FA6e Ch09 SolutionsManual 052219

CHAPTER 9
Reporting and Analyzing Liabilities
Learning Objectives – coverage by question

Mini- Cases
Exercises Problems
Exercises and Projects
LO1 – Identify and account for 18, 19,

38 - 40, 43 51, 59
current operating liabilities. 21, 25, 33
LO2 – Describe and account for

current nonoperating (financial) 20, 21 49
liabilities.
LO3 – Explain and illustrate the

22, 31, 32, 41, 42,
pricing of long-term nonoperating 52 - 58 60, 61
34 - 37 44 - 48, 50
liabilities.
LO4 – Analyze and account for

20, 23, 24,
financial statement effects of
26 - 29, 41, 44 - 50 51 - 58 60, 61
long-term nonoperating
34 - 36
liabilities.
LO5 – Explain how solvency

ratios and debt ratings are
22, 30 60, 61
determined and how they
impact the cost of debt.
©Cambridge Business Publishers, 2020

Solutions Manual, Chapter 9 9-1
QUESTIONS
Q9-1. Current liabilities are obligations that require payment within the coming year or
operating cycle, whichever is longer.
Generally, current liabilities are normally settled with use of existing current
assets or operating cash flows.
Q9-2. If a company fails to take a cash discount that is offered by a supplier, it is
effectively paying a penalty for taking additional time to pay the account
payable. Depending on the size of the discount, this penalty (an implicit
interest rate) can be quite high.
The net-of-discount method records the inventory at the purchase cost less the
discount. If the discount is lost, the extra cost is treated as part of interest
expense for the period. This has two benefits: (1) the lost discount is not
capitalized as part of the cost of inventory, and (2) the lost discount is
highlighted, which is useful information that may be helpful in managing
accounts payable.
Q9-3. An accrual is the recognition of an event in the financial statements even
though no actual transaction has occurred. Accruals can involve both liabilities
(and expenses) and assets (and revenues).
Accruals are vital to the fair presentation of the financial condition of a company
as they impact both the recognition of revenue and the matching of expense.
Q9-4. The coupon rate is the rate specified on the face of the bond. It is used to
compute the amount of cash interest paid to the bond holder. The market rate
is the rate of return expected by investors that purchase the bonds. The market
rate determines the market price of the bond. It incorporates expectations about
the relative riskiness of the borrower and the rate of inflation. In general, there
is an inverse relation between the bond’s market rate and the bond’s market
price.
Q9-5. Bonds sold at face (par) value earn an effective interest rate equal to the bonds’
coupon rate. Bonds are sold at a discount when the effective interest rate is
higher than the coupon rate. Bonds are sold at a premium when the effective
interest rate is lower than the coupon rate.

9-2 Financial Accounting, 6th Edition
Q9-6. Bonds are reported at historical cost, that is, the face amount plus (minus)
unamortized premium (discount). The market price of the bonds varies
inversely with the level of interest rates and fluctuates continuously. Differences
between the market price of a bond and its carrying amount represent
unrealized gains and losses. These unrealized gains (losses) are not reflected
in the financial statements (although they are disclosed in the footnotes). They
must be recognized upon repurchase of the bonds, the point at which they
become “realized.”
If the bonds are refunded (that is, replaced with new bonds reflecting current
market values and interest rates), the gain (or loss) that is recognized in the
current period will be offset by correspondingly higher (lower) interest payments
in the future. The present value of the future interest payments, along with the
present value of the difference between the face amount of the new bond and
the former face amount, exactly offset the reported gain (loss).
Q9-7. Debt ratings reflect the relative riskiness of the borrowing company. This
riskiness relates to the probability of default (e.g., not repaying the principal and
interest when due). Higher (greater quality) debt ratings result in higher market
prices for the bonds and a correspondingly lower effective interest rate for the
issuer. Lower (lesser quality) debt ratings result in lower market prices for the
bonds and a correspondingly higher effective interest rate for the issuer.
Q9-8. Reported gains or losses on bond redemption result from changes in the
market price of the bonds and the use of historical cost accounting. Because
bonds are typically reported at historical cost, fluctuations in bond prices are not
recognized until they are realized when the bonds are redeemed or refunded.
If the bonds are refunded (new bonds are issued), the gain or loss is offset by
the present value of lower (higher) future interest payments on the new bond
issue. (If the liabilities are reported at fair value, the gain or loss is the
difference between the last reported fair value and the sales price (assuming all
the fair value changes were recorded in income – meaning were not due to
instrument-specific credit risk changes.)
Q9-9. (a) Bonds payable – the liability account used to record the face value of
bonds issued by a company
(b) Call provision – the right for the bond issuer to repurchase the debt, before
it matures, at a predetermined price.
(c) Face value – the predetermined amount (typically $1,000) that must be
repaid when a bond matures
(d) Coupon rate – the rate specified on the face of the bond that determines
the periodic interest (coupon) payment
(e) Bond discount – the difference between the face value of the bond and the
market price when the price is lower than the face value; recorded as a
contra-liability

(f) Bond premium – the difference between the market price of a bond and the
face value when the market price is higher than the face value; recorded as
an adjunct-liability
(g) Amortization of premium or discount – the periodic reduction of the balance
in the premium or discount account recorded each time interest expense is
accrued; equal to the difference between the accrued interest and the
coupon payment (or payable)
Q9-10. The advantages of issuing bonds are (1) the interest payments are limited to
the predetermined amount specified on the bond; (2) the interest is tax
deductible; (3) bondholders do not have a vote when it comes to electing
directors and managing the company; (4) the additional financial leverage
created when bonds are issued increases profits in good years. The
disadvantages of bonds include (1) bonds must be repaid while common stock
is issued with an indefinite life; (2) bondholders can impose restrictive
covenants in the loan indenture; (3) the additional financial leverage created
when bonds are issued decreases profits in lean years.
Q9-11. $3,000,000 x [.98 + (.09 x 3/12)] = $3,007,500
Q9-12. The contract rate (or stated rate or coupon rate) determines the periodic
coupon payment. If this rate is not equal to the rate required by the market, the
bond price is adjusted to the present value of the cash payments from the bond
discounted at the applicable market rate of interest. If the market rate is higher
than the coupon rate, then the periodic coupon payments are insufficient and
the bond will be priced lower than the face value (a discount). If the market rate
is lower than the coupon rate, then the periodic coupon payments will be higher
than required by the market, and the bond will sell for a premium.
Q9-13. When the bonds mature, the book value of the bonds will be equal to the face
value. Over the life of the bonds, the change in the book value of the bonds will
be equal to face value less the market value at the time that the bonds are
issued.
Q9-14. When the effective interest method is used to amortize a bond discount or
premium, the effective rate is multiplied by the net balance in bonds payable
(bonds payable plus/minus the premium or discount). If the bond is issued at a
discount, the balance increases over the life of the bond; the interest expense
will increase as the balance increases. If the bond is issued at a premium, the
balance decreases over the life of the bond; the interest expense will decrease
as the balance decreases.

