CHAPTER 10

Liabilities
ASSIGNMENT CLASSIFICATION TABLE

Brief A B
Learning Objectives Questions Exercises Do It! Exercises Problems Problems

* 1. Explain a current liability, 1 1 1A 1B

and identify the major types
of current liabilities.

* 2. Describe the accounting for 2 2 1 1, 2 1A, 2A 1B

notes payable.

* 3. Explain the accounting for 3, 4, 5 3, 4, 12 1 3, 4, 5, 15 1A 1B

other current liabilities.

* 4. Explain why bonds are 6, 7, 8, 5 2 6, 7

issued, and identify the 9, 10,
types of bonds.

* 5. Prepare the entries for the 11, 12, 13 6, 7, 8 3 8, 9, 10, 3A, 4A, 6A, 2B, 3B, 5B,
issuance of bonds and 11, 18, 19 7A, 8A, 9A 6B, 7B,
interest expense. 8B, 9B

*6. Describe the entries when 14 9 4 11, 12 3A, 4A, 2B, 3B, 9B
bonds are redeemed. 10A

7. Describe the accounting for 15 10 5 13 5A 4B

long-term notes payable.

8. Identify the methods for the 16 11, 12 6 14, 15 3A, 4A, 5A 2B, 3B, 4B
presentation and analysis of
non-current liabilities.

*9. Apply the effective-interest 17, 18 13 16, 17 6A, 7A 5B, 6B

method of amortizing bond
discount and bond
premium.

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ASSIGNMENT CLASSIFICATION TABLE (Continued)

Brief A B
Learning Objectives Questions Exercises Do It! Exercises Problems Problems

*10. Apply the straight-line method of 19, 20 14, 15 18, 19 8A, 9A, 10A 7B, 8B, 9B
amortizing bond discount and
bond premium.
*11. Identify types of employee- 21 16, 17 20
related liabilities.
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendices to the
chapter.

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ASSIGNMENT CHARACTERISTICS TABLE
Problem Description Difficulty Time
Number Level Allotted (min.)

1A Prepare current liability entries, adjusting entries, and Moderate 3040

current liabilities section.

2A Journalize and post note transactions; and show Moderate 3040

statement of financial position presentation.

3A Prepare entries to record issuance of bonds, interest Moderate 2030

accrual, and bond redemption.

4A Prepare entries to record issuance of bonds, interest Moderate 1520

accrual, and bond redemption.

5A Prepare installment payments schedule and journal Moderate 2030

entries for a mortgage note payable.

*6A Prepare journal entries to record issuance of bonds, Moderate 3040

payment of interest, and amortization of bond discount
using effective-interest method.

*7A Prepare journal entries to record issuance of bonds, Moderate 3040

payment of interest, and effective-interest amortization,
and statement of financial position presentation.

*8A Prepare entries to record issuance of bonds, interest Simple 3040

accrual, and straight-line amortization for 2 years.

*9A Prepare entries to record issuance of bonds, interest, Simple 3040

and straight-line amortization of bond premium and
discount.

*10A Prepare entries to record interest payments, straight-line Moderate 3040

premium amortization, and redemption of bonds.

1B Prepare current liability entries, adjusting entries, and Moderate 3040

current liabilities section.

2B Prepare entries to record issuance of bonds, interest Moderate 2030

accrual, and bond redemption.

3B Prepare entries to record issuance of bonds, interest Moderate 1520

accrual, and bond redemption.

4B Prepare installment payments schedule and journal Moderate 2030

entries for a mortgage note payable.

*5B Prepare entries to record issuance of bonds, payment Moderate 3040

of interest, and amortization of bond discount using
effective-interest method.

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ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Problem Difficulty Time

Number Description Level Allotted (min.)
*6B Prepare entries to record issuance of bonds, payment of Moderate 3040
interest, and amortization of premium using effective-
interest method.

*7B Prepare entries to record issuance of bonds, interest Simple 3040

accrual, and straight-line amortization for 2 years.

*8B Prepare entries to record issuance of bonds, interest, and Simple 3040
straight-line amortization of bond premium and discount.

*9B Prepare entries to record interest payments, straight-line Moderate 3040

discount amortization, and redemption of bonds.

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 WEYGANDT FINANCIAL ACCOUNTING, IFRS EDITION, 3e
CHAPTER 10
LIABILITIES

Number LO BT Difficulty Time (min.)

BE1 1 C Simple 35
BE2 2 AP Simple 24
BE3 3 AP Simple 24
BE4 3 AP Simple 24
BE5 4 AP Simple 68
BE6 5 AP Simple 46
BE7 5 AP Simple 35
BE8 5 AP Simple 46
BE9 6 AP Simple 35
BE10 7 AP Simple 68
BE11 8 AP Simple 35
BE12 3, 8 AP Simple 35
*BE13 9 AP Simple 46
*BE14 10 AP Simple 46
*BE15 10 AP Simple 46
*BE16 11 AP Simple 35
*BE17 11 AP Simple 35
DI1 2, 3 C Simple 68
DI2 4 C Simple 23
DI3 5 AP Simple 46
DI4 6 AP Simple 35
DI5 7 AP Simple 46
DI6 8 AP Simple 35
EX1 2 AN Moderate 810
EX2 2 AN Simple 68
EX3 3 AP Simple 46
EX4 3 AN Simple 68
EX5 3 AP Simple 68
EX6 4 C Simple 46
EX7 4 AN Simple 46
EX8 5 AP Simple 46
EX9 5 AP Simple 46
EX10 5 AP Simple 68
EX11 5, 6 AP Simple 68
EX12 6 AP Moderate 810
EX13 7 AP Simple 68

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 EX14 8 AP Simple 35

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LIABILITIES (Continued)

Number LO BT Difficulty Time (min.)

EX15 3, 8 AP Simple 42
*EX16 9 AP Moderate 810
*EX17 9 AP Moderate 810
*EX18 5, 10 AP Simple 68
*EX19 5, 10 AP Simple 68
*EX20 11 AP Simple 68
P1A 13 AN Moderate 3040
P2A 2 AN Moderate 3040
P3A 5, 6, 8 AP Moderate 2030
P4A 5, 6, 8 AP Moderate 1520
P5A 7, 8 AP Moderate 2030
*P6A 5, 9 AP Moderate 3040
*P7A 5, 9 AP Moderate 3040
*P8A 5, 10 AP Simple 3040
*P9A 5, 10 AP Simple 3040
*P10A 6, 10 AP Moderate 3040
P1B 13 AN Moderate 3040
P2B 5, 6, 8 AP Moderate 2030
P3B 5, 6, 8 AP Moderate 1520
P4B 7, 8 AP Moderate 2030
*P5B 5, 9 AP Moderate 3040
*P6B 5, 9 AP Moderate 3040
*P7B 5, 10 AP Simple 3040
*P8B 5, 10 AP Simple 3040
*P9B 5, 6, 10 AP Moderate 3040
BYP1 1, 8 AN Simple 510
BYP2 1, 3, 8 AP Simple 1015
BYP3 4 C Simple 1015
*BYP4 5, 6, 10 AN Moderate 1520
BYP5 4 C Simple 1015
BYP6 E Simple 1015

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Correlation Chart between Blooms Taxonomy, Learning Objectives and End-of-Chapter Exercises and
Problems
Learning Objective Knowledge Comprehension Application Analysis Synthesis Evaluation
1. Explain a current liability, and identify Q10-1 P10-1A
the major types of current liabilities. BE10-1 P10-1B

BLOOMS TAXONOMY TABLE

2. Describe the accounting for notes Q10-2 BE10-2 E10-1 P10-1A
payable. DI10-1 E10-2 P10-2A
P10-1B
3. Explain the accounting for other Q10-3 Q10-5 BE10-3 E10-3 E10-4 P10-1B
current liabilities. Q10-4 BE10-4 E10-5 P10-1A
DI10-1 BE10-12 E10-15
4. Explain why bonds are issued, and Q10-10 Q10-6 Q10-9 BE10-5 E10-7
identify the types of bonds. Q10-7 DI10-2 E10-6
Q10-8
5. Prepare the entries for the issuance Q10-11 Q10-12 E10-11 P10-9A
of bonds and interest expense. Q10-13 BE10-6 E10-18 P10-2B
BE10-7 E10-19 P10-3B
BE10-8 P10-3A P10-5B
DI10-3 P10-4A P10-6B
E10-8 P10-6A P10-7B
E10-9 P10-7A P10-8B
E10-10 P10-8A P10-9B
6. Describe the entries when bonds are Q10-14 BE10-9 P10-3A P10-3B
redeemed. DI10-4 P10-4A P10-9B
E10-11 P10-10A
E10-12 P10-2B
7. Describe the accounting for long- Q10-15 DI10-5 P10-4B
term notes payable. BE10-10 E10-13 P10-5A
8. Identify the methods for the Q10-16 BE10-11 P10-3A P10-2B
presentation and analysis of BE10-12 P10-4A P10-3B
non-current liabilities. E10-14 P10-5A P10-4B
E10-15
DI10-6
*9. Apply the effective-interest Q10-17 BE10-13 P10-6A P10-6B
method of amortizing bond Q10-18 E10-16 P10-7A
discount and bond premium. E10-17 P10-5B
*10. Apply the straight-line method of Q10-19 Q10-20 E10-19 P10-7B
amortizing bond discount and BE10-14 P10-8A P10-8B
bond premium. BE10-15 P10-9A P10-9B
E10-18 P10-10A
*11. Identify types of employee-related Q10-21 BE10-16 E10-20
liabilities. BE10-17
Broadening Your Perspective Communication Comparative Analysis Financial Ethics Case
Real-World Focus Reporting
Decision-Making
Across the
Organization
 ANSWERS TO QUESTIONS

1. Brenda is not correct. A current liability is a debt that can reasonably be expected to be paid: (a)
from existing current assets or through the creation of other current liabilities and (2) within one
year or the operating cycle, whichever is longer.

