SOLUTIONS TO EXERCISES

EXERCISE 10.1

2022
(a) June 1 Cash............................................................ 15,000
Notes Payable.................................... 15,000
(b) June 30 Interest Expense
  ($15,000 X .08 X 1/12)............................... 100
Interest Payable................................. 100
(Interest exp. = Face value of note X interest rate X Fraction of yr. outstanding)
($100 = $15,000 x .08 x 1/12)

(c) Interest payable accrued each month....................... $100

Number of months from borrowing
  to year end................................................................. X  7
Balance in interest payable account......................... $700
2023
(d) Jan. 1 Notes Payable............................................ 15,000
Interest Payable.........................................    700
Cash.................................................... 15,700
LO 1 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10.2

(a) Principal X .08 X 4/12 = $480

Principal = $480 ÷ (.08 X 4/12)
Principal = $18,000
($480 = Face value of note X .08 X 4/12)
(b) $18,500 X Interest Rate X 4/12 = $555
Interest Rate = $555 ÷ ($18,500 X 4/12)
Interest Rate = 9 percent
($555 = $18,500 X Interest rate X 4/12)

(c) Initial Borrowing:

May 15 Cash.......................................................... 18,000
Notes Payable................................... 18,000

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EXERCISE 10.2 (Continued)
Repayment:
Sept. 15 Notes Payable.......................................... 18,000
Interest Expense......................................    480
Cash.................................................. 18,480

LO 1 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10.3

(a) June 1 Cash............................................................. 60,000

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

(b) June 30 Interest Expense ($60,000 X .08 X 1/12).... 400

Interest Payable................................... 400
(Interest expense = Face value of note X interest rate X Fraction of yr. outstanding)
($400 = $60,000 x .08 x 1/12)

(c) Dec. 1 Notes Payable.............................................. 60,000

Interest Payable ($60,000 X .08 X 6/12)...... 2,400
Cash...................................................... 62,400
(Interest payable = Face value of note X interest rate X Fraction of yr. outstanding)
($2,400 = $60,000 x .08 x 6/12)

(d) Interest expense accrued each month......................... $ 400

Number of months of loan............................................ X 6
Total interest expense................................................... $2,400

LO 1 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10.4

July 1, 2022
Cash................................................................................... 50,000
Notes Payable.......................................................... 50,000

November 1,
2022
Cash................................................................................... 60,000
Notes Payable.......................................................... 60,000

D ecember 31, 2022

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Interest Expense…($50,000 x 8% x 6/12)........................ 2,000
Interest Payable....................................................... 2,000
EXERCISE 10.4 (Continued)

Interest Expense…($60,000 x 6% x 2/12)........................ 600

Interest Payable....................................................... 600

February 1, 2023
Notes Payable................................................................... 60,000
Interest Payable................................................................ 600
Interest Expense….…($60,000 x 6% x 1/12)................... 300
Cash.......................................................................... 60,900

April 1, 2023
Notes Payable................................................................... 50,000
Interest Payable................................................................ 2,000
Interest Expense…($50,000 x 8% x 3/12)........................ 1,000
Cash.......................................................................... 53,000

LO 1 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10.5

CERVIQ COMPANY
Apr. 10 Cash.......................................................................  23,100
Sales Revenue...............................................  22,000
Sales Taxes Payable.....................................   1,100

QUARTZ COMPANY
15 Cash....................................................................... 13,780
Sales Revenue ($13,780 ÷ 1.06)...................  13,000
Sales Taxes Payable ($13,780 – $13,000)....     780
[Sales revenue = Total receipts ÷ (1 + sales tax rate)]
($13,000 = $13,780 ÷ 1.06)

LO 1 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 10.6

(a) Mar. 31 Salaries and Wages Expense...............  64,000

FICA Taxes Payable.......................   4,896
Federal Income Taxes Payable.....   7,500
State Income Taxes Payable.........   3,100
Union Dues Payable.......................     400
Salaries and Wages Payable.........  48,104

(b) Mar. 31 Payroll Tax Expense..............................   5,596

FICA Taxes Payable.......................   4,896
State Unemployment Taxes
  Payable..........................................     700

LO 1 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10.7

(a) Net pay = Gross pay – FICA taxes – Federal income tax
Net pay = $1,780 − $136 − $303
Net pay = $1,341

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

FICA Taxes Payable......................................... 136
Federal Income Taxes Payable....................... 303
Salaries and Wages payable........................... 1,341

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

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

LO 1 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10.8

Payroll Tax Expense........................................................ 244.38

FICA Taxes Payable......................................... 137.68
Federal Unemployment Taxes Payable.......... 13.77
State Unemployment Taxes Payable.............. 92.93

LO 1 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 10.9

(a) $1,728,000 ÷ $320 = 5,400 season tickets sold.

