financial accounting vol 2

18 CHAPTER 2

Problem 2-1 Problem 2-2

1. A 1. A 6. D2. B 2. D 7. A3. A 3. A 8. D4. C 4. D 9. D5. A 5. B 10. B

Problem 2-3Requirement 1

2008April 1 Cash (7,000,000 x 106%) 7,420,000

Bonds payable 7,000,000Premium on bonds payable 420,000

Oct. 1 Interest expense (7,000,000 x 12% x 6/12) 420,000Cash 420,000

Dec. 31 Interest expense (7,000,000 x 12% x 3/12) 210,000Accrued interest payable 210,000

31 Premium bonds payable 31,500

Interest expense (420,000 / 10 x 9/12) 31,500

2009Jan. 1 Accrued interest payable 210,000

Interest expense 210,000

April 1 Interest expense 420,000Cash 420,000

Oct. 1 Interest expense 420,000Cash 420,000

Dec. 31 Interest expense 210,000Accrued interest payable 210,000

31 Premium on bonds payable 42,000Interest expense (420,000 / 10)

42,000

19

Requirement 2

Noncurrent liabilities:Bonds payable

7,000,000Premium on bonds payable

346,500Book value

7,346,500


2008Jan. 1 Unissued bonds payable 8,000,000

Authorized bonds payable 8,000,000

1 Cash (5,000,000 x 95%) 4,750,000Discount on bonds payable 250,000

Unissued bonds payable 5,000,000

June 30 Interest expense (5,000,000 x 12% x 6/12) 300,000

Cash 300,000

Dec. 31 Interest expense 300,000Cash 300,000

31 Interest expense (250,000 / 10) 25,000Discount on bonds payable 25,000

2009June 30 Interest expense 300,000

Cash 300,000

Sept. 1 Cash 2,100,000Unissued bonds payable 2,000,000Premium on bonds payable 60,000Interest expense (2,000,000 x 12% x 2/12)

40,000

Dec. 31 Interest expense 420,000Cash (7,000,000 x 12% x 6/12)

420,000

31 Interest expense 25,000Discount on bonds payable 25,000

31 Premium on bonds payable 2,400Interest expense 2,400

20

120 months – 20 = 100 months remaining 60,000 / 100 = 600 monthly

600 x 4 = 2,400

Requirement 2

Noncurrent liabilities:Authorized bonds payable

8,000,000Less: Unissued bonds payable

1,000,000Issued bonds payable

7,000,000Premium on bonds payable

57,600Total

7,057,600Discount on bonds payable

( 200,000)Book value

6,857,600


2008April 1 Cash 4,850,000

Discount on bonds payable 100,000 Bond issue cost 50,000

Bonds payable 5,000,000

Oct. 1 Interest expense 300,000 Cash (5,000,000 x 12% x 6/12)

300,000 Dec. 31 Interest expense 150,000 Accrued interest payable (5,000,000 x 12% x 3/12) 150,000

Interest expense 22,500Discount on bonds payable (100,000 / 5 x 9/12)

15,000Bond issue cost (50,000 / 5 x 9/12)

7,500



April 1 Interest expense 300,000 Cash

300,000

July 1 Interest expense 15,000Discount on bonds payable (20,000 x 6/12)

10,000Bond issue cost (10,000 x 6/12)

5,00021

Retirement price (2,000,000 x 99%)

1,980,000 Add: Accrued interest from April 1 to July 1, 2008(2,000,000 x 12% x 3/12)

60,000 Total payment 2,040,000

Bonds payable retired 2,000,000 Less: Applicable discount (2/5 x 75,000) 30,000

Applicable issue cost (2/5 x 37,500) 15,000 45,000 Book value of bonds retired 1,955,000 Less: Retirement price 1,980,000 Loss on early retirement ( 25,000)

July 1 Bonds payable 2,000,000 Interest expense 60,000

Loss on early retirement of bonds 25,000 Cash

2,040,000 Discount on bonds payable 30,000 Bond issue cost

15,000

Oct. 1 Interest expense 180,000

Cash (3,000,000 x 12% x 6/12) 180,000 Dec. 31 Interest expense 90,000

Accrued interest payable (3,000,000 x 12% x 3/12)

90,000

31 Interest expense 9,000 Discount on bonds payable (12,000 x 6/12)

6,000 Bond issued cost (6,000 x 6/12)

3,000

Revised annual amortization:Discount (3/5 x 20,000)

12,000Issue cost (3/5 x 10,000)

6,000

Requirement 2

Noncurrent liabilities:Bonds payable 3,000,000Discount on bonds payable

( 39,000)Bond issue cost ( 19,500)Book value 2,941,500

22Problem 2-6

Requirement 12008

Jan. 1 Cash 4,200,000 Bonds payable 4,000,000 Premium on bonds payable 200,000

Dec. 31 Interest expense 480,000 Cash (4,000,000 x 12%)

480,000

31 Premium on bonds payable 40,000 Interest expense (200,000 / 5)

40,000

31 Bonds payable 1,000,000 Premium on bonds payable 40,000

Cash 950,000 Gain on early retirement of bonds 90,000

Face of bonds payable retired 1,000,000 Add: Applicable premium (1/4 x 160,000)

40,000 Book value 1,040,000 Less: Retirement price (1,000,000 x 95%)

950,000 Gain on retirement 90,000

2009Dec. 31 Interest expense 360,000

Cash (3,000,000 x 12%) 360,000

31 Premium on bonds payable 30,000 Interest expense (40,000 x 3/4) 30,000

Requirement 2

Noncurrent liabilitiesBonds payable 3,000,000Premium on bonds payable 90,000Book value 3,090,000

Problem 2-7

1. Total bonds payable issued 6,000,000 Less: Face value bonds payable retired 3,000,000 Bonds payable – December 31, 2008 3,000,000

23

Discount on bonds payable 300,000 Less: Amortization from 2001 to 2007 (300,000 / 10 x 7) 210,000 Balance – January 1, 2008 90,000 Less: Discount applicable to bonds retired (3/6 x 90,000) 45,000 Adjusted balance 45,000 Less: Amortization for 2008 (3/6 x 30,000) 15,000 Discount on bonds payable – December 31, 2008 30,000

2. Interest (3,000,000 x 12%) 360,000 Amortization of discount for 2008 15,000 Interest expense for 2008 375,000

3. Adjusting entries on December 31, 2008:

a. Retained earnings 210,000Discount on bonds payable 210,000

b. Bonds payable 300,000 Discount on bonds payable 45,000 Gain on early retirement of bonds 255,000

Bonds payable retired

3,000,000 Less: Applicable discount

45,000 Book value

2,955,000 Less: Retirement price

2,700,000 Gain on early retirement

255,000

c. Interest expense 15,000 Discount on bonds payable

15,000

Amortization for 2008.