Q9-15. Bonds payable is presented in the balance sheet net of any discount or plus
any premium.
Q9-16. The loss is the difference between the retirement value and the book value of
the bond: (101% x $200,000) – $197,600 = $4,400.
Q9-17. Each payment includes both interest on the outstanding balance and
repayment of the principal. As each payment is made, the principal balance is
reduced. As a consequence, the interest component of the payment is smaller
each period.

MINI EXERCISES
M9-18. (15 minutes)

LO 1
a.
11/15 Inventory (+A) 6,076
Accounts payable (+L) 6,076
11/23 Accounts payable (-L) 6,076

Cash (-A) 6,076
$6,076 = $6,200 x 0.98
b.
+ Inventory (A) - - Accounts Payable (L) +
11/15 6,076 6,076 11/15
11/23 6,076
+ Cash (A) -
6,076 11/23
c. [($6,200 - $6,076)/$6,076] x [365/(30-10)] = 37.25%. (With interest compounding,

the annual rate of interest r can be solved from (1+r) (20/365)=1.02. The value that
solves this relationship is r = 43.5%.)
M9-19. (15 minutes)

LO 1
a.
1/20 Inventory (+A) 12,250
Accounts payable (+L) 12,250
2/15 Accounts payable (-L) 12,250

Interest expense, discounts lost (+E, -SE) 250
Cash (-A) 12,500
$12,250 = $12,500 x 0.98

b.
+ Inventory (A) - - Accounts Payable (L) +
1/20 12,250 12,250 1/20
2/15 12,250
+ Cash (A) - + Interest Expense, Discounts Lost (E) -

12,500 2/15 2/15 250
c. [($12,500- $12,250)/$12,250] x [365/(60-15)] = 16.55%. (With interest

compounding, the annual rate of interest r can be solved from (1+r) (45/365)=1.02. The
value that solves this relationship is r = 17.4%.)
M9-20. (10 minutes)

LO 2
a. Interest expense (+E,-SE)…………………… 24

Interest payable (+L)……………………. 24
$7,200 × 8% × (15/365) = $24
b.
- Interest Payable (L) + + Interest Expense (E) -
24 a. a. 24
c.
Balance Sheet Income Statement
Cash Noncash Liabil- Contrib. Earned Net
Transaction Asset + Assets = ities + Capital + capital Revenues - Expenses = Income
Accrued $24 +24 -24 +24 -24
interest on = Interest Retained - Interest =
note payable Payable Earnings Expense
M9-21. (15 minutes)

LO 1, 2
a. Accounts Payable, $110,000 (current liability).
b. Not recorded as a liability; an accountable transaction has not yet occurred.
c. Estimated liability for product warranty, $2,200 (current liability).
d. Bonuses Payable, $30,000 (current liability)—computed as $600,000  5%. This

liability must be reported since its payment is “probable” and can be “estimated.”

M9-22. (10 minutes)
LO 3, 5
a. Microsoft is offering bonds with a coupon (stated) rate of 3.3%% when the market
rate (yield) is higher (3.383%). In order to obtain this expected rate of return, the
bonds sell at a discount price of 99.31 (99.31% of par).
b. The first bond matures in 2027 while the second matures in 2057. There is,
generally, a higher rate (yield) expected for a longer maturity.
M9-23. (10 minutes)

LO 4
Amount paid to retire bonds ($400,000 x 102%)............................................. $408,000

Book value of retired bonds, net of $3,000 unamortized discount................... 397,000
Loss on bond retirement................................................................................. $ 11,000
M9-24. (10 minutes)

LO 4
a. The $3,546 million of debt that is due in 2018 is already listed as the current portion
of long-term debt in Pfizer’s current liabilities.
b. Pfizer will need to pay off the bonds when they mature. This will result in a cash
outflow that must come from operating activities if the bonds cannot be refinanced
prior to maturity. However, most of Pfizer’s long-term debt matures more than 5
years after the financial statement date (December 31, 2017). Thus, Pfizer’s near-
term cash needs for covering long-term debt should not place a significant burden
on the company’s operations.
M9-25 (10 minutes)

LO 1
a. Gain on Bond Retirement: In the other (nonoperating) income and expenses section of
the income statement.
b. Discount on Bonds Payable: Deduction from Bonds Payable; thus, a (contra) long-term
liability in the balance sheet (e.g., it is netted in the presentation of long-term liabilities).
c. Mortgage Notes Payable: Long-term liability in the balance sheet.
d. Bonds Payable: Long-term liability in the balance sheet.

e. Bond Interest Expense: In other (nonoperating) income and expenses section of the
income statement.
f. Bond Interest Payable: Current liability in the balance sheet.
g. Premium on Bonds Payable: Addition to Bonds Payable; thus, part of a long-term

liability in the balance sheet (e.g., it is included in the presentation of long-term
liabilities).
h. Loss on Bond Retirement: In the other (nonoperating) income and expenses section of
the income statement.
M9-26. (10 minutes)

LO 4
a. Restrictive loan covenants are typically designed to protect the bond holders against
actions by management that they feel would be detrimental to their interests. These
covenants might include restrictions against the impairment of liquidity, restrictions
on the amount of financial leverage the company can employ, and restrictions on the
payment of dividends. In addition, bond holders usually impose various covenants
prohibiting the acquisition of other companies or the divestiture of business
segments without their consent. All of these covenants, by design, restrict
management in its actions.
b. Management, facing imminent violation of one or more of its bond covenants, may
be pressured into taking actions in order to avoid default. These may include, for
example, foregoing profitable investments, reduction of discretionary spending such
as R&D or advertising in order to improve profitability, missing opportunities to take
cash discounts and other methods of “leaning on the trade,” or reduction of
receivables (via early payment incentives) and inventories (by marketing promotions
or delaying restocking) in order to boost cash balances. Actions may also include
questionable accounting measures, such as improper recognition of revenues or
delayed recognition of expenses.
c. When evaluating solvency, analysts should compare a company’s position relative to

its restrictive covenants. A company may appear solvent, but in fact may be in close
proximity to a restrictive covenant. Also, analysts should be aware of the potential
effect that restrictive covenants can have on management decisions (see the answer
to requirement b). Restricted assets, such as cash or securities, should not be
considered as general assets in an analysis of the firm’s liquidity or solvency
because they are not available to management for general corporate uses.

