds, will the bonds be priced at face value, at
a premium, or at a discount? Explain.
3. The issue price of the bonds is 96. Journalize the following bond transactions:
a. Issuance of the bonds on January 1, 2016.
b. Payment of interest and amortization on June 30, 2016.
c. Payment of interest and amortization on December 31, 2016.
d. Retirement of the bond at maturity on December 31, 2035.

SOLUTION
Requirement 1
The 8% bonds will be issued at a premium if the market interest rate is 6%. They are attractive in this
market, so investors will pay more than the face value to acquire them.
Requirement 2
The 8% bonds will be issued at a discount if the market interest rate is 9%. They are unattractive in this
market, so investors will play less than face value to acquire them.
Requirement 3

2016
Jan. 1 Cash ($400,000 × 0.96) 384,000
Issued bonds at discount
Jun. 30 Interest Expense ($16,000 + $400) 16,400

Discount on Bonds Payable ($16,000 x 1/40) 400
Cash ($400,000 × 0.08 × 6/12) 16,000
discount.
Dec. 31 Interest Expense ($16,000 + $400) 16,400

Cash ($400,000 × 0.08 × 6/12) 16,000
discount.
2035
Cash 400,000
Retired bonds

P14-34A Analyzing and journalizing bond transactions
June 30, 2016, Interest Expense DR $20,400
On January 1, 2016, Agricultural Credit Union (ACU) issued 7%, 20-year bonds payable with face value
of $600,000. These bonds pay interest on June 30 and December 31. The issue price of the bonds is 104.
Journalize the following bond transactions:

a. Issuance of the bonds on January 1, 2016.
b. Payment of interest and amortization on June 30, 2016.
c. Payment of interest and amortization on December 31, 2016.
d. Retirement of the bond at maturity on December 31, 2035.
SOLUTION

2016
Jan. 1 Cash ($600,000 × 1.04) 624,000
Premium on Bonds Payable ($624,000 −
$600,000) 24,000
Issued bonds at premium
Jun. 30 Interest Expense ($21,000 − $600) 20,400

Cash ($600,000 × 0.07 × 6/12) 21,000
premium.
Dec. 31 Interest Expense ($21,000 − $600) 20,400

Cash ($600,000 × 0.07 × 6/12) 21,000
premium.
2035
Cash 600,000
Retired bonds

P14-35A Reporting liabilities on the balance sheet and computing debt to equity ratio
The accounting records of Router Wireless include the following as of December 31, 2016:
Requirements
1. Report these liabilities on the Router Wireless balance sheet, including headings and totals for
current liabilities and long-term liabilities.
2. Compute Router Wireless’s debt to equity ratio at December 31, 2016.
SOLUTION
Requirement 1
ROUTER WIRELESS
December 31, 2016
Liabilities
Current Liabilities
Unearned Revenue 3,400
Current Portion of Bonds Payable 25,000
Bonds Payable $ 63,000
Plus: Premium on Bonds Payable 13,000 76,000
Requirement 2
Debt to equity ratio = Total liabilities / Total equity

1.73 = 276,900 / $160,000

P14AB-36A Determining the present value of bonds payable and journalizing using the effective-
interest amortization method
Appendixes 14A, 14B
3. Jan. 1, 2016, Cash DR $529,170
Ben Norton issued $500,000 of 9%, 8-year bonds payable on January 1, 2016. The market interest rate
at the date of issuance was 8%, and the bonds pay interest semiannually.
Requirements
1. How much cash did the company receive upon issuance of the bonds payable? (Round all numbers
to the nearest whole dollar.)
2. Prepare an amortization table for the bond using the effective-interest method, through the first two
interest payments. (Round all numbers to the nearest whole dollar.)
3. Journalize the issuance of the bonds on January 1, 2016, and payment of the first semiannual interest
amount and amortization of the bond on June 30, 2016. Explanations are not required.
SOLUTION
Requirement 1

i = 4% (8% / 2),
n = 16 (8 years x 2)
= $500,000 × 0.534
= $267,000

i = 4% (8% / 2),
n = 16 (8 years x 2)
= ($500,000 × 0.09 × 6/12) ×
= $22,500 × 11.652
= $262,170

= $267,000 + $262,170
= $529,170

P14AB-36A, cont.
Requirement 2

01/01/2016 $ 529,170
06/30/2016 $ 22,500 $ 21,167 $ 1,333 527,837
12/31/2016 22,500 21,113 1,387 526,450
Stated interest
$22,500 $500,000 × 0.09 × 6/12

