chapter 13 hw solutions

1. Exercise 13-3 Short-term notes [LO2] The following selected transactions relate to liabilities of United Insulation Corporation. United’s fiscal yearends on December 31. 2011Jan. 13 Negotiated a revolving credit agreement with Parish Bank that can be renewed annually upon

bank approval. The amount available under the line of credit is $18.8 million at the bank’s prime rate.

Feb. 1 Arranged a three-month bank loan of $3.76 million with Parish Bank under the line of credit agreement. Interest at the prime rate of 8% was payable at maturity.

May 1 Paid the 8% note at maturity.Dec. 1 Supported by the credit line, issued $9.4 million of commercial paper on a nine-month note.

Interest was discounted at issuance at a 7% discount rate.31 Recorded any necessary adjusting entry(s).

2012Sept.

1 Paid the commercial paper at maturity.

Required:Prepare the appropriate journal entries through the maturity of each liability. (In cases where no entry is required, please select the option "No journal entry required" for your answer to grade correctly. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Round your final answers to the nearest dollar amount. Omit the "$" sign in your response.)

Date General Journal Debit Credit 2011

Jan. 13 No journal entry is required

No journal entry is required

Feb. 1 Cash

Notes payable

May 1 Interest expense

Notes payable

Cash

Dec. 1 Cash

Discount on notes payable

Notes payable

Dec. 31 Interest expense


2012

Sept. 1 Interest expense


Notes payable

Cash

0

0

3,760,000

3,760,000

75,200

3,760,00

8,906,50

493,500

9,400,000

54,833

54,833

438,667

9,400,000

9,400,000

Explanation:2011May 1Interest expense ($3,760,000 × 8% × 3/12) = 75,200Notes payable (face amount) = 3,760,000Cash ($3,760,000 + 75,200) = 3,835,200Dec. 1Cash (difference) = 8,906,500Discount on notes payable ($9,400,000 × 7% × 9/12) = 493,500Notes payable (face amount) = 9,400,000 Dec. 31The effective interest rate is 7.3879% ($493,500 ÷ $8,906,500) × 12/9. So, properly, interest should be recorded at that rate times the outstanding balance times one-twelfth of a year:Interest expense ($8,906,500 × 7.3879% × 1/12) = 54,833Discount on notes payable = 54,833However the same results are achieved if interest is recorded at the discount rate times the maturity amount times one-twelfth of a year:Interest expense ($9,400,000 × 7% × 1/12) = 54,833.Discount on notes payable = 54,833

2012Sept. 1Interest expense ($9,400,000 × 7% × 8/12)* = 438,667Discount on notes payable = 438,667Notes payable (balance) = 9,400,000Cash (maturity amount) = 9,400,000* or, ($8,906,500 × 7.3879% × 8/12) = $438,667

2. Exercise 13-13 Warranties [LO5, 6]Cupola Awning Corporation introduced a new line of commercial awnings in 2011 that carry a two-year warranty against manufacturer’s defects. Based on their experience with previous product introductions, warranty costs are expected to approximate 3.5% of sales. Sales and actual warranty expenditures for the first year of selling the product were:

Sales Actual Warranty Expenditures$4,805,000 $42,044

Required:(1-a) Does this situation represent a loss contingency?

Yes

(1-b) How should Cupola account for it?Estimated warranty liability is credited and warranty expense is debited in 2011.

(2) Prepare journal entries that summarize sales of the awnings (assume all credit sales) and any aspects of the warranty that should be recorded during 2011. (Omit the "$" sign in your response.)

General Journal Debit Credit 2011 Sales

Accounts receivable

Sales

Accrued liability and expense

Warranty expense

Estimated warranty liability

Actual expenditures

Estimated warranty liability

Cash, wages payable, parts and supplies, etc.

(3) What amount should Cupola report as a liability at December 31, 2011? (Omit the "$" sign in your

response.)

Liability $

Explanation:(1)This is a loss contingency. There may be a future sacrifice of economic benefits (cost of satisfying the warranty) due to an existing circumstance (the warranted awnings have been sold) that depends on an uncertain future event (customer claims).The liability is probable because product warranties inevitably entail costs. A reasonably accurate estimate of the total liability for a period is possible based on prior experience. So, the contingent liability for the warranty is accrued. The estimated warranty liability is credited and warranty expense is debited in 2011, the period in which the products under warranty are sold.