2. In the statement of financial position, Notes Payable of Rs300,000 and Interest Payable of Rs6,750
(Rs300,000 X .09 X 3/12) should be reported as current liabilities. In the income statement, Interest
Expense of Rs6,750 should be reported after other income and expense.

3. (a) Disagree. The company only serves as a collection agent for the taxing authority. It does not
report sales taxes as an expense; it merely forwards the amount paid by the customer to the
government.
(b) The entry to record the proceeds is:
Cash................................................................................................ 7,400
Sales Revenue........................................................................ 7,000
Sales Taxes Payable............................................................... 400

4. (a) The entry when the tickets are sold is:

Cash.......................................................................................... 900,000
Unearned Ticket Revenue................................................. 900,000

(b) The entry after each game is:

Unearned Ticket Revenue......................................................... 180,000
Ticket Revenue.................................................................. 180,000

5. Liquidity refers to the ability of a company to pay its maturing obligations and meet unexpected
needs for cash. Two measures of liquidity are working capital (current assets current liabilities)
and the current ratio (current assets current liabilities).

6. (a) Non-current liabilities are obligations that are expected to be paid after one year. Examples
include bonds, long-term notes, and lease obligations.
(b) Bonds are a form of interest-bearing notes payable used by corporations, universities, and
governmental agencies.

7. (a) The major advantages are:

(1) Shareholder control is not affectedbondholders do not have voting rights, so current
shareholders retain full control of the company.
(2) Tax savings resultin some countries bond interest is deductible for tax purposes;
dividends on stock are not.
(3) Earnings per share may be higheralthough bond interest expense will reduce net income,
earnings per share on ordinary shares will often be higher under bond financing because no
additional shares are issued.
(b) The major disadvantages in using bonds are that interest must be paid on a periodic basis
and the principal (face value) of the bonds must be paid at maturity.

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Questions Chapter 10 (Continued)

8. (a) Secured bonds have specific assets of the issuer pledged as collateral. In contrast, unse-
cured bonds are issued against the general credit of the borrower. These bonds are called
debenture bonds.
(b) Convertible bonds may be converted into ordinary shares at the bondholders option. In contrast,
callable bonds are subject to call and retirement at a stated dollar amount prior to maturity at the
option of the issuer.

9. (a) Face value is the amount of principal due at the maturity date. (Face value is also called par value.)
(b) The contractual interest rate is the rate used to determine the amount of cash interest the
borrower pays and the investor receives. This rate is also called the stated interest rate
because it is the rate stated on the bonds.
(c) A bond indenture is a legal document that sets forth the terms of the bond issue.
(d) A bond certificate is a legal document that indicates the name of the issuer, the face value of the
bonds, and such other data as the contractual interest rate and maturity date of the bonds.

10. The two major obligations incurred by a company when bonds are issued are the interest
payments due on a periodic basis and the principal which must be paid at maturity.

11. Less than. Investors are required to pay more than the face value; therefore, the market interest
rate is less than the contractual rate.

12. R$48,000. R$800,000 X 6% = R$48,000.

13. HK$9,000,000. The balance of the Bonds Payable account plus the unamortized bond discount
(or minus the unamortized bond premium) equals the face value of the bonds.

14. Debits: Bonds Payable (for the carrying value of the bonds).
Credits: Cash (for 97% of the face value) and Gain on Bond Redemption (for the difference
between the cash paid and the bonds carrying value).

15. No, Roy is not right. Each payment by Roy consists of: (1) interest on the unpaid balance of the
loan and (2) a reduction of loan principal. The interest decreases each period while the portion
applied to the loan principal increases each period.

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Questions Chapter 10 (Continued)

*16. The nature and the amount of each non-current liability should be presented in the statement of
financial position or in schedules in the accompanying notes to the statements. The notes
should also indicate the interest rates, maturity dates, conversion privileges, and assets pledged
as collateral.

*17. Ginny is probably indicating that since the borrower has the use of the bond proceeds over the
term of the bonds, the borrowing rate in each period should be the same. The effective-interest
method results in a varying amount of interest expense but a constant rate of interest on the
balance outstanding. Accordingly, it results in a better matching of expenses with revenues than
the straight-line method.

*18. Decrease. Under the effective-interest method the interest charge per period is determined by
multiplying the carrying value of the bonds by the effective-interest rate. When bonds are issued
at a premium, the carrying value decreases over the life of the bonds. As a result, the interest
expense will also decrease over the life of the bonds because it is determined by multiplying the
decreasing carrying value of the bonds at the beginning of the period by the effective-interest rate.

*19. The straight-line method results in the same amortized amount being assigned to Interest
Expense each interest period. This amount is determined by dividing the total bond discount or
premium by the number of interest periods the bonds will be outstanding.

*20. 24,000. Interest expense is the interest to be paid in cash less the premium amortization for the
year. Cash to be paid equals 7% X 400,000 or 28,000. Total premium equals 5% of 400,000
or 20,000. Since this is to be amortized over 5 years (the life of the bonds) in equal amounts,
the amortization amount is 20,000 5 = 4,000. Thus, 28,000 4,000 or 24,000 equals
interest expense for 2017.

*21. The two taxes are withholding taxes and social security taxes.

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 SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 10-1

(a) A note payable due in two years is a non-current liability, not a current
liability.

(b) 30,000 of the mortgage payable is a current maturity of long-term debt.

This amount should be reported as a current liability.

(c) Interest payable is a current liability because it will be paid out of current
assets in the near future.

(d) Accounts payable is a current liability because it will be paid out of

current assets in the near future.

BRIEF EXERCISE 10-2

July 1 Cash................................................................... 60,000

Notes Payable............................................ 60,000

Dec. 31 Interest Expense............................................... 3,000

Interest Payable
(60,000 X 10% X 1/2)............................ 3,000

BRIEF EXERCISE 10-3

Sales tax payable

(1) Sales = 12,100 = (12,826 1.06)
(2) Sales taxes payable = 726 = (12,100 X 6%)

Mar. 16 Cash................................................................... 12,826

Sales Revenue........................................... 12,100
Sales Taxes Payable.................................. 726

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BRIEF EXERCISE 10-4

Cash................................................................................. 720,000
Unearned Ticket Revenue....................................... 720,000
(To record sale of 4,000 season tickets)

Unearned Ticket Revenue.............................................. 72,000

Ticket Revenue........................................................ 72,000
(To record basketball ticket revenues earned)

BRIEF EXERCISE 10-5

Issue Issue Bond
Shares
Income before interest and taxes 900,000 900,000
Interest (2,000,000 X 6%) 0 120,000
Income before income taxes 900,000 780,000
Income tax expense (30%) 270,000 234,000
Net income (a) 630,000 546,000

Outstanding shares (b) 700,000 500,000

Earnings per share (a) (b) 0.90 1.09

Net income is higher if shares is used. However, earnings per share is

lower than earnings per share if bonds are used because of the additional
shares that are outstanding.