M9-27. (15 minutes)
LO 4
a.
1/1/2013 Cash (+A) ……………………………………..... 432,000
Bonds payable (+L) ………………..…… 400,000
Bond premium (+L) ………………..…… 32,000
1/1/2019 Bonds payable (-L) ………………………..….. 400,000

Bond premium (-L) ……………………..…….. 27,809
Cash (-A) ………………………………..... 412,000
Gain on retirement of bonds (+R, +SE) 15,809
b.
+ Cash (A) - - Bonds Payable (L) +
1/1/13 432,000 400,000 1/1/13
412,000 1/1/19 1/1/19 400,000
- Gain on Retirement of Bonds (R) + - Bond Premium (L) +

15,809 1/1/19 32,000 1/1/13
1/1/19 27,809
c.
Cash Noncash Contrib. Earned Net
Transaction Asset + Assets = Liabilities + Capital + Capital Revenues - Expenses = Income
1/1/13 432,000 = +400,000 - =
Issue bonds Cash Bonds
at a Payable
premium.
+32,000
Bond
Premium
1/1/19 -412,000 = -400,000 +15,809 +15,809 - = +15,809
Retired Cash Bonds Retained Gain on
bonds issued Payable Earnings Retirement
on 1/1/13. of Bonds
-27,809
Bond
Premium

M9-28. (15 minutes)
LO 4
a.
7/1/2012 Cash (+A) ……………………………………. 240,000
Bond discount (+XL, -L) …………….….…. 10,000
Bonds payable (+L) ………………….. 250,000
7/1/2019 Bonds payable (-L) ………………………… 250,000

Loss on retirement of bonds (+E, -SE) … 9,314
Bond discount (-XL, +L) ……….…… 6,814
Cash (-A) ………………………………. 252,500
b.
7/1/12 240,000 250,000 7/1/12
252,500 7/1/19 7/1/19 250,000
+ Loss on Retirement of Bonds (E) - + Bond Discount (XL) -

7/1/19 9,314 7/1/12 10,000
6,814 7/1/19
c.
Cash Noncash Contra Contrib. Earned Net
Transaction Asset + Assets = Liabilities - Liability + Capital + Capital Revenues - Expenses = Income
7/1/12 +240,000 = +250,000 +10,000 - =
Issue bonds
Cash Bonds Bond
at a discount
Payable Discount
7/1/19 Retired -252,500 = -250,000 -6,814 -9,314 - +9,314 = -9,314

bonds issued
Cash Bonds Bond Retained Loss on
on 7/1/12
Payable Discount Earnings retirement
of Bonds
M9-29. (10 minutes)

LO 4
Nissim: $18,000  0.10  40/365 = $197.26

Klein: $14,000  0.09  18/365 = 62.14
Bildersee: $16,000  0.12  12/365 = 63.12
$322.52

M9-30. (10 minutes)
LO 5
a. Unless there has been a decline in the General Mills’ operating liabilities, the Debt-
to-Equity ratio (D/E) will increase. The net effects of financing cash flows are to
increase financial liabilities and decrease shareholders’ equity. (although net income
would then increase equity, but still by an amount less than the increase in debt).
Times interest earned will likely decrease as additional interest cost on new
borrowing is added to the denominator. How much of an effect this will have
depends on the size of the change in net income.
b. Generally, the higher (lower) the firm's solvency measures, the higher (lower) the
firm's debt rating. In financial leverage terms, the higher (lower) the firm's leverage
the lower (higher) the firm's debt rating. Increasing the amount of debt while
decreasing equity may harm General Mills’ debt ratings, though increases in
operating results , could support additional financial liabilities.
M9-31. (15 minutes)

LO 3
a. Selling price of 9% bonds discounted at 8%

Present value of principal repayment ($500,000  0.45639) $228,195
Present value of interest payments ($22,500  13.59033) 305,782
Selling price of bonds $533,977
b. Selling price of 9% bonds discounted at 10%

M9-32. (15 minutes)

LO 3
a. Selling price of zero-coupon bonds discounted at 8%:

b. Selling price of zero coupon bonds discounted at 10%:

c. Based on the debt-to-equity ratio, financial leverage would increase from 2.0 [=($3 -
$1)/$1] to 2.19 [=($3 - $1 + $0.188)/$1)

M9-33. (15 minutes)
LO 1
a.
Month 1 2 3 4
Income statement:
Revenue $420 $420 $420 $420
Cost of goods sold 300 300 300 300
Operating expenses 110 110 110 110
Income $10 $10 $10 $10
Operating cash flows

Receipts $420 $420 $420 $420
Payments to suppliers 300 300 300 300
Payments for operating expenses 110 110 110 110
Net cash flow from operations $10 $10 $10 $10
b.
Month 1 2 3 4
Income statement:
Revenue $420 $420 $420 $420
Cost of goods sold 300 300 300 300
Operating expenses 110 110 110 110
Income $10 $10 $10 $10
Operating cash flows

Receipts $420 $420 $420 $420
Payments to suppliers 0 300 300 300
Payments for operating expenses 110 110 110 110
Net cash flow from operations $310 $10 $10 $10
The CFO’s proposal would increase the cash generated by operations, but only for
one month. Then the cash flows would revert to their original pattern. Therefore,
“leaning on the trade,” (deferring payables) is not likely to produce a steady source
of cash for expansion of the business.

M9-34. (30 minutes)
LO 3, 4

M9-35. (15 minutes)
LO 3, 4
a. Gain on bond retirement Reported in the income statement under other

(nonoperating) income
b. Discount on bonds payable Contra-liability netted against bonds payable
under long-term liabilities in the balance sheet
c. Mortgage notes payable Long-term liability in the balance sheet; the
amount due within one year would be reported as
a current liability
d. Bonds payable Long-term liability in the balance sheet; the
amount due within one year would be reported as
a current liability
e. Bond interest expense Nonoperating expense reported in the income
statement
f. Bond interest payable A current liability in the balance sheet
g. Premium on bonds payable Adjunct-liability added to bonds payable under
long-term liabilities in the balance sheet
M9-36. (15 minutes)

LO 3, 4
a.
12/31/18 Cash (+A) …………………………………….. 700,000
Mortgage note payable (+L) ………….. 700,000
6/30/19 Interest expense (+E, -SE) ……………………. 42,000

Mortgage note payable (-L) …………………… 8,854
Cash (-A) ………………………………….. 50,854
12/31/19 Interest expense (+E, -SE) …………………… 41,469*

Mortgage note payable (-L) ………………….. 9,385
Cash (-A) …………………………………. 50,854
* $41,469 = ($700,000 – $8,854) x 12%/2.

b.
+ Cash (A) - - Mortgage Note Payable (L) +
12/31/18 700,000 700,000 12/31/18
50,854 6/30/19 6/30/19 8,854
50,854 12/31/19 12/31/19 9,385
+ Interest Expense (E) -

6/30/19 42,000
12/31/19 41,469
c.
12/31/18 +700,000 = +700,000 - =
Borrow
Cash Mortgage
$700,000 on
Note
a 15-year
Payable
mortgage
note payable.
6/30/19 -50,854 = -8,854 -42,000 - +42,000 = -42,000
Interest
Cash Mortgage Retained Interest
payment
Note Earnings Expense
on note.
Payable
12/31/19 -50,854 = -9,385 -41,469 - +41,469 = -41,469
Interest
payment
on note.
Payable
M9-37. (5 minutes)
LO 3
$900,000 x 0.55839 + [(900,000 x 10%/2) x 7.36009] = $833,755.
$833,755 / $900,000 = 92.6% of par value.