(2)Accrued liability and expense:Warranty expense (3.5% × $4,805,000) = 168,175.

(3)Warranty Liability

168,175 Estimated liability Actual expenditures 42,044

126,131 Balance

3. Exercise 14-2 Determine the price of bonds in various situations [LO2]Determine the price of a $1 million bond issue under each of the following independent assumptions: (Use Table 2 and Table 4). (Round "PV Factor" to 5 decimal places, intermediate and final answers to the nearest whole dollar amount. Omit the "$" sign in your response.)

Maturity Interest Paid Stated Rate

Effective (Market)

RatePrice

4,805,000

4,805,000

168,175

168,175

42,044

42,044

126,131

1. 10 years annually 10% 12% $

2. 10 years semiannually 10% 12% $




Explanation:1.

Maturity Interest paid Stated rate Effective (market) rate10 years annually 10% 12%

Interest $ 100,000 ¥× 5.65022* =

$ 565,022

Principal

$ 1,000,000× .32197** =

321,970

Present value (price) of the bonds

$ 886,992

¥ 10% × $1,000,000* present value of an ordinary annuity of $1: n = 10, i = 12% (Table 4)** present value of $1: n = 10, i = 12% (Table 2) 2.

Maturity Interest paid Stated rate Effective (market) rate20 years semiannually 10% 12%

Interest $ 50,000 ¥×11.46992* =

$ 573,496

Principal

$ 1,000,000× .31180** =

311,800


$ 885,296



Interest $ 60,000 ¥×12.46221* =

$ 747,733

Principal

$ 1,000,000× .37689** =

376,890

886,992 ± .1%

885,296 ± .1%

1,124,623 ± .01%

1,171,595 ± .01%

999,998 ± .1%


$ 1,124,623



Interest $ 60,000 ¥×17.15909* =

$ 1,029,545

Principal

$ 1,000,000× .14205** =

142,050


$ 1,171,595

¥ 6% x $1,000,000* present value of an ordinary annuity of $1: n = 40, i = 5% (Table 4)** present value of $1: n = 40, i = 5% (Table 2) 5.


Interest $ 60,000 ¥×15.04630* =

$ 902,778

Principal

$ 1,000,000× .09722** =

97,220


$ 999,998

actually, $1,000,000 if PV table factors were not rounded ¥ 6% × $1,000,000* present value of an ordinary annuity of $1: n = 40, i = 6% (Table 4)** present value of $1: n = 40, i = 6% (Table 2)

4. Exercise 14-4 Investor; effective interest [LO2]The Bradford Company sold 8% bonds, dated January 1, with a face amount of $70 million on January 1, 2011 to Saxton-Bose Corporation. The bonds mature in 2020 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31.

Use (Table 2) and (Table 4) Required:(1) Prepare the journal entry to record the purchase of the bonds by Saxton-Bose on January 1, 2011.

(Enter your answers in dollars not in millions. Round "PV Factor" to 5 decimal places andfinal answers to the nearest whole dollar amount. Omit the "$" sign in your response.)

Date General Journal Debit Credit

Jan 1, 2011

Bond investment

Discount on bond investment

Cash

(2) Prepare the journal entry to record interest revenue on June 30, 2011 (at the effective rate). (Enter

your answers in dollars not in millions. Round "PV Factor" to 5 decimal places andfinal answers to the nearest whole dollar amount. Omit the "$" sign in your response.)


June 30, 2011

Cash


Interest revenue

(3) Prepare the journal entry to record interest revenue on December 31, 2011 (at the effective rate).

(Enter your answers in dollars not in millions. Round "PV Factor" to 5 decimal places andfinal answers to the nearest whole dollar amount. Omit the "$" sign in your response.)


