CH 10 - End of Chapter Exercises Solutions

CHAPTER 10
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 10-1
(a) A note payable due in two years is a long-term liability, not a current
liability.
(b) $20,000 of the mortgage payable is a current maturity of long-term

debt. This amount should be reported as a current liability.
(c) Interest payable is a current liability because it will be paid out of

current assets in the near future.
(d) Accounts payable is a current liability because it will be paid out of

current assets in the near future.
BRIEF EXERCISE 10-2
(a) July 1 Cash .......................................................... 90,000

Notes Payable ................................... 90,000
(b) Dec. 31 Interest Expense ....................................... 3,150

Interest Payable
($90,000 X 7% X 6/12) .................... 3,150
BRIEF EXERCISE 10-3
Sales tax payable
(1) Sales = ($10,388 ÷ 1.06) = $9,800

(2) Sales taxes payable = ($9,800 X 6%) = $588
or $10,388 – $9,800 = $588
Mar. 16 Cash .................................................................. 10,388

Sales Revenue .......................................... 9,800
Sales Taxes Payable ................................. 588
Copyright © 2013 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 7/e, Solutions Manual (For Instructor Use Only) 10-1
10-2 Copyright © 2013 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 7/e, Solutions Manual (For Instructor Use Only)
BRIEF EXERCISE 10-4
(a) Cash (3,500 X $80) .................................................. 280,000

Unearned Ticket Revenue .............................. 280,000
(To record sale of 3,500 season tickets)
(b) Unearned Ticket Revenue ...................................... 28,000

Ticket Revenue ($280,000 ÷ 10)....................... 28,000
(To record basketball ticket revenue
earned)
BRIEF EXERCISE 10-5
Gross earnings:
Regular pay (40 X $16) ........................................... $640.00
Overtime pay (7 X $24) ........................................... 168.00 $808.00
Gross earnings ............................................................... $808.00

Less: FICA taxes payable ($808 X 7.65%) .................... $ 61.81
Federal income taxes payable ........................... 95.00 156.81
Net pay ............................................................................ $651.19
BRIEF EXERCISE 10-6
Jan. 15 Salaries and Wages Expense.................... 808.00

FICA Taxes Payable ($808 X 7.65%) 61.81
Federal Income Taxes Payable ........ 95.00
Salaries and Wages Payable ............ 651.19
Jan. 15 Salaries and Wages Payable ..................... 651.19

Cash................................................... 651.19
BRIEF EXERCISE 10-7
Jan. 15 Payroll Tax Expense .................................. 61.81

FICA Taxes Payable ($808 X 7.65%) 61.81
BRIEF EXERCISE 10-8
Cash ($300,000 X .98) ................................ 294,000

Discount on Bonds Payable...................... 6,000
Bonds Payable .................................. 300,000
BRIEF EXERCISE 10-9
Cash ($400,000 X 1.01) ................................................... 404,000

Bonds Payable .................................................. 400,000
Premium on Bonds Payable............................. 4,000
BRIEF EXERCISE 10-10
2014
(a) Jan. 1 Cash ................................................... 3,000,000
Bonds Payable
(3,000 X $1,000) ....................... 3,000,000
(b) Dec. 31 Interest Expense ....................... 210,000

Interest Payable
($3,000,000 X 7%) .............. 210,000
2015
(c) Jan. 1 Interest Payable ........................ 210,000
Cash......................................... 210,000
Bonds Payable ......................................................... 2,000,000

Loss on Bond Redemption
($2,040,000 – $1,955,000) .................................... 85,000
Cash ($2,000,000 X 1.02).................................. 2,040,000
Discount on Bonds Payable ............................ 45,000
Long-term liabilities
Bonds payable ................................................. $700,000
Less: Discount on bonds payable ................. 28,000 $672,000
Notes payable .................................................. 80,000
Total long-term liabilities ......................... $752,000
DESMOND INC.
Balance Sheet (Partial)
December 31, 2014
Current liabilities
Note payable .............................................. $ 20,000
Accounts payable ...................................... 157,000
Unearned rent revenue ............................. 240,000
Interest payable ......................................... 40,000
FICA taxes payable.................................... 7,800
Income taxes payable ............................... 3,500
Sales taxes payable................................... 1,700
Total current liabilities .......................... $ 470,000
Bonds payable ........................................... 900,000
Less: Discount on bonds payable ........... 41,000 859,000
Notes payable ............................................ 80,000
Total long-term liabilities .................... 939,000
Total liabilities ................................................... $1,409,000
(a) Working capital = $4,485 – $2,836 = $1,649

(b) Current ratio = $4,485 ÷ $2,836 = 1.58:1
(c) Debt to assets = $5,099 ÷ $8,875 = 57%
(d) Times interest earned = ($245 + $113 + $169) ÷ $169 = 3.12 times
Working capital and the current ratio measure a company’s ability to pay
maturing obligations and meet cash needs. Adidas’s current assets are
58% larger than the amount of its current liabilities which indicates a
relatively high degree of liquidity.
Debt to assets and times interest earned measure a company’s ability to

survive over a long period of time. Adidas’s debt to assets ratio indicates
that approximately $.57 of every dollar invested in assets was provided by
creditors. Adidas’s times interest earned ratio of 3.12 indicates that its
earnings are adequate to make interest payments as they come due.
(a) Debt to assets:
$14,180
Without operating leases = 59%
$24,004
$14,180 + $740
With operating leases = 60%
$24,004 + $740
(b) CN does not have significant operating leases, therefore its assets and
liabilities reflect its true financial position. By increasing its assets and
liabilities for these operating leases we see that its debt to assets ratio
increases only slightly from 59% to 60%.
*BRIEF EXERCISE 10-16
(a) Jan. 1 Cash (99% X $2,000,000) ................ 1,980,000

Discount on Bonds Payable ........... 20,000
Bonds Payable......................... 2,000,000
(b) Dec. 31 Interest Expense ............................. 142,000

Cash ($2,000,000 X 7%) ........... 140,000
Discount on Bonds
Payable ($20,000 ÷ 10) ......... 2,000
(a) Jan. 1 Cash (102% X $4,000,000) .............. 4,080,000

Bonds Payable ......................... 4,000,000
Premium on Bonds Payable ... 80,000
(b) Dec. 31 Interest Expense ............................. 304,000

Premium on Bonds Payable
($80,000 ÷ 5) ............................ 16,000
Interest Payable
($4,000,000 X 8%) ..................... 320,000
(a) Interest Expense ............................................... 48,070

Discount on Bonds Payable ..................... 3,070
Cash ........................................................... 45,000
(b) Interest expense is greater than interest paid because the bonds sold
at a discount. The bonds sold at a discount because investors demanded
a market interest rate higher than the contractual interest rate. Interest
expense is calculated using the effective interest rate which is higher
than the stated rate used to compute the cash payment.
(c) Interest expense increases each period because the bond carrying
value increases each period. As the market interest rate is applied to
this bond carrying value, interest expense will increase.
(A) (B) (C) (D)