EXERCISES
E9-38. (15 minutes)

LO 1
a.
Total expected failures from units sold in the current period ............. 1,380*
Average cost per failure.....................................................................  $50
Total expected warranty costs for current period sales...................... $ 69,000
Plus beginning warranty liability......................................................... $ 30,000
Minus warranty services provided..................................................... $ 27,000
Ending warranty liability..................................................................... $ 72,000
*(69,000 x 0.02)
The product warranty liability must be increased by $69,000 to cover the expected
repair costs of products sold during the period, and that amount would be recognized
as expense. With the opening liability balance of $30,000 and warranty services
provided of $27,000, the ending liability balance would be $72,000.
b. The warranty liability should be equal, at all times, to the expected dollar cost of
future repairs. Waymire Company should conduct an analysis similar to an aging of
accounts to determine which products are still under warranty and what the
expected cost will be. That estimate will provide the correct value for the warranty
liability and determines any required adjustments in the period’s warranty expense.
Analysis issues relate to whether the warranty liability exists and, if so, whether it is
at the correct amount. Understating (overstating) the accrual overstates
(understates) current period income at the expense (benefit) of future income.
c. The debt-to-equity ratio will increase and the operating cash flow to liabilities will
decrease. The times-interest earned ratio will decrease, because the increase in
liability causes an increase in warranty expense, which decreases earnings before
interest and taxes.

E9-39. (10 minutes)
LO 1
Item Accounting Treatment

a. Neither record nor disclose (neither probable nor reasonably possible)
b. Record a current liability for the note, no liability for interest until incurred as time
passes.
c. Disclose in a footnote (at least reasonably possible) (Also, if Shevlin is an SEC
registrant and the amount is material, the line item “Commitment and
contingencies” may need to be shown on the face of the balance sheet, with no
associated amounts for that line item.)
d. Record warranty liability on balance sheet and recognize expense in income
statement (costs are probable and reasonably estimable).
E9-40. (15 minutes)

LO 1
The company must accrue the $25,000 of wages that have been earned by employees
even though these wages will not be paid until the first of next month. The required
accounting accrual will:
 Increase wages payable by $25,000 on the balance sheet
 Increase wages expense by $25,000 in the income statement
Failure to make this accounting accrual (called an adjusting entry) would understate
liabilities, understate expenses, overstate income, and overstate stockholders’ equity.
E9-41. (15 minutes)

LO 3, 4
a. Selling price of bonds:

Present value of principal repayment ($300,000  0.30832) $ 92,496
b.
1/1/19 Cash (+A) …………………………………….. 377,814
Bond premium (+L) …………………… 77,814
Bonds payable (+L) ……………...…… 300,000
6/30/19 Interest expense (+E, -SE) ………………… 15,113

Bond premium (-L) ……………...………….. 1,387
Cash (-A) ……………………………….. 16,500
Continued next page

b. continued

Bond premium (-L) …………………………. 1,443
Cash (-A) ……………………………….. 16,500
$15,057 = ($377,814 – $1,387) x 8%/2.
c.
1/1/19 377,814 300,000 1/1/19
16,500 6/30/19
16,500 12/31/19
+ Interest Expense (E) - - Bond Premium (L) +

77,814 1/1/19
6/30/19 15,113 6/30/19 1,387
12/31/19 15,057 12/31/19 1,443
d.
1/1/19 +377,814 = +300,000 - =
Issue bonds
Cash Bonds
at a premium.
Payable
+77,814
Bond
Premium
6/30/19 -16,500 = -1,387 -15,113 - +15,113 = -15,113

Interest
Cash Bond Retained Interest
payment
Premium Earnings Expense
on bonds.
12/31/19 -16,500 = -1,443 -15,057 - +15,057 = -15,057

Interest
payment
Premium Earnings Expense
on bonds.

E9-42. (10 minutes)
LO 3
Selling price of bonds

E9-43. (15minutes)
LO 1
a. Additions to the Warranty provision would be reflected in Warranty expense.
Warranty expense (+E, -SE) ………………………. 1,786

Warranty provision (+L)…………………… 1,786
b. Usage of the warranty provision would reflect Siemens providing warranty services
to its customers. The provision liability would be reduced, as would balances in
cash and perhaps inventory reflecting the resources needed for the warranty work.
Warranty provision (-L) …………………………….. 993

Cash or inventory (-A)……………………. 993
c. It can be useful to report the additions and reversals separately for a couple of
reasons. First, the reversals would reflect past periods’ errors in estimates, while the
additions could reflect the expected cost of providing warranty service for sales
made in the current period. In addition, it may provide insights into whether Siemens
tends to be systematically optimistic or pessimistic in its estimates. The numbers
reported indicate that Siemens tends to overestimate its warranty expenses.
d. 2018: €1,786/€83,044 = 2.15%

2017: €1,820/€82,863 = 2.20%
Warranty expense appears to have increased in 2014 as a percentage of sales

revenue.

E9-44. (15 minutes)
LO 3, 4
a.
5/1/18 Cash (+A) ………………………………………... 500,000
Bonds payable (+L) ………………………. 500,000
10/31/18 Interest expense (+E, -SE) ……………………. 22,5001

Cash (-A) …………………………………... 22,500
11/1/19 Bonds payable (-L) ……………………………... 300,000

Loss on retirement of bonds (+E, -SE) ………. 3,000
Cash (-A) …………………………………… 303,0002
1
$500,000 x 0.09 x 1/2 = $22,500 interest expense. Because the bonds were sold at par, there is no
discount or premium amortization.
2
Cash required to retire $300,000 of bonds at 101 = $300,000 x 1.01 = $303,000. The difference
between the cash paid and the carrying amount of the bonds is the gain or loss on the redemption. In
this case, the loss is $3,000. This calculation assumes that the interest was paid on 10/31/19, so
accrued interest is not recorded.
b.
5/1/18 500,000 500,000 5/1/18
22,500 10/31/18
303,000 11/1/19 11/1/18 300,000
+ Interest Expense (E) - + Loss on Retirement of Bonds (E) -