Dec. 31, 2011

Cash


Interest revenue

Explanation:(1) January 1, 2011 Interest $ 2,800,000 ¥× 12.46221*= $ 34,894,188 Principal $ 70,000,000× .37689**= 26,382,300

Present value (price) of the bonds $ 61,276,488

¥ 4% × $70,000,000* present value of an ordinary annuity of $1: n = 20, i = 5% (Table 4)** present value of $1: n = 20, i = 5% (Table 2) (2) June 30, 2011Cash (4% × $70,000,000) = 2,800,000

70,000,000 ± 0.01%

8,723,51

61,276,4

2,800,00

263,824

3,063,824 ± 0.01%

2,800,00

277,016

3,077,016 ± 0.01%

Interest revenue (5% × $61,276,488) = 3,063,824 (3) December 31, 2011 Cash (4% × $70,000,000) = 2,800,000Interest revenue (5% × [$61,276,488 + 263,824]) = 3,077,016

5. Exercise 14-9 Issuance of bonds; effective interest; amortization schedule; financial statement effects [LO2]When Patey Pontoons issued 5.00% bonds on January 1, 2011, with a face amount of $700,000, the market yield for bonds of similar risk and maturity was 6.00%. The bonds mature December 31, 2014 (4 years). Interest is paid semiannually on June 30 and December 31. (Use Table 2 and Table 4) Required:(1)

Determine the price of the bonds at January 1, 2011. (Do not round PV factors. Round final answer to the nearest dollar amount. Omit the "$" sign in your response.)

Price of the bonds $ (2)

Prepare the journal entry to record their issuance by Patey on January 1, 2011. (Do not round PV factors. Round final answer to the nearest dollar amount. Omit the "$" sign in your response.)


Jan. 1 Cash

Discount on bonds

Bonds payable

(3)

Prepare an amortization schedule that determines interest at the effective rate each period. (Do not round PV factors. Round final answer to the nearest dollar amount. Omit the "$" sign in your response.)

Cash Effective Increase in Outstanding

Payment Interest Balance Balance

1

2

3

4

5

6

7

8

675,431

675,431

24,569

700,000

675,431

17,500 20,263 2,763 678,194

17,500 20,346 2,846 681,040

17,500 20,431 2,931 683,971

17,500 20,519 3,019 686,990

17,500 20,610 3,110 690,100

17,500 20,703 3,203 693,303

17,500 20,799 3,299 696,602

17,500 20,898 3,398 700,000

140,000 164,569 24,569

(4)

Prepare the journal entry to record interest on June 30, 2011. (Do not round PV factors. Round final answer to the nearest dollar amount. Omit the "$" sign in your response.)


June 30 Interest expense

Discount on bonds payable

Cash

(5)

What is the amount related to the bonds that Patey will report in its balance sheet at December 31, 2011? (Do not round PV factors. Round final answer to the nearest dollar amount. Omit the "$" sign in your response.)

December 31, 2011 net liability $ (6)

What is the amount related to the bonds that Patey will report in its income statement for the year ended December 31, 2011? (Ignore income taxes.) (Do not round PV factors. Round final answer to the nearest dollar amount. Omit the "$" sign in your response.)

Interest expense for 2011 $ (7)

Prepare the appropriate journal entries at maturity on December 31, 2014. (Do not round PV factors. Round final answer to the nearest dollar amount. Omit the "$" sign in your response.)




Cash

Dec. 31 Bonds payable

Cash

rev: 12_13_2011

Explanation:(1)Price of the bonds at January 1, 2011

Interest$17,500¥× 7.01969* =

$ 122,845

Principal

$700,000× 0.78941** =

552,586

Present value $ 675,431

20,263

2,763

17,500

681,040

40,609

20,898

3,398

17,500

700,000

700,000

(price) of the bonds

¥ 2.500% × $700,000*present value of an ordinary annuity of $1: n = 8, i = 3.000% (Table 4)**present value of $1: n = 8, i = 3.000% (Table 2) (3)

CashPayment

EffectiveInterest

Increase inBalance

OutstandingBalance

2.500% × Face Amount

3.000% × Outstanding BalanceDiscount

Reduction675,431

1 17,500 0.030 (675,431) = 20,263 2,763 678,1942 17,500 0.030 (678,194) = 20,346 2,846 681,0403 17,500 0.030 (681,040) = 20,431 2,931 683,9714 17,500 0.030 (683,971) = 20,519 3,019 686,9905 17,500 0.030 (686,990) = 20,610 3,110 690,1006 17,500 0.030 (690,100) = 20,703 3,203 693,3037 17,500 0.030 (693,303) = 20,799 3,299 696,6028 17,500 0.030 (696,602) = 20,898* 3,398 700,000

