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Exercise 14-2

1. Maturity Interest paid Stated rate Effective (market) rate


10 years annually 10% 12%
Interest $100,000 ¥ x 5.65022 * = $565,022
Principal $1,000,000 x 0.32197 ** = 321,970
Present value (price) of the bonds $886,992
¥ 10% x $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) rate
10 years semiannually 10% 12%
Interest $50,000 ¥ x *
11.46992 = $573,496
Principal $1,000,000 x 0.31180 ** = 311,800
Present value (price) of the bonds $885,296
¥ 5% x $1,000,000
* present value of an ordinary annuity of $1: n=20, i=6% (Table 4)
** present value of $1: n=20, i=6% (Table 2)

3. Maturity Interest paid Stated rate Effective (market) rate


10 years semiannually 12% 10%
Interest $60,000 ¥ x *
12.46221 = $ 747,733
Principal $1,000,000 x 0.37689 ** = 376,890
Present value (price) of the bonds $1,124,623
¥ 6% x $1,000,000
* present value of an ordinary annuity of $1: n=20, i=5% (Table 4)
** present value of $1: n=20, i=5% (Table 2)

4. Maturity Interest paid Stated rate Effective (market) rate


20 years semiannually 12% 10%
Interest $60,000 ¥ x 17.15909 * = $1,029,545
Principal $1,000,000 x 0.14205 ** = 142,050
Present value (price) of the bonds $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)
Exercise 14-2 (concluded)
5. Maturity Interest paid Stated rate Effective (market) rate
20 years semiannually 12% 12%
Interest $60,000 ¥ x *
15.04630 = $902,778
Principal $1,000,000 x 0.09722 ** = 97,220
Present value (price) of the bonds $999,998

actually, $1,000,000 if PV table factors were not rounded


¥ 6% x $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)
Exercise 14-3
1. Price of the bonds at January 1, 2009

Interest $4,000,000¥ x 11.46992 * = $45,879,680


Principal $80,000,000 x 0.31180 ** = 24,944,000
Present value (price) of the bonds $70,823,680
¥ 5% x $80,000,000
* present value of an ordinary annuity of $1: n=20, i=6% (Table 4)
** present value of $1: n=20, i=6% (Table 2)

2. January 1, 2009
Cash (price determined above) ...................................... 70,823,680
Discount on bonds (difference) .................................. 9,176,320
Bonds payable (face amount) .................................. 80,000,000

3. June 30, 2009


Interest expense (6% x $70,823,680) ................................ 4,249,421
Discount on bonds payable (difference) ................. 249,421
Cash (5% x $80,000,000) ......................................... 4,000,000

Partial amortization schedule (not required)

Cash Effective Increase in Outstanding


Interest Interest Balance Balance
5% x Face Amount 6% x Outstanding Balance Discount Reduction
70,823,680
1 4,000,000 .06 (70,823,680) = 4,249,421 249,421 71,073,101
2 4,000,000 .06 (71,073,101) = 4,264,386 264,386 71,337,487
   
   

4. December 31, 2009


Interest expense (6% x [$70,823,680 + 249,421]) ............ 4,264,386
Discount on bonds payable (difference) ................. 264,386
Cash (5% x $80,000,000) ......................................... 4,000,000
Exercise 14-4
1. January 1, 2009

Interest $4,000,000¥ x 11.46992 * = $45,879,680


Principal $80,000,000 x 0.31180 ** = 24,944,000
Present value (price) of the bonds $70,823,680
¥ 5% x $80,000,000
* present value of an ordinary annuity of $1: n=20, i=6% (Table 4)
** present value of $1: n=20, i=6% (Table 2)

Bond investment (face amount) .................................. 80,000,000


Discount on bond investment (difference) ............. 9,176,320
Cash (price determined above) .................................. 70,823,680

2. June 30, 2009


Cash (5% x $80,000,000) ............................................. 4,000,000
Discount on bond investment (difference) ..................... 249,421
Interest revenue (6% x $70,823,680) ............................ 4,249,421