10/31/18 22,500 11/1/18 3,000
c.
5/1/18 +500,000 = +500,000 - =
Issue bonds.
Cash Bonds
Payable
10/31/18 -22,500 = -22,500 - +22,500 = -22,500

Interest
Cash Retained Interest
payment
Earnings Expense
on bonds.
11/1/19 -303,000 = -300,000 -3,000 - +3,000 = -3,000

Early
Cash Bonds Retained Loss on
retirement
Payable Earnings Retirement
of bonds.
of Bonds

E9-45. (25 minutes)
LO 3, 4
a. Selling price of bonds

b.
1/1/19 Cash (+A) ………………………………………. 220,776
Bond discount (+XL, -L) ……………………… 29,224
Bonds payable (+L) …………………….. 250,000
6/30/16 Interest expense (+E, -SE) …………………… 11,039

Bond Discount (-XL, +L) ………….……. 1,039
Cash (-A) ………………………………….. 10,000
$11,039 = $220,776  0.05
12/31/19 Interest expense (+E, -SE) …………………. 11,091

Bond Discount (-XL, +L) …………….…. 1,091
Cash (-A) ………………………………….. 10,000
$11,091 = [$220,776 + $1,039]  0.05
c.
1/1/19 220,776 250,000 1/1/19
10,000 6/30/19
10,000 12/31/19
+ Interest Expense (E) - + Bond Discount (XL) -

1/1/19 29,224
6/30/19 11,039 1,039 6/30/19
12/31/19 11,091 1,091 12/31/19
d.
1/1/19 +220,776 = +250,000 +29,224 - =
Issue
Cash Bonds Bond
bonds at a
Payable Discount
discount.
6/30/19 -10,000 -1,039 -11,039 +11,039 -11,039
Interest
payment
Discount Earnings Expense
on bonds.
12/31/19 -10,000 = -1,091 -11,091 - +11,091 = -11,091

Interest
payment
on bonds.

E9-46. (25 minutes)
LO 3, 4
a. Selling price of bonds:

b.
1/1/19 Cash (+A) ………………………………………... 879,172
Bond premium (+L) ……………………… 79,172
Bonds payable (+L) ……………………… 800,000
6/30/19 Interest expense (+E,-SE) ……………………. 35,167
Bond premium (-L) …………….……………… 833
Cash (-A) ………………………………….. 36,000
$35,167 = $879,172 x 0.04
12/31/19 Interest expense (+E,-SE) ……………………. 35,134

Bond premium (-L) …………….……………… 866
Cash (-A) ………………………………….. 36,000
$35,134 = ($879,172 - $833) x 0.04
c.
1/1/19 879,172 800,000 1/1/19
36,000 6/30/19
36,000 12/31/19
+ Interest Expense (E) - - Bond Premium (L) +

6/30/19 35,167 79,172 1/1/19
12/31/19 35,134 6/30/19 833
12/31/19 866
d.
1/1/19 +879,172 = +800,000 - =
Issue Cash Bonds
bonds at a Payable
premium. +79,172
Bond
Premium
6/30/19 -36,000 = -833 -35,167 - +35,167 = -35,167

Interest Cash Bond Retained Interest
payment Premium Earnings Expense
on bonds.
12/31/19 -36,000 = -866 -35,134 - +35,134 = -35,134
Interest Cash Bond Retained Interest
payment Premium Earnings Expense
on bonds.

E9-47. (20 minutes)
LO 3, 4
a. There is an inverse relation between interest rates and bond prices (examine the
increasing discount rates as the yield increases in present value tables). Since the
bonds now trade at a premium and assuming that Deere’s credit ratings have not
changed, we can conclude that interest rates have fallen since the bonds were
issued.
b. No, once the bond is initially recorded, neither the coupon rate nor the yield used to
compute interest expense is changed. Bonds are recorded at historical cost (like
most other balance sheet assets and liabilities). As a result, changes in the general
level of interest rates have no effect on interest expense (or the interest payment)
that is reflected in the financial statements.
c. Because the bonds trade at a premium in the market, Deere would be paying more
to retire the bonds than the amount at which they are carried on its balance sheet.
This would result in a loss on the repurchase that would lower current profitability.
d. The face amount of the bonds will be paid at maturity. As a result, the market price
of the bonds must also equal their face amount ($200 million) at that time.
E9-48. (25 minutes)

LO 3 4
a. Selling price of bonds

Present value of principal repayment ($600,000  0.09722) $ 58,332
b.
1/1/19 Cash (+A) …………………………………….. 554,860
Bond discount (+XL, -L) ………………..…… 45,140
Bonds payable (+L) …………………… 600,000
6/30/19 Interest expense (+E, -SE) …………………. 33,292

Bond discount (-XL, +L) ………………. 292
Cash (-A) ………………………………… 33,000
$33,292 = $554,860  .06.

Bond discount (-XL, +L) …………….…. 309
Cash (-A) ………….……………………. 33,000
$33,309 = ($554,860 + $292)  0.06.

c.
1/1/19 554,860 600,000 1/1/19
33,000 6/30/19
33,000 12/31/19

1/1/19 45,140
6/30/19 33,292 292 6/30/19
12/31/19 33,309 309 12/31/19
d. At December 31, 2019 (after the coupon payment recorded in b), the book value of
the bonds would be $554,860 + $292 + $309 = $555,461. The market value would
be $600,000 X 1.01 = $606,000. Thus, a fair value adjustment of $50,539
(=$606,000-$555,461) would be recorded as follows:
12/31/19 Loss due to adjustment of bonds to fair value +E, -SE) 50,539
Fair value adjustment (+L) 50,539
The loss would be reported in net income for the period.
e. Coupon payments ($33,000 X 2) $ 66,000

Discount amortization ($292 + $309) 601
Total interest expense 66,601
Fair value adjustment (loss) 50,539
Total effect on income (deduction) $117,140
E9-49. (10 minutes)

LO 2, 4
Current liabilities:
Bond interest payable $ 25,000
Current maturities of long-term debt:
10% bonds payable due 2019 500,000
Total current liabilities $525,000
Long-term debt:
9% bonds payable due 2020, net of $19,000 discount $581,000
Zero coupon bonds payable due 2021 170,500
8% bonds payable due 2023, including $2,000 premium 102,000
Total long-term debt $853,500

E9-50. (20 minutes)
LO 3, 4
a.
12/31/18 Cash (+A) …………………………………………… 500,000
Mortgage note payable (+L) ………………. 500,000
3/31/19 Interest expense (+E, -SE) ………………………. 10,000

Mortgage note payable (-L) ……………………... 8,278
Cash (-A) ……………………………………… 18,278
6/30/19 Interest expense (+E, -SE) ………………………. 9,834

