Week Six Homework Acct305

SOLUTIONS – WEEK SIX – ACCT 305

Exercise 14­1 Requirement 1  $100 million x 12% face amount

annual rate

x

2/12 fraction of the annual period

=

$2 million accrued interest

Requirement 2  ($ in millions) Cash ($99 million plus accrued interest)............................ 101 Discount on bonds ($100 million – $99 million)................ 1 Bonds payable (face amount).......................................... Interest payable (accrued interest determined above).....

100 2

Exercise 14-11 1. Price of the bonds at January 1, 2006 Interest $22,500¥ x 6.46321 *    = Principal $500,000 x 0.67684 **   =    Present value (price) of the bonds

$145,422 338,420 $483,842

¥  4.5% x $500,000 * present value of an ordinary annuity of $1: n=8, i=5% ** present value of $1: n=8, i=5%

2. January 1, 2006 Cash (price determined above)..................... Discount on bonds (difference).................... Bonds payable (face amount)....................

483,842 16,158 500,000

Exercise 14-11 (concluded) 3. Amortization schedule 

Cash Interest 4.5% x Face Amount

1 2 3 4 5 6 7 8

Effective Interest 5% x Outstanding Balance

483,842 22,500 485,534 22,500 22,500 489,177 22,500 22,500 493,193 22,500 495,353 22,500 497,621 22,500 500,000

Increase in Outstanding Balance Balance Discount Reduction

.05(483,842)

=

24,1921,692

.05(485,534)

=

487,311

.05(487,311)

=

24,2771,777 24,3661,866

.05(489,177)

=

491,136

.05(491,136)

=

24,4591,959 24,5572,057

.05(493,193)

=

24,6602,160

.05(495,353)

=

24,7682,268

.05(497,621)

=

24,879*2,379

180,000

196,15816,158

* rounded.

4. June 30, 2006 Interest expense (5% x $483,842)................ Discount on bonds payable (difference). . . Cash (4.5% x $500,000)........................... 5. December 31, 2009

24,192 1,692 22,500

Interest expense (5% x $497,621)................. Discount on bonds payable (difference). . . Cash (4.5% x $500,000)...........................

24,879* 2,379 22,500

Bonds payable .............................................. Cash .........................................................

500,000 500,000

* rounded value from table

Brief Exercise 14­10 $300,000 ÷ 2.72325 = $110,163 amount of loan

(from Table 4) n=3, i=5%

installment payment

Helpful, but not required: Cash Outstanding Dec.31 Payment

Interest

Effective

Decrease in

Balance Balance 5% x Outstanding BalanceBalance Reduction

300,000 1 2 3

110,163 110,163 110,163

.05 (300,000) = .05 (204,837) = .05(104,917) =

15,000 10,242 5,246

95,163 99,921 104,917

204,837 104,917 0

Interest expense (5% x ($300,000 – [$110,163 – 5% x $300,000])) 10,242 Note payable (difference)............................................. 99,921 ...............................Cash (payment determined above) 110,163