Semiannual Interest Reduction Principal
Interest Cash Expense of Principal Balance
Period Payment (D) X 5% (A) – (B) (D) – (C)
Issue Date $600,000
1 $48,145 $30,000 $18,145 581,855
Dec. 31 Cash ...................................................... 600,000

Mortgage Payable ....................... 600,000
June 30 Interest Expense .................................. 30,000

Mortgage Payable ................................ 18,145
Cash ............................................. 48,145
SOLUTIONS TO DO IT! REVIEW EXERCISES
DO IT! 10-1
1. $60,000 X 10% X 5/12 = $2,500

2. $42,000/1.05 = $40,000; $40,000 X 5% = $2,000
3. $42,000 X 2/6 = $14,000
DO IT! 10-2
(a) To determine wages payable, reduce wages expense by the withholdings

for FICA, federal income tax, and state income tax.
Feb. 28 Salaries and Wages Expense ....................... 74,000

FICA Taxes Payable .................................. 5,661
Federal Income Taxes Payable ................. 7,100
State Income Taxes Payable ..................... 1,900
Salaries and Wages Payable .................... 59,339
(b) Payroll taxes would be for the company’s share of FICA, as well as for
federal and state unemployment tax.
Feb. 28 Payroll Tax Expense ...................................... 5,931

FICA Taxes Payable .................................. 5,661
Federal Unemployment Taxes Payable.... 110
State Unemployment Taxes Payable ....... 160
DO IT! 10-3
1. False. Convertible bonds can be converted into common stock at the

bondholder’s option; callable bonds can be redeemed by the issuer at
a set amount prior to maturity.
2. True.
3. True.
4. True.
DO IT! 10-4
(a) Cash ...................................................................... 315,000

Bonds Payable ................................................ 300,000
Premium on Bonds Payable .......................... 15,000
(To record sale of bonds at a premium)
(b) Long-term liabilities

Bonds payable ................................................ $300,000
Plus: Premium on bonds payable ................ 15,000
$315,000
DO IT! 10-5
Bonds Payable ..................................................... 400,000

Loss on Bond Redemption .................................. 8,000
Cash ($400,000 X 99%) ................................... 396,000
Discount on Bonds Payable .......................... 12,000
(To record redemption of bonds at 99)
SOLUTIONS TO EXERCISES
EXERCISE 10-1
2014
(a) June 1 Cash .......................................................... 15,000
Notes Payable ................................... 15,000
(b) June 30 Interest Expense

($15,000 X .08 X 1/12) ........................... 100
Interest Payable ................................ 100
(c) Interest payable accrued each month ...................... $100

Number of months from borrowing
to year end.............................................................. X 7
Balance in interest payable account ........................ $700
2015
(d) Jan. 1 Notes Payable........................................... 15,000
Interest Payable ........................................ 700
Cash .................................................. 15,700
EXERCISE 10-2
(a) Principal X .08 X 4/12 = $480

Principal = $480 ÷ (.08 X 4/12)
Principal = $18,000
(b) $18,500 X Interest Rate X 4/12 = $555

Interest Rate = $555 ÷ ($18,500 X 4/12)
Interest Rate = 9 percent
(c) Initial Borrowing:

May 15 Cash ........................................................ 18,000
Notes Payable ................................. 18,000
Repayment:
Sept. 15 Notes Payable ......................................... 18,000
Interest Expense ..................................... 480
Cash ................................................. 18,480
EXERCISE 10-3
(a) June 1 Cash ............................................................ 60,000

Notes Payable ..................................... 60,000
(b) June 30 Interest Expense ($60,000 X .08 X 1/12) .... 400

Interest Payable .................................. 400
(c) Dec. 1 Notes Payable ............................................. 60,000

Interest Payable ($60,000 X .08 X 6/12) ..... 2,400
Cash..................................................... 62,400
(d) Interest expense accrued each month ........................ $ 400

Number of months of loan ........................................... X 6
Total interest expense .................................................. $2,400
EXERCISE 10-4
FURCAL COMPANY
Apr. 10 Cash ..................................................................... 23,100
Sales Revenue ............................................. 22,000
Sales Taxes Payable .................................... 1,100
CRYSTAL COMPANY
15 Cash ..................................................................... 13,780
Sales Revenue ($13,780 ÷ 1.06) .................. 13,000
Sales Taxes Payable ($13,780 – $13,000) ... 780
EXERCISE 10-5
(a) Mar. 31 Salaries and Wages Expense .............. 64,000

FICA Taxes Payable ...................... 4,896
Federal Income Taxes Payable .... 7,500
State Income Taxes Payable ........ 3,100
Union Dues Payable ..................... 400
Salaries and Wages Payable ........ 48,104
(b) Mar. 31 Payroll Tax Expense............................. 5,596

FICA Taxes Payable ...................... 4,896
State Unemployment Taxes
Payable ...................................... 700
EXERCISE 10-6
(a) $1,728,000 ÷ $320 = 5,400 season tickets sold.
(b) $1,728,000 ÷ 16 home games = $108,000 revenue recognized per home

game.
$1,188,000 ÷ $108,000 = 11 home games already played.
(c) Cash ......................................................................... 1,728,000

Unearned Ticket Revenue ............................... 1,728,000
(d) Unearned Ticket Revenue ...................................... 108,000

Ticket Revenue ................................................ 108,000
EXERCISE 10-7
(a) Nov. Cash (6,300 X $28) ................................ 176,400

Unearned Subscription Revenue . 176,400
(b) Dec. 31 Unearned Subscription Revenue ........ 14,700

Subscription Revenue
($176,400 X 1/12) ........................ 14,700
EXERCISE 10-7 (Continued)
(c) Mar. 31 Unearned Subscription Revenue ......... 44,100

Subscription Revenue
($176,400 X 3/12) ......................... 44,100
EXERCISE 10-8
2014
(a) Aug. 1 Cash ....................................................... 600,000
Bonds Payable ............................... 600,000
(b) Dec. 31 Interest Expense ................................... 17,500

Interest Payable
($600,000 X 7% X 5/12)................ 17,500
2015
(c) Aug. 1 Interest Expense
($600,000 X 7% X 7/12) ....................... 24,500
Interest Payable ..................................... 17,500
Cash ($600,000 X 7% X 12/12) ....... 42,000
EXERCISE 10-9
(a) Jan. 1 Cash ....................................................... 300,000

Bonds Payable ............................... 300,000
(b) Dec. 31 Interest Expense .................................... 24,000

Interest Payable
($300,000 X 8% X 12/12) .............. 24,000
(c) Jan. 1 Interest Payable ..................................... 24,000

Cash ................................................ 24,000
EXERCISE 10-10
(a) Jan. 1 Cash ($600,000  1.03) ........................... 618,000

Bonds Payable ................................ 600,000
Premium on Bonds Payable ......... 18,000
(b) Long-term Liabilities

Bonds Payable, due 2024.............................. $600,000
Add: Premium on Bonds Payable ................ 10,800 $610,800
(c) The bonds sold for more than their face amount because the contract
interest rate (6%) was higher than the market interest rate. When the
contract rate is higher than the market rate, bonds will sell at a
premium.
EXERCISE 10-11
(a) Jan. 1 Cash ($500,000  .96) .......................... 480,000