$21,167 = $529,170 × 0.08 × 6/12
$21,113 $527,837 × 0.08 × 6/12
Requirement 3

2016
Jan. 1 Cash 529,170
Jun. 30 Interest Expense ($22,500 − $1,333) 21,167

Premium on Bonds Payable 1,333
Cash 22,500
P14AB-37A Determining the present value of bonds payable and journalizing using the effective-
interest amortization method
Appendixes 14A, 14B
3. Jan. 1, 2016, Cash DR $557,025
Serenity, Inc. is authorized to issue 5%, 10-year bonds payable. On January 1, 2016, when the market
interest rate is 8%, the company issues $700,000 of the bonds. The bonds pay interest semiannually.
Requirements
1. How much cash did the company receive upon issuance of the bonds payable? (Round all numbers
to the nearest whole dollar.)
2. Prepare an amortization table for the bond using the effective-interest method, through the first two
interest payments. (Round all numbers to the nearest whole dollar.)
3. Journalize the issuance of the bonds on January 1, 2016, and payment of the first semiannual interest
amount and amortization of the bond on June 30, 2016. Explanations are not required.

SOLUTION
Requirement 1

i = 4% (8% / 2),
n = 20 (10 years x 2)
= $700,000 × 0.456
= $319,200

i = 4% (8% / 2),
n = 20 (10 years x 2)
= ($700,000 × 0.05 × 6/12) ×
= $17,500 × 13.590
= $237,825

= $319,200 + $237,825
= $557,025
Requirement 2

01/01/2016 $ 557,025
06/30/2016 $ 17,500 $ 22,281 $ 4,781 561,806
12/31/2016 17,500 22,472 4,972 566,778
Stated interest
$ 17,500 = $ 700,000 × × 6/12
0.05

$22,281 = $557,025 × 0.08 × 6/12
$22,472 = $561,806 × 0.08 × 6/12

P14AB-37A, cont.
Requirement 3

2016
Jan. 1 Cash 557,025
Discount on Bonds Payable ($700,000 − 142,975
$557,025)
Jun. 30 Interest Expense ($17,500 + $4,781) 22,281

Cash 17,500

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Chapter 14

2. What is an amortization schedule?

4. What is a bond payable?

5. List three types of bonds and briefly describe each of them.

6. When does a discount on bonds payable occur?

7. When does a premium on bonds payable occur?

8. What is the value of a bond at the maturity period?

© 2016 Pearson Education, Ltd. 14-1

10. Define the term ‘leverage’.

11. What are the advantages and disadvantages of issuing bonds?

15. What does it mean when a company calls a bond?

© 2016 Pearson Education, Ltd. 14-2

The time value of money depends on these key factors:

19A. What is an annuity?

An annuity is a stream of equal cash payments made at equal time intervals.

20A. How does compound interest differ from simple interest?

© 2016 Pearson Education, Ltd. 14-3

S14-1 Accounting for a long-term note payable

Date Accounts and Explanation Debit Credit

Date Accounts and Explanation Debit Credit

© 2016 Pearson Education, Ltd. 14-4

Date Accounts and Explanation Debit Credit

Date Accounts and Explanation Debit Credit

© 2016 Pearson Education, Ltd. 14-5

S14-4 Pricing bonds

Face Value × Issue Price = Market Price

© 2016 Pearson Education, Ltd. 14-6

Quick Drive-Ins borrowed money by issuing $4,000,000 of 4% bonds payable at 96.5.

Face value × Issue price = Cash received

Quick will have to pay back $4,000,000 at maturity.

Quick will pay $80,000 in interest payments every six months.

Face value × Interest rate × Time period = Interest payment

© 2016 Pearson Education, Ltd. 14-7

Date Accounts and Explanation Debit Credit

Date Accounts and Explanation Debit Credit

© 2016 Pearson Education, Ltd. 14-8

Ogden issued a $70,000, 12%, 10-year bond payable at 90 on January 1, 2016.

Date Accounts and Explanation Debit Credit

Date Accounts and Explanation Debit Credit

© 2016 Pearson Education, Ltd. 14-9

Date Accounts and Explanation Debit Credit

Date Accounts and Explanation Debit Credit

© 2016 Pearson Education, Ltd. 14-10

Date Accounts and Explanation Debit Credit

b. July 1 Interest Expense 3,750

© 2016 Pearson Education, Ltd. 14-11

Face value × Issue price Market price or Premium on bond

Amortization of bond premium $36,000 / 10 periods = 3,600 per interest payment

Face value of the bonds being retired $ 400,000

Market price paid to retire the bonds ($400,000 × 0.95) 380,000

Carrying amount of bonds payable 428,800

© 2016 Pearson Education, Ltd. 14-12

MASTER SUITES HOTELS

© 2016 Pearson Education, Ltd. 14-13

Richards Corporation has the following amounts as of December 31, 2016.

Compute the debt to equity ratio at December 31, 2016.

Debt to equity ratio = Total liabilities / Total equity

© 2016 Pearson Education, Ltd. 14-14

Present Amount of each cash Annuity PV factor for

Present PV factor for

Scenario 3 has the highest present value.

© 2016 Pearson Education, Ltd. 14-15