d. Interest expense 180,000 Accrued interest payable (3,000,000 x 12% x 1/2)

180,000


Jan. 1 Cash 6,737,000 Bonds payable

6,000,000 Premium on bonds payable 737,000

24

Dec. 31 Interest expense (6,000,000 x 12%) 720,000 Accrued interest payable 720,000

31 Premium on bonds payable 46,300 Interest expense (90,000 / 9)

46,300

Interest paid 720,000 Interest expense (10% x 6,737,000)

673,700 Premium amortization

46,300Requirement 2

Noncurrent liabilities:Bonds payable 6,000,000Premium on bonds payable (737,000 – 46,300)

690,700Book value 6,690,700

Problem 2-9

1. Cash (5,000,000 x 103) 5,150,000 Discount on bonds payable (5,000,000 x 5%) 250,000

Bonds payable 5,000,000 Share warrants outstanding

400,000

2. Interest expense (5,000,000 x 12%) 600,000 Cash 600,000

3. Interest expense 25,000 Discount on bonds payable (250,000 / 10) 25,000

4. Cash (20,000 shares x 30) 600,000 Share warrants outstanding 400,000

Share capital (20,000 x 25) 500,000

Share premium 500,000

Problem 2-10

Jan. 1 Cash 5,100,000 Discount on bonds payable 343,000


Share warrants outstanding 443,000 25

Dec. 31 Interest expense (5,000,000 x 12%) 600,000 Cash 600,000

31 Interest expense 51,980 Discount on bonds payable 51,980

Interest paid 600,000 Interest expense (14% x 4,657,000)

651,980 Discount amortization 51,980

31 Cash (25,000 x 100) 2,500,000 Share warrants outstanding 443,000

Share capital (25,000 x 50) 1,250,000 Share premium

1,693,000 Problem 2-11

Jan. 1 Cash 9,600,000Bonds payable 8,000,000Premium on bonds payable 585,600Share warrants outstanding 1,014,400

(6% x FV) (5% x BV) Interest Interest Premium

BookDate paid expense amortization

value01/01/2008 8,585,60006/30/2008 480,000 429,280 50,720

8,534,88012/31/2008 480,000 426,744 53,256

8,481,624

PV pf principal (8,000,000 x .61) 4,880,000

PV of interest (480,000 x 7.72) 3,705,600

Total PV of bonds payable 8,585,600

June 30 Interest expense 429,280 Premium on bonds payable 50,720

Cash 480,000

Dec. 31 Interest expense 426,744 Premium on bonds payable 53,256

Cash 480,000

26

Dec. 31 Cash (16,000 x 150) 2,400,000 Share warrants outstanding 1,014,400

Share capital (16,000 x 100) 1,600,000

Share premium 1,814,400

Problem 2-12

Present value of principal (2,000,000 x 0.77) 1,540,000Present value of interest payments (120,000 x 2.53) 303,600Total present value 1,843,600Face value 2,000,000Discount on bonds payable 156,400

1. Cash 2,200,000 Discount on bonds payable 156,400

Bonds payable 2,000,000 Share premium

356,400

2. Interest expense 120,000Cash (6% x 2,000,000)

120,000

3. Interest expense 45,924Discount on bonds payable 45,924

Interest paid 120,000Interest expense (9% x 1,843,600)165,924Discount amortization 45,924

Problem 2-13

1. Cash (5,000,000 x 105%) 5,250,000Discount on bonds payable 300,000 Bonds payable 5,000,000

Share premium – conversion privilege 550,000

2. Interest expense (14% x 4,700,000) 658,000 Discount on bonds payable 58,000

Cash (12% x 5,000,000) 600,000

27

3. Bonds payable 5,000,000 Share premium – conversion privilege 550,000 Discount on bonds payable 242,000

Share capital 4,000,000

Share premium - issuance 1,308,000

Bonds payable 5,000,000 Discount on bonds payable ( 242,000) Share premium – conversion privilege 550,000

Total consideration 5,308,000 Share capital issued (40,000 shares x 100) 4,000,000 Share premium - issuance 1,308,000

Problem 2-14

Bonds payable 5,000,000Share premium – conversion privilege 500,000

Discount on bonds payable 250,000Share capital 2,500,000Share premium – issuance

2,750,000

Share premium - issuance 200,000Cash 200,000

Problem 2-15

1. Cash 3,900,000

Discount on bonds payable 100,000 Bonds payable - new 4,000,000

2. Bonds payable - old 3,000,000 Premium on bonds payable 50,000 Accrued interest payable 180,000 Loss on early retirement of bonds 10,000

Cash 3,240,000

Bonds payable - old 3,000,000 Premium on bonds payable 50,000 Book value 3,050,000 Less: Retirement price (3,000,000 x 102) 3,060,000 Loss on early retirement ( 10,000)

28

Retirement price 3,060,000 Add: Accrued interest payable 180,000 Total payment 3,240,000

Problem 2-16

a. Amortization table

Bond Discount Interest Interest

Year outstanding Fraction amortization paid expense

2009 8,000,000 8/40 64,000 960,000 1,024,000 2010 8,000,000 8/40 64,000 960,000 1,024,000

2011 7,000,000 7/40 56,000 840,000 896,000

2012 6,000,000 6/40 48,000 720,000 768,000

2013 5,000,000 5/40 40,000 600,000 640,000

2014 4,000,000 4/40 32,000 480,000 512,000

2015 2,000,000 2/40 16,000 240,000 256,000

40,000,000 320,000 4,800,000 5,120,000

b. Journal entries

2008Dec. 31 Cash 7,680,000

Discount on bonds payable 320,000 Bonds payable

8,000,000


Cash 960,000



Cash 960,000


31 Bonds payable 1,000,000

Cash 1,000,000

292011

Dec. 31 Interest expense 840,000 Cash 840,000



Cash 1,000,000Problem 2-17

Amortization table

Bond Premium Interest Interest

Year outstanding Fraction amortization paid expense

2009 7,000,000 7/28 105,000 840,000 735,000 2010 6,000,000 6/28 90,000 720,000 630,000

2011 5,000,000 5/28 75,000 600,000 525,000

2012 4,000,000 4/28 60,000 480,000 420,000

2013 3,000,000 3/28 45,000 360,000 315,000

2014 2,000,000 2/28 30,000 240,000 210,000

2015 1,000,000 1/28 15,000 120,000 105,000

28,000,000 420,000 3,360,0002,940,000

2008Dec. 31 Cash 7,420,000

Bonds payable 7,000,000 Premium on bonds payable 420,000


Cash 840,000

31 Premium on bonds payable 105,000 Interest expense 105,000


Cash 1,000,000


Cash 720,00030

Dec. 31 Premium on bonds payable 90,000 Interest expense 90,000

31 Bonds payable 1,000,000 Cash 1,000,000

31 Bonds payable 1,000,000 Premium on bonds payable 30,000

Loss on early retirement of bonds 20,000 Cash (1,000,000 x 105)