Discount on Bonds Payable) ............... 26,000
Bonds Payable .............................. 500,000

Bonds Payable, due 2029.............................. $500,000
Less: Discount on Bonds Payable ............... 12,000 $488,000
(c) The bonds sold for less than their face value because the contract
interest rate (7%) was lower than the market interest rate. When the
contract rate is lower than the market rate, the bonds will sell at a
discount.
EXERCISE 10-12
(a) The General Electric bonds were issued at a premium and the Boeing
bonds were issued at a discount.
(b) The prices of the two bonds differed because bond price is based on the
market rate of interest not the stated rate of interest. Market interest
rates must have been different when the two bonds were issued causing
the selling prices to differ.
(c) Cash (111.12% X $800,000) .................................... 888,960

Bonds Payable .................................................. 800,000
Premium on Bonds Payable ............................ 88,960
Cash (99.08% X $800,000) ...................................... 792,640

Discount on Bonds Payable .................................. 7,360
Bonds Payable .................................................. 800,000
EXERCISE 10-13
2014
(a) Jan. 1 Cash ....................................................... 350,000
Bonds Payable ............................... 350,000
(b) Dec. 31 Interest Expense .................................... 28,000

Interest Payable
($350,000 X 8% X 12/12) .............. 28,000
2015
(c) Jan. 1 Interest Payable ..................................... 28,000
Cash ................................................ 28,000
2034
(d) Jan. 1 Bonds Payable ....................................... 350,000
Cash ................................................ 350,000
EXERCISE 10-14
(a) April 30 Bonds Payable ..................................... 140,000

Loss on Bond Redemption ................. 14,900*
Cash ($140,000 X 101%)............... 141,400
Discount on Bonds Payable*
($140,000 – $126,500) ............... 13,500
(b) June 30 Bonds Payable ..................................... 170,000

Premium on Bonds Payable ............... 14,000
Cash ($170,000 X 98%)................. 166,600
Gain on Bond Redemption .......... 17,400**
**$126,500 – (101% X $140,000)

**$184,000 – (98% X $170,000)
EXERCISE 10-15
(a) Account Classification Reason

Accounts payable Current liability Due within one year
Accrued pension liability Long-term liability Relates to pensions. Not due
within one year
Unearned rent revenue Current liability Due within one year
Bonds payable Long-term liability Not due within one year
Current portion of Current liability Due within one year
mortgage payable
Income taxes payable Current liability Due within one year
Mortgage payable Long-term liability Not due within one year
Operating leases N/A Not a balance sheet item—may
be disclosed in notes
Notes payable Long-term liability Not due within one year
(due in 2017)
Salaries and wages payable Current liability Due within one year
Notes payable (due in 2015) Current liability Due within one year
Unused operating line of N/A Not a balance sheet item as
credit unused—may be disclosed
in notes
Warranty liability—current Current liability Can be current and/or long-term
depending on the length of the
warranty. Given as current
(b) SANTANA INC.

January 31, 2014
(in thousands)
Current liabilities
Notes payable ............................................ $2,563.6
Accounts payable ...................................... 4,263.9
Current portion of mortgage payable....... 1,992.2
Warranty liability........................................ 1,417.3
Unearned rent revenue ............................. 1,058.1
Salaries and wages payable ..................... 858.1
Income taxes payable ............................... 265.2
Total current liabilities .......................... $12,418.4
Mortgage payable ...................................... $6,746.7
Bonds payable ........................................... 1,961.2
Accrued pension liability .......................... 1,115.2
Notes payable ............................................ 335.6
Total long-term liabilities .................... 10,158.7
Total liabilities ................................................... $22,577.1
EXERCISE 10-16
(a) 1. Working capital = $3,416.3 – $2,988.7 = $427.6

2. Current ratio = $3,416.3 ÷ $2,988.7 = 1.14:1
3. Debt to assets ratio = $16,191.0 ÷ $30,224.9 = 54%
4. Times interest earned = ($4,551.0 + $1,936.0 + $473.2) ÷
$473.2 = 14.71 times
A current ratio that is less than 1.30 indicates lower liquidity. The debt to
assets ratio indicates that $.54 of each dollar of asset have been
financed by creditors. The times interest earned of over 14 times
indicates that McDonald’s income is large enough to make required
interest payments as they come due.
(b) Debt to assets ratio, adjusted for off-balance-sheet lease obligations.
$16,191.0 + $8,800
= 64%
$30,224.9 + $8,800
By including these off-balance-sheet obligations the debt to assets ratio

increases from 54% to 64%, suggesting that McDonald’s is not as
solvent as it first appears.
EXERCISE 10-17
(a) Current ratio

2014 $10,795 ÷ $4,897 = 2.20:1
2013 $9,598 ÷ $5,839 = 1.64:1
(b) Current ratio

$10,495 ÷ $4,597 = 2.28
It would make its current ratio increase from 2.20 to 2.28.
EXERCISE 10-18
(a) Current ratio
2014 $6,244 ÷ $4,503 = 1.39:1

2013 $3,798 ÷ $2,619 = 1.45:1
(b) Current ratio

($6,244 – $1,500) ÷ ($4,503 – $1,500) = 1.58:1
It would make its current ratio increase (from 1.39:1 to 1.58:1).
(c) The liquidity ratios would not change but having access to a line of
credit means that cash is available on a short-term basis and therefore
the assessment of the company’s short-term liquidity would improve.
EXERCISE 10-19
(a) The company does not have to record these contingent liabilities
because they have determined that they are not likely to occur and the
impact would be immaterial in any event.
(b) For financial statement users it is important to understand the possible

implications that the contingent liabilities could have on the financial
results of the company. If the contingent liabilities result in material
losses for the company it will negatively impact the company’s finan-
cial results and affect the decisions made by the users of the financial
statements.
*EXERCISE 10-20
2014
(a) Jan. 1 Cash ($500,000 X 103%) ....................... 515,000
Bonds Payable .............................. 500,000
(b) Dec. 31 Interest Expense ................................... 29,500

($15,000 X 1/30) .................................. 500
Interest Payable
($500,000 X 6%) .......................... 30,000
2015
(c) Jan. 1 Interest Payable .................................... 30,000
Cash ............................................... 30,000
2044
(d) Jan. 1 Bonds Payable ...................................... 500,000
Cash ............................................... 500,000
*EXERCISE 10-21
2013
(a) Dec. 31 Cash...................................................... 288,000
Discount on Bonds Payable ............... 12,000
Bonds Payable ............................. 300,000
2014
(b) Dec. 31 Interest Expense .................................. 24,800
Cash ($300,000 X 8%) .................. 24,000
Discount on Bonds Payable
($12,000 X 1/15) ......................... 800
2028
(c) Dec. 31 Bonds Payable ..................................... 300,000
Cash .............................................. 300,000
*EXERCISE 10-22
2014
(a) Jan. 1 Cash ....................................................... 360,727
Discount on Bonds Payable ................. 39,273
Bonds Payable............................... 400,000
(b) Dec. 31 Interest Expense (360,727 X 8%) ......... 28,858

