1. Interest expense for year ended December 31, 2011

Dec. 31, 2011, interest expense (calculated below ¹ ) $4,422

2. Liabilities at December 31, 2011

Bonds payable (face amount) $500,000

Less: discount ² (57,785)

Initial balance, November 1, 2011 $442,215

Dec. 31, 2011 discount amortization ³ 255

Balance, December 31, 2011 $442,470

Interest payable ⁴ $4,167

3. Interest expense for year ended December 31, 2012

April 30, 2012 interest expense ⁵ $ 8,844

Oct. 31, 2012 interest expense ⁶ 13,289

Dec. 31, 2012 interest expense ⁷ 4,438

Interest expense for 2012 $26,571

Or, using the amortization schedule below: $13,266 x ⁴/₆ + 13,289 + 13,313 x ²/₆ = $26,571

4. Liabilities at December 31, 2012

Balance, December 31, 2011 (from req. 2 above) $442,470

April 30, 2012 discount amortization ⁸ 511

Oct. 31, 2012 discount amortization ⁹ 789

Dec. 31, 2012 discount amortization ¹⁰ 271

Balance, December 31, 2012 $444,041

Interest payable ¹¹ $4,167

Problem 14-8 (concluded)

Calculations:

November 1, 2011

Cash(price: given) 442,215 Discount on bonds (difference) 57,785 ² Bonds payable (face amount) 500,000

Partial amortization schedule (not required)

Cash Increase in Outstanding

Payment Effective Interest Balance Balance

442,215

1 12,500 .03 (442,215) = 13,266 766 442,981

2 12,500 .03 (442,981) = 13,289 789 443,770

3 12,500 .03 (443,770) = 13,313 813 444,583

December 31, 2011

Interest expense(3% x $442,215 x ²/₆)4,422¹ Discount on bonds payable (difference) 255 ³ Interest payable(2.5% x $500,000 x²/₆) 4,167 ⁴

April 30, 2012

Interest expense(3% x $442,215 x ⁴/₆)8,844 ⁵ Interest payable(from adjusting entry above) 4,167

Discount on bonds payable (difference) 511 ⁸

Cash (stated rate x face amount) 12,500

October 31, 2012

Interest expense(3% x [$442,215 + 255 + 511])13,289 ⁶Discount on bonds payable(difference)789 ⁹ Cash (stated rate x face amount) 12,500

December 31, 2012

Interest expense(3% x [$442,215 + 255 + 511 + 789]x ²/₆)4,438 ⁷ Discount on bonds payable (difference) 271 ¹⁰ Interest payable(2.5% x $500,000 x 2/6) 4,167 ¹¹

Problem 14-9

Requirement 1

Cash(price given) 5,795,518 Discount on bonds payable (difference) 12,204,482 Bonds payable (face amount) 18,000,000

Requirement 2

The discount rate that “equates” the present value of the debt ($5,795,518) and its future value ($18,000,000) is the effective rate of interest:

$5,795,518 ÷ $18,000,000 = .32197 – the Table 2 value for n= 10,i=?

In row 10 of Table 2, the value .32197 is in the 12% column. So, this is the effective interest rate. A financial calculator will produce the same rate.

Requirement 3

Interest expense(12% x $5,795,518)695,462 Discount on bonds payable 695,462

Requirement 4

Interest expense(12% x [$5,795,518 + $695,462])778,918 Discount on bonds payable 778,918

Requirement 5

Bonds payable 18,000,000 Cash 18,000,000

Problem 14-10

Requirement 1

Land 600,000 Notes payable (face amount) 600,000

Interest expense(12% x $600,000) 72,000 Cash(12% x $600,000) 72,000

Requirement 2

Office equipment(price given) 94,643 Discount on notes payable (difference) 5,357 Notes payable (face amount) 100,000

The discount rate that “equates” the present value of the debt ($94,643) and its future value ($100,000 + $6,000) is the effective rate of interest:

$94,643 ÷ $106,000 = .8929 – the Table 2 value for n= 1,i=?

In row 1 of Table 2, the value .8929 is in the 12% column. So, this is the effective interest rate. A financial calculator will produce the same rate.