(b) $1,728,000 ÷ 16 home games = $108,000 revenue recognized per home

game.

$1,188,000 ÷ $108,000 = 11 home games already played.

(c) Cash.......................................................................... 1,728,000

Unearned Ticket Revenue............................... 1,728,000

(d) Unearned Ticket Revenue.......................................    108,000

Ticket Revenue.................................................    108,000

LO 1 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10.10

(a) Nov. Cash (6,300 X $28)................................. 176,400

Unearned Subscription Revenue.. 176,400

(b) Dec. 31 Unearned Subscription Revenue......... 14,700

Subscription Revenue
($176,400 X 1/12)......................... 14,700

(c) Mar. 31 Unearned Subscription Revenue......... 44,100

Subscription Revenue
($176,400 X 3/12)......................... 44,100

LO 1 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10.11
1. True.
2. True.
3. False. Unsecured bonds are also known as debenture bonds.
4. True.
5. True.
6. True.
7. True.

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LO 1 BT: C Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10.12

2022
(a) Aug. 1 Cash........................................................ 600,000
Bonds Payable............................... 600,000

(b) Dec. 31 Interest Expense.................................... 17,500

Interest Payable
($600,000 X 7% X 5/12)................ 17,500
(Interest expense = Face value of bond X stated interest rate X 5/12)

2023
(c) Aug. 1 Interest Expense
($600,000 X 7% X 7/12)........................ 24,500
Interest Payable..................................... 17,500
Cash ($600,000 X 7% X 12/12)....... 42,000
(Interest expense = Face value of bond X stated interest rate X Fraction of yr. outstanding)
($24,500 = $600,000 x 7% x 7/12)

LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10.13

(a) Jan. 1 Cash........................................................ 300,000

Bonds Payable................................ 300,000

(b) Dec. 31 Interest Expense.................................... 24,000

Interest Payable
($300,000 X 8% X 12/12).............. 24,000

(c) Jan. 1 Interest Payable......................................  24,000

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

LO 3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Reporting

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EXERCISE 10.14

(a) Jan. 1 Cash ($600,000  1.03)............................ 618,000

Bonds Payable................................. 600,000
Premium on Bonds Payable......... 18,000
(Cash received = Face value of bond  Issue %)
($618,000 = $600,000 x 103%)

(b) Long-term Liabilities

Bonds Payable, due 2032.............................. $600,000
Add: Premium on Bonds Payable................. 10,800 $610,800

(c) The bonds sold for more than their face amount because the contract
interest rate (6%) was higher than the market interest rate. When the
contract rate is higher than the market rate, bonds will sell at a
premium.

LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10.15

(a) Jan. 1 Cash ($500,000  .96) ............................ 480,000

Discount on Bonds Payable.................. 20,000
Bonds Payable................................ 500,000
(Cash received = Face value of bond  Issue %)
($480,000 = $500,000 x 96%)

(b) Long-term Liabilities

Bonds Payable, due 2037............................... $500,000
Less: Discount on Bonds Payable................ 12,000 $488,000

(c) The bonds sold for less than their face value because the contract
interest rate (7%) was lower than the market interest rate. When the
contract rate is lower than the market rate, the bonds will sell at a
discount.

LO 3 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10.16

(a) The General Electric bonds were issued at a premium and the Boeing
bonds were issued at a discount.

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10-8 Copyright © 2018 John Wiley & Sons, Inc.   Kimmel, Financial Accounting, 9/e, Solutions Manual   (For Instructor Use Only)
EXERCISE 10.16 (Continued)

(b) The prices of the two bonds differed because bond price is based on the
market rate of interest, not the stated rate of interest. Market interest
rates must have been different when the two bonds were issued causing
the selling prices to differ.