Interest Payable
($400,000 X 7%) .......................... 28,000
Discount on Bonds Payable ......... 858
2015
Cash ............................................... 28,000
For explanation of calculations, see the following table.
10-28
Copyright © 2013 John Wiley & Sons, Inc.
*EXERCISE 10-22 (Continued)

(b), (c)
Kimmel, Financial Accounting, 7/e, Solutions Manual
(A) (B) (C) (D) (E)

Interest Expense
to Be Recorded
Interest to (8% X Preceding Discount Unamortized Bond
Interest Be Paid Bond Carrying Value) Amortization Discount Carrying Value
Periods (7% X $400,000) [(E) X .08] (B) – (A) (D) – (C) [$400,000 – (D)]
Issue date 39,273 360,727
1 28,000 28,858 858 38,415 361,585
2 28,000 28,927 927 37,488 362,512
(For Instructor Use Only)
*EXERCISE 10-23
2014
(a) Jan. 1 Cash....................................................... 407,968
Bonds Payable .............................. 380,000
(b) Dec. 31 Interest Expense ($407,968 X 6%) ....... 24,478

Premium on Bonds Payable ................ 2,122
Interest Payable
($380,000 X 7%) .......................... 26,600
2015
Cash ............................................... 26,600
For explanation of calculations, see the following table.
10-22
10-30
*EXERCISE 10-23 (Continued)

(b), (c)
(A) (B) (C) (D) (E)
Interest Expense
to Be Recorded
Interest to (6% X Preceding Premium Unamortized Bond
Interest Be Paid Bond Carrying Value) Amortization Premium Carrying Value
Periods (7% X $380,000) [(E) X .06] (A) – (B) (D) – (C) [$380,000 + (D)]
Issue date 27,968 407,968

1 26,600 24,478 2,122 25,846 405,846
2 26,600 24,351 2,249 23,597 403,597
*EXERCISE 10-24
Issuance of Note
2014 Dec. 31 Cash ................................................ 280,000
Mortgage Payable ................... 280,000
First Installment Payment

2015 June 30 Interest Expense
($280,000 X 6% X 6/12) ............... 8,400
Mortgage Payable ........................... 5,885
Cash ......................................... 14,285
Second Installment Payment

Dec. 31 Interest Expense
[($280,000 – $5,885) X 6% X 6/12] ... 8,223
Mortgage Payable ........................... 6,062
Cash ......................................... 14,285
(A) (B) (C) (D)

Semiannual Interest Reduction Principal
Period Payment (D X 3%) (A) – (B) (D) – (C)
Issue date $280,000
6/30/15 $14,285 $8,400 $5,885 274,115
12/31/15 14,285 8,223 6,062 268,053
*EXERCISE 10-25
(A) (B) (C) (D)

Annual Interest Reduction Principal
Period Payment (D) X 10% (A) – (B) (D) – (C)
1/1/2014 $50,000
1/1/2015 $8,137 $5,000 $3,137 46,863
GOINS CORPORATION
December 31, 2014
Current liabilities
Notes payable .............................................................................. $3,137
Interest payable ........................................................................... 5,000
Notes payable .............................................................................. 46,863
SOLUTIONS TO PROBLEMS
PROBLEM 10-1A
(a) Jan. 1 Cash .......................................................... 18,000

Notes Payable ................................... 18,000
5 Cash .......................................................... 6,254

Sales Revenue ($6,254 ÷ 1.06) ......... 5,900
Sales Taxes Payable
($6,254 – $5,900) ........................... 354
12 Unearned Service Revenue ..................... 10,000

Service Revenue ............................... 10,000
14 Sales Taxes Payable ................................ 6,600

Cash .................................................. 6,600
20 Accounts Receivable ............................... 25,440

Sales Revenue .................................. 24,000
Sales Taxes Payable
(500 X $48 X 6%) ........................... 1,440
(b) Jan. 31 Interest Expense ...................................... 75

Interest Payable
($18,000 X 5% X 1/12) ................... 75
31 Salaries and Wages Expense .................. 70,000

FICA Taxes Payable ......................... 5,355
Federal Income Taxes Payable ........ 5,000
State Income Taxes Payable............ 1,500
Salaries and Wages Payable ........... 58,145
31 Payroll Tax Expense ................................ 5,355

PROBLEM 10-1A (Continued)
(c) Current liabilities

Notes payable ................................................................. $ 18,000*
Accounts payable .......................................................... 42,500*
Salaries and wages payable .......................................... 58,145*
FICA taxes payable ($5,355 X 2) .................................... 10,710*
Unearned service revenue ($19,000 – $10,000) ............ 9,000*
Federal income taxes payable....................................... 5,000*
Sales taxes payable ....................................................... 1,794*
State income taxes payable .......................................... 1,500*
Interest payable .............................................................. 75
Total current liabilities ........................................... $146,724*
*($6,600 + $354 – $6,600 + $1,440)
PROBLEM 10-2A
(a) Sept. 1 Inventory ................................................... 12,000

Notes Payable ................................... 12,000
30 Interest Expense
($12,000 X .06 X 1/12) ........................... 60
Oct. 1 Equipment ................................................. 16,500

Notes Payable ................................... 16,500
31 Interest Expense
[($16,500 X .08 X 1/12) + $60] ............... 170
Nov. 1 Equipment ................................................. 34,000

Notes Payable ................................... 26,000
Cash ................................................... 8,000
30 Interest Expense
[($26,000 X .06 X 1/12) + $110 + $60] ... 300
Dec. 1 Notes Payable ........................................... 12,000

Interest Payable ........................................ 180
Cash ................................................... 12,180
31 Interest Expense ($110 + $130)................ 240

(b)
Notes Payable Interest Payable
12/1 12,000 9/1 12,000 12/1 180 9/30 60
10/1 16,500 10/31 170
11/1 26,000 11/30 300
12/31 240
12/31 Bal. 42,500 12/31 Bal. 590
PROBLEM 10-2A (Continued)
Interest Expense
9/30 60
10/31 170
11/30 300
12/31 240
12/31 Bal. 770

Notes payable ..................................................................... 42,500
Interest payable .................................................................. 590
(d) Total interest expense is $770. See (b) above.
PROBLEM 10-3A
(a) Jan. 1 Interest Payable ................................ 40,000

Cash ........................................... 40,000**
(b) Jan. 1 Bonds Payable .................................. 200,000

Loss on Bond Redemption .............. 6,000
Cash ($200,000 X 103%)............ 206,000
(c) Dec. 31 Interest Expense ............................... 24,000

Interest Payable
($300,000 X 8%) ...................... 24,000
PROBLEM 10-4A
2013
(a) Oct. 1 Cash .................................................. 700,000
Bonds Payable .......................... 700,000
(b) Dec. 31 Interest Expense ............................... 8,750

