Exercise 14-3

1. Price of the bonds at January 1, 2006

Interest

40,000,000 x 5%

11.46992 * =

22,939,840

40,000,000

0.31180 ** =

12,472,000

Principal

Present value (price) of the bonds

*

35,411,840

present value of an ordinary annuity of $1: n=20, i=6%

** present value of $1: n=20, i=6%

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

35,411,840
4,588,160
40,000,000

3. June 30, 2006

Interest expense (6% x 35,411,840)..........................................................
Discount on bonds payable (difference)..............................................
Cash (5% x 40,000,000).......................................................................

2,124,710
124,710
2,000,000

4. December 31, 2006

Interest expense [35,411,840 + (2,124,710 2,000,000] x 6%................
Discount on bonds payable (difference)..............................................
Cash (5% x 40,000,000).......................................................................

2,132,193
132,193
2,000,000

E 14 - 5:
Determine the price of bonds in various situations
Maturity
Interest Paid
1
2
3
4
5
1)

2)

3)

4)

5)

10
10
10
20
20

annually
semiannually
semiannually
semiannually
semiannually

Stated Rate
0.10
0.10
0.12
0.12
0.12

Effective
(market) Rate
0.12
0.12
0.10
0.10
0.10

n = 10
i = 12%
Gc
Li

2,000,000
2,000,000 x 5%

0.32197
5.65022

643,940
1,130,044
1,773,984

n = 10*2 =20
i = 12%/2 = 6%
Gc
Li

2,000,000
2,000,000 x 5%

0.31180
11.46992

623,600
1,146,992
1,770,592

n = 10*2 =20
i = 10%/2 = 5%
Gc
Li

2,000,000
2,000,000 x 6%

0.37689
12.46221

753,780
1,495,465
2,249,245

n = 20*2 =40
i = 10%/2 = 5%
Gc
Li

2,000,000
2,000,000 x 6%

0.14205
17.15909

284,100
2,059,091
2,343,191

Market interest rate = Stated rate ==> Bonds price = face value

2,000,000

E 14 - 7:
1. Determine the price of the bonds at January 1, 2003
n = 10*2 =20
i = 12%/2 = 6%
Gc
640,000,000
640,000,000 x
Li
5%

0.31180

199,552,000

11.46992

367,037,440
566,589,440

2/ Req.2
Bonds payable
Less: discount
Initial balance, January 1,2006
Amortization of discount,June 30
Amortization of discount,December 31
Net liability

640,000,000
73,410,560
566,589,440
1,995,36
6
2,115,088
570,699,894

3/ Req.3
Interest expense, June 30
Interest expense, December 31
Interest expense 2006
4/ Req.4
Cash inflow from financing activities
Cash outflow from operating activities

33,995,366
34,115,088
68,110,454
566,589,440
64,000,000

14.9
1. Determine the price of the bonds at January 1, 2006
n = 15*2 =30
i = 12%/2 = 6%
Gc
300,000,000
Li
300,000,000 x 5%

0.17411
13.76483

52,233,000
206,472,450
258,705,450

2. Prepare the journal entry on January 1, 2006

Cash
258,705,450
Discount on bonds
41,294,550
Bonds payable
300,000,000
3. Prepare the journal entry to record interest on June 30, 2006
Interest expense
16,376,486
1,376,48
Discount on bonds
6
Cash
15,000,000
4. Prepare the journal entry to record interest on December 31, 2006
Interest expense
16,376,486
Discount on bonds payable
1,376,486
Cash
15,000,000

E 14-12
1/

Interest
Principle
The price of bonds

(250,000 x 4.5%) x 6.46321

25,000
x 0.67684

72,711
169,210
241,921

2/ 01/01/2006
Cash
241,921
Discount on bonds
8,079
Bonds payable
250,000
3/
Period
Cash interest Effective interest Amortization of discount Outstanding balance
241,921
1
11,250
12,096
846
242,767
2
11,250
12,138
888
243,656
3
11,250
12,183
933
244,588
4
11,250
12,229
979
245,568
5
11,250
12,278
1,028
246,596
6
11,250
12,330
1,080
247,676
7
11,250
12,384
1,134
248,810
8
11,250
12,440
1,190
250,000
4/ June 30, 2006
Interest expense

12,096
Discount on bonds payable
Cash

5/ Dec 31, 2008

Interest expense

846
11,250

12,440
Discount on bonds payable
Cash

Bonds payable

1,190
11,250
250,000

Cash

250,000

Exercise 14-18
Bonds payable (face amount)....................................................................
Loss on early extinguishment (to balance)...............................................
Discount on bonds (given)...................................................................
Cash (180,000,000 x 102%)................................................................

180,000,000
9,600,000
6,000,000
183,600,000

Exercise 14-17
Requirement 1
Greek (Issuer)
Cash (101% x 6 million)...............................................
Convertible bonds payable (face amount)...............
Premium on bonds payable (difference).................
Centrak (Investor)
Investment in convertible bonds (10% x $6 million)...
Premium on bond investment (difference)....................
Cash (101% x $0.6 million).......................................
Requirement 2
Greek (Issuer)
Interest expense ($270,000 - $3,000)................................
Premium on bonds payable ($60,000 20).................
Cash (4.5% x $6,000,000).........................................
Central (Investor)
Cash (4.5% x $600,000)...............................................
Premium on bond investment ($12,000 20).........
Interest revenue ($27,000 - $300).................................

6,060,000
6,000,000
60,000

600,000
6,000
606,000

267,000
3000
270,000

27,000
300
26,700

[Using the straight-line method, each interest entry is the same.]

Requirement 3

Greek (Issuer)
Convertible bonds payable (10% of the account balance)
Premium on bonds payable
(($60,000 - [$3,000 x 11]) x 10%).............................
Common stock ([600 x 40 shares] x $1 par)...............
Paid-in capital excess of par (to balance).............
Central (Investor)
Investment in common stock ........................................
Investment in convertible bonds...............................
Premium on bond investment ($6,000 - [$300 x 11])

600,000
2,700
24,000
578,700

602,700
600,000
2,700

Exercise 14-20
Requirement 1
($ in millions)

Lake (Issuer)
Cash (104% x $30 million)......................................................
Discount on bonds payable (difference)................................
Bonds payable (face amount).............................................
Paid-in capital stock warrants outstanding
($8 x 20 warrants x [$30,000,000 $1,000] bonds)...............

31.2
3.6
30.0
4.8

Elgin (Investor)
Investment in stock warrants ($4.8 million x 20%)................
Investment in bonds (20% x $30 million)...............................
Discount on bonds (difference).........................................
Cash (104% x $30 million x 20%)........................................

0.96
6.00
0.72
6.24

Requirement 2
($ in millions)

Lake (Issuer)
Cash (20% x 30,000 bonds x 20 warrants x $62).........................
Paid-in capital stock warrants outstanding
($4.8 million x 20%).......................................................
Common stock (20% x 30,000 x 20 shares x $10 par)............
Paid-in capital excess of par (to balance).......................

7.44
0.96
1.20
7.2

Elgin (Investor)

Investment in common stock (to balance)............................

Investment in stock warrants ($4.8 million x 20%)............
Cash (20% x 30,000 x 20 warrants x $62)..............................

8.4
.96
7.44

10