Mortgage note payable (-L) ……………………... 8,444
Cash (-A) ……………………………………… 18,278
$9,834 = ($500,000 – $8,278) x 8%/4.
b.
12/31/18 500,000 500,000 12/31/18
18,278 3/31/19 3/31/19 8,278
18,278 6/30/19 6/30/19 8,444

3/31/19 10,000
6/30/19 9,834
c.
12/31/18 +500,000 = +500,000 - =
Borrow
Cash Mortgage
$500,000
Note
on a 10-year
Payable
mortgage note
payable.
3/31/19 -18,278 = -8,278 -10,000 - +10,000 = -10,000
Payment
on note.
Payable
6/30/19 -18,278 = -8,444 -9,834 - +9,834 = -9,834
Payment
on note.
Payable

PROBLEMS
P9-51. (20 minutes)

LO 1
a.
Hewlett-Packard Enterprise Company Cisco Systems
- Accrued Warranty Liability (L) + - Accrued Warranty Liability (L) +
475 17 bal. 407 17bal.
265 18 exp. 582 18 exp.
310 630
430 18 bal. 359 18 bal.
Hewlett-Packard incurred $310 million in warranty repair costs and settlements in

2018 while Cisco Systems, Inc. incurred costs of $630 million.
b. HPE’s ratio of warranty expense to sales was 1.40% in 2018 ($265/$19,504) down
slightly from 1.7% in 2017 ($292/$17,597). Cisco’s ratio was 1.59% in 2018
($582/$36,709) and 1.94% ($691/$35,705) in 2017. Cisco’s warranty expense is
slightly higher relative to sales revenue than that of HPE. In general, reasons for the
higher warranty expense-to-sales ratio include: (1) perhaps Cisco products require
more repairs than HPE products or (2) HPE may have a less generous warranty
policy than Cisco, resulting in fewer warranty repairs, even if the quality is the same.
The slight decrease in HPE’s warranty expense as a percent of sales indicates that
either (1) warranty costs have gone down, (2) the company overestimated warranty
costs in the past and needed to record smaller than normal accruals in 2018 to
correct the overestimation; or (3) HPE was building up a “cookie-jar reserve” by
increasing its warranty liability in past years.
P9-52. (20 minutes)

LO 3, 4
a. Cash (+A) ………………………………………….. 518,750

Accrued interest payable (+L) …………… 18,750
Bonds payable (+L) ……………………….. 500,000
$18,750 = $500,000 x .09 x 5/12
b. Interest expense (+E, -SE)………………………. 3,750

Accrued interest payable (-L) ………………….. 18,750
Cash (-A) …………………………………….. 22,500
$22,500 = $500,000 x 9% x 6/12
c. Interest expense (+E, -SE) ……………………… 7,500

Accrued interest payable (+L) …………… 7,500
$7,500 = $500,000 x 9% x 2/12

d. Fair value adjustment (+XL, -L) ……………….. 5,000
Gain from adjustment of bonds to fair value 5,000
(+R, +SE) ……………………………..
e. Interest expense (+E, -SE) ……………………… 15,000

Accrued interest payable (-L) ………………….. 7,500
Cash (-A) …………………………………….. 22,500
f. Bonds payable (-L) ………………………………. 300,000

Loss on retirement of bonds (+E, -SE) ………. 12,000
Cash (-A) …………………………………….. 303,000
Fair value adjustment (-XL, +L) … 9,000*
*($15,000 x 60%) = $9,000
g. If gains/losses on bond revaluations were reported in other comprehensive income

rather than net income, Eskew, Inc.’s December 31, 2018 income statement would
be lower because it would not include the $5,000 gain from part d above. The
$5,000 gain (after accounting for expected taxes) would increase the balance in an
account entitled accumulated other comprehensive income in Eskew, Inc.’s
shareholders’ equity, so shareholders’ equity would be unchanged. (Such
gains/losses would go through the income statement when Eskew, Inc. redeems the
bonds.)
P9-53. (15 minutes)

LO 3, 4
a. CVS reports interest expense of $1.04 billion, plus $8 million in capitalized

interest, giving a total interest cost of $1.048 billion on average debt of $27,266.5
million ([$27,002million + $27,531million]/2) for an average rate of 3.8%. Using
interest paid ($1.07 billion) instead of interest expense yields 3.92%. See the
answer to c below.
b. CVS reports coupon rates of 1.9% to 6.25%. In addition, no rates are reported
for capital leases, mortgage notes, commercial paper, or the floating rate notes. So,
the average rate seems reasonable given the information disclosed in the long-term
debt footnote.
c. Interest paid can differ from interest expense if bonds are sold at a premium or a
discount. It can also differ because of capitalized interest. CVS reported capitalized
interest of $8 million in 2017. Thus, CVS apparently amortized $22 million in net
bond discounts ($1,070 million - $1,040 million - $8 million).

P9-54. (25 minutes)
LO 3, 4
a. 7/1/19 Cash (+A) ……………………………………. 824,000

Accrued interest payable (+L) ……. 24,000
Bonds payable (+L) ………………… 800,000
$24,000 = $800,000 x .09 x 4/12
b. 9/1/19 Interest expense (+E, -SE) ……………..… 12,000

Accrued interest payable (-L) ……………. 24,000
Cash (-A) ……………………………… 36,000
$36,000 = $800,000 x 9%/2
c. 12/31/19 Interest expense (+E, -SE) ………………… 24,000

Accrued interest payable (+L) ……. 24,000
$24,000 = $800,000 x .09 x 4/12
d. 3/1/20 Interest expense (+E) ……………………… 12,000

Accrued interest payable (-L) ……………. 24,000
Cash (-A) ……………………………… 36,000
e. 3/1/20 Bonds payable (-L) ………………………… 200,000

Loss on retirement of bonds (+E, -SE) … 2,000
Cash (-A) …………………………….. 202,000

a. 824,000 36,000 b. 800,000 a.
36,000 d.
202,000 e. e. 200,000
+ Interest Expense (E) - - Accrued Interest Payable (L) +

b. 12,000 b. 24,000 24,000 a.
c. 24,000 d. 24,000 24,000 c.
d. 12,000
+ Loss on Retirement of Bonds (E) -
e. 2,000
continued next page

e. continued

a. 7/1/19 +824,000 = +800,000 - =
Issue Cash Bonds
bonds. Payable
+24,000
Interest
Payable
b. 9/1/19 -36,000 = -24,000 -12,000 - +12,000 = -12,000
Interest Cash Interest Retained Interest
payment Payable Earnings Expense
on bonds.
c. 12/31/9 = +24,000 -24,000 - +24,000 = -24,000
Accrued Interest Retained Interest
interest Payable Earnings Expense
on bonds.
d. 3/1/20 -36,000 = -24,000 -12,000 - +12,000 = -12,000
Interest Cash Interest Retained Interest
payment Payable Earnings Expense
on bonds.
e. 3/1/120 -202,000 = -200,000 -2,000 - +2,000 = -2,000
Early Cash Bonds Retained Loss on
retirement Payable Earnings Retirement
of bonds. of bonds
P9-55. (20 minutes)