1,050,000

420,000 / 28,000,000 = .015 per year 1,000,000 x .015 x 2 = 30,000

Problem 2-18

a. Amortization table

Interest Interest Discount BookDate paid expense amortization value

01/01/2008 2,738,682 06/30/2008 240,000 273,868 33,868

2,772,55012/31/2008 240,000 277,255 37,2552,809,80506/30/2009 240,000 280,980 40,9802,850,78512/31/2009 240,000 285,078 45,0782,895,86306/30/2010 240,000 289,586 49,5862,945,44912/31/2010 240,000 294,551 54,5513,000,000

b. Journal entries

2008Jan. 1 Cash 2,738,682

Discount on bonds payable 261,318 Bonds payable

3,000,000

June 30 Interest expense 273,868 Cash 240,000 Discount on bonds payable 33,868

312010

Dec. 31 Interest expense 294,551 Cash 240,000 Discount on bonds payable 54,551

Jan. 1 Bonds payable 3,000,000

Cash 3,000,000

Problem 2-19

1. Amortization tableInterest Interest Discount Book

Date paid expense amortization value04/01/2008 2,101,520

10/01/2008 120,000 105,076 14,9242,086,59604/01/2009 120,000 104,330 15,6702,070,92610/01/2009 120,000 103,546 16,4542,054,47204/01/2010 120,000 102,724 17,2762,037,19610/01/2010 120,000 101,860 18,1402,019,05604/01/2011 120,000 100,944 19,0562,000,000

2. Journal entries

2008Apr. 1 Cash 2,101,520


Premium on bonds payable 101,520

Oct. 1 Interest expense 105,076 Premium on bonds payable 14,924

Cash 120,000

Dec. 31 Interest expense 60,000 Accrued interest payable

60,000

Premium on bonds payable 7,835 Interest expense (15,670 x 1/2)

7,835



32 2009Apr. 1 Interest expense 120,000

Cash 120,000

1 Premium on bonds payable 7,835 Interest expense 7,835

Oct. 1 Interest expense 103,546 Premium on bonds payable 16,454

Cash 120,000

Dec. 31 Interest expense 60,000 Accrued interest payable

60,000

31 Premium on bonds payable 8,638 Interest expense (17,276 x 3/6)

8,638


Interest expense for 2008 (3,805,600 x 10%) 380,560Interest paid for 2008 320,000Discount amortization 60,560

Bonds payable 4,000,000Issue price – proceeds from issuance 3,805,600Discount on bonds payable – 12/31/2007 194,400Amortization for 2008 60,560Balance – 12/31/2008 133,840

Bonds payable 4,000,000Payment on 12/31/2008 ( 800,000)

Balance – 12/31/2008 3,200,000Discount on bonds payable ( 133,840)Carrying value – 12/31/2008 3,066,160

Requirement 2

1. Cash 3,805,600Discount on bonds payable 194,400


33

2. Interest expense 320,000Cash

320,000

3. Interest expense 60,560Discount on bonds payable

60,560

4. Bonds payable 800,000Cash

800,000 Problem 2-21

1. December 31, 2008Principal payment

2,000,000Interest payment (6,000,000 x 6%)

360,000Total payment – 12/31/2008

2,360,000

December 31, 2009Principal payment

2,000,000Interest payment (4,000,000 x 6%)

240,000Total payment – 12/31/2009

2,240,000

December 31, 2010

Principal payment2,000,000

Interest payment (2,000,000 x 6%) 120,000

Total payment – 12/31/20102,120,000

Present valueDecember 31, 2008 (2,360,000 x .9259)

2,185,124December 31, 2009 (2,240,000 x .8573)

1,920,352 December 31, 2010 (2,120,000 x .7938) 1,682,856 Total present value 5,788,332

2. Cash 5,788,332Discount on bonds payable 211,668


Interest expense 360,000Cash (6% x 6,000,000)

360,000

Interest expense 103,067Discount on bonds payable 103,067

34

Interest expense (8% x 5,788,332) 463,067 Interest paid

360,000 Discount amortization103,067

Bonds payable 2,000,000Cash 2,000,000

3. Bonds payable – 1/1/2008 6,000,000Discount on bonds payable ( 108,601)Principal payment on 12/31/2008 (2,000,000)Book value – 12/31/2008

3,891,399


PV of interest payment on 6/30/2008 (240,000 x .9615)230,760

PV of principal and interest payment on 12/31/2008 (2,000,000 + 240,000 x .9246)

2,071,104PV of interest payment on 6/30/2009 (120,000 x .8890)

106,680PV of principal and interest payment on 12/31/2009

(2,000,000 + 120,000 x .8548) 1,812,176Total present value 4,220,720

Requirement 2

Interest Interest Premium PrincipalBookDate paid expense amortization paymentvalue

01/01/2008 4,220,72006/30/2008 240,000 168,829 71,171 4,149,54912/31/2008 240,000 165,982 74,018 2,000,000 2,075,53106/30/2009 120,000 83,021 36,979 2,038,55212/31/2009 120,000 81,448 38,552 2,000,000 -

Requirement 3

01/01/2008 Cash 4,220,720 Bonds payable 4,000,000 Premium on bonds payable 220,720

06/30/2008 Interest expense 240,000 Cash 240,000

35

06/30/2008 Premium on bonds payable 71,171 Interest 71,171

12/31/2008 Interest expense 240,000 Cash 240,000

Premium on bonds payable 74,018Interest 74,018


06/30/2009 Interest expense 120,000Cash 120,000

Premium on bonds payable 36,979Interest expense 36,979

12/31/2009 Interest expense 120,000Cash 120,000



Problem 2-23

PV of principal (7,000,000 x 456) 3,192,000PV of interest (350,000 x 13.59) 4,756,500Total issue price 7,948,500

Interest Interest PremiumBookDate paid expense amortizationvalue

03/01/2008 7,948,50009/01/2008 750,000 317,940 32,060 7,916,44003/01/2009 350,000 316,658 33,342 7,883,098

2008March 1 Cash 7,948,500

Bonds payable 7,000,000Premium on bonds payable 948,500

36

2008Sept. 1 Interest expense 317,900

Premium on bonds payable 32,060

Cash 350,000

Dec. 31 Interest expense 233,333Accrued interest payable

233,333(7,000,000 x 10% x 4/12)


(33,342 x 4/6)

Problem 2-24

PV of principal (6,000,000 x .57)3,420,000

PV of interest (600,000 x 3.60)2,260,000

Total issue price5,580,000

Interest Interest PremiumBookDate paid expense amortizationvalue

06/01/20085,580,000

06/01/2009 600,000 669,600 69,6005,649,600

06/01/2010 600,000 667,952 77,9525,727,552

2008June 1 Cash 5,580,000

Discount on bonds payable 420,000Bonds payable

6,000,000


350,000(600,000 x 7/12)