Interest Payable
($700,000 X 5% X 3/12) ........... 8,750
(c) Current Liabilities

Interest Payable ............................................ 8,750
Long-term Liabilities
Bonds Payable .............................................. 700,000
2014
(d) Oct. 1 Interest Expense
($700,000 X 5% X 9/12) .................. 26,250
Interest Payable ................................ 8,750
Cash ($700,000 X 5%) ............... 35,000
(e) Dec. 31 Interest Expense ............................... 8,750

Interest Payable ........................ 8,750
2015
(f) Jan. 1 Interest Payable ................................ 8,750
Cash ........................................... 8,750
Bonds Payable .................................. 700,000

Cash ($700,000 X 104%) ........... 728,000
PROBLEM 10-5A
2014
(a) Jan. 1 Cash ($6,000,000 X 98%) ............... 5,880,000
Discount on Bonds Payable ......... 120,000
Bonds Payable ....................... 6,000,000*

Bonds Payable, due 2029 ....................... $6,000,000
Less: Discount on bonds payable ........ 112,000 $5,888,000*
2016
(c) Jan. 1 Bonds Payable ............................... 6,000,000
($6,120,000 – $5,896,000)........... 224,000
Cash ($6,000,000 X 102%) ...... 6,120,000*
Discount on Bonds
Payable ............................... 104,000*
*$6,000,000 – $5,896,000
PROBLEM 10-6A
(a)
2014 2013
1. Current ratio $2,893 ÷ $2,806 $4,443 ÷ $4,836
= 1.03:1 = .92:1
2. Free cash flow ($1,521) – $923 – $13 = $2,845 – $1,331 – $14 =
($2,457) $1,500
3. Debt to assets ratio $9,355 ÷ $14,308 $9,831 ÷ $16,772
= 65% = 59%
4. Times interest $4081 ÷ $130 $1,1772 ÷ $119
earned = 3.14 times = 9.89 times
1$178 + $100 + $130 = $408
2$645 + $413 + $119 = $1,177
(b) The company’s position as measured through all ratios except the
current ratio has deteriorated. Southwest appears to be much less liquid
and solvent when comparing 2014 to 2013.
(c) Southwest’s use of operating leases (vs. capital leases) would reduce its
solvency. If the leases were capital rather than operating, the balance sheet
would include higher total assets and higher liabilities. Using the $1,600
as an estimate of the increase in liabilities and assets that would result
if the operating leases were capital leases, the revised debt to assets
ratio would be [($9,355 + $1,600) ÷ ($14,308 + $1,600)] = 69%.
*PROBLEM 10-7A
2014
(a) Jan. 1 Interest Payable ................................ 96,000
Cash ........................................... 96,000
(b) Dec. 31 Interest Expense ............................... 98,400

Interest Payable
($2,400,000 X 4%) .................. 96,000
Discount on Bonds Payable
($24,000 ÷ 10) ......................... 2,400
2015
(c) Jan. 1 Bonds Payable .................................. 400,000
Cash ($400,000 X 102%)............ 408,000**
Discount on Bonds Payable ..... 3,600**
*($24,000 – $2,400) X $400,000/

* $2,400,000 = $3,600
(d) Dec. 31 Interest Expense ............................... 82,000

Interest Payable......................... 80,000**
Discount on Bonds Payable ..... 2,000**
**$24,000 – $2,400 – $3,600 = $18,000;

**$18,000 ÷ 9 = $2,000 or
**$2,400 X $2,000,000/$2,400,000 = $2,000
**($2,400,000 – $400,000 = $2,000,000;

**($2,000,000 X 4% = $80,000)
*PROBLEM 10-8A
(a) Jan. 1 Cash ($2,000,000 X 102%) ............... 2,040,000

Bonds Payable ......................... 2,000,000
Premium on Bonds Payable .... 40,000
Dec. 31 Interest Expense .............................. 132,000

($40,000 ÷ 5) ................................ 8,000
Interest Payable
($2,000,000 X 7%) ................. 140,000
(b) Jan. 1 Cash ($2,000,000 X 97%) ................. 1,940,000

Bonds Payable ......................... 2,000,000

Interest Payable ....................... 140,000
Discount on Bonds
Payable ($60,000 ÷ 5) ........... 12,000
(c) Premium
Current Liabilities
Interest payable ........................................ $ 140,000
Bonds payable, due 2019 ........................ $2,000,000
Add: Premium on bonds payable .......... 32,000 2,032,000
Discount
Current Liabilities
Interest payable ........................................ $ 140,000
Bonds payable, due 2019 ........................ $2,000,000
Less: Discount on bonds payable ......... 48,000 1,952,000
*PROBLEM 10-9A
(a) 1. 1/1/14 Cash ($3,000,000 X 103%) ....... 3,090,000

Bonds Payable ................. 3,000,000
Premium on Bonds
Payable ......................... 90,000
2. 1/1/14 Cash ($3,000,000 X 98%) ......... 2,940,000

Discount on Bonds
Payable ................................. 60,000
Bonds Payable ................. 3,000,000
(b) See amortization tables on following page.
(c) 1. 12/31/14 Interest Expense ...................... 231,000

Premium on Bonds
Payable ................................. 9,000
Interest Payable ............... 240,000
2. 12/31/14 Interest Expense ...................... 246,000

Interest Payable ............... 240,000
Discount on Bonds
Payable ......................... 6,000
(d) 1. Long-term Liabilities:

Bonds Payable .................................... $3,000,000
Plus: Unamortized Bond
Premium ................................... 81,000 $3,081,000
2. Long-term Liabilities:
Bonds Payable .................................... $3,000,000
Less: Unamortized Bond
Discount ................................... 54,000 $2,946,000
10-44
*PROBLEM 10-9A (Continued)

(b), (1)
(A) (B) (C) (D) (E)
Annual Interest to Interest Expense Premium Unamortized Bond
Interest Be Paid to Be Recorded Amortization Premium Carrying Value
Periods (8% X $3,000,000) (A) – (C) ($90,000 ÷ 10) (D) – (C) [$3,000,000 + (D)]
Issue date $90,000 $3,090,000
1 $240,000 $231,000 $9,000 81,000 3,081,000
2 240,000 231,000 9,000 72,000 3,072,000
3 240,000 231,000 9,000 63,000 3,063,000
(2)
(A) (B) (C) (D) (E)
Annual Interest to Interest Expense Discount Unamortized Bond
Interest Be Paid to Be Recorded Amortization Discount Carrying Value
Periods (8% X $3,000,000) (A) + (C) ($60,000 ÷ 10) (D) – (C) [$3,000,000 – (D)]
$2,940,000
Issue date $60,000

1 $240,000 $246,000 $6,000 54,000 2,946,000
2 240,000 246,000 6,000 48,000 2,952,000
3 240,000 246,000 6,000 42,000 2,958,000
*PROBLEM 10-10A
2014
(a) Jan. 1 Cash................................................. 1,667,518
Discount on Bonds Payable .......... 132,482
Bonds Payable ........................ 1,800,000
(b) LOCK CORP.