BRIEF EXERCISE 10-6

2017
(a) Jan. 1 Cash.................................................. 4,000,000
Bonds Payable
(4,000 X 1,000).................... 4,000,000

(b) Dec. 31 Interest Expense.............................. 320,000

Interest Payable
(4,000,000 X 8%).................. 320,000

2018
(c) Jan. 1 Interest Payable............................... 320,000
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 Cash.......................................... 320,000

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BRIEF EXERCISE 10-7

(a) Jan. 1 Cash (2,000,000 X .97)................... 1,940,000

Bonds Payable......................... 1,940,000

(b) Jan. 1 Cash (2,000,000 X 1.04)................. 2,080,000

Bonds Payable......................... 2,080,000

BRIEF EXERCISE 10-8

1. Jan. 1 Cash (1,000 X 1,000)...................... 1,000,000

Bonds Payable......................... 1,000,000

2. July 1 Cash (900,000 X 1.02).................... 918,000

Bonds Payable......................... 918,000

3. Sept.1 Cash (400,000 X .98)...................... 392,000

Bonds Payable......................... 392,000

BRIEF EXERCISE 10-9

Bonds Payable.......................................................... 940,000

Loss on Bond Redemption
(1,010,000 940,000)......................................... 70,000
Cash (1,000,000 X 101%)................................ 1,010,000

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BRIEF EXERCISE 10-10

(A) (B) (C) (D)

Annual Interest Reduction Principal
Interest Cash Expense of Principal Balance
Period Payment (D) X 10% (A) (B) (D) (C)
Issue Date 800,000
1 130,196 80,000 50,196 749,804

Dec. 31, 2017 Cash...................................................... 800,000

Mortgage Payable........................... 800,000

Dec. 31, 2018 Interest Expense.................................. 80,000

Mortgage Payable................................ 50,196
Cash................................................. 130,196

BRIEF EXERCISE 10-11

Non-current liabilities
Bonds payable, due 2019....................................... CHF500,000
Notes payable, due 2022........................................ 80,000
Lease liability.......................................................... 72,000
Total non-current liabilities............................ CHF652,000

BRIEF EXERCISE 10-12

(a) Working capital = 4,485 2,836 = 1,649
(b) Current ratio = 4,485 2,836 = 1.58:1
(c) Debt to assets = 5,099 8,875 = 57%
(d) Times interest earned = (245 + 113 + 169) 169 = 3.12 times
Working capital and the current ratio measure a companys ability to pay
maturing obligations and meet cash needs. Adidass current assets are
58% larger than the amount of its current liabilities which indicates a
relatively high degree of liquidity.
Debt to assets and times interest earned measure a companys ability to
survive over a long period of time. Adidass debt to assets ratio indicates
that approximately .57 of every dollar invested in assets was provided

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by creditors. Adidass times interest earned ratio of 3.12 indicates that its
earnings are adequate to make interest payments as they come due.
*BRIEF EXERCISE 10-13

(a) Interest Expense..................................................... 48,070

Bonds Payable................................................. 3,070
Cash.................................................................. 45,000

(b) Interest expense is greater than interest paid because the bonds sold
at a discount which must be amortized over the life of the bonds. The
bonds sold at a discount because investors demanded a market interest
rate higher than the contractual interest rate.

(c) Interest expense increases each period because the bond carrying value
increases each period. As the market interest rate is applied to this bond
carrying amount, interest expense will increase.

*BRIEF EXERCISE 10-14

(a) Jan. 1 Cash (.96 X HK$5,000,000)............... 4,800,000

Bonds Payable.......................... 4,800,000

(b) Dec. 31 Interest Expense............................... 470,000

Bonds Payable
(HK$200,000 10).................. 20,000
Cash (HK$5,000,000 X 9%)........ 450,000

*BRIEF EXERCISE 10-15

(a) Cash (1.02 X 4,000,000)................................... 4,080,000

Bonds Payable........................................... 4,080,000

(b) Interest Expense................................................ 384,000

Bonds Payable
(80,000 5).................................................... 16,000
Cash (4,000,000 X 10%)........................... 400,000

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*BRIEF EXERCISE 10-16

Salaries and Wages Expense......................................... 24,000

Withholding Taxes Payable.................................... 2,900
Social Security Taxes Payable............................... 1,920
Insurance Premiums Payable................................. 250
Cash.......................................................................... 18,930

*BRIEF EXERCISE 10-17

December 31, 2017

Salaries and Wages Expense............................................ 350,000
Salaries and Wages Payable................................... 350,000

February 15, 2018

Salaries and Wages Payable............................................. 350,000
Cash.......................................................................... 350,000

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 SOLUTIONS FOR DO IT! REVIEW EXERCISES

DO IT! 10-1
1. NT$2,100,000 X 7% X 5/12 = NT$61,250
2. NT$1,260,000/1.05 = NT$1,200,000; NT$1,200,000 X 5% = NT$60,000
3. NT$1,080,000 X 1/6 = NT$180,000

DO IT! 10-2

1. False. Mortgage bonds and sinking fund

bonds are both examples of secured bonds.
2. False. Convertible bonds can be converted into ordinary shares at the
bondholders option; callable bonds can be retired by the issuer at a
set amount prior to maturity.
3. True.
4. True.
5. True.

DO IT! 10-3

(a) Cash................................................................ 306,000,000

Bonds Payable........................................ 306,000,000
(To record sale of bonds at a
premium)

(b) Non-current liabilities

Bonds payable ........................................
W306,000,000

DO IT! 10-4

Loss on Bond Redemption.................................... 6,000

Bonds Payable........................................................ 390,000
Cash................................................................. 396,000
(To record redemption of bonds at 99)

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DO IT! 10-5

Cash......................................................................... 700,000
Mortgage Payable........................................... 700,000
(To record mortgage loan)

Interest Expense..................................................... 42,000*

Mortgage Payable................................................... 30,074
Cash................................................................. 72,074
(To record annual payment on
mortgage)

*Interest expense = R$700,000 X 6%

DO IT! 10-6

(a) Debt to assets ratio $26,000 $38,000 = .68:1

(b) Times interest earned ratio ($16,000 + $3,200 + $1,300) $1,300 = 15.8

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 SOLUTIONS TO EXERCISES

EXERCISE 10-1

July 1, 2017
Cash........................................................................ 60,000
Notes Payable................................................. 60,000

November 1, 2017
Cash........................................................................ 42,000
Notes Payable................................................. 42,000

December 31, 2017

Interest Expense
(60,000 X 8% X 6/12)......................................... 2,400
Interest Payable.............................................. 2,400

Interest Expense
(42,000 X 7% X 2/12)......................................... 490
Interest Payable.............................................. 490

February 1, 2018
Notes Payable........................................................ 42,000
Interest Payable..................................................... 490
Interest Expense.................................................... 245
Cash................................................................. 42,735

April 1, 2018
Notes Payable........................................................ 60,000
Interest Payable..................................................... 2,400
Interest Expense.................................................... 1,200
Cash................................................................. 63,600

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EXERCISE 10-2

(a) June 1 Cash........................................................... 70,000

Notes Payable.................................... 70,000

(b) June 30 Interest Expense....................................... 525

Interest Payable
[(70,000 X 9%) X 1/12].................. 525

(c) Dec. 1 Notes Payable........................................... 70,000

Interest Payable
(70,000 X 9% X 6/12)............................ 3,150
Cash.................................................... 73,150

(d) 3,150

EXERCISE 10-3

KEMER A. .
Apr. 10 Cash................................................................. 31,800
Sales Revenue........................................ 30,000
Sales Taxes Payable............................... 1,800

BODRUM A. .
15 Cash................................................................. 20,330
Sales Revenue ( 20,330 1.07)............. 19,000
Sales Taxes Payable
( 19,000 X .07)..................................... 1,330

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EXERCISE 10-4

2017

(a) Nov. 30 Cash............................................................ 216,000

Unearned Subscription Revenue
(12,000 X 18).................................. 216,000

(b) Dec. 31 Unearned Subscription Revenue............. 18,000

Subscription Revenue
(216,000 X 1/12)............................. 18,000

2018

(c) Mar. 31 Unearned Subscription Revenue.............. 54,000

Subscription Revenue
(216,000 X 3/12)............................. 54,000

EXERCISE 10-5

(a) Current ratio

2013$12,733 $7,498 = 1.70:1
2012$13,630 $6,200 = 2.20:1

Working capital
2013$12,733 $7,498 = $5,235 million
2012$13,630 $6,200 = $7,430 million

(b) Current ratio

$12,533 $7,298 = 1.72:1

Working capital
$12,533 $7,298 = $5,235 million

It would make its current ratio increase slightly, but its working capital
would remain the same.

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EXERCISE 10-6

1. True.
2. True.
3. False. When seeking long-term financing, an advantage of issuing bonds
over issuing ordinary shares is that tax savings result.
4. True.
5. False. Unsecured bonds are also known as debenture bonds.
6. True.
7. True.
8. True.
9. True.