(69,600 x 7/12)



37

2009June 1 Interest expense 600,000

Cash 600,000


(69,600 x 5/12)


350,000


(77,952 x 7/12)

Problem 2-25 Problem 2-26

Sinking fund bonds 1,100,000 9% Registered bonds3,500,000

Industrial revenue bonds 900,000 11% Collateral trust bonds3,000,000

Total serial bonds 2,000,000 Total terms bonds6,500,000

Problem 2-27 Answer A Serial bonds Debenture

bonds 9% Registered bonds 2,750,000 2,750,00011% Convertible bonds 1,250,00010% Commodity backed bonds 2,000,000 _________Total 4,750,000 4,000,000

Problem 2-28 Answer A Problem 2-29 Answer C

Issue price (5,000,000 x 110) 5,500,000 Issue price (4,000,000 x 99%)3,960,000

Accrued interest from Accrued interest from July 1 to October 1, 2008 January 1 to April 1, 2008

(5,000,000 x 12% x 3/12) 150,000 (4,000,000 x 8% x 3/12) 80,000Total 5,650,000 Total

4,040,000Less: Bond issue cost 200,000 Less: Bond issue cost 140,000Net cash received 5,450,000 Net cash received 3,900,000

Problem 2-30 Answer A

All costs are treated as bond issue cost to be amortized as interest expense over the life of the bonds.

38

Problem 2-31 Answer B

Bonds payable 5,000,000Premium on bonds payable (4% x 5,000,000) 200,000Bond issue cost ( 125,000)Bond liability 5,075,000

Problem 2-32 Answer D

Issue price (4,000,000 x 99%) 3,960,000

Bonds payable 4,000,000Discount on bonds payable ( 40,000)Bond issue cost ( 340,000)Bond liability 3,620,000


Interest:5,000,000 x 12% 600,0002,000,000 x 14%280,000

Amortization of premium (200,000 / 10) ( 20,000)Amortization of discount and issue cost (130,000 / 5) 26,000Total interest expense

886,000


Accrued interest payable from October 1 to December 31, 2008(4,000,000 x 8% x 3/12)

80,000

The nominal interest of 8% is used in determining the accrued interest payable.


Accrued interest payable from July 1 to September 30, 2008(3,000,000 x 12% x 3/12)

90,000

39Problem 2-36 Answer B

Bonds payable 5,000,000Add: Premium on bonds payable 30,000Total 5,030,000Less: Bond issue cost 50,000Book value 4,980,000Less: Retirement price (5,000,000 x 98%) 4,900,000Gain on retirement 80,000


Bonds payable 8,000,000Less: Bond issue cost 430,000Book value 7,570,000

Book value retired (4,000,000 / 8,000,000 x 7,570,000) 3,785,000Less: Retirement price (4,000,000 + 100,000) 4,100,000Loss on early extinguishment ( 315,000)


Discount on bonds payable (2% x 5,000,000) 100,000Less: Amortization from January 1, 1996 to January 1, 2008

(100,000 x 12/15) 80,000Balance – January 1, 2008 20,000

Bond issue cost 200,000Less: Amortization from January 1, 1996 to January 1, 2008

(200,000 x 12/15) 160,000Balance – January 1, 2008 40,000

Bonds payable 5,000,000Less: Discount on bonds payable 20,000

Bond issue cost 40,000 60,000Book value – January 1, 2008 4,940,000Less: Retirement price (5,000,000 x 102) 5,100,000Loss on retirement

( 160,000)


Book value – December 1, 2005 5,300,000Book value – December 31, 2007 5,150,000Amortization for 25 months 150,000

40

Monthly amortization (150,000 / 25) 6,000

Book value – December 31, 2007 5,150,000Less: Amortization of premium from January 1 to September 1, 2008

(6,000 x 8) 48,000Book value – September 1, 2008 5,102,000Less: Retirement price at face 5,000,000

Gain on early retirement 102,000


Date Interest paid Interest expense Discount amortizationBook value

1/1/2008 4,580,0007/1/2008 250,000 274,800 24,800 4,604,8001/1/2009 250,000 276,288 26,288 4,631,088

551,088

Problem 2-41 Answer A Problem 2-42 Answer B

Interest expense (10% x 3,756,000) 375,600 Interest expense (5,675,000 x 8%)454,000

Interest paid (9% x 4,000,000) 360,000 Interest paid (5,000,000 x 10%) 500,000

Discount amortization 15,600 Premium amortization 46,000

Discount on bonds payable 244,000 Premium on bonds payable675,000

Less: Amortization for 2008 15,600 Less: Amortization for 2008 46,000Balance – December 31, 2008 228,400 Balance – December 31, 2008

629,000


Interest expense (4,695,000 x 10% x 6/12) 234,750Interest paid (5,000,000 x 9% x 6/12) 225,000Amortization of discount, January 2 to June 30, 2008 9,750

Bonds payable 5,000,000Discount on bonds payable (305,000 – 9,750) 295,250Book value – June 30, 2008 4,704,750


Issue price (5,000,000 x 98)4,900,000

41

Bonds payable5,000,000

Discount on bonds payable ( 100,000)Bond issue cost ( 140,000)Book value

4,760,000

Interest expense (12% x 4,760,000) 571,200Interest paid (10% x 5,000,000) 500,000Amortization of discount and issue cost 71,200


Bond discount and issue cost (240,000 – 71,200) ( 168,000)Book value – 12/31/2008

4,831,200

Note that under the effective interest method, the discount on bonds payable and bond issue cost must be “lumped” together.

Problem 2-45 Answer C

Issue price (5,000,000 x 110)5,500,000


Premium on bonds payable 500,000Bond issue cost ( 80,000)Book value

5,420,000

Interest expense (6% x 5,420,000) 325,200

Interest paid (8% x 5,000,000) 400,000Amortization of discount and issue cost 74,800


Premium on bonds payable (420,000 – 74,800) 345,200Carrying amount – 12/31/2008

5,345,200

Note that under the effective interest method, the bond issue cost must be “netted” against the premium on bonds payable


Interest expense (10% x 4,757,000) 475,700Interest expense (8% x 5,000,000) 400,000Discount amortization 75,700

42Bonds payable 5,000,000Payment on December 31, 2008 (1,000,000)Discount on bonds payable (243,000 – 75,700) ( 167,300)Book value – December 31, 2008 3,832,700Problem 2-47 Answer B

Present value of principal (5,000,000 x 0.52) 2,600,000Present value of interest payments (600,000 x 3.43) 2,058,000Issue price of bonds 4,658,000Face value 5,000,000Discount on bonds payable 342,000


PAS 39 requires that an amount is allocated to the bonds payable equal to the market value of the bonds ex-warrants and any residual amount is allocated to the warrants.


