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CHAPTER 10

Liabilities
ASSIGNMENT CLASSIFICATION TABLE

Study Objectives

Questions

Brief
Exercises

* 1. Explain a current liability,


and identify the major types
of current liabilities.

* 2. Describe the accounting for


notes payable.

* 3. Explain the accounting for


other current liabilities.

3, 4, 5

3, 4

3, 4, 5

* 4. Explain why bonds are


issued, and identify the
types of bonds.

6, 7, 8,
9, 10

6, 7

* 5. Prepare the entries for the


issuance of bonds and
interest expense.

11, 12, 13

6, 7, 8

8, 9, 10,
11, 16, 17,
18, 19

3A, 4A,
6A, 7A,
8A, 9A

2B, 3B, 5B,


6B, 7B,
8B, 9B

14, 15

11, 12

3A, 4A,
10A

2B, 3B, 9B

7. Describe the accounting for


long-term notes payable.

16

10

13

5A

4B

8. Identify the methods for the


presentation and analysis of
non-current liabilities.

17

11

14

3A, 4A, 5A

2B, 3B, 4B

*9. Compute the market price of


a bond.

20

12

15

18, 19

13

16, 17

6A, 7A

5B, 6B

*6. Describe the entries when


bonds are redeemed.

*10. Apply the effective-interest


method of amortizing bond
discount and bond
premium.

Copyright 2011 John Wiley & Sons, Inc.

Do It!

A
Problems

B
Problems

1A

1B

1, 2

1A, 2A

1B

1A

1B

Exercises

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

10-1

ASSIGNMENT CLASSIFICATION TABLE (Continued)

Study Objectives

Questions

Brief
Exercises

*11. Apply the straight-line method of


amortizing bond discount and
bond premium.

21, 22

14, 15

18, 19

*12. Prepare entries for payroll and


payroll taxes under U.S. law

23

16, 17

20, 21

Do It!

A
Exercises Problems

B
Problems
7B, 8B, 9B

8A, 9A, 10A

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendices to the
chapter.

10-2

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

ASSIGNMENT CHARACTERISTICS TABLE


Problem
Number

Description

Difficulty
Level

Time
Allotted (min.)

1A

Prepare current liability entries, adjusting entries, and


current liabilities section.

Moderate

3040

2A

Journalize and post note transactions and show


statement of financial position presentation.

Moderate

3040

3A

Prepare entries to record issuance of bonds, interest


accrual, and bond redemption.

Moderate

2030

4A

Prepare entries to record issuance of bonds, interest


accrual, and bond redemption.

Moderate

1520

5A

Prepare installment payments schedule and journal


entries for a mortgage note payable.

Moderate

2030

*6A

Prepare entries to record issuance of bonds, payment


of interest, and amortization of bond premium using
effective-interest method.

Moderate

3040

*7A

Prepare entries to record issuance of bonds, payment of


interest, and amortization of discount using effectiveinterest method. In addition, answer questions.

Moderate

3040

*8A

Prepare entries to record issuance of bonds, interest


accrual, and straight-line amortization for 2 years.

Simple

3040

*9A

Prepare entries to record issuance of bonds, interest,


and straight-line amortization of bond premium and
discount.

Simple

3040

*10A

Prepare entries to record interest payments, straight-line


premium amortization, and redemption of bonds.

Moderate

3040

1B

Prepare current liability entries, adjusting entries, and


current liabilities section.

Moderate

3040

2B

Prepare entries to record issuance of bonds, interest


accrual, and bond redemption.

Moderate

2030

3B

Prepare entries to record issuance of bonds, interest


accrual, and bond redemption.

Moderate

1520

4B

Prepare installment payments schedule and journal


entries for a mortgage note payable.

Moderate

2030

*5B

Prepare entries to record issuance of bonds, payment


of interest, and amortization of bond discount using
effective-interest method.

Moderate

3040

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

10-3

ASSIGNMENT CHARACTERISTICS TABLE (Continued)


Problem
Number

Description

Difficulty
Level

Time
Allotted (min.)

Moderate

3040

*6B

Prepare entries to record issuance of bonds, payment of


interest, and amortization of premium using effectiveinterest method. In addition, answer questions.

*7B

Prepare entries to record issuance of bonds, interest


accrual, and straight-line amortization for two years.

Simple

3040

*8B

Prepare entries to record issuance of bonds, interest, and


straight-line amortization of bond premium and discount.

Simple

3040

*9B

Prepare entries to record interest payments, straight-line


discount amortization, and redemption of bonds.

Moderate

3040

10-4

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

WEYGANDT IFRS 1E
CHAPTER 10
LIABILITIES
Number
BE1
BE2
BE3
BE4
BE5
BE6
BE7
BE8
BE9
BE10
BE11
*BE12
*BE13
*BE14
*BE15
*BE16
*BE17
DI1
DI2
DI3
DI4
DI5
EX1
EX2
EX3
EX4
EX5
EX6
EX7
EX8
EX9
EX10
EX11
EX12

SO
1
2
3
3
4
5
5
5
6
7
8
9
10
11
11
12
12
3
4
5
6
7
2
2
3
3
3
4
4
5
5
5
5, 6
6

Copyright 2011 John Wiley & Sons, Inc.

BT
C
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
AP
C
C
AP
AP
AP
AN
AN
AP
AN
AP
C
AN
AP
AP
AP
AP
AP

Difficulty

Time (min.)

Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Moderate
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Moderate

35
24
24
24
68
46
35
46
35
68
35
35
46
46
46
35
35
68
23
46
35
46
810
68
46
68
68
46
46
46
46
68
68
810

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

10-5

LIABILITIES (Continued)
Number

SO

BT

Difficulty

Time (min.)

EX13
EX14
*EX15
*EX16
*EX17
*EX18
*EX19
*EX20
*EX21

7
8
9
5, 10
5, 10
5, 11
5, 11
12
12

AP
AP
AP
AP
AP
AP
AP
AP
AP

Simple
Simple
Simple
Moderate
Moderate
Simple
Simple
Simple
Simple

68
35
46
810
810
68
68
810
35

P1A
P2A
P3A
P4A
P5A
*P6A
*P7A
*P8A
*P9A
*P10A
P1B
P2B
P3B
P4B
P5B
*P6B
*P7B
*P8B
*P9B
BYP1
BYP2
BYP3
BYP4
BYP5
BYP6

13
2
5, 6, 8
5, 6, 8
7, 8
5, 10
5, 10
5, 11
5, 11
6, 11
13
5, 6, 8
5, 6, 8
7, 8
5, 10
5, 10
5, 11
5, 11
5, 6, 11
1
3, 8
4
5, 6
4
5, 6

AN
AN
AP
AP
AP
AP
AP
AP
AP
AP
AN
AP
AP
AP
AP
AP
AP
AP
AP
AN
AP
C
AN
C
E

Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Simple
Simple
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Simple
Simple
Moderate
Simple
Simple
Simple
Moderate
Simple
Simple

3040
3040
2030
1520
2030
3040
3040
3040
3040
3040
3040
2030
1520
2030
3040
3040
3040
3040
3040
510
1015
1015
1520
1015
1015

10-6

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Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual


Q10-23

(For Instructor Use Only)

Broadening Your Perspective

E10-18
E10-19
P10-3A
P10-4A
P10-6A
P10-7A
P10-8A
P10-9A

P10-5B
P10-6B

P10-5A
P10-2B
P10-3B

E10-15
E10-16
E10-17

P10-4B E10-14

BE10-16 E10-20
BE10-17 E10-21
Comparative
Analysis

Q10-22 P10-8A P10-7B E10-18


BE10-14 P10-9A P10-8B E10-19
BE10-15 P10-10A P10-9B

BE10-11
P10-3A
P10-4A
BE10-12
BE10-13
P10-6A
P10-7A

P10-4B E10-13

P10-4A P10-3B E10-11


P10-10A P10-9B E10-12
P10-2B
Q10-18 DI10-5
BE10-10 P10-5A

BE10-9
DI10-4
P10-3A

P10-2B E10-8
P10-3B E10-9
P10-5B E10-10
P10-6B
P10-7B
P10-8B
P10-9B

E10-7

BE10-5

Q10-9
DI10-2
E10-6
Q10-12
BE10-6
BE10-7
BE10-8
DI10-3
E10-11
E10-16
E10-17

BE10-3 P10-1B
E10-4 E10-5
P10-1A

BE10-2 P10-1A
E10-2 P10-1B
P10-2A

Analysis
P10-1A
P10-1B

BE10-4
E10-3

E10-1

Application

Q10-5

Financial Reporting
Exploring the Web
Communication

Q10-21

*11. Apply the straight-line method of


amortizing bond discount and
bond premium.

*12. Prepare entries for payroll and


payroll taxes under U.S. law.

Q10-20
Q10-18
Q10-19

*9. Compute the market price of a bond.


*10. Apply the effective-interest method
of amortizing bond discount and
bond premium.

8. Identify the methods for the


presentation and analysis of
non-current liabilities.

Q10-17

Q10-14
Q10-15

6. Describe the entries when bonds are


redeemed.

7. Describe the accounting for longterm notes payable.

Q10-11
Q10-13

Q10-6
Q10-7
Q10-8

4. Explain why bonds are issued, and


identify the types of bonds.

5. Prepare the entries for the issuance


of bonds and interest expense.

Q10-3
Q10-4
DI10-1

3. Explain the accounting for other


current liabilities.
Q10-10

Q10-2

2. Describe the accounting for notes


payable.