EXERCISE 10-7

Plan One Plan Two

Issue Shares Issue Bonds
Income before interest and taxes 800,000 800,000
Interest (2,400,000 X 7%) 168,000
Income before taxes 800,000 632,000
Income tax expense (30%) 240,000 189,600
Net income 560,000 442,400
Outstanding shares 150,000 90,000
Earnings per share 3.73 4.92

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EXERCISE 10-8

2017
(a) Jan. 1 Cash........................................................ 500,000
Bonds Payable................................ 500,000

(b) Dec. 31 Interest Expense (500,000 X 10%)...... 50,000

Interest payable.............................. 50,000

2018
(c) Jan. 1 Interest Payable..................................... 50,000
Cash................................................ 50,000

EXERCISE 10-9

2017
(a) Jan. 1 Cash........................................................ 400,000
Bonds Payable................................ 400,000

(b) Dec. 31 Interest Expense (R$400,000 X 8%)...... 32,000

Interest Payable.............................. 32,000

2018
(c) Jan. 1 Interest Payable...................................... 32,000
Cash................................................. 32,000

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EXERCISE 10-10

(a) 1. Cash................................................................. 485,000

Bonds Payable.......................................... 485,000

2. Annual interest payments

(40,000* X 5)............................................... 200,000
Plus: Bond discount....................................... 15,000
Total cost of borrowing................................... 215,000

*(500,000 X .08)

OR

Principal at maturity........................................ 500,000

Annual interest payments
(40,000 X 5)................................................. 200,000
Cash to be paid to bondholders.................... 700,000
Cash received from bondholders.................. (485,000)
Total cost of borrowing................................... 215,000

(b) 1. Cash................................................................. 525,000

Bonds Payable.......................................... 525,000

2. Annual interest payments

(40,000 X 5)................................................. 200,000
Less: Bond Premium...................................... 25,000
Total cost of borrowing................................... 175,000

OR

Principal at maturity........................................ 500,000

Annual interest payments
(40,000 X 5)................................................. 200,000
Cash to be paid to bondholders.................... 700,000
Cash received from bondholders.................. (525,000)
Total cost of borrowing................................... 175,000

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EXERCISE 10-11

(a) Jan. 1 Interest Payable..................................... 1,120,000

Cash................................................ 1,120,000

(b) Jan. 1 Bonds Payable....................................... 6,000,000

Loss on Bond Redemption................... 180,000
Cash (HK$6,000,000 X 1.03).......... 6,180,000

(c) Dec. 31 Interest Expense.................................... 700,000

Interest Payable
(HK$10,000,000 X 7%)................ 700,000

EXERCISE 10-12

1. June 30 Bonds Payable...................................... 117,500

Loss on Bond Redemption
(132,600 117,500)........................ 15,100
Cash (130,000 X 102%)............... 132,600

2. June 30 Bonds Payable...................................... 151,000

Gain on Bond Redemption
(151,000 147,000)................ 4,000
Cash (150,000 X 98%)................. 147,000

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EXERCISE 10-13

2017
Issuance of Note
Dec. 31 Cash............................................................... 240,000
Mortgage Payable................................. 240,000

2018
First Installment Payment
Dec. 31 Interest Expense
(240,000 X 6% X 6/12).............................. 14,400
Mortgage Payable......................................... 18,864
Cash....................................................... 33,264

2019
Second Installment Payment
Dec. 31 Interest Expense
[(240,000 18,864) X 6%]...................... 13,268
Mortgage Payable......................................... 19,996
Cash....................................................... 33,264

EXERCISE 10-14

Non-current liabilities
Bonds payable, due 2022......................... HK$204,000
Lease liability.............................................. 59,500
Total non-current liabilities..................... HK$263,500

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EXERCISE 10-15

(a) 1. Working capital = NT$3,416.3 NT$2,988.7 = NT$427.6

2. Current ratio = NT$3,416.3 NT$2,988.7 = 1.14:1
3. Debt to assets ratio = NT$16,191.0 NT$30,224.9 = 54%
4. Times interest earned = (NT$4,551.0 + NT$1,936.0 + NT$473.2)

NT$473.2 = 14.71 times

A current ratio that is less than 1.30 indicates lower liquidity. The debt
to assets ratio indicates that NT$.54 of each dollar of assets have
been financed by creditors. The times interest earned of over 14 times
indicates that Lin Ltd. income is large enough to make required
interest payments as they come due.

(b) Debt to assets ratio, adjusted for off-balance-sheet lease

obligations.

$16,191.0 + $8,800
= 64%
$30,224.9 + $8,800

By including these off-balance-sheet obligations the debt to assets

ratio increases from 54% to 64%, suggesting that Lin Ltd. is not as
solvent as it first appears.

*EXERCISE 10-16

2017
(a) Jan. 1 Cash........................................................... 360,727
Bonds Payable.................................. 360,727

(b) Dec. 31 Interest Expense

(360,727 X 8%)..................................... 28,858
Bonds Payable.................................. 858
Interest Payable (400,000 X 7%)..... 28,000

2018
(c) Jan. 1 Interest Payable ....................................... 28,000
Cash................................................... 28,000

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Copyright 2016 John Wiley & Sons, Inc. Weygandt Financial Accounting IFRS 3e Solutions Manual (For Instructor
Use Only) 10-30
Use Only)
10-28 Copyright 2015 John Wiley & Sons, Inc.

*EXERCISE 10-16 (Continued)

(b), (c)
(B)
Interest Expense
(A) to Be Recorded (C)
Annual Interest to (8% X Preceding Discount (D)
Interest Be Paid Bond Carrying Value) Amortization Bond
Weygandt Financial, IFRS, 3/e, Solutions Manual

Periods (7% X 400,000) (D X .08) (B) (A) Carrying Value

Issue date 360,727

1 28,000 28,858 858 361,585
(For Instructor
*EXERCISE 10-17

2017
(a) Jan. 1 Cash......................................................... 407,968
Bonds Payable................................. 407,968

(b) Dec. 31 Interest Expense

(407,968 X 6%).................................... 24,478
Bonds Payable........................................ 2,122
Interest Payable (380,000 X 7%)... 26,600

2018
(c) Jan. 1 Interest Payable....................................... 26,600
Cash.................................................. 26,600

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 *EXERCISE 10-17 (Continued)
(b), (c)
(B)
Interest Expense
(A) to Be Recorded (C)
Annual Interest to (6.0% X Preceding Premium (D)
Interest Be Paid Bond Carrying Value) Amortization Bond
Periods (7% X 380,000) (D X .06) (A) (B) Carrying Value

Issue date 407,968

1 26,600 24,478 2,122 405,846
*EXERCISE 10-18

2017
(a) Jan. 1 Cash (600,000 X 103%).......................... 618,000
Bonds Payable................................. 618,000

(b) Dec. 31 Interest Expense...................................... 53,100

Bonds Payable
(18,000 X 1/20).................................... 900
Interest Payable (600,000 X 9%). . 54,000

2018
(c) Jan. 1 Interest Payable...................................... 54,000
Cash................................................. 54,000

2037
(d) Jan. 1 Bonds Payable........................................ 600,000
Cash................................................. 600,000

*EXERCISE 10-19

(a) 2016
Dec. 31 Cash....................................................... 730,000
Bonds Payable............................... 730,000

(b) 2017
Dec. 31 Interest Expense................................... 95,000
Bonds Payable
(70,000 10)............................. 7,000
Cash (800,000 X 11%).................. 88,000

(c) 2026
Dec. 31 Bonds Payable...................................... 800,000
Cash................................................ 800,000

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*EXERCISE 10-20

(a) Net pay = Gross pay Social Security taxes Income tax withholding
Net pay = $1,780 $136 $303
Net pay = $1,341

(b) Salaries and Wages Expense..................................... 1,780

Social Security Taxes Payable............................. 136
Withholding Taxes Payable.................................. 303
Salaries and Wages Payable................................ 1,341

(c) Salaries and Wages Payable...................................... 1,341

Cash....................................................................... 1,341

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 SOLUTIONS TO PROBLEMS

PROBLEM 10-1A

(a) Jan. 5 Cash............................................................ 22,470

Sales Revenue (22,470 107%)...... 21,000
Sales Taxes Payable
(22,470 21,000)......................... 1,470

12 Unearned Service Revenue....................... 10,000

Service Revenue................................. 10,000

14 Sales Taxes Payable.................................. 5,800

Cash..................................................... 5,800

20 Accounts Receivable................................. 38,948

Sales Revenue.................................... 36,400
Sales Taxes Payable
(700 X 52 X 7%)............................. 2,548

21 Cash............................................................ 14,000
Notes Payable..................................... 14,000

25 Cash............................................................ 12,947
Sales Revenue (12,947 107%)...... 12,100
Sales Taxes Payable
(12,947 12,100)......................... 847

(b) Jan. 31 Interest Expense........................................ 23

Interest Payable.................................. 23
(14,000 X 6% X 10/360)

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PROBLEM 10-1A (Continued)