PV of principal (5,000,000 x .57) 2,850,000PV of interest (550,000 x 3.60) 1,980,000PV of bonds payable 4,830,000

Issue price (5,000,000 x 109) 5,450,000PV of bonds payable 4,830,000Share warrants outstanding 620,000


Issue price of bonds with conversion privilege (5,000,000 x 110) 5,500,000Market value of bonds without conversion privilege (5,000,000 x 103) 5,150,000Residual amount allocated to conversion privilege 350,000


PV of principal (5,000,000 x .77) 3,850,000PV of interest (300,000 x 2.53) 759,000PV of bonds payable 4,609,000

43

Issue price (5,000,000 x 110) 5,500,000PV of bonds payable 4,609,000Share premium 891,000


Face value 5,000,000Premium on bonds payable 300,000Book value 5,300,000

Book value converted (2,000 / 5,000 x 5,300,000) 2,120,000

Par value of share capital (2,000 x 50 x 10) 1,000,000

1,120,000Conversion expenses 20,000Share premium 1,100,000


Book value of bonds converted (9,500,000 x 5/10) 4,750,000Applicable share premium – conversion privilege (2,000,000 x 5/10) 1,000,000Total consideration 5,750,000 Par value of shares issued (200,000 x 20) 4,000,000Share premium – issuance 1,750,000

44

CHAPTER 3

Problem 3-1 Problem 3-2 Problem 3-3

1. A 6. C 1. C 6. B 1. D 6. B2. D 7. A 2. C 7. B 2. B 7. A3. D 8. C 3. A 8. A 3. A 8. D

4. D 9. D 4. B 9. D 4. A 9. A5. C 10. C 5. C 10. D 5. B 10. D

Problem 3-4

Book of Marian Company (Lessor)

Jan. 1 Machinery 2,400,000Cash 2,400,000

Mar. 1 Cash 600,000Rent income 600,000

Dec. 31 Repair and maintenance 30,000Cash

30,000

31 Rent income 100,000Unearned rent income (600,000 x 2/12)

100,000

31 Depreciation (2,400,000 / 6) 400,000Accumulated depreciation 400,000

Book of Delia Company (Lessee)

