Brief Exercise 14-2

Interest
$ 2,000,000
Principal
$80,000,000
Present value (price) of the bonds

x
x

23.11477* =
0.30656** =

$46,229,540
24,524,800
$70,754,340

[52] % x $80,000,000
* present value of an ordinary annuity of $1: n=40, i=3%. (Table 4)
** present value of $1: n=40, i=3%. (Table 2)
Brief Exercise 14-4
Interest

$ 2,500,000

Principal
$100,000,000
Present value (price) of the bonds

x
x

27.35548* =
0.45289** =

$ 68,388,700
45,289,000
$113,677,700

[52] % x $100,000,000
* present value of an ordinary annuity of $1: n=40, i=2%. (Table 4)
** present value of $1: n=40, i=2%. (Table 2)
Brief Exercise 14-11
Bonds payable (face amount).................................................
Loss on early extinguishment (to balance) ............................
Discount on bonds (given) .................................................
Cash ($60,000,000 x 102%) ..............................................

($ in millions)
60.0
3.2
2.0
61.2

Brief Exercise 14-12

The issue price of bonds with detachable warrants is allocated between the two different
securities on the basis of their market values.
($ in millions)
Cash (102% x $60 million) ................................................................
61.2
Discount on bonds payable (difference) ............................................
1.8
Bonds payable (face amount) ........................................................
60.0
Equity stock warrants outstanding
($5 x 10 warrants x 60,000 bonds) .............................................
3.0
Brief Exercise 14-13
GAAP requires that the entire issue price of convertible bonds be recorded as debt,
precisely the same way, in fact, as for nonconvertible bonds.
($ in millions)
Cash (102% x $60 million) ................................................................
61.2
Premium on bonds payable (difference) ........................................
1.2
Bonds payable (face amount) ........................................................
60.0

Exercise 14-3
1. Price of the bonds at January 1, 2011
Interest
$4,000,000
Principal
$80,000,000
Present value (price) of the bonds

11.46992 * =
0.31180 ** =

x
x

$45,879,680
24,944,000
$70,823,680

5% x $80,000,000
* present value of an ordinary annuity of $1: n=20, i=6% (Table 4)
** present value of $1: n=20, i=6% (Table 2)
2. January 1, 2011
Cash (price determined above) ..............................................
Discount on bonds (difference) ..............................................
Bonds payable (face amount) ............................................

70,823,680
9,176,320
80,000,000

3. June 30, 2011

Interest expense (6% x $70,823,680) .....................................
Discount on bonds payable (difference) ............................
Cash (5% x $80,000,000) ..................................................

4,249,421
249,421
4,000,000

Partial amortization schedule (not required)

Cash
Payment
5% x Face Amount
1
2

4,000,000
4,000,000

Effective
Interest
6% x Outstanding Balance

.06 (70,823,680) =
.06 (71,073,101) =

Increase in Outstanding
Balance
Balance
Discount Reduction
70,823,680
4,249,421
249,421
71,073,101
4,264,386
264,386
71,337,487

4. December 31, 2011

Interest expense (6% x [$70,823,680 + 249,421])
Discount on bonds payable (difference)
Cash (5% x $80,000,000)
Exercise 14-5

4,264,386
264,386
4,000,000

1. Liability at December 31, 2011

Bonds payable (face amount).................................................

$320,000,000

Less: discount.........................................................................
Initial balance, January 1, 2011 .............................................
June 30, 2011 discount amortization .....................................
Dec. 31, 2011 discount amortization .....................................
December 31, 2011 net liability .............................................

36,705,280
$283,294,720
997,683*
1,057,544**
$285,349,947

2. Interest expense for year ended December 31, 2011

June 30, 2011 interest expense...............................................
Dec. 31, 2011 interest expense ..............................................
Interest expense for 2011 .......................................................

$16,997,683*
17,057,544**
$34,055,227

3. Statement of cash flows for year ended December 31, 2011

Myriad would report the cash inflow of $283,294,720*** from the sale of the bonds as a
cash inflow from financing activities in its statement of cash flows.
The $32,000,000 ($16,000,000* + 16,000,000**) cash interest paid is cash outflow from
operating activities because interest is an income statement (operating) item.
Calculations:
January 1, 2011***
Cash (price given) ..................................................................
Discount on bonds (difference) ..............................................
Bonds payable (face amount) ............................................
June 30, 2011*
Interest expense (6% x $283,294,720) ...................................
Discount on bonds payable (difference) ............................
Cash (5% x $320,000,000) ................................................
December 31, 2011**
Interest expense (6% x [$283,294,720 + 997,683]) ...............
Discount on bonds payable (difference) ............................
Cash (5% x $320,000,000) ................................................

283,294,720
36,705,280
320,000,000
16,997,683
997,683
16,000,000
17,057,544
1,057,544
16,000,000

Exercise 14-6
1. June 30, 2011
Cash (price given) ..................................................................
Bonds payable (face amount) ............................................
Premium on bonds payable (difference) ............................
2. December 31, 2011

967,707
900,000
67,707

Interest expense (6% x $967,707) ..........................................

Premium on bonds payable (difference) ................................
Cash (6.5% x $900,000) ....................................................
3. June 30, 2012
Interest expense (6% x [$967,707 438])
Premium on bonds payable (difference)
Cash (6.5% x $900,000)

58,062
438
58,500

58,036
464
58,500

Exercise 14-21
Bonds payable (face amount).................................................
Loss on early extinguishment (to balance) ............................
Discount on bonds (given) .................................................
Cash ($90,000,000 x 102%) ..............................................

