University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

281

Pages:

2
Author:

stud_ice13

To solve these exercises, we'll need to approach each one using accounting principles for financing, bonds, leases, and amortization. Let's address a few of the exercises here to illustrate the process: Exercise 10-1: Debt versus Equity Financing (a) Net Income Calculation 1. Option 1: No Expansion o Net income remains $50,000. 2. Option 2: Expand with $80,000 in Debt (8% Interest Rate) o Additional income: $25,000 o Interest expense: $80,000 * 8% = $6,400 o Net income = $50,000 + $25,000 - $6,400 = $68,600 3. Option 3: Expand with $80,000 Equity Financing o Additional income: $25,000 o No interest expense o Net income = $50,000 + $25,000 = $75,000 (b) Return on Equity (ROE) Calculation 1. Option 1: No Expansion o ROE = Net Income / Equity = $50,000 / $200,000 = 25% 2. Option 2: Expand with $80,000 Debt o Total equity remains $200,000 o ROE = $68,600 / $200,000 = 34.3% 3. Option 3: Expand with $80,000 Equity o New equity = $200,000 + $80,000 = $280,000 o ROE = $75,000 / $280,000 = 26.8% Exercise 10-2: Recording Bond Issuance at Par, Interest Payments, and Maturity 1. Issuance of Bonds on January 1, 2021 o Debit Cash $3,400,000 o Credit Bonds Payable $3,400,000 2. First Semiannual Interest Payment on June 30, 2021 o Interest = $3,400,000 * 9% * 1/2 = $153,000 o Debit Interest Expense $153,000 o Credit Cash $153,000 3. Second Semiannual Interest Payment on December 31, 2021 o Same as the first interest payment. 4. Maturity of Bonds on December 31, 2024 o Debit Bonds Payable $3,400,000 o Credit Cash $3,400,000 Exercise 10-3: Bond Interest Payments and Journal Entries for Boston Enterprises 1. Semiannual Interest Payment Calculation o Interest = $3,400,000 * 9% * 1/2 = $153,000 2. Journal Entries o Issuance of Bonds on January 1  Debit Cash $3,400,000  Credit Bonds Payable $3,400,000 o First Interest Payment on June 30  Debit Interest Expense $153,000  Credit Cash $153,000 o Second Interest Payment on December 31  Debit Interest Expense $153,000  Credit Cash $153,000 3. Issuance at Different Prices o At 98 (Discount)  Debit Cash $3,332,000 ($3,400,000 * 98%)  Debit Discount on Bonds Payable $68,000  Credit Bonds Payable $3,400,000 o At 102 (Premium)  Debit Cash $3,468,000 ($3,400,000 * 102%)  Credit Premium on Bonds Payable $68,000  Credit Bonds Payable $3,400,000 Exercise 10-4: Straight-Line Amortization of Bond Discount 1. Amount of the Discount o Discount = $180,000 - $170,862 = $9,138 2. Total Bond Interest Expense o Total cash interest = $180,000 * 8% * 3 years = $43,200 o Total bond interest expense = $43,200 + $9,138 = $52,338 3. Amortization Table o Divide the total discount by the number of interest periods (6 periods for 3 years semiannual). o Amortization per period = $9,138 / 6 = $1,523 o Record interest expense and discount amortization for each period. These exercises involve different approaches depending on the type of financing or bond amortization method used. Let me know if you'd like to focus on another specific exercise or if you need a more detailed explanation for any part.