Study Objective
Knowledge Comprehension
1. Explain a current liability, and identify
Q10-1
the major types of current liabilities.
BE10-1

Synthesis

Decision Making
Across the
Organization
Ethics Case

Evaluation

Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems

BLOOMS TAXONOMY TABLE

10-7

ANSWERS TO QUESTIONS
1.

Jill is not correct. A current liability is a debt that can reasonably be expected to be paid: (a) from
existing current assets or through the creation of other current liabilities and (b) within one year or
the operating cycle, whichever is longer.

2.

In the statement of financial position, Notes Payable of Rs400,000 and Interest Payable of Rs9,000
(Rs400,000 X .09 X 3/12) should be reported as current liabilities. In the income statement, Interest
Expense of Rs9,000 should be reported under other income and expense.

3.

(a) Disagree. The company only serves as a collection agent for the taxing authority. It does not
report sales taxes as an expense; it merely forwards the amount paid by the customer to the
government.
(b) The entry to record the proceeds is:
Cash.................................................................................................................
7,400
Sales.......................................................................................................
7,000
Sales Taxes Payable...........................................................................
400

4.

(a) The entry when the tickets are sold is:


Cash..........................................................................................................
Unearned Football Ticket Revenue...........................................
(b)

The entry after each game is:


Unearned Football Ticket Revenue ....................................................
Football Ticket Revenue ..............................................................

800,000
800,000

160,000
160,000

5.

Liquidity refers to the ability of a company to pay its maturing obligations and meet unexpected
needs for cash. Two measures of liquidity are working capital (current assets current liabilities)
and the current ratio (current assets current liabilities).

6.

(a) Non-current liabilities are obligations that are expected to be paid after one year. Examples
include bonds, long-term notes, and lease obligations.
(b) A bond is a form of an interest-bearing notes payable used by corporations, universities, and
governmental agencies.

7.

(a) The major advantages are:


(1) Shareholder control is not affectedbondholders do not have voting rights, so current
shareholders retain full control of the company.
(2) Tax savings resultbond interest is deductible for tax purposes; dividends on ordinary
shares are not.
(3) Earnings per share may be higheralthough bond interest expense will reduce net income,
earnings per share will often be higher under bond financing because no additional shares
are issued.
(b) The major disadvantages in using bonds are that interest must be paid on a periodic basis
and the principal (face value) of the bonds must be paid at maturity.

10-8

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

Questions Chapter 10 (Continued)


8.

(a) Secured bonds have specific assets of the issuer pledged as collateral. In contrast, unsecured bonds are issued against the general credit of the borrower. These bonds are called
debenture bonds.
(b) Term bonds mature at a single specified future date. In contrast, serial bonds mature in
installments.
(c) Registered bonds are issued in the name of the owner. In contrast, bearer (coupon) bonds are
issued to bearer and are unregistered. Holders of bearer bonds must send in coupons to receive
interest payments.
(d) Convertible bonds may be converted into ordinary shares at the bondholders option. In contrast,
callable bonds are subject to call and retirement at a stated dollar amount prior to maturity at the
option of the issuer.

9.

(a) Face value is the amount of principal due at the maturity date. (Face value is also called par value.)
(b) The contractual interest rate is the rate used to determine the amount of cash interest the borrower
pays and the investor receives. This rate is also called the stated interest rate because it is
the rate stated on the bonds.
(c) A bond indenture is a legal document that sets forth the terms of the bond issue.
(d) A bond certificate is a legal document that indicates the name of the issuer, the face value of the
bonds, and such other data as the contractual interest rate and maturity date of the bonds.

10.

The two major obligations incurred by a company when bonds are issued are the interest
payments due on a periodic basis and the principal which must be paid at maturity.

11.

Less than. Investors are required to pay more than the face value; therefore, the market interest
rate is less than the contractual rate.

12.

R$28,000. R$800,000 X 7% X 1/2 year = R$28,000.

13.

$860,000. The balance of the Bonds Payable account minus the unamortized bond discount
(or plus the unamortized bond premium) equals the carrying value of the bonds.

14.

Debits:
Credits:

Bonds Payable (for the face value) and Premium on Bonds Payable (for the
unamortized balance).
Cash (for 97% of the face value) and Gain on Bond Redemption (for the difference
between the cash paid and the bonds carrying value).

15.

A convertible bond permits bondholders to convert it into ordinary shares at the option of the
bondholders.
(a) For bondholders, the conversion option gives an opportunity to benefit if the market price of
the shares increases substantially.
(b) For the issuer, convertible bonds usually have a higher selling price and a lower rate of
interest than comparable debt securities without the conversion option.

16.

No, Tim is not right. Each payment by Tim consists of: (1) interest on the unpaid balance of the
loan and (2) a reduction of loan principal. The interest decreases each period while the portion
applied to the loan principal increases each period.

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

10-9

Questions Chapter 10 (Continued)


*17.

The nature and the amount of each non-current liability should be presented in the statement of
financial position or in schedules in the accompanying notes to the statements. The notes
should also indicate the interest rates, maturity dates, conversion privileges, and assets pledged
as collateral.

*18.

Laura is probably indicating that since the borrower has the use of the bond proceeds over the
term of the bonds, the borrowing rate in each period should be the same. The effective-interest
method results in a varying amount of interest expense but a constant rate of interest on the
balance outstanding. Accordingly, it results in a better matching of expenses with revenues than
the straight-line method.

*19.

Decrease. Under the effective-interest method the interest charge per period is determined by
multiplying the carrying value of the bonds by the effective-interest rate. When bonds are issued
at a premium, the carrying value decreases over the life of the bonds. As a result, the interest
expense will also decrease over the life of the bonds because it is determined by multiplying the
decreasing carrying value of the bonds at the beginning of the period by the effective-interest rate.

*20. No, Tina is not right. The market price of any bond is a function of three factors: (1) The dollar
amounts to be received by the investor (interest and principal), (2) The length of time until the
amounts are received (interest payment dates and maturity date), and (3) The market interest rate.
*21. The straight-line method results in the same amortized amount being assigned to Interest
Expense each interest period. This amount is determined by dividing the total bond discount or
premium by the number of interest periods the bonds will be outstanding.
*22. $28,000. Interest expense is the interest to be paid in cash less the premium amortization for the
year. Cash to be paid equals 8% X $400,000 or $32,000. Total premium equals 5% of $400,000
or $20,000. Since this is to be amortized over 5 years (the life of the bonds) in equal amounts,
the amortization amount is $20,000 5 = $4,000. Thus, $32,000 $4,000 or $28,000 equals
interest expense for 2011.
*23. Three taxes commonly withheld by employers from employees gross pay are: (1) federal
income taxes (2) state income taxes, and (3) social security (FICA) taxes.

10-10

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Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO BRIEF EXERCISES


BRIEF EXERCISE 10-1
(a) A note payable due in two years is a non-current liability, not a current
liability.
(b) $30,000 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


July 1

Dec. 31

Cash .............................................................................
Notes Payable ..................................................

80,000

Interest Expense ......................................................


Interest Payable
(80,000 X 10% X 1/2) ................................

4,000

80,000

4,000

BRIEF EXERCISE 10-3


Sales tax payable
(1) Sales = $14,800 = ($15,540 1.05)
(2) Sales taxes payable = $740 = ($14,800 X 5%)
Mar. 16

Cash..............................................................................
Sales ....................................................................
Sales Taxes Payable ......................................

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15,540

(For Instructor Use Only)

14,800
740

10-11

BRIEF EXERCISE 10-4


Cash ..............................................................................................
Unearned Basketball Ticket Revenue.......................
(To record sale of 4,000 season tickets)

720,000

Unearned Basketball Ticket Revenue................................


Basketball Ticket Revenue ...........................................
(To record basketball ticket revenues earned)

60,000

720,000

60,000

BRIEF EXERCISE 10-5


Issue Shares

Issue Bond

Income before interest and taxes


Interest (2,000,000 X 8%)
Income before income taxes
Income tax expense (30%)
Net income (a)

700,000
0
700,000
210,000
490,000

700,000
160,000
540,000
162,000
378,000

Outstanding shares (b)


Earnings per share (a) (b)

700,000

0.70

500,000

0.76

Net income is higher if shares are used. However, earnings per share is
lower than earnings per share if bonds are used because of the additional
shares that are outstanding.

BRIEF EXERCISE 10-6


(a) Jan. 1

(b) July 1

(c) Dec. 31

10-12

Cash..........................................................
Bonds Payable
(3,000 X $1,000)........................

3,000,000

Bond Interest Expense .......................


Cash ($3,000,000 X 8% X 1/2) ....

120,000

Bond Interest Expense .......................


Bond Interest Payable
($3,000,000 X 8% X 1/2) .........

120,000

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3,000,000

120,000

Weygandt, IFRS, 1/e, Solutions Manual

120,000

(For Instructor Use Only)

BRIEF EXERCISE 10-7


(a) Jan. 1

(b) Jan. 1

Cash (2,000,000 X .97) ......................


Bonds Payable .............................

1,940,000

Cash (2,000,000 X 1.04) ....................


Bonds Payable .............................

2,080,000

1,940,000

2,080,000

BRIEF EXERCISE 10-8


1.

2.

3.

Jan. 1

July 1

Sept. 1

Cash (1,000 X $1,000) .........................


Bonds Payable .............................