(c) Current liabilities

Notes payable.................................................................... 14,000
Accounts payable.............................................................. 52,000
Unearned service revenue (13,000 10,000)............... 3,000
Sales taxes payable (1,470 + 2,548 + 847)................. 4,865
Interest payable................................................................. 23
Total current liabilities............................................... 73,888

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 PROBLEM 10-2A

(a) Jan. 2 Inventory .................................................. 30,000

Accounts Payable............................. 30,000

Feb. 1 Accounts Payable..................................... 30,000

Notes Payable................................... 30,000

Mar. 31 Interest Expense

(30,000 X 6% X 2/12)............................ 300
Interest Payable................................ 300

Apr. 1 Notes Payable........................................... 30,000

Interest Payable........................................ 300
Cash................................................... 30,300

July 1 Equipment................................................. 48,000

Cash................................................... 8,000
Notes Payable................................... 40,000

Sept. 30 Interest Expense

(40,000 X 7% X 3/12)............................ 700
Interest Payable................................ 700

Oct. 1 Notes Payable........................................... 40,000

Interest Payable........................................ 700
Cash................................................... 40,700

Dec. 1 Cash........................................................... 15,000

Notes Payable................................... 15,000

Dec. 31 Interest Expense

(15,000 X 6% X 1/12)............................ 75
Interest Payable................................ 75

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PROBLEM 10-2A (Continued)

(b)
Notes Payable
4/1 30,000 2/1 30,000
10/1 40,000 7/1 40,000
12/1 15,000
12/31 Bal. 15,000

Interest Payable
4/1 300 3/31 300
10/1 700 9/30 700
12/31 75
12/31 Bal. 75

Interest Expense
3/31 300
9/30 700
12/31 75
12/31 Bal. 1,075

(c) Current liabilities

Notes payable.................................................. 15,000
Interest payable............................................... 75 15,075

(d) Total interest is 1,075

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 PROBLEM 10-3A

(a) 2017
May 1 Cash..................................................... 600,000
Bonds Payable............................. 600,000

(b) Dec. 31 Interest Expense................................. 36,000

Interest Payable
(CHF600,000 X 9% X 8/12)....... 36,000

(c) Non-current Liabilities

Bonds Payable, due 2022............................. CHF600,000

Current Liabilities
Interest Payable............................................. CHF36,000

(d) 2018
May 1 Interest Payable................................... 36,000
Interest Expense
(CHF600,000 X 9% X 4/12)............... 18,000
Cash.............................................. 54,000
(e) Dec. 31 Interest Expense................................. 36,000
Interest Payable
(CHF600,000 X 9% X 8/12)....... 36,000

(f) 2019
Jan. 1 Interest Payable................................... 36,000
Cash.............................................. 36,000
Bonds Payable.................................... 600,000
Loss on Bond Redemption................. 12,000
Cash (CHF600,000 X 1.02)........... 612,000

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 PROBLEM 10-4A

(a) 2017
Jan. 1 Cash (6,000,000 X .98)..................... 5,880,000
Bonds Payable........................... 5,880,000

(b) Non-current Liabilities

Bonds payable, due 2027............................ 5,888,000

(c) 2019
Jan. 1 Bonds Payable................................... 5,896,000**
Loss on Bond Redemption............... 224,000*
Cash (6,000,000 X 1.02)............ 6,120,000

*(6,120,000 5,896,000)

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 PROBLEM 10-5A

(a) Annual Cash Interest Reduction of Principal

Interest Period Payment Expense Principal Balance
Issue Date R$400,000
1 R$59,612 R$32,000 R$27,612 372,388
2 59,612 29,791 29,821 342,567
3 59,612 27,405 32,207 310,360
4 59,612 24,829 34,783 275,577

(b) 2016
Dec. 31 Cash........................................................ 400,000
Mortgage Payable.......................... 400,000

2017
Dec. 31 Interest Expense.................................... 32,000
Mortgage Payable.................................. 27,612
Cash................................................ 59,612

(c) 12/31/17
Current Liabilities
Current portion of mortgage payable R$29,821

Non-Current Liabilities
Mortgage payable, due 2026 R$342,567

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 *PROBLEM 10-6A

2017
(a) Jan. 1 Cash.................................................. 1,667,518
Bonds Payable.......................... 1,667,518

(b) LOCK INDUSTRIES LTD.

Bond Discount Amortization
Effective-Interest MethodAnnual Interest Payments
5% Bonds Issued at 6%

(A) (B) (C) (D)

Interest Discount Bond
Annual Interest Expense Amor- Carrying
Interest to Be to Be tization Value
Periods Paid Recorded (B) (A)
Issue date 1,667,518
1 90,000 100,051 10,051 1,677,569
2 90,000 100,654 10,654 1,688,223
3 90,000 101,293 11,293 1,699,516

(c) Dec. 31 Interest Expense

(1,667,518 X 6%)................................... 100,051
Interest Payable
(1,800,000 X 5%)........................... 90,000
Bonds Payable................................... 10,051

2018
(d) Jan. 1 Interest Payable......................................... 90,000
Cash.................................................... 90,000

(e) Dec. 31 Interest Expense

[(1,667,518 + 10,051) X 6%]............... 100,654
Interest Payable................................. 90,000
Bonds Payable.......................... 10,654

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 *PROBLEM 10-7A

2017
(a) (1) Jan. 1 Cash............................................. 2,147,202
Bonds Payable.................... 2,147,202

(2) Dec. 31 Interest Expense

(2,147,202 X 6%).................... 128,832
Bonds Payable............................ 11,168
Interest Payable
(2,000,000 X 7%)............. 140,000

2018
(3) Jan. 1 Interest Payable.......................... 140,000
Cash..................................... 140,000

(4) Dec. 31 Interest Expense......................... 128,162

[(2,147,202 11,168) X 6%]
Bonds Payable............................ 11,838
Interest Payable.................. 140,000

(b) Bonds payable...................................................... 2,124,196*

*(2,147,202 11,168 11,838)

(c) (1) Total bond interest expense2018, 128,162.

(2) The effective-interest method will result in more interest expense

reported than the straight-line method in 2018 when the bonds are
sold at a premium. Straight-line interest expense for 2018 is
125,280 [140,000 (147,202 10)].

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 *PROBLEM 10-8A

(a) 2017
Jan. 1 Cash (3,000,000 X 1.04)................... 3,120,000
Bonds Payable........................... 3,120,000

(b) See page 10-44.

(c) 2017
Dec. 31 Interest Expense............................... 288,000
Bonds Payable (120,000 10)........ 12,000
Interest Payable......................... 300,000

2018
Jan. 1 Interest Payable................................. 300,000
Cash............................................ 300,000

Dec. 31 Interest Expense............................... 288,000

Bonds Payable.................................. 12,000
Interest Payable......................... 300,000

(d) Non-current Liabilities

Bonds payable, due 2027........................... 3,096,000
Current Liabilities
Interest payable........................................... 300,000

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 *PROBLEM 10-8A (Continued)
(b)
(A) (B) (C) (D)
Annual Interest to Interest Expense Premium Bond
Interest Be Paid to Be Recorded Amortization Carrying Value
Periods (10% X 3,000,000) (A) (C) (120,000 10)
Issue date 3,120,000
1 300,000 288,000 12,000 3,108,000
2 300,000 288,000 12,000 3,096,000
3 300,000 288,000 12,000 3,084,000
4 300,000 288,000 12,000 3,072,000
 *PROBLEM 10-9A

(a) 2017
Jan. 1 Cash (Rs3,500,000 X 104%)............. 3,640,000
Bonds Payable.......................... 3,640,000

Dec. 31 Interest Expense.............................. 266,000

Bonds Payable
(Rs140,000 10)............................ 14,000
Interest Payable
(Rs3,500,000 X 8%)............... 280,000

(b) 2017
Jan. 1 Cash (Rs3,500,000 X 98%)............... 3,430,000
Bonds Payable.......................... 3,430,000

Dec. 31 Interest Expense.............................. 287,000

Bonds
Payable (Rs70,000 10)....... 7,000
Interest Payable
(Rs3,500,000 X 8%)............... 280,000

(c) Premium

Non-current Liabilities
Bonds payable, due 2027.......................... Rs3,626,000
Current Liabilities
Interest Payable......................................... 280,000

Discount

Non-current Liabilities
Bonds payable, due 2027.......................... Rs3,437,000
Current Liabilities
Interest Payable......................................... 280,000

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 *PROBLEM 10-10A

(a) 2018
Jan. 1 Interest Payable............................... 210,000**
Cash.......................................... 210,000

(b) Dec. 31 Interest Expense.............................. 190,000**

Bonds Payable (200,000 10)....... 20,000
Interest Payable........................ 210,000