140,000 164,569 24,569

*rounded (4)Interest expense (3.000% × $675,431) = 20,263Cash (2.500% × $700,000) = 17,500 (5) Bonds payable $ 700,000 Less: discount (24,569)

Initial balance, January 1, 2011

$ 675,431

June 30, 2011 discount amortization

2,763

Dec. 31, 2011 discount amortization

2,846

December 31, 2011 net liability

$ 681,040

(6) June 30, 2011 interest expense

$ 20,263

Dec. 31, 2011 interest expense

20,346

Interest expense for 2011

$ 40,609

(7)Interest expense (3.000% × 696,602) = 20,898** rounded value from amortization scheduleCash (2.500% × $700,000) = 17,500

6. Exercise 14-10 Issuance of bonds; effective interest; amortization schedule [LO2]National Orthopedics Co. issued 8% bonds, dated January 1, with a face amount of $800,000 on January 1, 2011. The bonds mature in 2014 (4 years). For bonds of similar risk and maturity the market yield was 9%. Interest is paid semiannually on June 30 and December 31. (Use Table 2 andTable 4) Required:(1)

Determine the price of the bonds at January 1, 2011. (Round PV factors to 5 decimal places.Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)

Price of the bonds $ (2)

Prepare the journal entry to record their issuance by National on January 1, 2011. (Round PV factors to 5 decimal places. Round your answers to the nearest dollar amount. Omit the "$" sign in your response.)


Jan. 1 Cash


Bonds payable

(3)

Prepare an amortization schedule that determines interest at the effective rate each period. (Round PV factors to 5 decimal places. Round your answers to the nearest dollar amount. Omit the "$" sign in your response.)

Cash Effective Increase in Outstanding

Payment Interest Balance Balance

1

2

3

4

5

773,620 ± 0.1%

773,620

26,380 ±

800,000 ± 0.1%

773,620 ± 0.1%

32,000 ± 0.1% 34,813 ± 0.1% 2,813 ± 0.1% 776,433 ± 0.1%

32,000 ± 0.1% 34,939 ± 0.1% 2,939 ± 0.1% 779,372 ± 0.1%

32,000 ± 0.1% 35,072 ± 0.1% 3,072 ± 0.1% 782,444 ± 0.1%

32,000 ± 0.1% 35,210 ± 0.1% 3,210 ± 0.1% 785,654 ± 0.1%

32,000 ± 0.1% 35,354 ± 0.1% 3,354 ± 0.1% 789,008 ± 0.1%

6

7

8

(4)

Prepare the journal entry to record interest on June 30, 2011. (Round PV factors to 5 decimal places. Round your answers to the nearest dollar amount. Omit the "$" sign in your response.)


June 30 Interest expense


Cash

(5)

Prepare the appropriate journal entries at maturity on December 31, 2014. (Round PV factors to 5 decimal places. Round your answers to the nearest dollar amount. Omit the "$" sign in your response.)




Cash

Dec. 31 Bonds payable

Cash

Explanation:(1)Price of the bonds at January 1, 2011

Interest$32,000¥× 6.59589* =

$ 211,068

Principal$800,000× 0.70319** =

562,552


$ 773,620

¥ 4.0% × $800,000*present value of an ordinary annuity of $1: n = 8, i = 4.5% (Table 4)**present value of $1: n = 8, i = 4.5% (Table 2)

32,000 ± 0.1% 35,505 ± 0.1% 3,505 ± 0.1% 792,513 ± 0.1%

32,000 ± 0.1% 35,663 ± 0.1% 3,663 ± 0.1% 796,176 ± 0.1%

32,000 ± 0.1% 35,824 ± 0.1% 3,824 ± 0.1% 800,000

256,000 ± 0.1% 282,380 ± 0.1% 26,380 ± 0.1%

34,813 ± 0.1%

2,813 ±

32,000 ±

35,824 ± 0.1%

3,824 ±

32,000 ±

800,000

800,000

(3)