90,000,000
4,800,000
3,000,000
91,800,000

Exercise 14-24
Requirement 1
Cash (given) ...........................................................................
Convertible bonds payable (face amount) .........................
Premium on bonds payable (to balance)............................

40,800,000
40,000,000
800,000

Requirement 2
Interest expense ($1,200,000 40,000) .................................
Premium on bonds payable ($800,000 20) .........................
Cash (3% x $40,000,000) ..................................................

1,160,000
40,000

Requirement 3
Interest expense ($1,200,000 40,000) .................................
Premium on bonds payable ($800,000 20) .........................
Cash (3% x $40,000,000) ..................................................

1,160,000
40,000

1,200,000

1,200,000

Convertible bonds payable (account balance)

40,000,000
Premium on bonds payable ($800,000 [$40,000 x 5])
600,000
Common stock (to balance)
40,600,000
Exercise 14-26
Requirement 1
($ in millions)
Limbaugh (Issuer)
Cash (104% x $30 million) ................................................................
Discount on bonds payable (difference) ............................................
Bonds payable (face amount) ........................................................
Equity stock warrants
($8 x 20 warrants x [$30,000,000 $1,000] bonds) ..................

31.2
3.6
30.0
4.8

Interstate (Investor)
Investment in stock warrants ($4.8 million x 20%) ...........................
Investment in bonds (20% x $30 million)..........................................
Discount on bonds (difference) .....................................................
Cash (104% x $30 million x 20%) ................................................

0.96
6.00
0.72
6.24

Requirement 2
($ in millions)
Limbaugh (Issuer)
Cash (20% x 30,000 bonds x 20 warrants x $60) ..............................
Equity stock warrants ($4.8 million x 20%) ...................................
Common stock (to balance) ...........................................................

7.20
0.96
8.16

Interstate (Investor)
Investment in common stock (to balance) .........................................
Investment in stock warrants ($4.8 million x 20%).......................
Cash (20% x 30,000 x 20 warrants x $60) ....................................
Exercise 14-31

8.16
.96
7.20

Land ($450,000 325,000)....................................................

Gain on disposition of assets .............................................

125,000

Note payable (face amount) ...................................................

Accrued interest payable (11% x $600,000) ..........................
Gain on troubled debt restructuring (difference) ...............
Land (fair value) ................................................................

600,000
66,000

125,000

216,000
450,000

Problem 14-1
Requirement 1
Interest
$2,500,000
x
Principal
$50,000,000
x
Present value (price) of the bond

15.04630 * =
0.09722 ** =
s

$37,615,750
4,861,000
$42,476,750

5% x $50,000,000
* present value of an ordinary annuity of $1: n=40, i=6% (Table 4)
** present value of $1: n=40, i=6% (Table 2)
Cash (price determined above) ..............................................
Discount on bonds (difference) ..............................................
Bonds payable (face amount) ............................................

42,476,750
7,523,250
50,000,000

Requirement 2
Interest
$ 2,500,000
x
Principal
$50,000,000
x
Present value (price) of the bonds

18.40158 * =
0.17193 ** =

$46,003,950
8,596,500
$54,600,450

* present value of an ordinary annuity of $1: n=40, i=4.5% (Table 4)

** present value of $1: n=40, i=4.5% (Table 2)
Cash (price determined above) ..............................................
Premium on bonds (difference) .........................................
Bonds payable (face amount) ............................................
Requirement 3
Investment in bonds (face amount) ........................................
Premium on bond investment ...............................................
Cash (price calculated above) ............................................

54,600,450
4,600,450
50,000,000
50,000,000
4,600,450
54,600,450

Problem 14-14
Bonds payable (face amount) .....................................................
Loss on early extinguishment (to balance) .................................
Debt issue costs (7/10 x $3,000) ............................................
Discount on bonds (7/10 x [$800,000 $770,000]) ..............

800,000
13,100
2,100
21,000
790,000

Cash (given) ...........................................................................

Problem 14-15
Requirement 1
Interest expense (7% x $19,000,000) .........................................
Discount on bonds payable (difference) ................................
Cash (6% x $20,000,000).......................................................

1,330,000
130,000
1,200,000

Requirement 2
Bonds payable (face amount) .....................................................
Loss on early extinguishment (to balance) .................................
Discount on bonds payable ($1,000,000 130,000) .............
Cash (redemption price) .........................................................

20,000,000
1,270,000
870,000
20,400,000

Problem 14-19

List A
j_ 1. Effective rate times balance
h_ 2. Promises made to bondholders
o_ 3. Present value of interest plus
other
present value of principal
m_ 4. Call feature
l_ 5. Debt issue costs
b_ 6. Market rate higher than stated rate
d_ 7. Coupon bonds
k_ 8. Convertible bonds
e_ 9. Market rate less than stated rate
n_ 10. Stated rate times face amount
f_ 11. Registered bonds
g_ 12. Debenture bond
i_ 13. Mortgage bond
a_ 14. Materiality concept
c_ 15. Subordinated debenture

a.
b.
c.

List B
Straight-line method
Discount
Liquidation payments after

d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.

claims satisfied
Name of owner not registered
Premium
Checks are mailed directly
No specific assets pledged
Bond indenture
Backed by a lien
Interest expense
May become stock
Legal, accounting, printing
Protection against falling rates
Periodic cash payments
Bond price