Bond Discount Amortization
Effective-Interest Method—Annual Interest Payments
5% Bonds Issued at 6%
(A) (B) (C) (D) (E)

Interest Discount Unamor- Bond
Annual Interest Expense Amor- tized Carrying
Interest to Be to Be tization Discount Value
Periods Paid Recorded (B) – (A) (D) – (C) ($1,800,000 – D)
Issue date $132,482 $1,667,518
1 $90,000 $100,051 $10,051 122,431 1,677,569
2 90,000 100,654 10,654 111,777 1,688,223
3 90,000 101,293 11,293 100,484 1,699,516
(c) Dec. 31 Interest Expense

($1,667,518 X 6%) ................................. 100,051
Interest Payable
($1,800,000 X 5%) ......................... 90,000
Discount on Bonds Payable ............ 10,051
2015
(d) Jan. 1 Interest Payable ....................................... 90,000
Cash .................................................. 90,000
(e) Dec. 31 Interest Expense

[($1,667,518 + $10,051) X 6%] .............. 100,654
Interest Payable................................ 90,000
Discount on Bonds Payable ............ 10,654
*PROBLEM 10-11A
2014
(a) 1. Jan. 1 Cash............................................ 2,147,202
Bonds Payable ................... 2,000,000
Premium on Bonds
Payable ........................... 147,202
2. Dec. 31 Interest Expense

($2,147,202 X 6%) ................... 128,832
Premium on Bonds
Payable ................................... 11,168
Interest Payable
($2,000,000 X 7%) ........... 140,000
2015
3. Jan. 1 Interest Payable ......................... 140,000
Cash .................................... 140,000
4. Dec. 31 Interest Expense ........................ 128,162

[($2,147,202 – $11,168) X 6%]
Premium on Bonds
Payable ................................... 11,838
Interest Payable.................. 140,000
(b) Bonds payable .................................................... 2,000,000

Add: Premium on bonds payable ..................... 124,196* 2,124,196
*($147,202 – $11,168 – $11,838)
(c) 1. Total bond interest expense—2015, $128,162.
2. The effective-interest method will result in more interest expense

reported than the straight-line method in 2015 when the bonds
are sold at a premium. Straight-line interest expense for 2015 is
$125,280 [$140,000 – ($147,202 ÷ 10)].
*PROBLEM 10-12A
(a) (A) (B) (C) (D)

Interest Reduction Principal
Quarterly Cash Expense of Principal Balance
Interest Period Payment (D) X 2% (A) – (B) (D) – (C)
Issue Date $320,000
1 $30,259 $6,400 $23,859 296,141
2 30,259 5,923 24,336 271,805
3 30,259 5,436 24,823 246,982
4 30,259 4,940 25,319 221,663
5 30,259 4,433 25,826 195,837
(b) Dec. 31 Mortgage Payable ................................ 23,859

Interest Expense .................................. 6,400
Cash............................................... 30,259

Mortgage payable ........................................... $100,304*
Mortgage payable ........................................... 195,837**
Total liabilities ................................. $296,141*
**($24,336 + $24,823 + $25,319 + $25,826)

**($296,141 – $100,304)
*PROBLEM 10-13A
(a)
Cash Interest Principal
Period Payment Expense Reduction Balance
(A) (B) = (D) X 7% (C) = (A) – (B) (D) = (D) – (C)
July 1, 2013 $150,000
June 30, 2014 $ 36,584 $10,500 $ 26,084 123,916
June 30, 2015 36,584 8,674 27,910 96,006
June 30, 2016 36,584 6,720 29,864 66,142
June 30, 2017 36,584 4,630 31,954 34,188
June 30, 2018 36,584 2,396* 34,188 0
Total $182,920 $32,920 $150,000
*Rounded to make principal element equal to balance.
(b) July 1/13 Cash ................................................... 150,000

Notes Payable .............................. 150,000
June 30/14 Notes Payable ................................... 26,084

Interest Expense ............................... 10,500
Cash .............................................. 36,584
June 30/15 Notes Payable ................................... 27,910

Interest Expense ............................... 8,674
Cash .............................................. 36,584
(c) 2015
Current liabilities
Notes payable ..................................................... $29,864
Note payable ($96,006 – $29,864)....................... $66,142
PROBLEM 10-1B
(a) Jan. 1 Cash .......................................................... 18,000

Notes Payable ................................... 18,000
5 Cash .......................................................... 18,480

Sales Revenue
($18,480 ÷ 106.25%) ...................... 17,393*
Sales Taxes Payable
($18,480 – $17,393) ....................... 1,087
12 Unearned Service Revenue ..................... 8,000

Service Revenue ............................... 8,000
14 Sales Taxes Payable ................................ 8,200

Cash .................................................. 8,200
20 Accounts Receivable ............................... 26,563

Sales Revenue .................................. 25,000
Sales Taxes Payable
(500 X $50 X 6.25%) ...................... 1,563*
(b) Jan. 31 Interest Expense ...................................... 120

Interest Payable
($18,000 X 8% X 1/12 = $120) ....... 120
31 Salaries and Wages Expense .................. 54,000

Federal Income Taxes Payable ........ 3,900
State Income Taxes Payable............ 1,200
Salaries and Wages Payable ........... 44,769
31 Payroll Tax Expense ................................ 4,131

*Rounded to nearest dollar
PROBLEM 10-1B (Continued)

Notes payable ................................................................. $ 18,000
Accounts payable .......................................................... 52,000
Salaries and wages payable .......................................... 44,769
FICA taxes payable ($4,131 X 2) .................................... 8,262
Federal income taxes payable....................................... 3,900
Unearned service revenue ($11,000 – $8,000) .............. 3,000
Sales taxes payable ....................................................... 2,650*
State income taxes payable .......................................... 1,200
Interest payable .............................................................. 120
Total current liabilities $133,901
*$8,200 + $1,087 – $8,200 + $1,563
PROBLEM 10-2B
(a) Aug. 1 Inventory or Purchases .......................... 6,000

Notes Payable ................................. 6,000
31 Interest Expense
($6,000 X .09 X 1/12) ........................... 45
Interest Payable .............................. 45
Sept. 1 Equipment ............................................... 15,000

Notes Payable ................................. 15,000
30 Interest Expense
[($15,000 X .08 X 1/12) + $45] ............. 145
Oct. 1 Buildings ................................................. 50,000

Notes Payable ................................. 40,000
Cash ................................................. 10,000
31 Interest Expense
[($40,000 X .08 X 1/12) + $100 + $45] ... 412
Nov. 1 Notes Payable ......................................... 6,000

Interest Payable ...................................... 135
Cash ................................................. 6,135
30 Interest Expense ($100 + $267).............. 367

Dec. 31 Interest Expense ($100 + $267).............. 367

PROBLEM 10-2B (Continued)
(b)
Notes Payable Interest Payable
11/1 6,000 8/1 6,000 11/1 135 8/31 45
9/1 15,000 9/30 145
10/1 40,000 10/31 412
12/31 Bal. 55,000 11/30 367
12/31 367
12/31 Bal. 1,201
Interest Expense
8/31 45
9/30 145
10/31 412
11/30 367
12/31 367
12/31 Bal. 1,336