Mar. 1 Rent expense 600,000 Cash 600,000

Dec. 31 Prepaid rent 100,000 Rent expense 100,000

45Problem 3-5

Requirement 1

Books of Lessor

1. Equipment 3,000,000Cash 3,000,000

2. Cash (40,000 x 9) 360,000Rent income 360,000

3. Cash 120,000Unearned rent income 120,000

4. Repairs 20,000Cash 20,000

5. Unearned rent income 30,000Rent income (120,000 / 3 = 40,000 x 9/12)

30,000

6. Depreciation 300,000 Accumulated depreciation (3,000,000 / 10)

300,000

Books of Lessee

1. Rent expense 360,000Cash 360,000

2. Prepaid rent 120,000Cash 120,000

3. Rent expense 30,000Prepaid rent 30,000

Requirement 2

Rent income (360,000 + 30,000)390,000

Less: Repairs 20,000Depreciation 300,000

320,000Net income of lessor 70,000

46Problem 3-6

Books of Lessor1. Tractor 1,600,000

Cash1,600,000

2. Cash 600,000 Rent income

600,000

3. Repairs 15,000 Transportation 5,000

Cash 20,000

4. Rent income 150,000 Unearned rent income (50,000 x 3) 150,000


300,000

Books of Lessee

1. Rent expense 600,000Cash

600,000

2. Prepaid rent 150,000Rent expense

150,000

Problem 3-7Books of Lessor

1. Machinery 2,400,000 Cash2,400,000

2. Cash (36,000 x 9) 324,000 Rent income

324,000

3. Machinery 120,000 Cash

120,000

4. Amortization of initial direct costs 22,500 Machinery (120,000 / 4 = 30,000 x 9/12)22,500

5. Depreciation 180,000 Accumulated depreciation (2,400,000 / 10 x 9/12)

180,000

47

Books of Lessee

1. Rent expense 324,000 Cash

324,000

Problem 3-8

1. Rent expense 60,000 Prepaid rent 60,000 Rent deposit 80,000 Leasehold improvement 360,000

Cash 560,000

2. Depreciation 6,000 Accumulated depreciation (360,000 / 5 x 1/12)

6,000

Problem 3-9

1. Rent expense 900,000 Cash

900,000

2. Cash 6,000,000 Sales6,000,000

3. Prepaid rent 250,000Cash

250,000

4. Rent expense (5% X 1,000,000) 50,000 Accrued rent payable

50,000

5. Rent expense 25,000Prepaid rent (250,000 / 10)

25,000

Problem 3-10

1. Machinery 4,800,000 Cash4,800,000

2. Cash 850,000 Rent income

850,000

3. Cash 300,000 Unearned rent income

300,000 48

4. Insurance 80,000 Cash 80,000


400,000

6. Unearned rent income 100,000 Rent income (300,000 / 3)

100,000

Problem 3-11

20081. Equipment 375,000

Cash 375,000

2. Equipment 75,000 Cash 75,000

20091. Cash 180,000

Rent income 180,000

2. Repairs 7,000 Transportation 3,000

Cash 10,000

3. Depreciation 90,000

Accumulated depreciation (450,000 / 5) 90,000

4. Rent income 45,000 Unearned rent income (15,000 x 3)

45,000

Problem 3-12

2007Jan. 1 Building (800,000 x 4.17) 3,336,000

Lease liability3,336,000

1 Building 100,000

Cash 100,000

1 Lease liability 800,000Cash

800,00049

2007

Dec. 31 Depreciation (3,436,000 / 10) 343,600Accumulated depreciation

343,600

31 Interest expense 253,600Accrued interest payable

253,600

Year Payment 10% interest Principal Present value

01/01/2008 3,336,000

01/01/2008 800,000 - 800,000 2,536,000

01/01/2009 800,000 253,600 546,400 1,989,600

01/01/2010 800,000 198,960 601,040 1,388,560

31 Taxes 40,000Cash

40,000


Lease liability 546,400Cash

800,000

Dec. 31 Depreciation 343,600Accumulated depreciation

343,600

31 Interest expense 198,960Accrued interest payable

198,960

31 Taxes 40,000Cash

40,000

Problem 3-13

20081. Building (1,000,000 x 3.79) 3,790,000

Lease liability 3,790,000

2. Interest expense 379,000 Lease liability 621,000

Cash 1,000,000

50


01/01/2008 3,790,00012/31/2008 1,000,000 379,000 621,000

3,169,00012/31/2009 1,000,000 316,900 683,100

2,485,900

3. Taxes 75,000 Insurance 125,000

Cash 200,000

4. Depreciation (3,790,000 / 10) 379,000Accumulated depreciation 379,000

20091. Interest expense 316,900 Lease liability 683,100

Cash 1,000,0002. Taxes 75,000 Insurance 125,000

Cash 200,000

3. Depreciation 379,000Accumulated depreciation 379,000

Problem 3-14

2007Jan. 1 Machinery 6,392,400


Present value of rentals (1,000,000 x 6.328) 6,328,000

Present value of bargain option (200,000 x .322) 64,400

Total cost 6,392,400

1 Lease liability 1,000,000Cash 1,000,000

Dec. 31 Depreciation (6,392,400 / 15) 426,160Accumulated depreciation 426,160

31 Interest expense 647,088Accrued interest payable 647,088

51


01/01/20086,392,400

01/01/2008 1,000,000 - 1,000,0005,392,400

01/01/2009 1,000,000 647,088 352,9125,039,488

01/01/2010 1,000,000 604,739 395,2614,644,277


Lease liability 352,912Cash

1,000,000

Dec. 31 Depreciation 426,160Accumulated depreciation 426,160

31 Interest expense 604,739Accrued interest payable 604,739

Problem 3-15

1. Building (1,000,000 x 7.606) 7,606,000Lease liability

7,606,000

2. Depreciation 507,067Accumulated depreciation 507,067

The term of the lease is at least 75% of the life of the asset (15/20). Since this is the basis of the finance lease, the depreciation is computed using the term of the lease, which is shorter than the life of the asset.

3. Interest expense (10% x 7,606,000) 760,600Lease liability 239,400

Cash 1,000,000


Present value of rentals (1,000,000 x 3.2743) 3,274,300Present value of guaranteed residual value (474,060 x .4761) 225,700Total present value 3,500,000

52

The lease is accounted for as finance lease because the present value of rentals is 100% of the fair value of the leased asset.


01/01/2008 3,500,00012/31/2008 1,000,000 560,000 440,000

3,060,00012/31/2009 1,000,000 489,600 510,400

2,549,60012/31/2010 1,000,000 407,936 592,064

1,957,53612/31/2011 1,000,00 0 313,206 686,794

1,270,74212/31/2012 1,000,000 203,318 796,682

474,060

Requirement 22008

Jan. 1 Equipment 3,500,000 Lease liability

3,500,000 Dec. 31 Interest expense 560,000

Lease liability 440,000 Cash

1,000,000

31 Depreciation 605,188 Accumulated depreciation

605,188(3,500,000 – 474,060 / 5)


Lease liability 510,400 Cash

1,000,000

31 Depreciation 605,188 Accumulated depreciation

605,188

Requirement 3

Accumulated depreciation (605,188 x 5) 3,025,940Lease liability 474,060

Equipment3,500,000

53Requirement 4

Accumulated depreciation 3,025,940Lease liability 474,060

Equipment 3,500,000

Loss on finance lease 174,060Cash (474,060 – 300,000)

174,060

Problem 3-17

1. Lease receivable 5,000,000Sales

3,072,500Unearned interest income

1,927,500

2. Cost of sales 2,000,000Inventory

2,000,000

3. Cash 500,000Lease receivable

500,000

4. Unearned interest income 307,250Interest income (10% x 3,072,500)

307,250

Problem 3-18

2008Jan. 1 Lease receivable 500,000

Machinery 403,700

Unearned interest income 96,300

1 Cash 100,000 Lease receivable

100,000

Dec. 31 Unearned interest income 36,444

Interest income 36,444


01/01/2008 403,700 01/01/2008 100,000 - 100,000

303,700 01/01/2009 100,000 36,444 63,556

240,144 01/01/2010 100,000 28,817 71,183

168,961

542009

Jan. 1 Cash 100,000 Lease receivable

100,000

Dec. 31 Unearned interest income 28,817 Interest income 28,817

Problem 3-19

1. Lease receivable (600,000 x 8) 4,800,000Sales

3,520,000Unearned interest income 1,280,000

2. Initial direct costs 50,000Cash 50,000

3. Cash 600,000Lease receivable 600,000

4. Unearned interest income 292,000Interest income

292,000


01/01/2008 3,520,000 01/01/2008 600,000 - 600,000

2,920,000 01/01/2009 600,000 292,000 308,000

2,612,000

Problem 3-20

Books of Fox Company (Lessor)2008

Jan. 1 Lease receivable (500,000 x 10) 5,000,000 Sales 3,165,000 Unearned interest income 1,835,000

1 Cost of sales 2,675,000 Inventory

2,675,000

1 Cash 500,000 Lease receivable 500,000

Dec. 31 Unearned interest income 319,800 Interest income

319,800

55


01/01/2008 3,165,000 01/01/2008 500,000 - 500,000

2,665,000 01/01/2009 500,000 319,800 180,200

2,484,800 01/01/2010 500,000 298,176 201,824

2,282,976

2009Jan. 1 Cash 500,000

Lease receivable 500,000

Dec. 31 Unearned interest income 298,176 Interest income 298,176

Books of Tiger Company (Lessee)2008

Jan. 1 Equipment 3,165,000 Lease liability 3,165,000

1 Lease liability 500,000 Cash 500,000

Dec. 31 Depreciation (3,165,000 / 10) 316,500 Accumulated depreciation 316,500

31 Interest expense 319,800 Accrued interest payable

319,800


Lease liability 180,200 Cash 500,000

Dec. 31 Depreciation 316,500 Accumulated depreciation 316,500

31 Interest expense 298,176 Accrued interest payable

298,176

56Problem 3-21

1. Equipment 2,330,000Lease liability

2,330,000

Interest expense (12% x 2,330,000) 279,600Lease liability 320,400

Cash 600,000

Depreciation 406,000Accumulated depreciation (2,330,000 – 300,000 / 5)

406,000

2. Lease liability 300,000Accumulated depreciation (406,000 x 5) 2,030,000

Equipment2,330,000

3. Lease liability 300,000Accumulated depreciation 2,030,000

Equipment2,330,000

Loss on finance lease 120,000Cash (300,000 – 180,000)

120,000

Problem 3-22Books of Universal Company (Lessor)

Gross rentals (700,000 x 8)5,600,000

Unguaranteed residual value 400,000Lease receivable

6,000,000Present value:

Gross rentals (700,000 x 4.968) 3,477,600Unguaranteed RV (400,000 x .404) 161,6003,639,200

Unearned interest income2,360,800

Cost of equipment sold2,000,000

Less: PV of unguaranteed RV 161,600Cost of sales

1,838,400

1. Lease receivable 6,000,000Cost of sales 1,838,400

Sales (equal to PV of rentals only) 3,477,600Unearned interest income 2,360,800Inventory 2,000,000

57

2. Cash 700,000Lease receivable 700,000

3. Unearned interest income 436,704Interest income (12% x 3,639,200)

436,704

Books of National Company (Lessee)

1. Equipment 3,477,600


The residual value is unguaranteed, so it is not included in the computation of the lessee’s lease liability.