1,000,000

Cash ($800,000 X 1.02) .......................


Bonds Payable .............................

816,000

Cash ($200,000 X .98) .........................


Bonds Payable .............................

196,000

1,000,000

816,000

196,000

BRIEF EXERCISE 10-9


Bonds Payable ...................................................................
Loss on Bond Redemption
(1,010,000 940,000)...............................................
Cash (1,000,000 X 101%) .....................................

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Weygandt, IFRS, 1/e, Solutions Manual

940,000
70,000
1,010,000

(For Instructor Use Only)

10-13

BRIEF EXERCISE 10-10


(B)
Interest
Expense
(D) X 5%

(A)
Semiannual
Interest
Period

Cash
Payment

Issue Date
1
Dec. 31

June 30

$48,145

$30,000

(C)
Reduction
of Principal
(A) (B)

(D)
Principal
Balance
(D) (C)

$18,145

$600,000
581,855

Cash .......................................................................
Mortgage Notes Payable ........................

600,000

Interest Expense ................................................


Mortgage Notes Payable .................................
Cash ..............................................................

30,000
18,145

600,000

48,145

BRIEF EXERCISE 10-11


Non-current liabilities
Bonds payable, due 2013...............................
Notes payable, due 2016 ................................
Lease liability .....................................................
Total .............................................................

CHF455,000
80,000
70,000
CHF605,000

*BRIEF EXERCISE 10-12


(a)

i = 10%
?

$10,000

Discount rate from Table 16 A-1 is .46651 (8 periods at 10%). Present value
of $10,000 to be received in 8 periods discounted at 10% is therefore $4,665.10
($10,000 X .46651).

10-14

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

*BRIEF EXERCISE 10-12 (Continued)


(b)

i = 8%
?

$20,000 $20,000 $20,000 $20,000 $20,000 $20,000

Discount rate from Table 11 A-2 is 4.62288 (6 periods at 8%). Present


value of 6 payments of $20,000 each discounted at 8% is therefore
$92,457.60 ($20,000 X 4.62288).
*BRIEF EXERCISE 10-13
(a) Interest Expense..............................................................
Bonds Payable ........................................................
Cash............................................................................

46,884
1,884
45,000

(b) Interest expense is greater than interest paid because the bonds sold
at a discount which must be amortized over the life of the bonds. The
bonds sold at a discount because investors demanded a market interest
rate higher than the contractual interest rate.
(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 amount, interest expense will increase.
*BRIEF EXERCISE 10-14
(a) Jan. 1

(b) July 1

Cash (.96 X HK$5,000,000) ...................... 4,800,000


Bonds Payable ...................................

Bond Interest Expense .............................


Bonds Payable
(HK$200,000 20) .........................
Cash (HK$5,000,000 X 9% X 1/2) ....

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

4,800,000

235,000
10,000
225,000

(For Instructor Use Only)

10-15

*BRIEF EXERCISE 10-15


(a) Cash (1.02 X $3,000,000) ........................................
Bonds Payable..................................................

3,060,000

(b) Bond Interest Expense ...........................................


Bonds Payable ($60,000 10) ..............................
Cash ($3,000,000 X 10% X 1/2) ....................

144,000
6,000

3,060,000

150,000

*BRIEF EXERCISE 10-16


Gross earnings:
Regular pay (40 X $16) ...................................................
Overtime pay (7 X $24)...................................................
Gross earnings..........................................................................
Less: FICA taxes payable ($808 X 8%).............................
Federal income taxes payable ................................
Net pay .........................................................................................

$640.00
168.00

$808.00
$808.00

$ 64.64
95.00

159.64
$648.36

*BRIEF EXERCISE 10-17


Jan. 15

Jan. 15

10-16

Wages Expense.........................................................
FICA Taxes Payable ($808 X 8%)................
Federal Income Taxes Payable ...................
Wages Payable .................................................

808.00

Wages Payable ..........................................................


Cash .....................................................................

648.36

Copyright 2011 John Wiley & Sons, Inc.

64.64
95.00
648.36

Weygandt, IFRS, 1/e, Solutions Manual

648.36

(For Instructor Use Only)

SOLUTIONS FOR DO IT! REVIEW EXERCISES

DO IT! 10-1
1.
2.

$42,000/1.05 = $40,000; $40,000 X 5% = $2,000


1,000 X $12 X 9/12 = $9,000

DO IT! 10-2
1.
2.

3.
4.
5.

False. Mortgage bonds and sinking fund bonds are both examples of
secured bonds.
False. Convertible bonds can be converted into ordinary shares at the
bondholders option; callable bonds can be retired by the issuer at a
set amount prior to maturity.
True.
True.
True.

DO IT! 10-3
(a) Cash................................................................................. 312,000,000
Bonds Payable ....................................................
312,000,000
(To record sale of bonds at a premium)
(b) Non-current liabilities
Bonds payable ....................................................

312,000,000

DO IT! 10-4
Loss on Bond Redemption ...............................................
Bonds Payable ......................................................................
Cash.................................................................................
(To record redemption of bonds at 99)

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6,000
390,000
396,000

(For Instructor Use Only)

10-17

DO IT! 10-5
Cash .............................................................................................
Mortgage Notes Payable ..............................................
(To record mortgage loan)
Interest Expense ......................................................................
Mortgage Notes Payable .......................................................
Cash ....................................................................................
(To record semiannual payment on mortgage)

350,000
350,000

10,500*
7,357
17,857

*Interest expense = R$350,000 X 6% X 6/12

10-18

Copyright 2011 John Wiley & Sons, Inc.

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(For Instructor Use Only)

SOLUTIONS TO EXERCISES
EXERCISE 10-1
July 1, 2011
Cash...................................................................................
Notes Payable.........................................................

50,000

November 1, 2011
Cash...................................................................................
Notes Payable.........................................................

60,000

50,000

60,000

December 31, 2011


Interest Expense
(50,000 X 12% X 6/12).............................................
Interest Payable .....................................................

3,000

Interest Expense
(60,000 X 10% X 2/12).............................................
Interest Payable .....................................................

1,000

February 1, 2012
Notes Payable.................................................................
Interest Payable .............................................................
Interest Expense (60,000 X 10% X 1/12)...............
Cash...........................................................................

60,000
1,000
500

April 1, 2012
Notes Payable.................................................................
Interest Payable .............................................................
Interest Expense (50,000 X 12% X 3/12)...............
Cash...........................................................................

50,000
3,000
1,500

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3,000

1,000

61,500

(For Instructor Use Only)

54,500

10-19

EXERCISE 10-2
(a) June 1 Cash ....................................................................
Notes Payable ..........................................

90,000

(b) June 30 Interest Expense .............................................


Interest Payable
[($90,000 X 12%) X 1/12]..................

900

(c) Dec. 1 Notes Payable ..................................................


Interest Payable
($90,000 X 12% X 6/12)..............................
Cash ............................................................

90,000

90,000

900

5,400
95,400

(d) $5,400

EXERCISE 10-3
Apr. 10

15

10-20

KEMER COMPANY
Cash ...........................................................................
Sales..................................................................
Sales Taxes Payable....................................
BODRUM COMPANY
Cash ...........................................................................
Sales (TL23,540 1.07) ...............................
Sales Taxes Payable
(TL23,540 TL22,000)............................

Copyright 2011 John Wiley & Sons, Inc.

31,500
30,000
1,500

23,540

Weygandt, IFRS, 1/e, Solutions Manual

22,000
1,540

(For Instructor Use Only)

EXERCISE 10-4
(a) Nov. 30

(b) Dec. 31

(c) Mar. 31

Cash .....................................................................
Unearned Subscriptions
(12,000 X $20) ......................................

240,000

Unearned Subscriptions ...............................


Subscription Revenue
($240,000 X 1/12).................................

20,000

Unearned Subscriptions ................................


Subscription Revenue
($240,000 X 3/12).................................

60,000

240,000

20,000

60,000

EXERCISE 10-5
(a) Current ratio
2008
$9,598 $5,839 = 1.64:1
2007
$9,838 $5,362 = 1.83:1
Working capital
2008
$9,598 $5,839 = $3,759 million
2007
$9,838 $5,362 = $4,476 million
(b) Current ratio
$9,298 $5,539 = 1.68:1
Working capital
$9,298 $5,539 = $3,759 million
It would make its current ratio increase slightly, but its working capital
would remain the same.

Copyright 2011 John Wiley & Sons, Inc.

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(For Instructor Use Only)

10-21

EXERCISE 10-6
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

True.
True.
False. When seeking long-term financing, an advantage of issuing bonds
over issuing ordinary shares is that tax savings result.
True.
False. Unsecured bonds are also known as debenture bonds.
False. Bonds that mature in installments are called serial bonds.
True.
True.
True.
True.

EXERCISE 10-7

Income before interest and taxes


Interest (2,700,000 X 10%)
Income before taxes
Income tax expense (30%)
Net income
Outstanding shares
Earnings per share

Plan One
Issue Shares
800,000

800,000
240,000
560,000
150,000
3.73

Plan Two
Issue Bonds
800,000
270,000
530,000
159,000
371,000
90,000
4.12

EXERCISE 10-8
(a) Jan. 1

(b) July 1

(c) Dec. 31

10-22

Cash.................................................................
Bonds Payable ....................................

500,000

Bond Interest Expense ..............................


Cash ($500,000 X 10% X 1/2)...........

25,000

Bond Interest Expense ..............................


Bond Interest Payable ......................