3. December 31, 2009


Cash (5% x $80,000,000) ............................................. 4,000,000
Discount on bond investment (difference) ................. 264,386
Interest revenue (6% x [$70,823,680 + 249,421]) ........ 4,264,386
Exercise 14-10
1. Price of the bonds at January 1, 2009
Interest $22,500¥ x 6.46321 * = $145,422
Principal $500,000 x 0.67684 ** = 338,420
Present value (price) of the bonds $483,842
¥ 4.5% x $500,000
* present value of an ordinary annuity of $1: n=8, i=5% (Table 4)
** present value of $1: n=8, i=5% (Table 2)

2. January 1, 2009
Cash (price determined above) ........................... 483,842
Discount on bonds payable (difference).......... 16,158
Bonds payable (face amount) ....................... 500,000

3. Amortization schedule

Cash Effective Increase in Outstanding


Interest Interest Balance Balance
4.5% x Face Amount 5% x Outstanding Balance Discount Reduction
483,842
1 22,500 .05 (483,842) = 24,192 1,692 485,534
2 22,500 .05 (485,534) = 24,277 1,777 487,311
3 22,500 .05 (487,311) = 24,366 1,866 489,177
4 22,500 .05 (489,177) = 24,459 1,959 491,136
5 22,500 .05 (491,136) = 24,557 2,057 493,193
6 22,500 .05 (493,193) = 24,660 2,160 495,353
7 22,500 .05 (495,353) = 24,768 2,268 497,621
8 22,500 .05 (497,621) = 24,879* 2,379 500,000
180,000 196,158 16,158
* rounded.
Exercise 14-10 (concluded)
4. June 30, 2009
Interest expense (5% x $483,842) ....................... 24,192
Discount on bonds payable (difference) ...... 1,692
Cash (4.5% x $500,000) ................................ 22,500

5. December 31, 2012


Interest expense (5% x $497,621) ....................... 24,879*
Discount on bonds payable (difference) ...... 2,379
Cash (4.5% x $500,000) ................................ 22,500
* rounded value from amortization schedule

Bonds payable ..................................................... 500,000


Cash .......................................................... 500,000
Exercise 14-14
Requirement 1
At January 1, 2009, the book value of the bonds was the initial issue price,
$739,814,813. The liability, though, was increased when Federal recorded interest
during 2009:

June 30, 2009


Interest expense (6% x $739,814,813) ........................ 44,388,889
Discount on bonds payable (difference) ............ 388,889
Cash (5.5% x $800,000,000) ................................ 44,000,000

December 31, 2009


Interest expense (6% x [$739,814,813 + 388,889]) .... 44,412,222
Discount on bonds payable (difference) ............ 412,222
Cash (5.5% x $800,000,000) ................................ 44,000,000

Reducing the discount increases the book value of the bonds:

Jan.1, 2009, book value $739,814,813


Increase from discount amortization ($388,889 + 412,222) 801,111
December 31, 2009, book value (amortized initial amount) $740,615,924

Comparing the amortized initial amount at December 31, 2009, with the fair value
on that date provides the Fair value adjustment balance needed:

December 31, 2009, book value (amortized initial amount) $740,615,924


December 31, 2009, fair value 730,000,000
Fair value adjustment balance needed: debit/(credit) $ 10,615,924

Federal would record the $10,615,924 as a gain in the 2009 income statement:

December 31, 2009


Fair value adjustment 10,615,924
Unrealized holding gain 10,615,924
Note: A decrease in the value of an asset is a loss; a decrease in the value of a
liability is a gain.
Exercise 14-14 (continued)

In the balance sheet, the bonds are reported among long-term liabilities at their
$730,000,000 fair value:

Bonds payable $800,000,000


Less: Discount on bonds payable (59,384,076)
December 31, 2009, book value (amortized initial amount) $740,615,924
Less: Fair value adjustment (10,615,924)
December 31, 2009, fair value $730,000,000