(c) 2019
Jan1 Bonds Payable................................. 1,200,000**
Bonds Payable................................. 72,000**
Gain on Bond Redemption
(1,272,000 1,212,000)..... 60,000
Cash (1,200,000 X 101%)....... 1,212,000

*(200,000 20,000) X .40 = 72,000

(d) Dec. 31 Interest Expense.............................. 114,000**

Bonds Payable................................. 12,000**
Interest Payable
(1,800,000 X 7%)................. 126,000

**200,000 20,000 72,000 = 108,000;108,000/ 9 = 12,000 or 20,000 X .60.

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 PROBLEM 10-1B

(a) Jan. 1 Cash.............................................................. 15,000

Notes Payable....................................... 15,000

5 Cash.............................................................. 9,828
Sales Revenue (9,828 108%)........... 9,100
Sales Taxes Payable
(9,828 9,100)............................... 728

12 Unearned Service Revenue......................... 9,400

Service Revenue................................... 9,400

14 Sales Taxes Payable.................................... 5,800

Cash....................................................... 5,800

20 Accounts Receivable................................... 33,264

Sales Revenue...................................... 30,800
Sales Taxes Payable
(700 X 44 X 8%)............................... 2,464

25 Cash.............................................................. 16,308
Sales Revenue (16,308 108%)......... 15,100
Sales Taxes Payable
(16,308 15,100)........................... 1,208

(b) Jan. 31 Interest Expense.......................................... 75

Interest Payable
(15,000 X 6% X 1/12)....................... 75

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PROBLEM 10-1B (Continued)

(c) Current liabilities

Notes payable............................................................. 15,000
Accounts payable....................................................... 42,500
Unearned service revenue (15,000 9,400).......... 5,600
Sales taxes payable (728 + 2,464 + 1,208).......... 4,400
Interest payable.......................................................... 75
Total current liabilities........................................ 67,575

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 PROBLEM 10-2B

(a) 2017
June1 Cash................................................... 1,200,000
Bonds Payable........................... 1,200,000

(b) Dec.31 Interest Expense............................... 56,000

Interest Payable
(1,200,000 X 8% X 7/12)......... 56,000

(c) Non-current Liabilities

Bonds Payable........................................... 1,200,000

Current Liabilities
Interest Payable.......................................... 56,000

(d) 2018
June1 Interest Payable................................. 56,000
Interest Expense
(1,200,000 X 8% X 5/12)................. 40,000
Cash............................................ 96,000

(e) Dec. 31 Interest Expense............................... 56,000

Interest Payable
(1,200,000 X 8% X 7/12)......... 56,000

(f) 2019
Jan. 1 Interest Payable................................. 56,000
Cash............................................ 56,000
Bonds Payable.................................. 1,200,000
Loss on Bond Redemption............... 24,000
Cash (1,200,000 X 1.02)........... 1,224,000

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 PROBLEM 10-3B

(a) 2017
Jan. 1 Cash (R$800,000 X 1.05)..................... 840,000
Bonds Payable............................. 840,000

(b) Non-current Liabilities

Bond payable, due 2027............................... R$836,000

(c) 2019
Jan. 1 Bonds Payable.................................... 832,000
Loss on Bond Redemption................. 16,000*
Cash (R$800,000 X 1.06)............. 848,000

*(R$848,000 R$832,000)

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 PROBLEM 10-4B

(a) Annual Cash Interest Reduction Principal

Interest Period Payment Expense of Principal Balance
Issue Date 800,000
1 119,224 64,000 55,224 744,776
2 119,224 59,582 59,642 685,134
3 119,224 54,811 64,413 620,721
4 119,224 49,658 69,566 551,155

(b) 2016
Dec. 31 Cash...................................................... 800,000
Mortgage Payable......................... 800,000

2017
Dec. 31 Interest Expense.................................. 64,000
Mortgage Payable................................ 55,224
Cash............................................... 119,224

(c) 12/31/17
Non-current Liabilities
Mortgage payable............................................ 685,134*

Current Liabilities
Current portion of mortgage payable.............. 59,642

**744,776 59,642

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 *PROBLEM 10-5B

(a) 2017
Jan. 1 Cash.................................................. 4,219,600
Bonds Payable......................... 4,219,600

(b) WITHERSPOON SATELLITES

Bond Discount Amortization
Effective-Interest MethodAnnual Interest Payments
9% Bonds Issued at 10%

(A) (B) (C) (D)

Interest Discount
Annual Interest Expense Amor- Bond
Interest to Be to Be tization Carrying
Periods Paid Recorded (B) (A) Value
Issue date 4,219,600
1 405,000 421,960 16,960 4,236,560
2 405,000 423,656 18,656 4,255,216

(c) Dec. 31 Interest Expense

(4,219,600 X 10%)....................... 421,960
Bonds Payable.......................... 16,960
Interest Payable
(4,500,000 X 9%)................. 405,000

(d) 2018
Jan. 1 Interest Payable............................... 405,000
Cash.......................................... 405,000

(e) Dec. 31 Interest Expense

[4,236,560 X 10%]....................... 423,656
Bonds Payable.......................... 18,656
Interest Payable....................... 405,000

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 *PROBLEM 10-6B

(a) 1. 2017
Jan. 1 Cash.............................................. 4,543,627
Bonds Payable..................... 4,543,627

2. Dec. 31 Interest Expense

(4,543,627 X 8%)..................... 363,490
Bonds Payable............................. 36,510
Interest Payable
(4,000,000 X 10%)............ 400,000

3. 2018
Jan. 1 Interest Payable............................ 400,000
Cash....................................... 400,000

4. Dec. 31 Interest Expense

[(4,543,627 36,510) X 8%]. . . 360,569
Bonds Payable............................. 39,431
Interest Payable.................... 400,000

(b) Bonds payable......................................................

4,467,686*

*(4,543,627 36,510 39,431)

(c) 1. The amount of interest expense reported for 2018 related to these
bonds is 360,569.

2. When the bonds are sold at a premium, the effective-interest method

will result in more interest expense reported than the straight-line
method in 2018. Straight-line interest expense for 2018 is 345,637
(400,000 54,363).

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Use Only) 10-55
 *PROBLEM 10-7B

(a) 2017
Jan. 1 Cash (6,000,000 X 96%)................... 5,760,000
Bonds Payable........................... 5,760,000

(b) See page 10-57.

(c) 2017
Dec. 31 Interest Expense................................ 492,000
Bonds Payable........................... 12,000
Interest Payable......................... 480,000

2018
Jan. 1 Interest Payable................................. 480,000
Cash............................................ 480,000

Dec. 31 Interest Expense................................ 492,000

Bonds Payable........................... 12,000
Interest Payable......................... 480,000

(d) Non-current Liabilities

Bonds payable........................................... 5,784,000

Current Liabilities
Interest payable......................................... 480,000

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 *PROBLEM 10-7B (Continued)
(b)
(A) (B) (C) (D)
Annual Interest to Interest Expense Discount Bond
Interest Be Paid to Be Recorded Amortization Carrying Value
Periods (8% X 6,000,000) (A) + (C) (240,000 20)
Issue date 5,760,000
1 480,000 492,000 12,000 5,772,000
2 480,000 492,000 12,000 5,784,000
3 480,000 492,000 12,000 5,796,000
4 480,000 492,000 12,000 5,808,000
 *PROBLEM 10-8B

(a) Jan. 1 Cash (4,000,000 X 103%)................. 4,120,000

Bonds Payable............................ 4,120,000

Dec. 31 Interest Expense................................ 268,000

Bonds Payable (120,000 10)......... 12,000
Interest Payable
(4,000,000 X 7%).................... 280,000

(b) Jan. 1 Cash (4,000,000 X 96%)................... 3,840,000

Bonds Payable............................ 3,840,000

Dec. 31 Interest Expense................................ 296,000

Bonds Payable
(160,000 10)........................ 16,000
Interest Payable.......................... 280,000

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*PROBLEM 10-8B (Continued)

(c) Premium

Non-current Liabilities
Bonds payable, due 2027........................ 4,108,000

Current Liabilities
Interest payable........................................ 280,000

Discount

Non-current Liabilities
Bonds payable, due 2027........................ 3,856,000

Current Liabilities
Interest payable........................................ 280,000

Copyright 2016 John Wiley & Sons, Inc. Weygandt Financial Accounting IFRS 3e Solutions Manual (For Instructor
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 *PROBLEM 10-9B

(a) 2017
Jan. 1 Interest Payable.................................. 216,000
Cash............................................. 216,000**

(b) Dec. 31 Interest Expense................................ 225,000

Bonds
Payable (90,000 10)............ 9,000**
Interest Payable
(2,400,000 X .09).................... 216,000**