25,000

Copyright 2011 John Wiley & Sons, Inc.

500,000

25,000

Weygandt, IFRS, 1/e, Solutions Manual

25,000

(For Instructor Use Only)

EXERCISE 10-9
(a) Jan. 1

(b) July 1

(c) Dec. 31

Cash .................................................................
Bonds Payable .....................................

300,000

Bond Interest Expense...............................


Cash (R$300,000 X 8% X 1/2)...........

12,000

Bond Interest Expense...............................


Bond Interest Payable .......................

12,000

300,000

12,000

12,000

EXERCISE 10-10
(a) 1.

2.

Cash............................................................................
Bonds Payable ................................................
Semiannual interest payments
($20,000* X 10) ....................................................
Plus: bond discount..............................................
Total cost of borrowing........................................

485,000
485,000

$200,000
15,000
$215,000

*($500,000 X .08 X 6/12)


OR
Principal at maturity..............................................
Semiannual interest payments
($20,000 X 10)......................................................
Cash to be paid to bondholders........................
Cash received from bondholders .....................
Total cost of borrowing........................................

Copyright 2011 John Wiley & Sons, Inc.

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$500,000
200,000
700,000
(485,000)
$215,000

(For Instructor Use Only)

10-23

EXERCISE 10-10 (Continued)


(b) 1.

2.

Cash ............................................................................
Bonds Payable ................................................

525,000
525,000

Semiannual interest payments


($20,000 X 10) ......................................................
Less: bond premium .............................................
Total cost of borrowing ........................................

$200,000
25,000
$175,000

OR
Principal at maturity ..............................................
Semiannual interest payments
($20,000 X 10) ......................................................
Cash to be paid to bondholders ........................
Cash received from bondholders .....................
Total cost of borrowing ........................................

$500,000
200,000
700,000
(525,000)
$175,000

EXERCISE 10-11
(a) Jan. 1

(b) Jan

(c) July 1

10-24

Bond Interest Payable................................


Cash ........................................................

72,000

Bonds Payable .............................................


Loss on Bond Redemption ......................
Cash ($600,000 X 1.04)......................

600,000
24,000

Bond Interest Expense ..............................


Cash ($1,000,000 X 9% X 6/2) .........

45,000

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72,000

624,000

Weygandt, IFRS, 1/e, Solutions Manual

45,000

(For Instructor Use Only)

EXERCISE 10-12
1.

2.

June 30

June 30

Bonds Payable ...........................................


Loss on Bond Redemption
(132,600 117,500)...........................
Cash (130,000 X 102%) .................

117,500

Bonds Payable ...........................................


Gain on Bond Redemption
(151,000 147,000) ..................
Cash (150,000 X 98%)....................

151,000

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15,100
132,600

4,000
147,000

(For Instructor Use Only)

10-25

EXERCISE 10-13

Dec. 31

June 30

Dec. 31

2011
Issuance of Note
Cash ........................................................................
Mortgage Notes Payable .........................
2012
First Installment Payment
Interest Expense
($240,000 X 10% X 6/12) ...............................
Mortgage Notes Payable ..................................
Cash ...............................................................
Second Installment Payment
Interest Expense
[($240,000 $8,000) X 10% X 6/12] ...........
Mortgage Notes Payable ..................................
Cash ...............................................................

240,000
240,000

12,000
8,000
20,000

11,600
8,400
20,000

EXERCISE 10-14
Non-current liabilities
Bonds payable, due 2016..........................
Lease liability ................................................
Total.........................................................

HK$212,000
89,500
HK$301,500

*EXERCISE 10-15
Present value of principal ($200,000 X .61391)..............
Present value of interest ($8,000 X 7.72173) ..................
Market price of bonds ............................................................

10-26

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$122,782
61,774
$184,556

(For Instructor Use Only)

*EXERCISE 10-16
(a) Jan. 1

(b) July 1

(c) Dec. 31

Cash ................................................................
Bonds Payable ....................................
Bond Interest Expense
(562,613 X 5%) .......................................
Bonds Payable ....................................
Cash (600,000 X 9% X 1/2).............
Bond Interest Expense
[(562,613 + 1,131) X 5%] ...................
Bonds Payable ....................................
Bond Interest Payable ......................

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

562,613
562,613

28,131
1,131
27,000

28,187

(For Instructor Use Only)

1,187
27,000

10-27

10-28

Copyright 2011 John Wiley & Sons, Inc.

Issue date
1
2
27,000
27,000

28,131
28,187

1,131
1,187

562,613
563,744
564,931

(B)
Interest Expense
(C)
to Be Recorded
(A)
Discount
(D)
(5% X Preceding
Interest to
Semiannual
Bond
Bond Carrying Value) Amortization
Be Paid
Interest
(B) (A)
Carrying Value
(E X .05)
(4.5% X 600,000)
Periods

(b), (c)

*EXERCISE 10-16 (Continued)

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

*EXERCISE 10-17
(a) Jan. 1

(b) July 1

(c) Dec. 31

Cash ..................................................................
Premium on Bonds Payable.............

318,694
318,694

Bond Interest Expense


($318,694 X 5%) .........................................
Bonds Payable...............................................
Cash ($300,000 X 11% X 1/2) ............

15,935
565

Bond Interest Expense


[($318,694 $565) X 5%] ........................
Bonds Payable...............................................
Bond Interest Payable ........................

15,906
594

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Weygandt, IFRS, 1/e, Solutions Manual

16,500

(For Instructor Use Only)

16,500

10-29

10-30

Copyright 2011 John Wiley & Sons, Inc.

Issue date
1
2
16,500
16,500

15,935
15,906

565
594

318,694
318,129
317,535

(B)
Interest Expense
(C)
to Be Recorded
(A)
Premium
(D)
(5.0% X Preceding
Interest to
Semiannual
Bond
Bond Carrying Value) Amortization
Be Paid
Interest
(A) (B)
Carrying Value
(E X .05)
(5.5% X $300,000)
Periods

(b), (c)

*EXERCISE 10-17 (Continued)

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

*EXERCISE 10-18
(a) Jan. 1

(b) July 1

(c) Dec. 31

(d) Jan.

Cash (400,000 X 103%).............................


Bonds Payable .....................................

412,000

Bond Interest Expense...............................


Bonds Payable (12,000 X 1/40) ..............
Cash (400,000 X 9% X 1/2)..............

17,700
300

Bond Interest Expense .............................


Bonds Payable ............................................
Bond Interest Payable......................

17,700
300

2031
Bonds Payable ............................................
Cash .......................................................

412,000

18,000

18,000
400,000
400,000

*EXERCISE 10-19
(a)
Dec. 31
(b)
June 30

(c)
Dec. 31

(d)
Dec. 31

2010
Cash ................................................................
Bonds Payable ...................................
2011
Bond Interest Expense .............................
Bonds Payable ($70,000 20) .......
Cash ($800,000 X 11% X 1/2)..........
2011
Bond Interest Expense .............................
Bonds Payable ...................................
Cash ($800,000 X 11% X 1/2)..........
2020
Bonds Payable ............................................
Cash .......................................................

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

730,000
730,000
47,500
3,500
44,000
47,500
3,500
44,000
800,000
800,000

(For Instructor Use Only)

10-31

*EXERCISE 10-20
(a) Net pay = Gross pay FICA taxes Federal income tax
Net pay = $1,780 $135.73 $301.63
Net pay = $1,342.64
(b) Salaries Expense .................................................................. 1,780.00
FICA Taxes Payable......................................................
135.73
Federal Income Taxes Payable .................................
301.63
Salaries Payable.............................................................
1,342.64
(c) Salaries Payable.................................................................... 1,342.64
Cash ...................................................................................
1,342.64

*EXERCISE 10-21
Payroll Tax Expense ............................................................
FICA Taxes Payable......................................................
Federal Unemployment Taxes Payable..................
State Unemployment Taxes Payable ......................

10-32

Copyright 2011 John Wiley & Sons, Inc.

352.16

Weygandt, IFRS, 1/e, Solutions Manual

198.40
19.84
133.92

(For Instructor Use Only)

SOLUTIONS TO PROBLEMS
PROBLEM 10-1A

(a) Jan. 5

12

14

20

21

25

(b) Jan. 31

Cash......................................................................
Sales (22,680 108%) ..........................
Sales Taxes Payable
(22,680 21,000) .............................

22,680

Unearned Service Revenue...........................


Service Revenue......................................

10,000

Sales Taxes Payable .......................................


Cash.............................................................

7,700

Accounts Receivable ......................................


Sales ............................................................
Sales Taxes Payable
(800 X 50 X 8%)..................................

43,200

Cash......................................................................
Notes Payable...........................................

18,000

Cash......................................................................
Sales (12,420 108%) ..........................
Sales Taxes Payable
(12,420 11,500) .............................

12,420

Interest Expense ..............................................


Interest Payable .......................................
(18,000 X 8% X 1/12 =
(120; 120 X 1/3)

40

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

21,000
1,680

10,000

7,700

40,000
3,200

18,000

11,500
920

(For Instructor Use Only)

40

10-33

PROBLEM 10-1A (Continued)


(c) Current liabilities
Notes payable ...............................................................................
Accounts payable........................................................................
Unearned service revenue (16,000 10,000) .................
Sales taxes payable (1,680 + 3,200 + 920) ....................
Interest payable............................................................................
Total current liabilities ......................................................