LO 3, 4
a.
Interest Cash Interest Discount Discount Bond Payable
Period Expense Paid Amortization Balance Net
0 $41,292 $678,708
1 $40,722 $39,600 $1,122 $40,170 $679,830
2 $40,790 $39,600 $1,190 $38,980 $681,020
$40,722 = $678,708 x 12%/2
$40,790 = $679,830 x 12%/2
b.
12/31/18 Cash (+A) ………………………………….. 678,708
Bond discount (+XL) ……………………. 41,292
Bonds payable (+L) ……………….. 720,000
6/30/19 Interest expense (+E,-SE) ………………. 40,722

Bond discount (-XL) ……………….. 1,122
Cash (-A) …………………………….. 39,600
12/31/19 Interest expense (+E,-SE) ………………. 40,790

Bond discount (-XL) ……………….. 1,190
Cash (-A) …………………………….. 39,600

c.
12/31/18 678,708 720,000 12/31/18
39,600 6/30/19
39,600 12/31/19

12/31/18 41,292
6/30/19 40,722 1,122 6/30/19
12/31/19 40,790 1,190 12/31/19
d.
Cash Noncash Contra Contrib. Retained Net
Transaction Asset + Assets = Liabilities - Liability + Capital + Earnings Revenues - Expenses = Income
12/31/18 +678,708 = +720,000 +41,292 - =
Issue bonds
Cash Bonds Bond
at a discount.
Payable Discount
6/30/19 -39,600 = -1,122 -40,722 - +40,722 = -40,722
Interest
payment
on bonds.
12/31/19 -39,600 = -1,190 -40,790 - +40,790 = -40,790

Interest
Cash Bonds Retained Interest
payment
on bonds.
P9-56. (20 minutes)

LO 3, 4
a.
Interest Cash Discount Discount Bond Payable
Period Expense Interest Paid Amortization Balance Net
0 $43,230 $206,770
1 $8,271 $7,500 $771 $42,459 $207,541
2 $8,302 $7,500 $802 $41,657 $208,343
$8,271= $206,770 x 8%/2
$8,302 = $207,541 x 8%/2
b.
4/30/19 Cash (+A) …………………….……….………..…… 206,770
Bond discount (+XL, -L) …………………………. 43,230
Bonds payable (+L) …….…………………… 250,000
10/31/19 Interest expense (+E, -SE) ………………..….….. 8,271

Bond discount (-XL, +L) ……………………. 771
Cash(-A) ……………………………………….. 7,500
continued next page

b. continued
12/31/19 Interest expense (+E, -SE) ………………..….….. 2,767*

Accrued interest payable (+L) …………….. 2,500
4/30/20 Interest expense (+E, -SE) …………………...….. 5,535**

Accrued interest payable (-L) ………..….………. 2,500
Cash(-A) ……………………………………….. 7,500
Within each six-month period, interest is apportioned to individual months on a straight-line basis:
*$2,767 = ($8,302 x 2/6)
**$5,535 = ($8,302 x 4/6)
c.
4/30/19 206,770 250,000 4/30/19
7,500 10/31/19
7,500 4/30/20

4/30/19 43,230
10/31/19 8,271 771 10/31/18
12/31/19 2,767 267 12/31/18
4/30/20 5,535 535 4/30/20
- Accrued Interest Payable (L) +

2,500 12/31/19
4/30/20 2,500
d.
4/30/19 +206,770 = +250,000 +43,230 - =
Issue bonds
Cash Bonds Bond
at a discount.
Payable Discount
10/31/19 -7,500 = -771 -8,271 - +8,271 = -8,271

Interest
payment
on bonds.
12/31/19 = +2,500 -267 -2,767 - +2,767 = -2,767
Accrued
Accrued Bond Retained Interest
interest
Interest Discount Earnings Expense
on bonds.
Payable
4/30/20 -7,500 = -2,500 -535 -5,535 - +5,535 = -5,535

Interest
Cash Accrued Bond Retained Interest
payment
Interest Discount Earnings Expense
on bonds.
Payable

P9-57. (20 minutes)
LO 3, 4
a. Payment x 12.46221 = $500,000; Payment = $500,000/12.46221 = $40,121.
b.
12/31/18 Cash (+A) ………………………………………..…… 500,000
Mortgage note payable (+L) ………………… 500,000
6/30/19 Interest expense (+E, -SE) ………………………… 25,000

Mortgage note payable (-L) ………………………. 15,121
Cash (-A) …………………………………..…… 40,121
$25,000 = $500,000 x 10%/2
12/31/19 Interest expense (+E, -SE) ……………………….… 24,244

Mortgage note payable (-L) ……………………….. 15,877
Cash (-A) …………………………………..…… 40,121
$24,244 = ($500,000 – $15,121) x 10%/2
c.
12/31/18 500,000 500,000 12/31/18
40,121 6/30/19 6/30/19 15,121
40,121 12/31/19 12/31/19 15,877
6/30/18 25,000
12/31/18 24,244
d.
12/31/18 +500,000 = +500,000 - =
Borrow
Cash Mortgage
$500,000
Note
on a 10-year
Payable
mortgage note
payable.
6/30/19 -40,121 = -15,121 -25,000 - +25,000 = -25,000

Interest
payment
on note.
Payable
12/31/19 -40,121 = -15,877 -24,244 - +24,244 = -24,244

Interest
payment
on note.
Payable

P9-58. (20 minutes)
LO 3, 4
a. Payment x 16.35143 = $950,000; Payment = $950,000/16.35143 = $58,099.
b.
12/31/18 Cash (+A) ………………………………………..…… 950,000
Mortgage note payable (+L) ………………… 950,000
3/31/19 Interest expense (+E, -SE) ………………………… 19,000*

Cash (-A) …………………………………..…… 58,099
* $19,000 = $950,000 x 8%/4
6/30/19 Interest expense (+E, -SE) ………………………… 18,218*

Cash (-A) …………………………………..…… 58,099
* $18,218 = ($950,000 – $39,099) x 8%/4.
c.
12/31/18 950,000 950,000 12/31/18
58,099 3/31/19 3/31/19 39,099
58,099 6/30/19 6/30/19 39,881
3/31/19 19,000
6/30/19 18,218
d.
12/31/18 +950,000 = +950,000 - =
Borrow
Cash Mortgage
$950,000
Note
on a 5-year
Payable
mortgage note
payable.
3/31/19 -58,099 = -39,099 -19,000 - +19,000 = -19,000
Payment
on note.
Payable
6/30/19 -58,099 = -39,881 -18,218 - +18,218 = -18,218

Payment
on note.
Payable

P9-59. (10 minutes)
LO 1
a. BP recorded the $9.2 billion estimate as an expense on its 2010 income

statement. This increased the company’s liabilities.
b. If BP had prepared its financial statements in accordance with U.S. GAAP, the
accrual would most likely have been at the low end of the range -- $6 million,
instead of the expected amount (best reliable estimate), or mid-point in the
range.