2. Interest expense (12% x 3,477,600) 417,312Lease liability 282,688

Cash 700,000

3. Depreciation 434,700Accumulated depreciation (3,477,600 / 8)

434,700

Problem 3-23

Gross rentals (3,000,000 x 5) 15,000,000Residual value – guaranteed 1,000,000Gross investment 16,000,000Present value:

Rentals (3,000,000 x 3.60) 10,800,000Residual value (1,000,000 x .57) 570,000

11,370,000Total unearned financial revenue 4,630,000

Sales11,370,000

Cost of sales:Cost of machinery

( 8,000,000)Initial direct costs

( 300,000)Gross income 3,070,000

58

Books of Vanderbilt Company

1. Lease receivable 16,000,000Cost of sales 8,000,000

Sales11,370,000

Unearned interest income 4,630,000Inventory 8,000,000

2. Cost of sales (Initial direct costs) 300,000Cash 300,000

3. Cash 3,000,000Lease receivable 3,000,000

4. Unearned interest income 1,364,400Interest income (12% x 11,370,000)

1,364,400

Books of Thunder Company

1. Machinery 11,370,000Lease liability

11,370,000

2. Interest expense 1,364,400Lease liability 1,635,600

Cash 3,000,000

3. Depreciation 2,074,000Accumulated depreciation 2,074,000

(11,370,000 – 1,000,000 / 5)

Problem 3-24

1. Gross rentals (600,000 x 10) 6,000,000

Net investment in the lease:Cost of equipment

(3,390,000) Initial direct costs( 143,400)

Total financial revenue 2,466,600

2. Equipment 143,400Cash 143,400

59

Lease receivable 6,000,000Equipment 3,533,400Unearned interest income 2,466,600

Cash 600,000

Lease receivable 600,000

Unearned interest income 388,674Interest income (11% x 3,533,400)

388,674

PV factor (3,533,400 / 600,000) 5.889

This factor is applicable to 11%. Thus, this is the new implicit rate in computing

interest income.

Problem 3-24

1. Lease receivable (3,328,710 x 5) 16,643,550

PV of gross rentals (3,328,710 x 3.605) 12,000,000

Total unearned financial revenue 4,643,550

The residual value of P500,000 is ignored by the lessor because ownership of the asset is transferred to the lessee at the end of the lease term.

2. Sales price (equal to present value of rentals) 12,000,000

Cost of sales:Cost of equipment

( 8,000,000)Initial direct costs

( 200,000)Manufacturer’s profit

3,800,000

3. Interest income for first year (12% x 12,000,000) 1,440,000

Problem 3-26

Books of German Company

1. Cash 1,100,000Accumulated depreciation 1,500,000

Equipment 2,500,000Gain on sale and leaseback 100,000

2. Rent expense 40,000 Cash 40,000

60

Books of Sterling Company

1. Equipment 1,100,000Cash

1,100,000

2. Cash 40,000Rent income 40,000


Problem 3-27Books of Canada Company

1. Cash 500,000Accumulated depreciation 450,000Loss on sale and leaseback 50,000

Machinery 1,000,000

2. Rent expense 90,000Cash 90,000

Books of Saigon Company

1. Machinery 500,000Cash 500,000

2. Cash 90,000Rent income 90,000

3. Depreciation (500,000 / 10) 50,000Accumulated depreciation 50,000

Problem 3-28Books of Cuba Company

1. Cash 2,415,000Accumulated depreciation 3,400,000

Building 5,000,000

Deferred gain on sale and leaseback 815,000

61

2. Building 2,415,000Lease liability

2,415,000


4. Deferred gain on sale and leaseback 81,500Gain on sale and leaseback (815,000 / 10)

81,500

5. Interest expense (16% x 2,415,000) 386,400 Lease liability 113,600

Cash 500,000Books of Mexico Company

1. Building 2,415,000 Cash 2,415,000

2. Lease receivable (500,000 x 10) 5,000,000 Building

2,415,000 Unearned interest income 2,585,000

3. Cash 500,000 Lease receivable 500,000

4. Unearned interest income 386,400 Interest income 386,400


Rent for June 200,000Amortization of bonus (prepaid rent)[600,000 / 5 x 1/12] 10,000Rent expense for the month of June 210,000


Annual rent (15,000 x 12) 180,000Additional rent

6% x 3,000,000 180,000

5% x 3,000,000 150,000Property taxes 120,000Insurance 50,000Total expenses 680,000

62


Total rent expense (200,000 x 51 remaining months) 10,200,000

Average annual rent expense, July 1, 2006 to June 30, 2007 (10,200,000 / 5)

2,040,000


Total rent expense (600,000 x 117 remaining months) 70,200,000

Average annual rent (70,200,000 / 10) 7,020,000

Rent expense from October 1 to December 31, 2008 (7,020,000 x 3/12)

1,755,000


First year (1,200 x 1,000) 1,200,000Second year (3,000 x 1,000) 3,000,000Third year (3,000 x 1,000) 3,000,000Total rental revenue 7,200,000

Average annual rental (7,200,000 / 3) 2,400,000

Rental revenue from January1 to September 30, 2008 (2,400,000 x 9/12)

1,800,000


First year (800,000 x 6/12) 400,000Second year 1,250,000Third year 1,250,000Fourth year 1,250,000Fifth year 1,250,000Total rental revenue 5,400,000

Average annual rental revenue (5,400,000 / 5) 1,080,000

63Problem 3-35 Answer C

Average annual rental revenue (360,000 / 3) 120,000

Rent revenue from July 1, 2006 to June 30, 2008 (120,000 x 2) 240,000Less: Rentals received:

First 12 months 60,000Second 12 months 90,000

150,000Rent receivable, June 30, 2008 90,000


Rent income 500,000Less: Amortization of initial direct costs (150,000 / 10) 15,000

Depreciation 120,000Insurance and property tax 90,000 225,000

Net rent income 275,000


Annual rental 900,000Amortization of lease bonus (500,000 / 5) 100,000Total rent revenue 1,000,000


This is not a finance lease and therefore no liability is recorded because:

1. There is no transfer of ownership or title to the lessee at the end of the lease term.

2. There is no a bargain purchase option.

3. The term is only 66 2/3% of the life of the asset (10 / 15 equals 66 2/3%).

4. The present value of the rental of P3,380,000 (500,000 x 6.76) is only 84.5% of the fair value of P4,000,000.


Cost of leased property (100,000 x 6.145) 614,500

The lease is treated as a finance lease because the term is 83 1/3% of the life of the asset (10 years / 12 years).



Present value of rentals (400,000 x 5.95) 2,380,000

The purchase option of P500,000 is not included in the computation of the lease liability because it approximates the fair value of the asset at the end of the lease term and therefore is not a bargain purchase option. Again, the lease is a finance lease because the term is 83 1/3% of the life of the asset (10/12).