Notes payable ................................................................ 55,000
Interest payable ............................................................. 1,201
(d) Total interest expense is $1,336. See (b) above.
PROBLEM 10-3B
(a) Jan. 1 Interest Payable ...................................... 96,000

Cash ................................................. 96,000
(b) Jan. 1 Bonds Payable ........................................ 300,000

Loss on Bond Redemption .................... 24,000
Cash ($300,000 X 108%) ................. 324,000
(c) Dec. 31 Interest Expense ..................................... 72,000

Interest Payable
($900,000 X 8%) ............................ 72,000
PROBLEM 10-4B
(a) 2013 Cash ......................................................... 600,000

April 1 Bonds Payable ................................. 600,000
(b) Dec. 31 Interest Expense ..................................... 22,500

Interest Payable
($600,000 X 5% X 9/12).................. 22,500
(c) Current Liabilities

Interest Payable .................................................... 22,500
Bonds Payable ...................................................... 600,000
(d) 2014 Interest Payable ....................................... 22,500

April 1 Interest Expense
($600,000 X 5% X 3/12) ......................... 7,500
Cash ($600,000 X 5%) ...................... 30,000
(e) Dec. 31 Interest Expense ..................................... 22,500

Interest Payable ............................... 22,500
(f) 2015 Interest Payable ....................................... 22,500

Jan. 1 Cash.................................................. 22,500
Bonds Payable ........................................ 600,000

Loss on Bond Redemption ..................... 15,000
Cash ($600,000 X 102.5%) ............... 615,000
PROBLEM 10-5B
(a) 2014
Jan. 1 Cash ($5,000,000 X 103%) ................ 5,150,000
Bonds Payable .......................... 5,000,000
Premium on Bonds
Payable .................................. 150,000

Bonds payable, due 2024.......................... $5,000,000
Add: Premium on bonds payable ........... 135,000 $5,135,000
(c) 2015
Jan. 1 Bonds Payable .................................. 5,000,000
Premium on Bonds Payable ............ 120,000*
($5,120,000 – $5,200,000).............. 80,000
Cash ($5,000,000 X 104%) ......... 5,200,000
*$5,120,000 – $5,000,000
PROBLEM 10-6B
(a)
2014 2013
1. Current ratio $2,717 ÷ $4,044 $2,427 ÷ $4,020
= .67:1 = .60:1
2. Free cash flow $1,503 – $472 – $475 $1,410 – $453 – $450
= $556 = $507
3. Debt to assets ratio $8,871 ÷ $11,397 $8,645 ÷ $10,714
= 78% = 81%
4. Times interest $1,8661 ÷ $319 $1,7782 ÷ $307
earned = 5.85 times = 5.79 times
1 $1,103 + $444 + $319 = $1,866
2 $1,004 + $467 + $307 = $1,778
(b) The company’s liquidity position as measured through the current

ratio and free cash flow has improved. The debt to assets ratio
decreased, and the times interest earned increased in 2014.
Kellogg appears to be more liquid and solvent when comparing 2014
to 2013.
(c) Kellogg’s use of operating leases (vs. capital leases) would reduce its
solvency. If the leases were capital rather than operating, the balance
sheet would include higher total assets and higher liabilities. Using the
$584 as an estimate of the increase in liabilities and assets that would
result if the operating leases were capital leases, the revised debt to
assets ratio would be [($8,871 + $584) ÷ ($11,397 + $584)] = 79%.
*PROBLEM 10-7B
2014
(a) Jan. 1 Interest Payable ............................. 144,000
Cash ........................................ 144,000
(b) Dec. 31 Interest Expense ............................ 116,000

($280,000 ÷ 10) ........................... 28,000
Interest Payable...................... 144,000
2015
(c) Jan. 1 Bonds Payable ............................... 1,800,000
Premium on Bonds Payable ......... 126,000*
Cash ($1,800,000 X 102%) ...... 1,836,000
Gain on Bond Redemption
($1,926,000 – $1,836,000) ... 90,000
*($280,000 – $28,000) X 1/2 = $126,000
(d) Dec. 31 Interest Expense ............................ 58,000

Premium on Bonds Payable ......... 14,000**
Interest Payable
($1,800,000 X 4%) ............... 72,000
$126,000
**$280,000 – $28,000 – $126,000 = $126,000; = $14,000 or $28,000 X 1/2.
9
*PROBLEM 10-8B
(a) Jan. 1 Cash ($2,200,000 X 102%) ............... 2,244,000

Premium on Bonds Payable .... 44,000
Bonds Payable ......................... 2,200,000

($44,000 ÷ 5) ............................. 8,800
Interest Payable
($2,200,000 X 8%) ................. 176,000
(b) Jan. 1 Cash ($2,200,000 X 98%) ................. 2,156,000

Bonds Payable ......................... 2,200,000

Discount on Bonds
Payable ($44,000 ÷ 5) ........... 8,800
Interest Payable ....................... 176,000
(c) Premium
Current Liabilities
Interest payable $ 176,000
Bonds payable, due 2019 $2,200,000
Add: Premium on bonds payable 35,200 2,235,200
Discount
Current Liabilities
Interest payable $ 176,000
Bonds payable, due 2019 $2,200,000
Less: Discount on bonds payable 35,200 2,164,800
*PROBLEM 10-9B
(a) (1) 1/1/14 Cash ($3,000,000 X 103%) ..... 3,090,000

Bonds Payable ............... 3,000,000
Premium on Bonds
Payable ....................... 90,000
(2) 1/1/14 Cash ($3,000,000 X 99%) ....... 2,970,000

Discount on Bonds
Payable ............................... 30,000
Bonds Payable ............... 3,000,000
(b) See amortization tables on following page.
(c) (1) 12/31/14 Interest Expense .................... 198,750

Premium on Bonds
Payable ............................... 11,250
Interest Payable ............. 210,000
(2) 12/31/14 Interest Expense .................... 213,750

Discount on Bonds
Payable ....................... 3,750
Interest Payable ............. 210,000
(d) (1) Long-term Liabilities:

Bonds Payable $3,000,000
Plus: Bond Premium 78,750 $3,078,750
(2) Long-term Liabilities:

Bonds Payable $3,000,000
Less: Bond Discount 26,250 $2,973,750
10-60
*PROBLEM 10-9B (Continued)

(b), (1)
(A) (B) (C) (D) (E)
Annual Interest to Interest Expense Premium Unamortized Bond
Interest Be Paid to Be Recorded Amortization Premium Carrying Value
Periods (7% X $3,000,000) (A) – (C) ($90,000 ÷ 8) (D) – (C) [$3,000,000 + (D)]
Issue date $90,000 $3,090,000