10-34

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Weygandt, IFRS, 1/e, Solutions Manual

18,000
52,000
6,000
5,800
40
81,840

(For Instructor Use Only)

PROBLEM 10-2A

(a) Jan.

Feb.

Mar. 31

Apr.

July

Sept. 30

Oct.

Dec.

Dec. 31

Merchandise Inventory or
Purchases.....................................................
Accounts Payable..................................
Accounts Payable ..........................................
Notes Payable.........................................
Interest Expense
($30,000 X 9% X 2/12)................................
Interest Payable .....................................

30,000
30,000
30,000
30,000

450
450

Notes Payable..................................................
Interest Payable ..............................................
Cash ...........................................................

30,000
450

Equipment.........................................................
Cash ...........................................................
Notes Payable.........................................

51,000

Interest Expense
($40,000 X 10% X 3/12) .............................
Interest Payable .....................................

30,450

11,000
40,000

1,000
1,000

Notes Payable..................................................
Interest Payable ..............................................
Cash ...........................................................

40,000
1,000

Cash ....................................................................
Notes Payable.........................................

15,000

Interest Expense
($15,000 X 8% X 1/12)................................
Interest Payable .....................................

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Weygandt, IFRS, 1/e, Solutions Manual

41,000

15,000

100

(For Instructor Use Only)

100

10-35

PROBLEM 10-2A (Continued)


(b)
4/1
10/1

4/1
10/1

3/31
9/30
12/31
12/31 Bal.

Notes Payable
30,000 2/1
40,000 7/1
12/1
12/31 Bal.

30,000
40,000
15,000
15,000

Interest Payable
450 3/31
1,000 9/30
12/31
12/31 Bal.

450
1,000
100
100

Interest Expense
450
1,000
100
1,550

(c) Current liabilities


Notes payable ..........................................................
Interest payable.......................................................

$15,000
100

$15,100

(d) Total interest is $1,550.

10-36

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 10-3A
(a)
May 1

(b) Dec. 31

2011
Cash .............................................................
Bonds Payable .................................
Bond Interest Expense...........................
Bond Interest Payable
(CHF600,000 X 9% X 2/12) ........

600,000
600,000
9,000
9,000

(c) Non-current Liabilities


Bonds Payable, due 2016..................................

$600,000

Current Liabilities
Bond Interest Payable........................................
(d)
May 1

(e) Nov. 1

(f)

Nov. 1

2012
Bond Interest Payable ............................
Bond Interest Expense
(CHF600,000 X 9% X 4/12).................
Cash.....................................................

9,000
18,000
27,000

Bond Interest Expense...........................


Cash (CHF600,000 X 9% X 1/2) ...

27,000

Bonds Payable..........................................
Loss on Bond Redemption...................
Cash (CHF600,000 X 1.02) ............

600,000
12,000

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Weygandt, IFRS, 1/e, Solutions Manual

9,000

27,000

612,000

(For Instructor Use Only)

10-37

PROBLEM 10-4A

(a)
Jan. 1

2011
Cash ($500,000 X 1.04)..........................
Bonds Payable ...............................

520,000
520,000

(b) Non-current Liabilities


Bonds payable, due 2021................................

$518,000*

Current Liabilities
Bond interest payable
($500,000 X 10% X 1/2) .........................................

$ 25,000

*$500,000 + [$20,000 ($20,000 X 1/10)]


(c)
Jan. 1

2013
Bonds Payable ........................................
Loss on Bond Redemption .................
Cash ($500,000 X 1.05).................

516,000
9,000*
525,000

*($525,000 $516,000)

10-38

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 10-5A

(a)

Semiannual
Interest Period
Issue Date
1
2
3
4

(b)
Dec. 31

June 30

Dec. 31

Cash
Payment
R$29,433
29,433
29,433
29,433

Interest
Expense

Reduction of
Principal

R$16,000
15,463
14,904
14,323

R$13,433
13,970
14,529
15,110
R$57,042

2010
Cash ................................................................
Mortgage Notes Payable .................

400,000

2011
Interest Expense .........................................
Mortgage Notes Payable ..........................
Cash .......................................................

16,000
13,433

Interest Expense .........................................


Mortgage Notes Payable ..........................
Cash .......................................................

(c)

Principal
Balance
R$400,000
386,567
372,597
358,068
342,958

400,000

29,433
15,463
13,970
29,433

12/31/11
Non-current Liabilities
Mortgage notes payable, due 2020

R$342,958*

Current Liabilities
Current portion of mortgage notes payable

R$ 29,639**

*(R$372,597 R$14,529 R$15,110)


**(R$14,529 + R$15,110)

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

10-39

*PROBLEM 10-6A
(a)
July 1

(b)

2011
Cash...........................................................
Bonds Payable ..............................

2,271,813

ATWATER CORPORATION
Bond Premium Amortization
Effective-Interest MethodSemiannual Interest Payments
10% Bonds Issued at 8%
(A)
Semiannual
Interest
Interest
to Be
Periods
Paid
Issue date
1
$100,000
100,000
2
3
100,000

(c) Dec. 31

(d)
July 1

(e) Dec. 31

10-40

2,271,813

(B)

(C)
Premium
AmorInterest tization
Expense (A) (B)

(D)

$90,873
90,507
90,128

Bond
Carrying
Value
$2,271,813
2,262,686
2,253,193
2,243,321

$9,127
9,493
9,872

Bond Interest Expense


($2,271,813 X 4%)..............................
Bonds Payable .......................................
Bond Interest Payable
($2,000,000 X 5%) .....................
2012
Bond Interest Expense
[($2,271,813 $9,127) X 4%]..........
Bonds Payable .......................................
Cash ..................................................
Bond Interest Expense
[($2,262,686 $9,493) X 4%]..........
Bonds Payable .......................................
Bond Interest Payable.................

Copyright 2011 John Wiley & Sons, Inc.

90,873
9,127
100,000

90,507
9,493
100,000

90,128
9,872

Weygandt, IFRS, 1/e, Solutions Manual

100,000

(For Instructor Use Only)

*PROBLEM 10-7A

(a) 1.
July 1

2.

Dec. 31

3.
July 1

4.

Dec. 31

2011
Cash...................................................... 3,501,514
Bonds Payable .........................
Bond Interest Expense
(3,501,514 X 5%).........................
Bonds Payable .........................
Bond Interest Payable
(4,000,000 X 4%)................
2012
Bond Interest Expense
[(3,501,514 + 15,076) X 5%].....
Bonds Payable .........................
Cash.............................................
Bond Interest Expense
[(3,516,590 + 15,830) X 5%].....
Bonds Payable .........................
Bond Interest Payable .............

(b) Bonds payable ...........................................................

3,501,514

175,076
15,076
160,000

175,830
15,830
160,000
176,621
16,621
160,000

3,549,041*

*(3,501,514 + 15,076 + 15,830 + 16,621)

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

10-41

*PROBLEM 10-7A (Continued)


(c) Dear

Thank you for asking me to clarify some points about the bonds issued by
Rossillon Company.
1.

The amount of interest expense reported for 2012 related to these


bonds is 352,451 (175,830 + 176,621).

2.

When the bonds are sold at a discount, the effective-interest method


will result in less interest expense reported than the straight-line
method in 2012. Straight-line interest expense for 2012 is 369,848
[160,000 + 160,000 + (24,924 + 24,924)].

3.

The total cost of borrowing is 3,698,486 as shown below:


Semiannual interest payments
(4,000,000 X 4%) = 160,000; 160,000 X 20 ...........
Add: bond discount (4,000,000 3,501,514)............
Total cost of borrowing ..............................................

4.

3,200,000
498,486
3,698,486

The total bond interest expense over the life of the bonds is the same
under either method of amortization.

If you have other questions, please contact me.


Sincerely,

10-42

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

*PROBLEM 10-8A

(a)
Jan. 1

2011
Cash ($3,000,000 X 1.04)......................
Bonds Payable ...............................

3,120,000
3,120,000

(b) See page 10-45.


(c)
July 1

Dec. 31

Jan. 1

July 1

Dec. 31

2011
Bond Interest Expense.........................
Bonds Payable ($120,000 20) .........
Cash...................................................
Bond Interest Expense.........................
Bonds Payable........................................
Bond Interest Payable .................
2012
Bond Interest Payable ..........................
Cash...................................................

144,000
6,000
150,000
144,000
6,000
150,000

150,000
150,000

Bond Interest Expense.........................


Bonds Payable........................................
Cash...................................................

144,000
6,000

Bond Interest Expense.........................


Bonds Payable........................................
Bond Interest Payable .................

144,000
6,000

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

150,000

150,000

(For Instructor Use Only)

10-43

*PROBLEM 10-8A (Continued)


(d) Non-current Liabilities
Bonds payable, due 2021................................

$3,096,000

Current Liabilities
Bond interest payable ......................................

$ 150,000

10-44

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

Copyright 2011 John Wiley & Sons, Inc.