Cost of leased property 2,400,000Less: Residual value 200,000Depreciable cost 2,200,000

Depreciation (2,200,000 / 8) 275,000


Depreciation (1,080,000 / 12) 90,000

If the “transfer of ownership criterion” is used in qualifying a finance lease, the depreciation is based on the life of the asset.

Problem 3-44

Question 1 – Answer C Question 2 – Answer B Question 3 - Answer C

1. Date Payment 10% interest Principal Present value

01/01/2007 1,352,00001/01/2007 200,000 - 200,000 1,152,00001/01/2008 200,000 115,200 84,800 1,067,200

Lease liability – December 31, 2008 1,152,000

Current portion 84,800Noncurrent liability

1,067,200

2. Interest expense for 2008 115,200

3. Depreciation for 2008 (1,352,000 / 20) 67,600


Present value (using implicit rate of 10%) 3,165,000Less: Payment on December 31, 2007 (all applicable to principal) 500,000Balance – December 31, 2007 2,665,000Less: Principal payment on December 31, 2008

Payment 500,000Interest (10% x 2,665,000) 266,500

233,500Lease liability – December 31, 2008 2,431,500


Present value, January 1, 2008 1,125,000Less: First payment on December 30, 2008 100,000

Interest for 2008 (8% x 1,125,000) ( 90,000) 10,000Lease liability, December 31, 2008 1,115,000


Interest expense for 2008 (10% x 3,790,000) 379,000


Present value, January 1, 2008 1,350,000Less: First payment on January 1, 2008 (all applicable to principal) 200,000Lease liability, January 1, 2008 1,150,000

Interest expense for 2008 (10% x 1,150,000) 115,000


Present value of rentals (1,300,000 x 4.24) 5,512,000Present value of guaranteed residual value (1,000,000 x 0.65) 650,000Total lease liability – 1/1/2008 6,162,000Less: First payment on January 1, 2008 (all applicable to principal) 1,300,000Lease liability – 12/31/2008 4,862,000

The present value of an “annuity due” factor is used in the computation because the rental is payable in advance.


Lease liability, January 1, 2007 (1,000,000 x 6.14) 6,140,000

66

The minimum lease payments shall include the guaranteed residual if guaranteed by the lessee. In this case, the residual value is guaranteed by a third party and therefore excluded in computing the lease liability.


Present value – 12/31/20081,350,000

Less: First payment on December 31, 2008 (all applicable to principal) 200,000Lease liability – 12/31/2008

1,150,000Less: Second payment on December 31, 2009:

Payment 200,000Interest for 2009 (10% x 1,150,000) 115,000Principal payment

85,000Lease liability – 12/31/2009

1,065,000



Cash payment1,440,000

Book value of leased asset (2,000,000 – 800,000)1,200,000

Total consideration2,640,000

Balance of lease liability1,300,000

Cost of machinery purchased1,340,000

The entry to record the actual purchase of the leased asset is:

Machinery (purchased) 1,340,000Lease liability 1,300,000Accumulated depreciation 800,000

Cash1,440,000

Machinery (leased)2,000,000

Problem 3-54

Question 1 – Answer A

Question 2 – Answer B

1. Gain on sale (3,520,000 – 2,800,000) 720,000

672. Date Payment 10% interest Principal Present value

07/01/2008 3,520,00007/01/2008 600,000 - 600,000 2,920,00007/01/2009 600,000 292,000 308,000 2,612,000

July 1 to December 31, 2008 (292,000 x 1/2) 146,000


Date Payment 10% interest Principal Present value01/01/2008 2,400,00001/01/2008 355,080 - 355,080 2,044,92001/01/2009 355,080 204,492 150,588 1,894,332

Selling price or fair value2,400,000

Less: Cost to Gallant Company2,000,000

Dealer’s profit 400,000Add: Interest income – 2008 204,492Total income before tax 604,492


This is mathematical. The procedure is to determine the annual rental payment which is equal to the “cost of the asset divided by the present value factor of annuity of 1”. Accordingly, the annual rental is equal to P323,400 divided by 4.312 or P75,000.

Lease receivable (75,000 x 5) 375,000

Present value of rentals (fair value) 323,400Total interest revenue 51,600Problem 3-57 Answer A

Cost of equipment 4,361,200Present value of residual value (200,000 x .466) ( 93,200)Net investment to be recovered 4,268,000

Annual rental (4,268,000 / 5.335) 800,000


Interest income (5,250,000 – 900,000 x 12%) 522,000

68




Problem 3-62

Question 1 - Answer A

Gross rentals (1,500,000 x 20)30,000,000

Present value or fair value of asset (1,500,000 x 8.37)12,555,000

Unearned financial revenue 17,445,000

Observe that the present value of rentals is the same as the fair value of the asset. Note also that the residual value is ignored because the ownership of the asset will transfer to the lessee at the end of the lease term.

Question 2 - Answer B

Fair value of asset12,555,000

Cost of asset 8,000,000

Profit on sale 4,555,000

Question 3 – Answer C

PV of rentals equals to the fair value of asset12,555,000

Payment of January 1, 2008 – all applicable to principal 1,500,000Balance – January 1, 2008 11,055,000

Interest income for 2008 (11,055,000 x 12%) 1,326,600

Problem 3-63

Question 1 – Answer B

Interest income for 2008 (10% x 4,850,000)485,000

69Question 2 – Answer A

Sales price 3,250,000Book value of lease receivable:

Lease receivable 5,850,000Unearned interest income (1,000,000 – 485,000) ( 515,000)

5,335,000Loss on sale of machinery (2,085,000)

1. To recognize the interest income for 2008:

Unearned interest income 485,000Interest income

485,000

2. To record the sale of the machinery:

Cash 3,250,000Unearned interest income 515,000Loss on sale of machinery 2,085,000

Lease receivable 5,850,000






Sales price 1,500,000Cost of equipment sold 1,000,000Deferred gain on sale and leaseback 500,000Less: Realized gain in 2008 (500,000 / 10) 50,000Deferred gain – December 31, 2008 450,000


Sales price 480,000Carrying amount 360,000Deferred revenue 120,000

The gain is deferred because the leaseback is a finance lease (12 / 15 equals 80%).

70Problem 3-70 Answer A

Sales price7,800,000

Carrying amount5,850,000

Deferred gain – 12/31/20081,950,000


Sales price 360,000

Carrying amount 330,000Gain on sale and leaseback 30,000

The gain is not deferred but recognized immediately because the leaseback is an operating lease.


Sales price6,000,000

Fair value5,000,000

Deferred gain1,000,000

Fair value5,000,000

Carrying amount3,500,000

Gain on sale and leaseback to be recognized immediately1,500,000

financial accounting vol 2

Documents

premium bonds payable

unissued bonds payable

authorized bonds payable

bonds payable retired

early retirement of

book value of bonds

applicable discount

bond issue cost