CashPayment

EffectiveInterest

Increase inBalance

OutstandingBalance

4.0% × Face Amount 4.5% × Outstanding Balance

Discount Reduction

773,6201 32,000 .045 (773,620) = 34,813 2,813 776,4332 32,000 .045 (776,433) = 34,939 2,939 779,3723 32,000 .045 (779,372) = 35,072 3,072 782,4444 32,000 .045 (782,444) = 35,210 3,210 785,6545 32,000 .045 (785,654) = 35,354 3,354 789,0086 32,000 .045 (789,008) = 35,505 3,505 792,5137 32,000 .045 (792,513) = 35,663 3,663 796,1768 32,000 .045 (796,176) = 35,824* 3,824 800,000

256,000 282,380 26,380

*rounded (4)Interest expense (4.5% × $773,620) = 34,813Cash (4.0% × $800,000) = 32,000 (5)Interest expense (4.5% × 796,176) = 35,824** rounded value from amortization scheduleCash (4.0% × $800,000) = 32,000

7. Exercise 14-12 Bonds; straight-line method; adjusting entry [LO2]On March 1, 2011, Stratford Lighting issued 15% bonds, dated March 1, with a face amount of $850,000. The bonds sold for $833,000 and mature on February 28, 2021 (10 years). Interest is paid semiannually on August 31 and February 28. Stratford uses the straight-line method and its fiscal year ends December 31. Required:(1)

Prepare the journal entry to record the issuance of the bonds by Stratford Lighting on March 1, 2011.(Omit the "$" sign in your response.)


Mar. 1 Cash


Bonds payable

(2)

Prepare the journal entry to record interest on August 31, 2011. (Omit the "$" sign in your response.)

833,000

17,000 ±

850,000 ± 1


Aug. 31 Interest expense


Cash

(3)

Prepare the journal entry to accrue interest on December 31, 2011. (Do not round intermediate calculations. Round your answers to the nearest dollar amount. Omit the "$" sign in your response.)




Interest payable

(4)

Prepare the journal entry to record interest on February 28, 2012. (Do not round intermediate calculations. Round your answers to the nearest dollar amount. Omit the "$" sign in your response.)


Feb. 28 Interest expense

Interest payable


Cash

Explanation:(2)

August 31, 2011:

Interest expense ($63,750 + 850) = 64,600Discount on bonds payable ($17,000 ÷ 20) = 850Cash (7.5% × $850,000) = 63,750

(3)

December 31, 2011:

Interest expense (4/6 × $64,600) = 43,067Discount on bonds payable (4/6 × $850) = 567Interest payable (4/6 × $63,750) = 42,500

(4)

February 28, 2012:

Interest expense (2/6 × $64,600) = 21,533Interest payable (4/6 × $63,750) = 42,500Discount on bonds payable (2/6 × $850) = 283Cash (7.5% × $850,000) = 63,750

8. Exercise 14-19 Installment note [LO3]

64,600 ± 1

850 ± 1

63,750 ±

43,067 ± 1

567 ± 1

42,500 ±

21,533 ±

42,500 ±

283 ± 1

63,750 ±

LCD Industries purchased a supply of electronic components from Entel Corporation on November 1, 2011. In payment for the $29 million purchase, LCD issued a 1-year installment note to be paid in equal monthly payments at the end of each month. The payments include interest at the rate of 12%. (Use Table

4.) Required:(1) Prepare the journal entry for LCD’s purchase of the components on November 1, 2011. (Enter your

answers in dollars not in millions. Omit the "$" sign in your response.)


Nov. 1 2011 Component inventory

Notes payable

(2) Prepare the journal entry for the first installment payment on November 30, 2011. (Enter your

answers in dollars not in millions. Round "PV Factor" to 5 decimal places and final answers to the nearest dollar amount. Omit the "$" sign in your response.)


