Chapter 12: Q12SE (page 657)
Computing the debt to equity ratio
Jackson Corporation has the following amounts as of December 31, 2018.
Total assets $ 55,250
Total liabilities 22,750
Total equity 32,500
Compute the debt to equity ratio on December 31, 2018.
The debt-to-equity ratio is 0.70
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Your grandfather would like to share some of his fortune with you. He offers to give
you money under one of the following scenarios (you get to choose):
1. \(8,750 per year at the end of each of the next six years
2. \)49,650 (lump sum) now
3. $100,450 (lump sum) six years from now
C H A P T E R 1 2
Requirements
1. Calculate the present value of each scenario using a 6% discount rate. Which scenario
yields the highest present value? Round to the nearest dollar.
2. Would your preference change if you used a 12% discount rate?
Analyzing and journalizing bond transactions
On January 1, 2018, Nurses Credit Union (NCU) issued 8%, 20-year bonds payablewith face value of $600,000. The bonds pay interest on June 30 and December 31.
Requirements
1. If the market interest rate is 7% when NCU issues its bonds, will the bonds bepriced at face value, at a premium, or at a discount? Explain.
2. If the market interest rate is 9% when NCU issues its bonds, will the bonds bepriced at face value, at a premium, or at a discount? Explain.
3. The issue price of the bonds is 92. Journalize the following bond transactions:
a. Issuance of the bonds on January 1, 2018.
b. Payment of interest and amortization on June 30, 2018.
c. Payment of interest and amortization on December 31, 2018.
d. Retirement of the bond at maturity on December 31, 2037, assuming the lastinterest payment has already beenrecorded.
Determining the present value of bonds payable and journalizingusing the effective-interest amortization methodRelaxation, Inc. is authorized to issue 7%, 10-year bonds payable. On January 1, 2018,when the market interest rate is 12%, the company issues $300,000 of the bonds. Thebonds pay interest semiannually.
Requirements
1. How much cash did the company receive upon issuance of the bonds payable?(Round to the nearest dollar.)
2. Prepare an amortization table for the bond using the effective-interest method,through the first two interest payments (Round to the nearest dollar.)
3. Journalize the issuance of the bonds on January 1, 2018, and the first and secondpayments of the semiannual interest amount and amortization of the bonds onJune 30, 2018, and December 31, 2018. Explanations are not required.
Retiring bonds payable before maturity
On January 1, 2018, Powell Company issued $350,000 of 10%, five-year bonds
payable
at 102. Powell Company has extra cash and wishes to retire the bonds payable
on
January 1, 2019, immediately after making the second semiannual interest
payment. To
retire the bonds, Powell Company pays the market price of 98.
Requirements
1. What is Powell Company’s carrying amount of the bonds payable on the
retirement
date?
2. How much cash must Powell Company pay to retire the bonds payable?
3. Compute Powell Company’s gain or loss on the retirement of the bonds
payable.
Determining the present value of bonds payable
Interest rates determine the present value of future amounts. (Round to the nearest
dollar.)
Requirements
1. Determine the present value of 10-year bonds payable with face value of $86,000
and stated interest rate of 14%, paid semiannually. The market rate of interest is
14% at issuance.
2. Same bonds payable as in Requirement 1, but the market interest rate is 16%.
3. Same bonds payable as in Requirement 1, but the market interest rate is 12%.
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