USA Long Term Liabilities Problem Solving

[KajuMonkey]

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(Hello fellow Accountants and future Accountants! Below I have listed ten questions that I come to you, the knowledgeable accountants, seeking your help. I have listed out the problem, and the answer, but I was hoping that someone on here could take some of your precious time to show me how the answer is calculated, and the steps that it took to get to the answer so that I can understand how the problem is solved. I would greatly greatly greatly appreciate it as this would help me study and understand the concepts. Thank you for your time.)


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(1) Farmer Company issues $25,000,000 of 10-year, 9% bonds on March 1, 2014 at 97 plus accrued interest. The bonds are dated January 1, 2014, and pay interest on June 30 and December 31. What is the total cash received on the issue date?

Answer: $24,625,000

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(2) On January 1, 2014, Huber Co. sold 12% bonds with a face value of $1,000,000. The bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $1,077,250 to yield 10%. Using the effective-interest method of amortization, interest expense for 2014 is

Answer: $107,419

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(3) On January 1, 2014, Ann Price loaned $112,695 to Joe Kiger. A zero-interest-bearing note (face amount, $150,000) was exchanged solely for cash. The note is to be repaid on December 31, 2016. The prevailing rate of interest for a loan of this type is 10%. The present value of $150,000 at 10% for three years is $112,695. What amount of interest income should Ms. Price recognize in 2014?

Answer: $11,270

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(4) On June 30, 2015, Omara Co. had outstanding 8%, $6,000,000 face amount, 15-year bonds maturing on June 30, 2025. Interest is payable on June 30 and December 31. The unamortized balances in the bond discount and deferred bond issue costs accounts on June 30, 2015 were $210,000 and $60,000, respectively. On June 30, 2015, Omara acquired all of these bonds at 94 and retired them. What net carrying amount should be used in computing gain or loss on this early extinguishment of debt?

Answer: $5,730,000

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(5) Kent Corporation retires it's $300,000 face value bonds at 102 on January 1, following the payment of interest. The carrying (book) value of the bonds at the redemption date is $288,750. The entry to record the redemption will include a:

Answer: Credit of 11,250 to Discount on Bonds Payable

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(6) A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,144, Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2014 balance sheet?

Answer: $19,612,642

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(7) On January 1, 2014, Solis Co. issued its 10% bonds in the face amount of $6,000,000, which mature on January 1, 2024. The bonds were issued for $6,810,000 to yield 8%, resulting in bond premium of $810,000. Solis uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2014, Solis's unamortized bond premium should be

Answer: $754,800

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(8) On October 1, 2014 Bartley Corporation issued 5%, 10-year bonds with a face value of $5,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. The entry to record the issuance of the bonds would include a

Answer: credit of $200,000 to Premium on Bonds Payable

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(9) A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. What isinterest expensefor 2015, usingstraight-lineamortization?

Answer: $789,896

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(10) On January 1, 2014, Ellison Co. issued eight-year bonds with a face value of $4,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:

Present value of 1 for 8 periods at 6%............................................. .627

Present value of 1 for 8 periods at 8%............................................. .540

Present value of 1 for 16 periods at 3%........................................... .623

Present value of 1 for 16 periods at 4%........................................... .534

Present value of annuity for 8 periods at 6%................................... 6.210

Present value of annuity for 8 periods at 8%................................... 5.747

Present value of annuity for 16 periods at 3%................................. 12.561

Present value of annuity for 16 periods at 4%................................. 11.652

The issue price of the bonds is

Answer: $3,534,240

 

[Cady M]

Hi! I just stumbled across your thread on Google actually. I'm currently in Intermediate 2 and just failed my midterm (1 of 2 tests yay!). I have to get a 76 on the final to get a C in the class. So my life is about to be this class and a couple of the questions you posted were actually on my midterm! I really like doing these problems, even though I failed my test, ugh (it's seriously the hardest tests I've ever taken.)
However my first question is whether you have a BAIIPlus calculator. I pray you say yes, because using those charts is awful.

 

[Cady M]

1) Farmer Company issues $25,000,000 of 10-year, 9% bonds on March 1, 2014 at 97 plus accrued interest. The bonds are dated January 1, 2014, and pay interest on June 30 and December 31. What is the total cash received on the issue date?