Nov. 30 2011 Interest expense

Note payable

Cash

(3) What is the amount of interest expense that LCD will report in its income statement for the year ended

December 31, 2011?. (Enter your answers in dollars not in millions. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)

Interest expense $

Explanation:(2)November 30, 2011Interest expense (1% × outstanding balance) = 290,000Note payable (difference) = 2,286,615Cash (payment determined below) = 2,576,615 Calculation of installment payment:

$29,000,000 ÷ 11.25508 = $2,576,615amountof loan

(from Table 4)n = 12, i = 1%

installmentpayment

(3) November (1% × $29,000,000)

$ 290,000

December (1% × [$29,000,000 – 2,286,615])

267,134

2011 interest expense $ 557,134

29,000,000

29,000,000

290,000

2,286,61

2,576,615 ± 1

557,134 ± 1

9. Exercise 14-22 Convertible bonds [LO5]On January 1, 2011, Gless Textiles issued $20 million of 10.9%, 10-year convertible bonds at 103. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 90 shares of Gless’s no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 101 (that is, 101% of face amount). Century Services purchased 12% of the issue as an investment. Required:(1) Prepare the journal entries for the issuance of the bonds by Gless and the purchase of the bond

investment by Century. (Enter your answers in dollars not in millions. Do not round intermediate calculations. Round your answers to the nearest dollar amount. Omit the "$" sign in your response.)

General Journal Debit Credit

Gless (Issuer)

Cash

Convertible bonds payable

Premium on bonds payable

Century (Investor)

Investment in convertible bonds

Premium on bond investment

Cash

(2) Prepare the journal entries for the June 30, 2015, interest payment by both Gless and Century

assuming both use the straight-line method. (Enter your answers in dollars not in millions. Do not round intermediate calculations. Round your answers to the nearest dollar amount. Omit the "$" sign in your response.)

General Journal Debit Credit

Gless (Issuer)

Interest expense


Cash

Century (Investor)

Cash


Interest revenue

(3) On July 1, 2016, when Gless’s common stock had a market price of $33 per share, Century converted

the bonds it held. Prepare the journal entries by both Gless and Century for the conversion of the bonds (book value method). (Enter your answers in dollars not in millions. Do not round intermediate calculations. Round your answers to the nearest dollar amount. Omit the "$" sign in your response.)

20,600,000

20,000,0

600,000

2,400,00

72,000 ±

2,472,000 ± 1

1,060,00

30,000 ±

1,090,000

130,800 ± 1

3,600 ±

127,200

General Journal Debit Credit Gless (Issuer)

Convertible bonds payable


Common stock

Century (Investor)

Investment in common stock

Investment in convertible bonds


rev: 04-27-2011 Explanation:(1)Gless (Issuer)Cash (103% × $20 million) = 20,600,000Convertible bonds payable (face amount) = 20,000,000Premium on bonds payable (difference) = 600,000Century (Investor)

Investment in convertible bonds (12% × $20 million) = 2,400,000Premium on bond investment (difference) = 72,000Cash (103% × $2,400,000) = 2,472,000 (2)Gless (Issuer)Interest expense ($1,090,000 – 30,000) = 1,060,000Premium on bonds payable ($600,000 ÷ 20) = 30,000Cash (5.45% × $20,000,000) = 1,090,000Century (Investor)Cash (5.45% × $2,400,000) = 130,800Premium on bond investment ($72,000 ÷ 20) = 3,600Interest revenue ($130,800 – 3,600) = 127,200[Using the straight-line method, each interest entry is the same.] (3)Gless (Issuer)Convertible bonds payable (12% of the account balance) = 2,400,000Premium on bonds payable (($600,000 – [$30,000 × 11]) × 12%) = 32,400Common stock (to balance)= 2,432,400Century (Investor)Investment in common stock = 2,432,400Investment in convertible bonds (account balance) = 2,400,000Premium on bond investment ($72,000 – [$3,600 × 11]) = 32,400

10. Exercise 14-27 Reporting bonds at fair value [LO6]Federal Semiconductors issued 9% bonds, dated January 1, with a face amount of $849 million on January 1, 2011. The bonds sold for $776,163,483 and mature in 2030 (20 years). For bonds of similar risk and maturity the market yield was 10%. Interest is paid semiannually on June 30 and December 31. Federal determines interest at the effective rate. Federal elected the option to report these bonds at their fair value. On December 31, 2011, the fair value of the bonds was $724 million as determined by their

2,400,00

32,400 ±

2,432,400 ± 1

2,432,400 ± 1

2,400,00

32,400 ±

market value in the over-the-counter market. Required:(1) Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31,

2011, balance sheet. (Enter your answers in dollars not in millions. Round "PV Factor" to 5 decimal places and final answers to the nearest whole dollar amount. Omit the "$" sign in your response.)