(c) 2018

Jan. 1 Bonds Payable................................... 773,000*

Loss on Bond Redemption............... 43,000
Cash (800,000 X 102%)............. 816,000**

*(2,310,000 + 9,000) X 1/3

(d) Dec. 31 Interest Expense................................ 150,000

Bonds Payable............................ 6,000**
Interest Payable.......................... 144,000**

*(90,000 10) X 2/3

**(2,400,000 X 2/3) X 9%

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 COMPREHENSIVE PROBLEM SOLUTION 101

(a) 1. Interest Payable............................................... 2,500

Cash.......................................................... 2,500

2. Inventory.......................................................... 241,100
Accounts Payable.................................... 241,100

3. Cash.................................................................. 481,500
Sales Revenue......................................... 450,000
Sales Taxes Payable................................ 31,500

Cost of Goods Sold......................................... 250,000

Inventory................................................... 250,000

4. Account Payable.............................................. 230,000

Cash.......................................................... 230,000

5. Interest Expense.............................................. 2,500

Cash.......................................................... 2,500

6. Insurance Expense.......................................... 5,600

Prepaid Insurance.................................... 5,600

7. Prepaid Insurance........................................... 12,000

Cash.......................................................... 12,000

8. Sales Taxes Payable........................................ 24,000

Cash.......................................................... 24,000

9. Other Operating Expenses............................. 91,000

Cash.......................................................... 91,000

10. Interest Expense.............................................. 2,500

Cash.......................................................... 2,500

Bonds Payable................................................. 50,000

Cash.......................................................... 47,000

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 Gain on Bond Redemption...................... 3,000

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COMPREHENSIVE PROBLEM SOLUTION (Continued)

11. Cash (90,000 X 104%).................................... 93,600

Bonds Payable......................................... 93,600

Adjusting Entries
1. Insurance Expense (12,000 X 5/12).............. 5,000
Prepaid Insurance.................................... 5,000

2. Depreciation Expense (43,000 3,000) 5.... 8,000

Accumulated DepreciationEquipment. 8,000

3. Income Tax Expense....................................... 26,520

Income Taxes Payable............................. 26,520

(b) JAMES LTD.

Adjusted Trial Balance
12/31/2017

Account Debit Credit

Cash............................................................. 194,100
Inventory...................................................... 16,850
Prepaid Insurance....................................... 7,000
Equipment................................................... 43,000
Accumulated DepreciationEquipment.... 8,000
Accounts Payable....................................... 24,850
Sales Taxes Payable................................... 7,500
Income Taxes Payable................................ 26,520
Bonds Payable............................................ 93,600
Share CapitalOrdinary.............................. 20,000
Retained Earnings....................................... 18,600
Sales Revenue............................................. 450,000
Cost of Goods Sold..................................... 250,000
Depreciation Expense................................. 8,000
Insurance Expense..................................... 10,600
Other Operating Expenses......................... 91,000
Interest Expense......................................... 5,000
Gain on Bond Redemption......................... 3,000
Income Tax Expense................................... 26,520
652,070 652,070
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Copyright 2016 John Wiley & Sons, Inc. Weygandt Financial Accounting IFRS 3e Solutions Manual (For Instructor
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COMPREHENSIVE PROBLEM SOLUTION (Continued)

(a) and (b)Optional T accounts

Cash Bal. 24,850

Bal. 30,500 2,500 Interest Payable
481,500 230,000 2,500 Bal. 2,500
93,600 2,500 Bal. 0
12,000
24,000 Sales Taxes Payable
91,000 24,000 31,500
2,500 Bal. 7,500
47,000
Bal. 194,100
Income Taxes Payable
26,520
Inventory
Bal. 25,750 250,000
241,100
Bonds Payable
Bal. 16,850
50,000 Bal. 50,000
93,600
Prepaid Insurance Bal. 93,600
Bal. 5,600 5,600
12,000 5,000 Share CapitalOrdinary
Bal. 7,000 Bal. 20,000

Equipment
Bal. 43,000 Retained Earnings
Bal. 18,600

Accumulated Depreciation
Equipment Sales Revenue
8,000 450,000

Accounts Payable
230,000 Bal. 13,750
241,100

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COMPREHENSIVE PROBLEM SOLUTION (Continued)

(a) and (b)(Continued)

Cost of Goods Sold Interest Expense
250,000 2,500
2,500
Bal. 5,000

Depreciation Expense
8,000 Gain on Bond Redemption
3,000

Insurance Expense
5,600 Income Tax Expense
5,000 26,520
Bal. 10,600

Other Operating Expenses

91,000

(c) JAMES LTD.

Income Statement
For the Year Ending 12/31/17

Sales revenue.............................................. 450,000

Cost of goods sold...................................... 250,000
Gross profit................................................. 200,000
Operating expenses
Insurance expense.............................. 10,600
Depreciation expense......................... 8,000
Other operating expenses.................. 91,000
Total operating expenses........................... 109,600
Income from operations............................. 90,400
Other income and expense
Gain on bond redemption................... 3,000
Interest expense.................................. 5,000
Income before taxes................................... 88,400

Copyright 2015 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 3/e, Solutions Manual (For Instructor Use
Only) 10-66
 Income tax expense............................ 26,520
Net income................................................... 61,880
COMPREHENSIVE PROBLEM SOLUTION (Continued)

JAMES LTD.
Retained Earnings Statement
For the Year Ending 12/31/17

Retained earnings, 1/1/17........................................... 18,600

Add: Net income....................................................... 61,880
Retained earnings, 12/31/17 80,480
JAMES LTD.
Statement of Financial Position
12/31/2017

Assets

Property, Plant, and Equipment

Equipment............................................ 43,000
Less: Accumulated depreciation....... 8,000 35,000
Current Assets
Prepaid insurance............................... 7,000
Inventory.............................................. 16,850
Cash...................................................... 194,100
Total current assets....................... 217,950
Total assets 252,950
Equity and Liabilities

Equity
Share capitalordinary........................ 20,000
Retained earnings............................... 80,480
Total equity..................................... 100,480

Non-current liabilities
Bonds payable..................................... 93,600

Current Liabilities
Accounts payable............................... 24,850
Income taxes payable......................... 26,520
Sales taxes payable............................ 7,500

Copyright 2015 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 3/e, Solutions Manual (For Instructor Use
Only) 10-67
 Total current liabilities.................. 58,870
Total liabilities................................ 152,470
Total equity and liabilities ....................... 252,950

Copyright 2015 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 3/e, Solutions Manual (For Instructor Use
Only) 10-68
 COMPREHENSIVE PROBLEM SOLUTION 102

(a) Eastland Westside

AG AG
Plant and Equipment CHF255,300 CHF257,300
Accumulated Depreciation (2.) (188,375) ( (189,850)
Inventory 463,900 515,200
Accounts Receivable 304,700 302,500
Allowance for Doubtful Accounts (1.) (13,600) (18,000)
Cash 63,300 48,400
Total Assets CHF885,225 CHF915,550

Equity CHF367,025* CHF402,050**

Non-current Liabilities 78,000 66,000
Current Liabilities (3.) 440,200 447,500
Total Equity and Liabilities CHF885,225 CHF915,550

**CHF442,750 CHF75,725 (CHF188,375 CHF112,650) change in

accumulated depreciation.

**CHF420,050 CHF18,000 allowance for doubtful accounts.

(b) Based on a review of the companies and revision of financial state-

ments for purposes of comparability, it can be seen that Westside is in
a better financial position. However, this claim to the better position is
a tenuous one. The amounts within each category in the statement of
financial position of each company are very similar.

In terms of short-term liquidity, Westside is in a little stronger financial

position. Total current assets for Eastland are CHF818,300 versus
CHF848,100 for Westside. Comparing these to the current liabilities,
Westside has a current ratio of 1.90 (CHF 848,100 CHF447,500)
versus 1.86 (CHF818,300 CHF440,200) for Eastland.

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MC10 MATCHA CREATIONS

(a) NT$2,000 X 6% X 8.5/12 = NT$85

(b) Aug. 31 Interest Expense (NT$2,000 X 6% X 1/12). . 10

Interest Payable....................................... 10

(c) Sept. 15 Notes Payable............................................... 2,000

Interest Payable (NT$25 + $70)................... 95
Interest Expense (NT$2,000 X 6% X 0.5/12) 5
Cash (NT$2,000 + (NT$2,000 X 6% X 10/12))
2,100

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 BYP 10-1 FINANCIAL REPORTING PROBLEM

(a) Total current liabilities at December 31, 2013, NT$189,778 million.

TSMCs total current liabilities increased by NT$41,304 (NT$189,778
NT$148,474) million over the prior year.