Issue date
1
2
3
4
$150,000
150,000
150,000
150,000

$144,000
144,000
144,000
144,000

$6,000
6,000
6,000
6,000

$3,120,000
3,114,000
3,108,000
3,102,000
3,096,000

(A)
(B)
(C)
(D)
Semiannual
Interest to
Interest Expense
Premium
Bond
Interest
Be Paid
to Be Recorded
Amortization
Carrying Value
Periods
(5% X $3,000,000)
(A) (C)
($120,000 20) [$3,000,000 (C)]

(b)

*PROBLEM 10-8A (Continued)

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

10-45

*PROBLEM 10-9A

(a)
July 1

Dec. 31

(b)
July 1

Dec. 31

2011
Cash (Rs2,500,000 X 104%)...............
Bonds Payable .............................
Bond Interest Expense .......................
Bonds Payable (Rs100,000 20).....
Bond Interest Payable
(Rs2,500,000 X 8% X 1/2) ......
2011
Cash (Rs2,500,000 X 98%) .................
Bonds Payable .............................
Bond Interest Expense .......................
Bonds Payable
(Rs50,000 20) ........................
Bond Interest Payable
(Rs2,500,000 X 8% X 1/2) ......

2,500,000
2,500,000
95,000
5,000
100,000

2,450,000
2,450,000
102,500
2,500
100,000

(c) Premium
Non-current Liabilities
Bonds payable, due 2021..........................

Rs2,595,000

Discount
Non-current Liabilities
Bonds payable, due 2021..........................

10-46

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

Rs2,452,500

(For Instructor Use Only)

*PROBLEM 10-10A

(a)
Jan. 1

(b) July 1

(c) July 1

2012
Bond Interest Payable ........................
Cash.................................................
Bond Interest Expense.......................
Bonds Payable
($200,000 20)..................................
Cash.................................................
Bonds Payable......................................
Gain on Bond Redemption ......
($1,276,000 $1,212,000)
Cash ($1,200,000 X 101%) ........

105,000
105,000
95,000
10,000
105,000
1,276,000*
64,000
1,212,000

*($200,000 $10,000) X .40 = $76,000


(d) Dec. 31

Bond Interest Expense.......................


Bonds Payable......................................
Bond Interest Payable
($1,800,000 X 7% X 1/2)........

**$200,000 $10,000 $76,000 = $114,000;

Copyright 2011 John Wiley & Sons, Inc.

57,000
6,000**
63,000

$114,000
= $6,000 or $10,000 X .60.
19

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

10-47

PROBLEM 10-1B

(a) Jan. 1

12

14

20

25

(b) Jan. 31

10-48

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


Notes Payable .............................................
Cash ........................................................................ 10,400
Sales (10,400 104%) ............................
Sales Taxes Payable
(10,400 10,000)...............................
Unearned Service Revenue.............................
Service Revenue ........................................

9,000

Sales Taxes Payable..........................................


Cash ...............................................................

5,800

Weygandt, IFRS, 1/e, Solutions Manual

400

5,800

Cash ........................................................................ 18,720


Sales (18,720 104%) ............................
Sales Taxes Payable
(18,720 18,000)................................

Copyright 2011 John Wiley & Sons, Inc.

10,000

9,000

Accounts Receivable......................................... 48,672


Sales...............................................................
Sales Taxes Payable
(900 X 52 X 4%) ....................................

Interest Expense .................................................


Interest Payable
(30,000 X 8% X 1/12)...........................

30,000

46,800
1,872

18,000
720

200
200

(For Instructor Use Only)

PROBLEM 10-1B (Continued)


(c) Current liabilities
Notes payable.......................................................................
Accounts payable ...............................................................
Unearned service revenue (15,000 9,000) ...........
Sales taxes payable (400 + 1,872 + 720) ...............
Interest payable ...................................................................
Total current liabilities..............................................

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

30,000
42,500
6,000
2,992
200
81,692

(For Instructor Use Only)

10-49

PROBLEM 10-2B

(a)
June 1

(b) Dec. 31

2011
Cash............................................................
Bonds Payable ...............................
Bond Interest Expense .........................
Bond Interest Payable
($1,500,000 X 8% X 1/12) ...........

1,500,000
1,500,000
10,000
10,000

(c) Non-current Liabilities


Bonds Payable...................................................

$1,500,000

Current Liabilities
Bond Interest Payable.....................................
(d)
June 1

(e) Dec. 1

(f)

10-50

Dec. 1

2012
Bond Interest Payable...........................
Bond Interest Expense
($1,500,000 X 8% X 5/12) ....................
Cash ...................................................

10,000
50,000
60,000

Bond Interest Expense .........................


Cash ($1,500,000 X 8% X 1/2) ....

60,000

Bonds Payable ........................................


Loss on Bond Redemption .................
Cash ($1,500,000 X 1.02) .............

1,500,000
30,000

Copyright 2011 John Wiley & Sons, Inc.

10,000

60,000

Weygandt, IFRS, 1/e, Solutions Manual

1,530,000

(For Instructor Use Only)

PROBLEM 10-3B

(a)
Jan. 1

2011
Cash (R$600,000 X 1.05) ........................
Bonds Payable .................................

630,000
630,000

(b)
Non-current Liabilities
Bond Payable, due 2021 ...................................

R$627,000*

Current Liabilities
Bond Interest Payable (R$600,000 X 9% X 1/2).......

R$27,000

*R$600,000 + R$30,000 (R$30,000 10)


(c)
Jan. 1

2013
Bonds Payable..........................................
Loss on Bond Redemption...................
Cash (R$600,000 X 1.05) ...............

624,000
6,000*
630,000

*(R$630,000 R$624,000)

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

10-51

PROBLEM 10-4B

(a)

Semiannual
Interest Period
Issue Date
1
2
3
4

(b)
Dec. 31

June 30

Dec. 31

Cash
Payment
$36,791
36,791
36,791
36,791

Interest
Expense
$20,000
19,328
18,630
17,903

Reduction
of Principal

Principal
Balance
$500,000
483,209
465,746
447,585
428,697

$16,791
17,463
18,161
18,888
$71,303

2011
Cash ..............................................................
Mortgage Notes Payable................

500,000

2012
Interest Expense .......................................
Mortgage Notes Payable ........................
Cash .....................................................

20,000
16,791

Interest Expense .......................................


Mortgage Notes Payable ........................
Cash .....................................................

(c)

500,000

36,791
19,328
17,463
36,791
12/31/12

Non-current Liabilities
Mortgage notes payable......................................

$428,697*

Current Liabilities
Current portion of mortgage notes payable ....

$ 37,049***

**($465,746 $37,049)
**($18,161 + $18,888)

10-52

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

*PROBLEM 10-5B

(a)
July 1

(b)

2011
Cash .........................................................
Bonds Payable .............................

2,531,760
2,531,760

MATLOCK SATELLITES
Bond Discount Amortization
Effective-Interest MethodSemiannual Interest Payments
9% Bonds Issued at 10%
(A)

(B)
(C)
Interest Discount
Expense
Amorto Be
tization
Recorded (B) (A)

Semiannual
Interest
Interest
to Be
Periods
Paid
Issue date
1
121,500 126,588
121,500
126,842
2
127,110
3
121,500
(c) Dec. 31

(d)
July 1

(e) Dec. 31

5,088
5,342
5,610

Bond Interest Expense


(2,531,760 X 5%).............................
Bonds Payable ..............................
Bond Interest Payable
(2,700,000 X 9% X 1/2).........
2012
Bond Interest Expense
[(2,531,760 + 5,088) X 5%] ........
Bonds Payable ..............................
Cash.................................................
Bond Interest Expense
[(2,536,848 + 5,342) X 5%] ........
Bonds Payable ..............................
Bond Interest Payable ...............

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(D)
Bond
Carrying
Value
2,531,760
2,536,848
2,542,190
2,547,800

126,588
5,088
121,500

126,842
5,342
121,500

127,110
5,610
121,500

(For Instructor Use Only)

10-53

*PROBLEM 10-6B

(a) 1.
July 1

2.

Dec. 31

3.
July 1

4.

Dec. 31

2011
Cash ..................................................... 3,407,720
Bonds Payable ........................
Bond Interest Expense
($3,407,720 X 4%) ........................
Bonds Payable .................................
Bond Interest Payable
($3,000,000 X 5%) ...............
2012
Bond Interest Expense
[($3,407,720 $13,691) X 4%]....
Bonds Payable .................................
Cash ............................................
Bond Interest Expense
[($3,394,029 $14,239) X 4%]....
Bonds Payable .................................
Bond Interest Payable...........

3,407,720

136,309
13,691
150,000

135,761
14,239
150,000
135,192
14,808

(b) Bonds payable...............................................................

150,000
$3,364,982*

*($3,407,720 $13,691 $14,239 $14,808)

10-54

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

*PROBLEM 10-6B (Continued)


(c) Dear

Thank you for asking me to clarify some points about the bonds issued by
Posadas Chemical Company.
1.

The amount of interest expense reported for 2012 related to these


bonds is $270,953 ($135,761 + $135,192).

2.

When the bonds are sold at a premium, the effective-interest method


will result in more interest expense reported than the straight-line
method in 2012. Straight-line interest expense for 2012 is $259,228
[$150,000 + $150,000 ($20,386 + $20,386)].

3.

The total cost of borrowing is as shown below:


Semiannual interest payments
($3,000,000 X 10% X 1/2) = $150,000 X 20 ..................
Less: bond premium ($3,407,720 $3,000,000) ..........
Total cost of borrowing...............................................

4.

$3,000,000
407,720
$2,592,280

The total bond interest expense over the life of the bonds is the
same under either method of amortization.

If you have other questions, please contact me.


Sincerely,

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

10-55

*PROBLEM 10-7B

(a)

2011
Jan. 1

Cash (4,000,000 X 96%).......................... 3,840,000


Bonds Payable ...................................

3,840,000

(b) See page 10-58.