CASES and PROJECTS
C9-60. (30 minutes)

LO 3, 4, 5
a. The difference between interest expense and interest paid can be caused by three
factors: (1) interest capitalized as part of self-constructed assets is paid but not part
of interest expense (a detailed discussion is beyond the scope of this text); (2)
coupon payments differ from interest expense charged on bonds due to amortization
of discounts or premiums; (3) interest payments may not coincide with the fiscal
period, thus requiring the company to record accrued interest payable.
b. In 2017, Comcast’s debt had a fair value of $71.7 billion while its historical cost was
$64.6 billion. Thus, Comcast would report a fair value adjustment as a credit in its
balance sheet of $7.1 billion ($71.7 - $64.6). In 2016, the fair value was $66.3 billion
and the historical cost was $61.0 billion yielding a credit balance in the fair value
adjustment account of $5.3 billion ($66.3 - $61.0). The change in the fair value
adjustment from 2016 to 2017 ($1.8 = $7.1 – $5.3) would be recorded as follows:
12/31/17 Loss due to adjustment of bonds to fair value (+E, -SE) 1.8
Fair value adjustment (+L) 1.8
c. Debt-to-equity: $117,500 million/$69,449 million = 1.69
Times interest earned: ($15,322 million + $3,086 million)/$3,086 million = 5.97
Creditors are naturally concerned about the risk of default. The debt-to-equity ratio
measures the extent to which a company is relying on debt financing and the higher
the ratio, the greater chance of default. In addition, the times interest earned ratio
measures the company’s ability to pay the interest on the debt.
d. Management may bypass profitable investment projects or cut discretionary

expenditures such as R&D or advertising. It may also engage in questionable
accounting practices in an attempt to manage the ratios.
e. Note16 for Comcast discusses various contractual commitments – payment

schedules for future cash outflows as a result of their contractual agreements. These
are not recorded liabilities on the balance sheet, however. (We discuss these more
in Chapter 10). Comcast also discusses various contingent liabilities that it may
have, often as a result of litigation.

C9-61. (20 minutes)
LO 3, 4, 5
a. The gain results from the difference between the book value of the debt
($3,000,000) and the current redemption (market) value ($2,200,000). The gain
would be reported in the income statement under other (nonoperating) income. The
source of the gain should be adequately disclosed in the notes.
b. Currently, Foster is paying 4% interest on the $3,000,000 of long-term debt, or

$120,000 per year. Under the proposed refinancing, Foster would pay 8%, or
$240,000. The refinancing would generate an additional $800,000 in cash.
However, because interest costs are increasing by $120,000 per year ($240,000 -
$120,000), Foster is effectively borrowing the additional $800,000 at a rate of almost
15% ($120,000 / $800,000). As such, Foster would be paying in the future (in the
form of higher interest costs) for a one-time boost in current earnings.
c. The potential ethical conflict exists because Foster’s president is concerned that his
job might be dependent on producing short-term earnings. Because of this, he
might be tempted to accept this proposal and boost current earnings at the cost of
lower earnings in future years. This thinking is misguided because, given adequate
disclosure, analysts and investors would be able to identify and discount the source
of the earnings boost. The most serious unethical act would be to try to hide (or
obfuscate) the bond refinancing with inadequate disclosure.


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CHAPTER 9

Reporting and Analyzing Liabilities

Learning Objectives – coverage by question

LO1 – Identify and account for 18, 19,

LO2 – Describe and account for

LO3 – Explain and illustrate the

LO4 – Analyze and account for

LO5 – Explain how solvency

©Cambridge Business Publishers, 2020

©Cambridge Business Publishers, 2020

©Cambridge Business Publishers, 2020

©Cambridge Business Publishers, 2020

©Cambridge Business Publishers, 2020

M9-18. (15 minutes)

11/23 Accounts payable (-L) 6,076

$6,076 = $6,200 x 0.98

c. [($6,200 - $6,076)/$6,076] x [365/(30-10)] = 37.25%. (With interest compounding,

M9-19. (15 minutes)

2/15 Accounts payable (-L) 12,250

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+ Cash (A) - + Interest Expense, Discounts Lost (E) -

c. [($12,500- $12,250)/$12,250] x [365/(60-15)] = 16.55%. (With interest

M9-20. (10 minutes)

a. Interest expense (+E,-SE)…………………… 24

M9-21. (15 minutes)

a. Accounts Payable, $110,000 (current liability).

b. Not recorded as a liability; an accountable transaction has not yet occurred.

c. Estimated liability for product warranty, $2,200 (current liability).

d. Bonuses Payable, $30,000 (current liability)—computed as $600,000  5%. This

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M9-23. (10 minutes)

Amount paid to retire bonds ($400,000 x 102%)............................................. $408,000

M9-24. (10 minutes)

M9-25 (10 minutes)

c. Mortgage Notes Payable: Long-term liability in the balance sheet.

d. Bonds Payable: Long-term liability in the balance sheet.

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f. Bond Interest Payable: Current liability in the balance sheet.

g. Premium on Bonds Payable: Addition to Bonds Payable; thus, part of a long-term

M9-26. (10 minutes)

c. When evaluating solvency, analysts should compare a company’s position relative to

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1/1/2019 Bonds payable (-L) ………………………..….. 400,000

- Gain on Retirement of Bonds (R) + - Bond Premium (L) +

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7/1/2019 Bonds payable (-L) ………………………… 250,000

+ Loss on Retirement of Bonds (E) - + Bond Discount (XL) -

7/1/19 Retired -252,500 = -250,000 -6,814 -9,314 - +9,314 = -9,314

M9-29. (10 minutes)

Nissim: $18,000  0.10  40/365 = $197.26

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M9-31. (15 minutes)

a. Selling price of 9% bonds discounted at 8%

b. Selling price of 9% bonds discounted at 10%

M9-32. (15 minutes)

a. Selling price of zero-coupon bonds discounted at 8%:

b. Selling price of zero coupon bonds discounted at 10%:

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Operating cash flows

Operating cash flows

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©Cambridge Business Publishers, 2020

a. Gain on bond retirement Reported in the income statement under other