Requirement 2

If the fair value at December 31, 2010, is $736,000,000 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 2010:

June 30, 2010


Interest expense (6% x [$739,814,813 + 388,889 + 412,222]) 44,436,955

Discount on bonds payable (difference) ................... 436,955


Cash (5.5% x $800,000,000)........................................ 44,000,000

December 31, 2010


Interest expense (6% x [$739,814,813 + 388,889 + 412,222 + 436,955]) 44,463,173

Discount on bonds payable (difference) ................... 463,173


Cash (5.5% x $800,000,000)........................................ 44,000,000

Reducing the discount increases the book value of the bonds:

December 31, 2009, book value (amortized initial amount) $740,615,924


Increase from discount amortization ($436,955 + 463,173) 900,128
December 31, 2010, book value (amortized initial amount) $741,516,052
Exercise 14-14 (concluded)

Comparing the amortized initial amount at December 31, 2010, with the fair value
on that date provides the Fair value adjustment balance needed:

December 31, 2010, book value (amortized initial amount) $741,516,052


December 31, 2010, fair value (736,000,000)
Fair value adjustment balance needed: debit/(credit) $ 5,516,052
Less: Current fair value adjustment debit/(credit) 10,615,924
Change in fair value adjustment $ (5,099,872)

Federal records the $5,099,872 as a loss in the 2010 income statement:

December 31, 2010


Unrealized holding loss 5,099,872
Fair value adjustment 5,099,872

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
$736,000,000 fair value:

Bonds payable $800,000,000


Less: Discount on bonds payable (58,483,948)
December 31, 2010, book value (amortized initial amount) $741,516,052
Less: Fair value adjustment (5,516,052)
December 31, 2010, fair value $736,000,000
Exercise 14-18
1. January 1, 2009

Operational assets .............................................................. 4,000,000


Notes payable .................................................................. 4,000,000

2. Amortization schedule

$4,000,000 ÷ 3.16987 = $1,261,881


amount (from Table 4) installment
of loan n=4, i=10% payment

Cash Effective Decrease in Outstanding


Dec.31 Payment Interest Balance Balance
10% x Outstanding Balance Balance Reduction

2009 1,261,881 .10 (4,000,000) = 400,000 861,881 3,138,119


2010 1,261,881 .10 (3,138,119) = 313,812 948,069 2,190,050
2011 1,261,881 .10 (2,190,050) = 219,005 1,042,876 1,147,174
2012 1,261,881 .10 (1,147,174) = 114,707* 1,147,174 0
5,047,524 1,047,524 4,000,000
* rounded.

3. December 31, 2009

Interest expense (10% x outstanding balance) .............................. 400,000


Note payable (difference) ...................................................... 861,881
Cash (payment determined above) ........................................ 1,261,881

4. December 31, 2011

Interest expense (10% x outstanding balance) .............................. 219,005


Note payable (difference) ...................................................... 1,042,876
Cash (payment determined above) ........................................ 1,261,881
Exercise 14-19
1. November 1, 2009
Component inventory ................................................. 24,000,000
Notes payable ........................................................... 24,000,000

2. November 30, 2009


Interest expense (1% x outstanding balance) ................................ 240,000
Note payable (difference) ...................................................... 1,892,370
Cash (payment determined below) ........................................ 2,132,370

Calculation of installment payment:


$24,000,000 ÷ 11.25508 = $2,132,370
amount (from Table 4) installment
of loan n=12, i=1% payment

3. December 31, 2009


November (1% x $24,000,000) $240,000
December (1% x [$24,000,000 – 1,892,370]) 221,076
2009 interest expense $461,076
Journal entry (not required):
Interest expense (1% x [$24,000,000 – 1,892,370]) ...................... 221,076
Note payable (difference) ...................................................... 1,911,294
Cash (payment determined above) ........................................ 2,132,370

© The McGraw-Hill Companies, Inc., 2009


Solutions Manual, Vol.2, Chapter 14 14-39