June 30, 2011

Interest expense


Cash

Dec 31, 2011

Interest expense


Cash

Fair value adjustment

Unrealized holding gain

(2) Assume the fair value of the bonds on December 31, 2012, had risen to $734 million. Prepare the

journal entry to adjust the bonds to their fair value for presentation in the December 31, 2012, balance sheet. (Enter your answers in dollars not in millions. Round "PV Factor" to 5 decimal places and final answers to the nearest whole dollar amount. Omit the "$" sign in your response.)


June 30, 2012

Interest expense


Cash

Dec 31, 2012

Interest expense


Cash

Unrealized holding loss

Fair value adjustment

Explanation:(1)At January 1, 2011, the book value of the bonds was the initial issue price, $776,163,483. The liability, though, was increased when Federal recorded interest during 2011: June 30, 2011Interest expense (5% × $776,163,483) = 38,808,174Cash (4.5% × $849,000,000) = 38,205,000 December 31, 2011

38,808,174 ± 0.01%

603,174

38,205,0

38,838,333 ± 0.01%

633,333

38,205,0

53,399,990 ± 0.01%

53,399,990 ± 0.01%

38,870,000 ± 0.01%

665,000

38,205,0

38,903,250 ± 0.01%

698,250

38,205,0

8,636,750 ± 0.01%

8,636,750 ± 0.01%

Interest expense (5% × [$776,163,483 + 603,174]) = 38,838,333Cash (4.5% × $849,000,000) = 38,205,000

Reducing the discount increases the book value of the bonds: Jan.1, 2011, book value $ 776,163,483 Increase from discount amortization ($603,174 + 633,333)

1,236,507

December 31, 2011, book value (amortized initial amount)

$ 777,399,990

Comparing the amortized initial amount at December 31, 2011, with the fair value on that date provides the Fair value adjustment balance needed: December 31, 2011, book value (amortized initial amount)

$ 777,399,990

December 31, 2011, fair value 724,000,000

Fair value adjustment balance needed: debit/(credit)

$ 53,399,990

Federal would record the $53,399,990 as a gain in the 2011 income statement: Note: A decrease in the value of an asset is a loss; a decrease in the value of a liability is a gain. In the balance sheet, the bonds are reported among long-term liabilities at their $724,000,000 fair value: Bonds payable $ 849,000,000 Less: Discount on bonds payable (71,600,010)


$ 777,399,990

Less: Fair value adjustment (53,399,990)

December 31, 2011, fair value $ 724,000,000

(2)If the fair value at December 31, 2012, is $734,000,000 a year later, Federal needs to compare that amount with the amortized initial measurement on that date. That amount was increased when Federal recorded interest during 2012: June 30, 2012Interest expense (5% × [$776,163,483 + 603,174 + 633,333]) = 38,870,000Cash (4.5% × $849,000,000) = 38,205,000

December 31, 2012Interest expense (5% × [$776,163,483 + 603,174 + 633,333 + 665,000]) = 38,903,250Cash (4.5% × $849,000,000) = 38,205,000 Reducing the discount increases the book value of the bonds: December 31, 2011, book value (amortized initial amount)

$ 777,399,990

Increase from discount amortization ($665,000 + 698,250)

1,363,250


$ 778,763,240

Comparing the amortized initial amount at December 31, 2012, with the fair value on that date provides the Fair value adjustment balance needed: December 31, 2012, book value (amortized initial amount)

$ 778,763,240

December 31, 2012, fair value (734,000,000)

Fair value adjustment balance needed: debit/(credit)

$ 44,763,240

Less: Fair value adjustment debit/(credit), balance 1/1/2012

53,399,990

Change in fair value adjustment, 12/31/2012 $ (8,636,750)

Federal records the $8,636,750 as a loss in the 2012 income statement: Note: An increase in the value of an asset is a gain; an increase in the value of a liability is a loss. In the balance sheet, the bonds are reported among long-term liabilities at their $734,000,000 fair value: Bonds payable $ 849,000,000 Less: Discount on bonds payable (70,236,760)


$ 778,763,240

Less: Fair value adjustment (44,763,240)

December 31, 2012, fair value $ 734,000,000

chapter 13 hw solutions

Documents