4. June 30, 2011

Interest expense(3.5% x $579,377)20,278 Discount on bonds payable (difference) 2,278 Cash(3% x $600,000) 18,000

December 31, 2011**

Interest expense(3.5% x [$579,377 + 2,278])20,358 Discount on bonds payable (difference) 2,358 Cash(3% x $600,000) 18,000

5. Liability at December 31, 2011

Bonds payable (face amount) $600,000

Less: discount (20,623)

Initial balance, January 1, 2011 $579,377

June 30, 2011 discount amortization 2,278

Dec. 31, 2011 discount amortization 2,358

December 31, 2011 net liability $584,013

6. Interest expense for year ended December 31, 2011

June 30, 2011 interest expense $20,278

Dec. 31, 2011 interest expense 20,358

Interest expense for 2011 $40,636

7. December 31, 2014

Interest expense(3.5% x 597,099)20,901* Discount on bonds payable (difference) 2,901 Cash(3% x $600,000) 18,000

* rounded value from amortization schedule

Bonds payable600,000 Cash 600,000

Exercise 14-10

1. Price of the bonds at January 1, 2011

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, 2011

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 Payment 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, 2011

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, 2014

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 payable500,000 Cash 500,000

Exercise 14-11

1. February 1, 2011

Cash(price given) 731,364 Discount on bonds payable (difference) 68,636 Bonds payable (face amount) 800,000

2. July 31, 2011

Interest expense(5% x $731,364)36,568 Discount on bonds payable (difference) 568 Cash(4.5% x $800,000) 36,000

3. December 31, 2011

Interest expense(⁵/₆x 5% x [$731,364 + 568]) 30,497 Discount on bonds payable (difference) 497 Interest payable(⁵/₆x 4.5% x $800,000) 30,000

4. January 31, 2012

Interest expense(¹/₆x 5% x [$731,364 + 568]) 6,100* Interest payable(from adjusting entry) 30,000 Discount on bonds payable (difference) 100 Cash (4.5% x $800,000) 36,000

* rounded

Exercise 14-12

1. March 1, 2011

Cash(price given) 294,000 Discount on bonds payable (difference) 6,000 Bonds payable (face amount) 300,000

2. August 31, 2011

Interest expense($21,000 + 150)21,150 Discount on bonds payable ($6,000 ÷ 40) 150 Cash(7% x $300,000) 21,000

3. December 31, 2011

Interest expense(⁴/₆x $21,150) 14,100 Discount on bonds payable (⁴/₆x $150) 100 Interest payable(⁴/₆x $21,000) 14,000

4. February 28, 2012

Interest expense(²/₆x $21,150) 7,050 Interest payable(⁴/₆x $21,000) 14,000 Discount on bonds payable (²/₆x $150) 50 Cash (7% x $300,000) 21,000

Exercise 14-13

1. January 1, 2011

Cash(price given) 739,814,813 Discount on bonds (difference) 60,185,187 Bonds payable (face amount) 800,000,000

2. June 30, 2011

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

3. December 31, 2011

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

4. December 31, 2011

Federal will report the bonds among its liabilities in the December 31, 2011, balance sheet at $740,615,924:

Balance Jan. 1 $739,814,813

June 30 increase 388,889

Dec. 31 increase 412,222

$740,615,924

Exercise 14-14

1. National Equipment Transfer Corporation

Cash(priced at par) 200,000,000 Bonds payable (face amount) 200,000,000

IgWig

Cash(99% x $350 million) 346,500,000 Discount on notes (difference) 3,500,000 Notes payable (face amount) 350,000,000

2. National Equipment Transfer Corporation

Interest expense7,460,000 Cash([7.46% ÷ 2] x $200 million) 7,460,000

IgWig

Interest expense([6.56% ÷ 2] x$346,500,000)11,365,200 Discount on notes payable (difference) 60,200 Cash([6.46% ÷ 2] x $350 million) 11,305,000

Exercise 14-15

The 2011 interest expense is overstated by the extra interest recorded in February. Similarly, retained earnings is overstated the same amount because 2010 interest expense was understated when the accrued interest was not recorded.

To correct the error:

Retained earnings 61,000 Interest expense ($73,200 – 12,200*) 61,000

*$73,200 x ¹/₆