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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

## 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

## 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

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
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

## 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)

## December 31, 2010

Unrealized holding loss 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
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.

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

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

## 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