(c)

2011
July 1

Dec. 31

Bond Interest Expense .............................


Bonds Payable (160,000 40).....
Cash (4,000,000 X 9% X 1/2) ........

184,000

Bond Interest Expense .............................


Bonds Payable ...................................
Bond Interest Payable......................

184,000

4,000
180,000

4,000
180,000

2012
Jan. 1

July 1

Dec. 31

10-56

Bond Interest Payable..............................


Cash ......................................................

180,000

Bond Interest Expense ............................


Bonds Payable ..................................
Cash (4,000,000 X 9% X 1/2) .......

184,000

Bond Interest Expense ............................


Bonds Payable ..................................
Bond Interest Payable.....................

184,000

Copyright 2011 John Wiley & Sons, Inc.

180,000

4,000
180,000

Weygandt, IFRS, 1/e, Solutions Manual

4,000
180,000

(For Instructor Use Only)

*PROBLEM 10-7B (Continued)


(d) Non-current Liabilities
Bonds payable .................................................

3,856,000

Current Liabilities
Bond interest payable....................................

180,000

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

10-57

10-58

Copyright 2011 John Wiley & Sons, Inc.

Issue date
1
2
3
4
R180,000
180,000
180,000
180,000

R184,000
184,000
184,000
184,000

R4,000
4,000
4,000
4,000

(C)
(A)
(B)
Discount
Interest to
Interest Expense
Semiannual
Amortization
Be Paid
to Be Recorded
Interest
(R160,000 40)
(4.5% X R4,000,000)
(A) + (C)
Periods

(b)

R3,840,000
3,844,000
3,848,000
3,852,000
3,856,000

Bond
Carrying Value

(D)

*PROBLEM 10-7B (Continued)

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

*PROBLEM 10-8B

(a) Jan. 1

July 1

Dec. 31

(b) Jan. 1

July 1

Dec. 31

Cash ($5,000,000 X 103%)....................... 5,150,000


Bonds Payable ..................................
Bond Interest Expense ............................
Bonds Payable ($150,000 20).............
Cash ($5,000,000 X 8% X 1/2) .......

192,500
7,500

Bond Interest Expense ............................


Bonds Payable ...........................................
Bond Interest Payable.....................

192,500
7,500

200,000

200,000

Cash ($5,000,000 X 96%)......................... 4,800,000


Bonds Payable ........................................... 200,000
Bonds Payable ..................................
Bond Interest Expense ............................
Bonds Payable ($200,000 20)....
Cash......................................................

210,000

Bond Interest Expense ............................


Bonds Payable ..................................
Bond Interest Payable.....................

210,000

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

5,150,000

5,000,000

10,000
200,000

10,000
200,000

(For Instructor Use Only)

10-59

*PROBLEM 10-8B (Continued)


(c) Premium
Non-current Liabilities
Bonds payable, due 2021 ............................

$5,135,000

Current Liabilities
Bond interest payable ..................................

$ 200,000

Discount

10-60

Non-current Liabilities
Bonds payable, due 2021 ............................

$4,820,000

Current Liabilities
Bond interest payable ..................................

$ 200,000

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

*PROBLEM 10-9B

(a) Jan. 1

(b) July 1

(c) July 1

Bond Interest Payable ...........................


Cash....................................................

84,000

Bond Interest Expense ..........................


Bonds Payable (90,000 20) ....
Cash (2,400,000 X 7% X 1/2)......

88,500

Bonds Payable .........................................


Loss on Bond Redemption ..................
Cash (800,000 X 101%) ...............

771,500*
36,500

84,000**

4,500**
84,000**

808,000**

*800,000 [(90,000 4,500) X 1/3] = 771,500

(d) Dec. 31

Bond Interest Expense ..........................


Bonds Payable ................................
Bond Interest Payable...................

59,000
3,000**
56,000**

*(90,000 4,500) X 2/3 = 57,000;


*(57,000 19 = 3,000 or
*(4,500 X 2/3 = 3,000
**(2,400,000 800,000 = 1,600,000;
**(1,600,000 X 7% X 1/2 = 56,000)

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

10-61

COMPREHENSIVE PROBLEM SOLUTION 101

(a)

1. Bond Interest Payable...........................................


Cash ...................................................................

3,000

2. Merchandise Inventory .........................................


Accounts Payable..........................................

241,100

3. Cash ............................................................................
Sales...................................................................
Sales Taxes Payable.....................................

477,000

Cost of Goods Sold................................................


Merchandise Inventory ................................

250,000

4. Account Payable .....................................................


Cash ...................................................................

230,000

5. Bond Interest Expense..........................................


Cash ...................................................................

3,000

6. Insurance Expense.................................................
Prepaid Insurance..........................................

5,600

7. Prepaid Insurance ..................................................


Cash ...................................................................

10,200

8. Sales Taxes Payable..............................................


Cash ...................................................................

17,000

9. Other Operating Expenses ..................................


Cash ...................................................................

91,000

10. Bond Interest Expense..........................................


Cash ...................................................................

3,000

Bonds Payable.........................................................
Cash ...................................................................
Gain on Bond Redemption .........................

50,000

10-62

Copyright 2011 John Wiley & Sons, Inc.

3,000

241,100

450,000
27,000

250,000

230,000

3,000

5,600

10,200

17,000

91,000

3,000

Weygandt, IFRS, 1/e, Solutions Manual

48,000
2,000

(For Instructor Use Only)

COMPREHENSIVE PROBLEM SOLUTION (Continued)


11. Cash ($90,000 X 104%) ..........................................
Bonds Payable ................................................

93,600
93,600

Adjusting Entries
12. Insurance Expense ($10,200 X 5/12) .................
Prepaid Insurance ..........................................

4,250

13. Depreciation Expense ($38,000 $3,000) 5.......


Accumulated Depreciation..........................

7,000

14. Income Tax Expense ..............................................


Income Tax Payable ......................................

26,445

(b)

4,250

7,000

26,445

ABER CORPORATION
Trial Balance
12/31/2011
Account
Cash .......................................................................
Merchandise Inventory ....................................
Prepaid Insurance .............................................
Equipment............................................................
Accumulated Depreciation .............................
Accounts Payable..............................................
Sales Tax Payable .............................................
Income Tax Payable..........................................
Bonds Payable....................................................
Share CapitalOrdinary .................................
Retained Earnings .............................................
Sales.......................................................................
Cost of Goods Sold...........................................
Depreciation Expense ......................................
Insurance Expense............................................
Other Operating Expenses .............................
Bond Interest Expense ....................................
Gain on Bond Redemption .............................
Income Tax Expense ........................................

Copyright 2011 John Wiley & Sons, Inc.

Debit
$195,900
16,850
5,950
38,000

Credit

7,000
24,850
10,000
26,445
93,600
20,000
13,100
450,000

250,000
7,000
9,850
91,000
6,000
2,000
26,445
$646,995

Weygandt, IFRS, 1/e, Solutions Manual

$646,995

(For Instructor Use Only)

10-63

COMPREHENSIVE PROBLEM SOLUTION (Continued)


(a) and (b) Optional T accounts
Cash
30,500
477,000
93,600

Bal.

Bal.

3,000
230,000
3,000
10,200
17,000
91,000
3,000
48,000

195,900

Merchandise Inventory
Bal.
25,750
250,000
241,100
Bal.
16,850

Bond Interest Payble


3,000 Bal.
3,000
Bal.
0
Sales Tax Payable
17,000
27,000
Bal.
10,000
Income Tax Payable
26,445

Bonds Payable
50,000 Bal.
Bal.

Prepaid Insurance
5,600
10,200
5,950

Bal.
Bal.

5,600
4,250

Equipment
38,000

Bal.

Accumulated Depreciation
7,000

50,000
93,600
93,600

Share CapitalOrdinary
Bal.
20,000

Retained Earnings
Bal.
13,100

Sales
450,000

Accounts Payable
230,000 Bal.
13,750
241,100
Bal.
24,850
10-64

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COMPREHENSIVE PROBLEM SOLUTION (Continued)


(a) and (b) (Continued)
Cost of Goods Sold
250,000

Bond Interest Expense


3,000
3,000
Bal.
6,000

Depreciation Expense
7,000

Bal.

Insurance Expense
5,600
4,250
9,850

Income Tax Expense


26,445

Gain on Bond Redemption


2,000

Other Operating Expenses


91,000

(c)

ABER CORPORATION
Income Statement
For the Year Ending 12/31/11
Sales .......................................................................
Cost of goods sold ............................................
Gross profit ..........................................................
Operating expenses
Insurance expense....................................
Depreciation expense ..............................
Other operating expenses......................
Total operating expenses ................................
Income from operations...................................
Other income and expense
Gain on bond redemption.......................
Bond interest expense......................................
Income before taxes..........................................
Income tax expense..................................
Net income............................................................

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

$450,000
250,000
200,000
$9,850
7,000
91,000
107,850
92,150
2,000
6,000
88,150
26,445
$ 61,705
(For Instructor Use Only)

10-65

COMPREHENSIVE PROBLEM SOLUTION (Continued)


ABER CORPORATION
Retained Earnings Statement
For the Year Ending 12/31/11
Retained earnings, 1/1/11...................................................
Add: Net income.................................................................
Less: Dividends ...................................................................
Retained earnings, 12/31/11 ..............................................