(Bear with me, I might say some of this wrong but I'm trying) Ok so when a company issues a bond (March 1) after the date stated on the face of the bond (Jan 1) the customer actually pays the company the interest they "missed out" on since the bonds were issued 2 months after stated date. The customer does this because when it comes times for Farmer to make the first interest payment on June 30 he will pay the customer the entire semiannual interest, Jan. 1 - June 30

So in this case the cash Farmer receives is computed by $25,000,000 X .97 (the bond sold for a discount) = 24,250,000
Now I decided to find out how much the interest payment way going to be monthly. There are a million different ways people do this which always confuses me, so I try and do what I understand best.
$25,000,000 X .09 = $2,250,000 a year in interest.
$2,250,000 / 12 months = $187,500 a month in interest
So the company missed out on 2 months of interest, January and February.
$187,500 X 2 months = $375,000
$24,250,000 + $375,000 = $24,625,000 cash paid to farmer.

So when June 30 comes up, the customer will receive the full six months interest payment of $1,125,000, essentially reimbursing them for their extra costs at purchase.

Honestly there is probably a correct term for this but I'm still learning all of that. I'm going to keep looking at these and solving them. I'll post what I figure out. Doing this on an iPhone is an awful idea lol

 

[KajuMonkey]

Thank you for your response! I, like you, did not do so well on my midterm and i also calculated an estimate of what i would have to get on the final to pass the class! lol! It's why i need to study hard and do well on this final. That's why i really need to learn the concepts for these questions so that i can have a better chance at passing this class.

 

[Cady M]

Did my explanation for the first question make sense to you? I typed it on my iPhone after being awake for 36 hours straight so I might not have been as clear as I should have.

And do you have the BAII Plus calculator? I really hope you are not solving Present Value and Future Value problems without it.

 

[KajuMonkey]

Your explanation was good. Thank you. We do not use the BAII plus calculator, only normal/scientific calculators. For Present Value and Future Value calculations, we just get the amount of periods, percentage, and use the charts provided in the book and calculate it that way.

 

[Cady M]

Will your school not allow you to use this calculator? If they will let you I HIGHLY recommend buying one and they are only 25-30$ at Target. It will greatly decrease your work, confusion, and you will use this calculator in finance.

Take number 10 for example:
(10) On January 1, 2014, Ellison Co. issued eight-year bonds with a face value of $4,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%.

The calculator has 5 keys for calculating these problems: N (number of periods), I/Y (interest rate), NPV (net present value), PMT (payments, I think R, or rents, is used in my book), and FV (future value). You can also change the setting for an ordinary annuity (payments at the end of the month) or an annuity due (payments at the end of the month), but that doesn't have anything to do with this particular problem.

In this case, your number of periods, N, would be 16 (8 year bonds X semiannual payments).
The yield, or effective rate is used as your I/Y. Here is would be 4% due to the semiannual nature. 8%/2
The PV is what we are solving for, or the issue price because the bonds will have a future value, FV, of $4,000,000.
We solve for the PMT by multiplying the stated rate times the face value of the bonds. $4,000,000 X 3% (aka 6% / semiannual payments) = $120,000
Entering that all into the calculator and CPT for PV, I however, do not get $3,534,240. I get $3,533,908.18, which is only off by $331.82

I would love for someone else that uses a calculator on here to tell me if I am doing something wrong or if the answers are just that far off from using the charts or calculator.

 

[Cady M]

 

[Cady M]

 

[Cady M]

I hope you can see these two images! I tried to submit the answers on here and it distorted all of my tables and entries

 

[KajuMonkey]

the images are showing! Thank you so much so far for your efforts. You are a great help!

 

[KajuMonkey]

Would anyone else be able to assist with the remaining problems? My final is coming up monday and i really need to understand these concepts by then.

 

[KajuMonkey]

Please ignore my last post. Thank you Cady for the help. This thread has been solved.

 

[Cady M]

Good luck to you on your final! I hope you did well!

Turns out my teacher put our midterm grades in wrong! I ended up passing

 

[KajuMonkey]

hey, thanks for your help!!! it turns out that i did end up passing the midterm and i barely passed the class. thanks again for your help. Also, i'm glad you passed!

 

[Cady M]

Awesome! I'm glad I could help!