Chapter 12: Q17RQ (page 655)
What does the debt to equity ratio show, and how is it calculated?
Debt to equity ratio measure the ability to pay debt by using the equity. It is the ratio of debt and equity.
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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.
Payne Corporation has the folowing accounts as of December 31, 2018:
Total Assets $60,000
Total Liabilities 20,000
Total Equity 40,000
Compute the debt to equity ratio at December 31,2018.
Determining bond prices
Bond prices depend on the market rate of interest, stated rate of interest, and time.
Determine whether the following bonds payable will be issued at face value, at a
premium, or at a discount:
a. The market interest rate is 8%. Idaho issues bonds payable with a stated rate
of 7.75%.
b. Austin issued 9% bonds payable when the market interest rate was 8.25%.
c. Cleveland’s Cars issued 10% bonds when the market interest rate was 10%.
d. Atlanta’s Tourism issued bonds payable that pay the stated interest rate of 8.5%. At
issuance, the market interest rate was 10.25%.
Using the effective-interest amortization method
On December 31, 2018, when the market interest rate is 8%, Biggs Realty issues
\(450,000 of 5.25%, 10-year bonds payable. The bonds pay interest semiannually. The
present value of the bonds at issuance is \)365,732.
Requirements
1. Prepare an amortization table using the effective interest amortization method for
the first two semiannual interest periods. (Round to the nearest dollar.)
2. Using the amortization table prepared in Requirement 1, journalize issuance of the
bonds and the first two interest payments.
Reporting liabilities on the balance sheet and computing debt toequity ratio
The accounting records of Compass Wireless include the following as of December31, 2018:
Accounts Payable \( 74,000 Salaries Payable \) 7,500
Mortgages Payable (long-term) 80,000 Bonds Payable (current portion) 25,000
Interest Payable 21,000 Premium on Bonds Payable 13,000
Bonds Payable (long-term) 63,000 Unearned Revenue (short-term) 2,700
Total Stockholders’ Equity 145,000
Requirements
1. Report these liabilities on the Compass Wireless balance sheet, including headingsand totals for current liabilities and long-term liabilities.
2. Compute Compass Wireless’s debt to equity ratio at December 31, 2018.
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