$13,100
61,705
74,805

$74,805

ABER CORPORATION
Statement of Financial Position
12/31/2011
Property, Plant, and Equipment
Equipment ...................................................
Accumulated depreciation.....................
Current Assets
Prepaid insurance.....................................
Merchandise inventory............................
Cash...............................................................
Total assets ..........................................
Equity
Share capitalordinary ..........................
Retained earnings.....................................

$ 38,000
7,000
5,950
16,850
195,900

$20,000
74,805

Non-current liabilities
Bonds payable ...........................................
Current Liabilities
Accounts payable .....................................
Income taxes payable..............................
Sales tax payable ......................................
Total equity and liabilities...............................

10-66

Copyright 2011 John Wiley & Sons, Inc.

$ 31,000

218,700
$249,700

94,805
93,600

24,850
26,445
10,000

Weygandt, IFRS, 1/e, Solutions Manual

61,295
$249,700

(For Instructor Use Only)

COMPREHENSIVE PROBLEM SOLUTION 102

(a)

Paris
Company
Plant and Equipment
Accumulated Depreciation (2.)
Merchandise Inventory
Accounts Receivable (1.)
Allowance for Doubtful Accounts
Cash
Total Assets
Equity
Non-current Liabilities
Current Liabilities (3.)
Total Equity and Liabilities

CHF 255,300
(188,375)
517,000
309,700
(13,600)
17,200
CHF897,225

Troyer
Company
CHF257,300
(189,850)
520,200
312,500
(20,000)
48,400
CHF928,550

CHF379,025*
78,000
440,200
CHF897,225

CHF412,050**
84,000
432,500
CHF928,550

**CHF454,750 CHF75,725 (CHF188,375 CHF112,650) change in


accumulated depreciation.
**CHF432,050 CHF20,000 allowance for doubtful accounts.
(b) Based on a review of the companies and revision of financial statements for purposes of comparability, it can be seen that Troyer Company is in a better financial position. However, this claim to the better
position is a tenuous one. The amounts within each category in the
statement of financial position of each company are quite similar.
In terms of short-term liquidity, Troyer Company is in a little stronger
financial position. Total current assets for Paris Company are CHF830,300
versus CHF861,100 for Troyer. Comparing these to the current liabilities,
Troyer has a current ratio of 1.99 (CHF861,100 CHF432,500) versus 1.89
(CHF830,300 CHF440,200) for Paris.

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Weygandt, IFRS, 1/e, Solutions Manual

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10-67

BYP 10-1

FINANCIAL REPORTING PROBLEM

(a) Total current liabilities at December 31, 2008, 3,388 million. Cadburys
total current liabilities decreased by 1,226 (3,388 4,614) million over
the prior year.
(b) The components of current liabilities for December 31, 2008 are:
Short-term borrowings and overdrafts ......................... 1,189,000,000
Trade and other payables .................................................. 1,551,000,000
Tax payable............................................................................. 328,000,000
(c) At December 31, 2008, Cadburys non-current debt was 1,876 million.
There was a 657 million decrease (1,876 2,533) in non-current
debt during the year. The statement of financial position indicates that
non-current debt consists of borrowings (1,194).

10-68

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BYP 10-2

COMPARATIVE ANALYSIS PROBLEM

(a) Cadburys largest current liability was trade and other payables at
1,551 million. Its total current liabilities were 3,388 million. Nestls
largest current liability was financial liabilities at CHF15,383 million.
Its total current liabilities were CHF33,223 million.
(b)

(in millions)

Cadbury

Nestl

(1) Working capital

2,635 3,388 = (753)

CHF33,048 CHF33,223 = (CHF175)

(1) Current ratio

2,635
3,388 = .78:1

CHF33,048
= .99:1
CHF33,223

(c) Based on this information, it appears that both companies are illiquid.
Additional analysis should be done to assess the reason for the
negative working capital and low current ratio.
(d)
1. Debt to total
assets
2. Times interest
earned

Cadbury
5,361
= 60.3%
8,895
366 + 30 + 50
= 8.92 times
50

Nestl
CHF51,299
CHF106,215

= 48.3%

CHF19,051 + CHF3,787 + CHF1,247


= 19.3 times
CHF1,247

(e) The higher the percentage of debt to total assets, the greater the risk
that a company may be unable to meet its maturing obligations.
Cadburys 2008 debt to total assets ratio was 25% higher than Nestls.
The times interest earned ratio provides an indication of a companys
ability to meet interest payments. Both times interest earned ratios are
excellent and, therefore, both companies will have no difficulty meeting
these interest payments.

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

10-69

BYP 10-3

EXPLORING THE WEB

(a) In 1909, Moodys introduced the first bond ratings as part of Moodys
Analyses of Railroad Investments.
(b) Moodys tracks more than $35 trillion worth of debt securities.
(c) The ultimate value of a rating agencys contribution to that market
efficiency depends on its ability to provide ratings that are clear,
credible, accurate risk opinions based on a fundamental understanding
of credit risk. To provide a reliable frame of reference for investment
decisions, the agencys ratings should offer broad coverage and also
be based on a globally consistent rating process, supported by rating
committees with a multi-national perspective.

10-70

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BYP 10-4

DECISION MAKING ACROSS THE ORGANIZATION

*(a) Face value of bonds ..................................................


Proceeds from sale of bonds
($6,000,000 X .96) ...................................................
Discount on bonds payable ....................................

$6,000,000
5,760,000
$ 240,000

Bond discount amortization per year:


$240,000 5 = $48,000
Face value of bonds ..................................................
Amount of original discount ...................................
Less: Amortization through January 1, 2011
(2-year)..............................................................
Carrying value of bonds, January 1, 2011..........

$6,000,000
$240,000
96,000

(b) 1. Bonds Payable ...................................................... 5,856,000


Gain on Bond Redemption.......................
Cash.................................................................
(To record redemption of 8%
bonds)

144,000
$5,856,000

856,000*
5,000,000

*$5,856,000 $5,000,000
2. Cash.......................................................................
Bonds Payable ..........................................
(To record sale of 10-year, 11%
bonds at par)

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5,000,000
5,000,000

(For Instructor Use Only)

10-71

BYP 10-4 (Continued)


(c) Dear President Bailey:
The early redemption of the 8%, 5-year bonds results in recognizing a
gain of $856,000 that increases current year net income by the aftertax effect of the gain. The amount of the liabilities on the statement of
financial position will be lowered by the issuance of the new bonds
and retirement of the 5-year bonds.
1.

The cash flow of the company as it relates to bonds payable will


be adversely affected as follows:
Annual interest payments on the new issue
($5,000,000 X .11) ..............................................................
Annual interest payments on the 5-year bonds
($6,000,000 X .08) ..............................................................
Additional cash outflows per year...................................

2.

$550,000
(480,000)
$ 70,000

The amount of interest expense shown on the income statement


will be higher as a result of the decision to issue new bonds:
Annual interest expense on new bonds ..........
$550,000
Annual interest expense on 8% bonds:
Interest payment .............................................. $480,000
Discount amortization....................................
48,000 (528,000)
Additional interest expense per year.................
$ 22,000

These comparisons hold for only the 3-year remaining life of the 8%,
5-year bonds. The company must acknowledge either redemption of
the 8% bonds at maturity, January 1, 2014, or refinancing of that issue
at that time and consider what interest rates will be in 2014 in
evaluating a redemption and issuance in 2011.
Sincerely,

10-72

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Weygandt, IFRS, 1/e, Solutions Manual

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BYP 10-5

COMMUNICATION ACTIVITY

To:

Ken Robson

From:

I. M. Student

Subject:

Bond Financing

(a) The advantages of bond financing over equity financing include:


1.

Shareholder control is not affected.

2.

Tax savings result.

3.

Earnings per share of ordinary shares may be higher.

(b) The types of bonds that may be issued are:


1.

Secured or unsecured bonds. Secured bonds have specific assets


of the issuer pledged as collateral. Unsecured bonds are issued
against the general credit of the borrower.

2.

Term or serial bonds. Term bonds mature at a single specified date,


while serial bonds mature in installments.

3.

Registered or bearer bonds. Registered bonds are issued in the name


of the owner, while bearer bonds are not.

4.

Convertible bonds, which can be converted by the bondholder into


ordinary shares.

5.

Callable bonds, which are subject to early retirement by the issuer


at a stated amount.

(c) State laws grant corporations the power to issue bonds after formal
approval by the board of directors and shareholders. The terms of the
bond issue are set forth in a legal document called a bond indenture. After
the bond indenture is prepared, bond certificates are printed.

Copyright 2011 John Wiley & Sons, Inc.

Weygandt, IFRS, 1/e, Solutions Manual

(For Instructor Use Only)

10-73

BYP 10-6

ETHICS CASE

(a) The stakeholders in the Galena case are:









Sam Farr, president, founder, and majority shareholder.


Jill Hutton, minority shareholder.
Other minority shareholders.
Existing creditors (debt holders).
Future bondholders.
Employees, suppliers, and customers.

(b) The ethical issues:


The desires of the majority shareholder (Sam Farr) versus the
desires of the minority shareholders (Jill Hutton and others).
Doing what is right for the company and others versus doing what is best
for oneself.
Questions:
Is what Sam wants to do legal? Is it unethical? Is Sams action brash
and irresponsible? Who may benefit/suffer if Sam arranges a high-risk
bond issue? Who may benefit/suffer if Jill Hutton gains control of Galena?
(c) The rationale provided by the student will be more important than the
specific position because this is a borderline case with no right answer.

10-74

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