1 $210,000 $198,750 $11,250 78,750 3,078,750
2 210,000 198,750 11,250 67,500 3,067,500
3 210,000 198,750 11,250 56,250 3,056,250
(2)
(A) (B) (C) (D) (E)
Annual Interest to Interest Expense Discount Unamortized Bond
Interest Be Paid to Be Recorded Amortization Discount Carrying Value
Periods (7% X $3,000,000) (A) + (C) ($60,000 ÷ 8) (D) – (C) [$3,000,000 – (D)]
Issue date $30,000 $2,970,000

1 $210,000 $213,750 $3,750 26,250 2,973,750
2 210,000 213,750 3,750 22,500 2,977,500
3 210,000 213,750 3,750 18,750 2,981,250
*PROBLEM 10-10B
2014
(a) Jan. 1 Cash................................................. 2,154,434
Bonds Payable ........................ 2,000,000
Premium on Bonds Payable ... 154,434
(b) IMELDA CORPORATION

Bond Premium Amortization
Effective-Interest Method—Annual Interest Payments
6% Bonds Issued at 5%
(A) (B) (C) (D) (E)

Premium Unamor- Bond
Annual Interest Amor- tized Carrying
Interest to Be Interest tization Premium Value
Periods Paid Expense (A) – (B) (D) – (C) ($2,000,000 + D)
Issue date $154,434 $2,154,434
1 $120,000 $107,722 $12,278 $142,156 $2,142,156
2 120,000 $107,108 $12,892 $129,264 $2,129,264
3 120,000 $106,463 $13,537 $115,727 $2,115,727
(c) Dec. 31 Interest Expense

($2,154,434 X 5%) ................................. 107,722
Premium on Bonds Payable ................... 12,278
Interest Payable
($2,000,000 X 6%) ......................... 120,000
(d) 2015
Jan. 1 Interest Payable ....................................... 120,000
Cash .................................................. 120,000
(e) Dec. 31 Interest Expense

[($2,154,434 – $12,278) X 5%] .............. 107,108
Premium on Bonds Payable ................... 12,892
Interest Payable................................ 120,000
*PROBLEM 10-11B
2014
(a) (1) Jan. 1 Cash.......................................... 1,717,761
Bonds Payable ................. 1,600,000
Premium on Bonds
Payable ......................... 117,761
(2) Dec. 31 Interest Expense

($1,717,761 X 6%) ................. 103,066
Premium on Bonds
Payable ................................. 8,934
Interest Payable
($1,600,000 X 7%) ......... 112,000
2015
(3) Jan. 1 Interest Payable ....................... 112,000
Cash .................................. 112,000
(4) Dec. 31 Interest Expense ...................... 102,530

[($1,717,761 – $8,934) X 6%]
Premium on Bonds
Payable ................................. 9,470
Interest Payable................ 112,000
(b) Bonds payable .................................................. 1,600,000

Add: Premium on bonds payable ................... 99,357* 1,699,357
*($117,761 – $8,934 – $9,470)
(c) (1) Total bond interest expense—2015, $102,530.
(2) The effective-interest method will result in more interest expense

reported than the straight-line method in 2015 when the bonds
are sold at a premium. Straight-line interest expense for 2015 is
$100,224 [$112,000 – ($117,761 ÷ 10)].
*PROBLEM 10-12B
(a) (A) (B) (C) (D)

Interest Reduction Principal
Quarterly Cash Expense of Principal Balance
Interest Period Payment (D) X 2% (A) – (B) (D) – (C)
Issue Date $340,000
1 $20,792 $6,800 $13,992 326,008
2 20,792 6,520 14,272 311,736
3 20,792 6,235 14,557 297,179
4 20,792 5,944 14,848 282,331
5 20,792 5,647 15,145 267,186
(b) Dec. 31 Interest Expense .................................. 6,800

Mortgage Payable ................................ 13,992
Cash............................................... 20,792

Mortgage payable .................................................. $ 58,822*
Mortgage payable .................................................. 267,186**
Total liabilities ......................................... $326,008
**($14,272 + $14,557 + $14,848 + $15,145)

**($326,008 – $58,822)

CH 10 - End of Chapter Exercises Solutions

Uploaded by

Copyright:

Available Formats

CH 10 - End of Chapter Exercises Solutions

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CH 10 - End of Chapter Exercises Solutions

Uploaded by

Copyright:

Available Formats

What are some examples of current and long-term liabilities discussed in the text?

What are some examples of current and long-term liabilities discussed in the text?

How is interest expense calculated for bonds issued at a premium or discount?

How is interest expense calculated for bonds issued at a premium or discount?

CHAPTER 10

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 10-1

(b) $20,000 of the mortgage payable is a current maturity of long-term

(c) Interest payable is a current liability because it will be paid out of

(d) Accounts payable is a current liability because it will be paid out of

BRIEF EXERCISE 10-2

(a) July 1 Cash .......................................................... 90,000

(b) Dec. 31 Interest Expense ....................................... 3,150

BRIEF EXERCISE 10-3

Sales tax payable

(1) Sales = ($10,388 ÷ 1.06) = $9,800

Mar. 16 Cash .................................................................. 10,388

(a) Cash (3,500 X $80) .................................................. 280,000

(b) Unearned Ticket Revenue ...................................... 28,000

BRIEF EXERCISE 10-5

Gross earnings ............................................................... $808.00

BRIEF EXERCISE 10-6

Jan. 15 Salaries and Wages Expense.................... 808.00

Jan. 15 Salaries and Wages Payable ..................... 651.19

BRIEF EXERCISE 10-7

Jan. 15 Payroll Tax Expense .................................. 61.81

BRIEF EXERCISE 10-8

Cash ($300,000 X .98) ................................ 294,000

Cash ($400,000 X 1.01) ................................................... 404,000

BRIEF EXERCISE 10-10

(b) Dec. 31 Interest Expense ....................... 210,000

BRIEF EXERCISE 10-11

Bonds Payable ......................................................... 2,000,000

BRIEF EXERCISE 10-12

BRIEF EXERCISE 10-14

(a) Working capital = $4,485 – $2,836 = $1,649

Debt to assets and times interest earned measure a company’s ability to

(a) Debt to assets:

*BRIEF EXERCISE 10-16

(a) Jan. 1 Cash (99% X $2,000,000) ................ 1,980,000

(b) Dec. 31 Interest Expense ............................. 142,000

*BRIEF EXERCISE 10-17

(a) Jan. 1 Cash (102% X $4,000,000) .............. 4,080,000

(b) Dec. 31 Interest Expense ............................. 304,000

(a) Interest Expense ............................................... 48,070

BRIEF EXERCISE 10-19

(A) (B) (C) (D)

Dec. 31 Cash ...................................................... 600,000

June 30 Interest Expense .................................. 30,000

1. $60,000 X 10% X 5/12 = $2,500

(a) To determine wages payable, reduce wages expense by the withholdings

Feb. 28 Salaries and Wages Expense ....................... 74,000

Feb. 28 Payroll Tax Expense ...................................... 5,931

1. False. Convertible bonds can be converted into common stock at the

(a) Cash ...................................................................... 315,000

(b) Long-term liabilities

Bonds Payable ..................................................... 400,000

(b) June 30 Interest Expense

(c) Interest payable accrued each month ...................... $100