(b) The components of current liabilities for December 31, 2013 are:

Short term loans NT$15,645.0 million

Financial liabilities at fair value through profit or
loss 33.7
Accounts payable 14,670.3
Payables to related parties 1,688.4
Salary and bonus payable 8,330.9
Accrued profit sharing to employees and bonus
to directors and supervisors 12,738.8
Payable to contractors and equipment suppliers 89,810.2
Income tax payable 22,563.3
Provisions 7,603.8
Accrued expenses and other current liabilities 16,693.5

(c) At December 31, 2013, TSMCs non-current liabilities was NT$225,502

million. There was a NT$135,715 million increase (NT$225,502
NT$89,787) in non-current liabilities during the year.

The components of non-current liabilities for December 31, 2013 are:

Hedging derivative financial liabilities NT$ 5,481.6 million

Bonds payable 210,767.6
Long-term bank loans 40.0
Provisions 10.5
Other long-term payables 36.0
Obligations under finance leases 776.2
Accrued pension cost 7,589.9
Guarantee deposits 151.7
Others 648.4

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 BYP 10-2 COMPARATIVE ANALYSIS PROBLEM

(a) Nestls largest current liability was Trade and other payables at
CHF16,072 million. Its total current liabilities were CHF32,917 million.
Petra Foods largest current liability was Other payables at
US$77,508 thousand. Its total current liabilities were US$161,678
thousand.

Nestl Petra Foods

(b) (in millions) (in thousands)

(1) Working capital CHF30,066 CHF32,917 = US$373,037 US$161,678

(CHF2,851) = US$211,359

CHF30,066 US$373,037
(1) Current ratio = 2.31:1
CHF32,917 = 0.91:1 US$161,678

(c) Based on this information, it appears that Nestl is not liquid.

Additional analysis should be done to assess the reason for the
negative working capital and a current ratio less than 1.00.

(d) Nestl Petra Foods

1. Debt to total CHF56,303 US$175,510
= 46.8% = 37.7%
assets CHF120,442 US$465,896

2. Times interest CHF10,445 + CHF3,256 + US$20,555 +

earned CHF850 = 17.1 times US$23,514 + US$1,651 = 27.7 times
CHF850 US$1,651

(e) The higher the percentage of debt to total assets, the greater the risk
that a company may be unable to meet its maturing obligations.
Nestls debt to total assets ratio was 24% higher than Petra Foods.
The times interest earned ratio provides an indication of a companys
ability to meet interest payments. Nestls times interest earned ratio is
good but Petra Foods is 62% higher. However, neither company
should have difficulty meeting its interest payments.

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 BYP 10-3 REAL-WORLD FOCUS

(a) In 1924, the Fitch Publishing Company introduced the now familiar
AAA to D ratings scale to meet the growing demand for independent
analysis of financial securities.

(b) The terms investment grade and speculative grade have established
themselves over time as shorthand to describe the categories AAA to
BBB (investment grade) and BB to D (speculative grade).

(c) Moodys and Standard and Poors are two other major credit rating
agencies.

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 BYP 10-4 DECISION-MAKING ACROSS THE ORGANIZATION

*(a) Face value of bonds........................................... 2,400,000

Proceeds from sale of bonds
(2,400,000 X .95)............................................ 2,280,000
Discount on bonds payable............................... 120,000

Bond discount amortization per year:

120,000 5 = 24,000

Face value of bonds........................................... 2,400,000

Amount of original discount.............................. 120,000
Less: Amortization through January 1, 2017
(2-year)..................................................... 48,000 72,000
Carrying value of bonds, January 1, 2017........ 2,328,000

(b) 1. Bonds Payable.............................................. 2,328,000

Gain on Bond Redemption................... 328,000*
Cash........................................................ 2,000,000
(To record redemption of 8%
bonds)

*2,328,000 2,000,000

2. Cash............................................................. 2,000,000
Bonds Payable.................................... 2,000,000
(To record sale of 10-year, 11%
bonds at par)

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BYP 10-4 (Continued)

(c) Dear President Fleming:

The early redemption of the 8%, 5-year bonds results in recognizing a

gain of 328,000 that increases current year net income by the after-
tax effect of the gain. The amount of the liabilities on the statement of
financial position will be lowered by the issuance of the new bonds
and retirement of the 5-year bonds.

1. The cash flow of the company as it relates to bonds payable will

be adversely affected as follows:

Annual interest payments on the new issue

(2,000,000 X .11)...................................................... 220,000
Annual interest payments on the 5-year bonds
(2,400,000 X .08)...................................................... (192,000)
Additional cash outflows per year.............................. 28,000

2. The amount of interest expense shown on the income statement

will be higher as a result of the decision to issue new bonds:

Annual interest expense on new bonds......... 220,000

Annual interest expense on 8% bonds:
Interest payment....................................... 192,000
Discount amortization...................................... 24,000 216,000
Additional interest expense per year.............. 4,000

These comparisons hold for only the 3-year remaining life of the 8%,
5-year bonds. The company must acknowledge either redemption of
the 8% bonds at maturity, January 1, 2020, or refinancing of that issue
at that time and consider what interest rates will be in 2020 in
evaluating a redemption and issuance in 2017.

Sincerely,

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 BYP 10-5 COMMUNICATION ACTIVITY

To: Ron Seiser

From: I. M. Student

Subject: Bond Financing

(1) The advantages of bond financing over equity stock financing include:

1. Shareholder control is not affected.

2. Tax savings result.

3. Earnings per share of ordinary shares may be higher.

(2) The types of bonds that may be issued are:

1. Secured or unsecured bonds. Secured bonds have specific assets

of the issuer pledged as collateral. Unsecured bonds are issued
against the general credit of the borrower.

2. Convertible bonds, which can be converted by the bondholder into

ordinary shares.

3. Callable bonds, which are subject to early retirement by the issuer

at a stated amount.

(3) State laws grant corporations the power to issue bonds after formal
approval by the board of directors and shareholders. The terms of the
bond issue are set forth in a legal document called a bond indenture. After
the bond indenture is prepared, bond certificates are printed.

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 BYP 10-6 ETHICS CASE

(a) The stakeholders in the Wesley case are:

Dylan Horn, president, founder, and majority shareholder.

Mary Sommers, minority shareholder.
Other minority shareholders.
Existing creditors (debt holders).
Future bondholders.
Employees, suppliers, and customers.

(b) The ethical issues:

The desires of the majority shareholder (Dylan Horn) versus the

desires of the minority shareholders (Mary Sommers and others).

Doing what is right for the company and others versus doing what is best
for oneself.

Questions:

Is what Dylan wants to do legal? Is it unethical? Is Dylans action brash

and irresponsible? Who may benefit/suffer if Dylan arranges a high-
risk bond issue? Who may benefit/suffer if Mary Sommers gains control
of Wesley?

(c) The rationale provided by the student will be more important than the
specific position because this is a borderline case with no right answer.

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 GAAP EXERCISES

GAAP 10-1

The similarities between GAAP and IFRS include: (1) the basic definition of
a liability, (2) both classify liabilities as current or non-current on the face of
the statement of financial position, and (3) both use the same basic
calculation for bond valuation.

Differences between GAAP and IFRS include: (1) GAAP allows straight line
amortization of bond discounts and premiums, but IFRS requires the
effective-interest method in all cases, (2) IFRS does not isolate unamortized
bond discount or premium in a separate account, (3) IFRS splits the
proceeds from convertible bonds into debt and equity components, and
(4) GAAP uses a rules-based approach to account for liabilities while
IFRS is more conceptual in its approach.

GAAP 10-2
(a) Jan. 1 Cash ($2,000,000 X .97)......................... 1,940,000
Discount on Bonds Payable................. 60,000
Bonds Payable............................... 2,000,000
(b) Jan. 1 Cash ($2,000,000 X 1.04)....................... 2,080,000
Bonds Payable............................... 2,000,000
Premium on Bonds Payable......... 80,000

GAAP 10-3

(a) Cash (4,000,000 X .99)........................................... 3,960,000

Discount on Bonds Payable................................... 40,000
Bonds Payable.............................................. 4,000,000

(b) Cash (4,000,000 X .99)........................................... 3,960,000

Bonds Payable.............................................. 3,800,000
Share PremiumConversion Equity.......... 160,000

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 GAAP10-4 INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a) Total current liabilities at September 28, 2013, $43,658 million. Apples
total current liabilities increased by $5,116 ($43,658 $38,542) million
over the prior year.

(b) Accounts payable at September 28, 2013 were $22,367 million.

(c) The components of current liabilities are:

(in millions)
Accounts payable.................................................... $22,367
Accrued expenses................................................... 13,856
Deferred revenue..................................................... 7,435
Total current liabilities....................................... $43,658

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