Proof:

Interest $6,000^¥ x 0.89286 ^* = $ 5,357 Principal $100,000 x 0.89286 ^** = 89,286 Present value (price) of the note $94,643

^¥ 6% x $100,000

^* present value of an ordinary annuity of $1: n=1, i=12% (Table 4)

^** present value of $1: n=1, i=12% (Table 2)

Interest expense(12% x $94,643) 11,357 Discount on note payable (determined above) 5,357 Cash(6% x $100,000) 6,000

Problem 14-10 (concluded)

Not required, but recorded at the same date (may be combined with interest entry):

Note payable (face amount) 100,000 Cash 100,000

Requirement 3

$1,000,000 x 2.40183 = $2,401,830

installment (from Table 4) present payments n=3, i=12% value

Building(implicit price) 2,401,830 Note payable (present value determined above) 2,401,830

Interest expense(12% x $2,401,830) 288,220 Note payable (difference) 711,780 Cash(given) 1,000,000

Problem 14-11

Requirement 1

Interest $ 6,000 x 3.79079 ^* = $ 22,745 Principal $150,000 x 0.62092 ^** = 93,138 Present value (price) of the note $115,883

^* present value of an ordinary annuity of $1: n=5, i=10% (Table 4)

^** present value of $1: n=5, i=10% (Table 2)

Equipment(fair value ) 115,883 Discount on notes payable (difference) 34,117 Note payable (face amount) 150,000

Requirement 2

December 31, 2011

Interest expense(10% x $115,883) 11,588 Discount on notes payable (difference) 5,588 Cash(given) 6,000

Requirement 3

December 31, 2012

Interest expense(10% x [$115,883 + 5,588]) 12,147 Discount on notes payable (difference) 6,147 Cash(given) 6,000

Problem 14-12

Requirement 1

$6,074,700 ÷ $2,000,000 = 3.03735

present installment present value value payment table amount

This is the Table 4 value for n = 4, i = ? In row 4 of Table 4, the number 3.03735 is in the 12% column. So, 12% is the implicit interest rate.

Requirement 2

Machine (fair value) 6,074,700 Notes payable (present value) 6,074,700

Requirement 3

Interest expense(12% x outstanding balance) 728,964 Notes payable (difference) 1,271,036 Cash(given) 2,000,000

Requirement 4

Interest expense(12% x [$6,074,700 – 1,271,036]) 576,440 Note payable (difference) 1,423,560 Cash(given) 2,000,000

Requirement 5

$2,000,000 x 3.10245 = $6,204,900 installment (from Table 4) present payment n=4, i=11% value

Machine 6,204,900 Notes payable 6,204,900

Problem 14-13

Requirement 1

Interest $5,000^¥ x 3.16987 ^* = $15,849 Principal $100,000 x 0.68301 ^** = 68,301 Present value (price) of the note $84,150

^¥ 5% x $100,000

^* present value of an ordinary annuity of $1: n=4, i=10% (Table 4)

^** present value of $1: n=4, i=10% (Table 2)

Equipment(price determined above) 84,150 Discount on notes payable (difference) 15,850 Notes payable (face amount) 100,000

Requirement 2

Cash Effective Increase in Outstanding Dec.31 Payment Interest Balance Balance

84,150

2011 5,000 .10 (84,150) = 8,415 3,415 87,565

2012 5,000 .10 (87,565) = 8,757 3,757 91,322

2013 5,000 .10 (91,322) = 9,132 4,132 95,454

2014 5,000 .10 (95,454) = 9,546* 4,546 100,000

20,000 35,850 15,850

* rounded

Requirement 3

Interest expense(market rate x outstanding balance) 9,132 Discount on notes payable (difference) 4,132 Cash(stated rate x face amount) 5,000

Problem 14-13 (concluded)

Requirement 4

$84,150 ÷ 3.16987 = $26,547

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

Requirement 5

Cash Effective Decrease in Outstanding Dec.31 Payment Interest Balance Balance 10% x Outstanding Balance Balance Reduction

84,150

2011 26,547 .10 (84,150) = 8,415 18,132 66,018

2012 26,547 .10 (66,018) = 6,602 19,945 46,073

2013 26,547 .10 (46,073) = 4,607 21,940 24,133

2014 26,547 .10 (24,133) = 2,414* 24,133 0

106,188 22,038 84,150

* rounded

Requirement 6

Interest expense(market rate x outstanding balance) 4,607 Note payable (difference) 21,940 Cash(payment determined above) 26,547

Problem 14-14

Bonds payable (face amount) 800,000 Loss on early extinguishment (to balance) 13,100 Debt issue costs (⁷/₁₀x $3,000) 2,100 Discount on bonds (⁷/₁₀x [$800,000 – $770,000]) 21,000 Cash(given) 790,000

Problem 14-15

Requirement 1

Interest expense(7% x $19,000,000)1,330,000 Discount on bonds payable (difference) 130,000 Cash(6% x $20,000,000) 1,200,000

Requirement 2

Bonds payable (face amount) 20,000,000 Loss on early extinguishment (to balance) 1,270,000 Discount on bonds payable ($1,000,000 – 130,000) 870,000 Cash(redemption price) 20,400,000

Problem 14-16