(c) Cash (111.12% X $800,000)..................................... 888,960

Bonds Payable................................................... 800,000
Premium on Bonds Payable............................. 88,960

Cash (99.08% X $800,000)....................................... 792,640

Discount on Bonds Payable................................... 7,360
Bonds Payable................................................... 800,000
(Cash received = Face value of bond X Issue price)
($792,640 = $800,000 x 99.08%)

LO 3 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10.17

2022
(a) Jan. 1 Cash........................................................ 350,000
Bonds Payable................................ 350,000

(b) Dec. 31 Interest Expense.................................... 28,000

Interest Payable
($350,000 X 8% X 12/12).............. 28,000

2023
(c) Jan. 1 Interest Payable...................................... 28,000
Cash................................................. 28,000

2042
(d) Jan. 1 Bonds Payable....................................... 350,000
Cash................................................. 350,000
LO 3 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10.18

(a) April 30 Bonds Payable...................................... 140,000

Loss on Bond Redemption..................  14,900*
Cash ($140,000 X 101%)................ 141,400
Discount on Bonds Payable*
  ($140,000 – $126,500).................. 13,500

Copyright © 2018 John Wiley & Sons, Inc.   Kimmel, Financial Accounting, 9/e, Solutions Manual   (For Instructor Use Only) 10-9
EXERCISE 10.18 (Continued)
[Loss on redemption = Carrying value of bond – (face value of bond X % pd.)]
[$14,900 = ($140,000 - $13,500) – ($140,000 x 101%)]

*$126,500 – (101% X $140,000)

(b) June 30 Bonds Payable...................................... 170,000

Premium on Bonds Payable................  14,000
Cash ($170,000 X 98%)................. 166,600
Gain on Bond Redemption...........  17,400
**
[Gain on redemption = Carrying value of bond – (face value of bond X % pd.)]
[$17,400 = ($170,000 + $14,000) – ($170,000 x 98%)]

**$184,000 – (98% X $170,000)

LO 3 BT: AP Difficulty: Hard TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10.19

(a) Account Classification Reason

Accounts payable Current liability Due within one year
Unearned rent revenue Current liability Due within one year
Bonds payable Long-term liability Not due within one year
Current portion of Current liability Due within one year
mortgage payable
Income taxes payable Current liability Due within one year
Mortgage payable Long-term liability Not due within one year
Notes payable Long-term liability Not due within one year
(due in 2025)
Salaries and wages payable Current liability Due within one year
Notes payable (due in 2023) Current liability Due within one year
Warranty liability—current Current liability Can be current and/or long-term
depending on the length of the
warranty. Given as current

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EXERCISE 10.19 (Continued)

(b) SANCHEZ INC.

Balance Sheet (Partial)
December 31, 2022
(in thousands)

Current liabilities
Notes payable.............................................. $2,563.6
Accounts payable....................................... 4,263.9
Current portion of mortgage payable....... 1,992.2
Warranty liability......................................... 1,417.3
Unearned rent revenue............................... 1,058.1
Salaries and wages payable...................... 858.1
Income taxes payable................................. 265.2
Total current liabilities........................... $12,418.4
Long-term liabilities
Mortgage payable....................................... $6,746.7
Bonds payable............................................ 1,961.2
Notes payable.............................................. 335.6
Total long-term liabilities...................... 9,043.5
Total liabilities.................................................... $21,461.9

LO 4 BT: AP Difficulty: Hard TOT: 20 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 10.20

(a) Working capital = $3,416.3 – $2,988.7 = $427.6 (in millions)

(b) Current ratio = $3,416.3 ÷ $2,988.7 = 1.14:1
(c) Debt to assets ratio = $16,191.0 ÷ $30,224.9 = 54%
(d) Times interest earned = ($4,551.0 + $1,936.0 + $473.2) ÷
$473.2 = 14.71 times
[Times interest earned = (Net income + Interest expense + Income taxes) ÷ Interest expense]
[14.71 times = ($4,551.0 + $1,936.0 + $473.2) ÷ $473.2]

A current ratio of 1.14 indicates lower liquidity. The debt to assets ratio
indicates that $.54 of each dollar of assets have been financed by
creditors. The times interest earned of over 14 times indicates that
McDonald’s income is large enough to make required interest
payments as they come due.

LO 4 BT: AP Difficulty: Medium TOT: 15 min. AACSB: Analytic AICPA FC: Measurement and Reporting

Copyright © 2018 John Wiley & Sons, Inc.   Kimmel, Financial Accounting, 9/e, Solutions Manual   (For Instructor Use Only) 10-11
EXERCISE 10.21

(a) Current ratio

2022  $10,795 ÷ $4,897 = 2.20:1

2021  $9,598 ÷ $5,839 = 1.64:1

(b) Current ratio

$10,495 ÷ $4,597 = 2.28:1
It would make its current ratio increase from 2.20 to 2.28.

LO 4 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement and Reporting

EXERCISE 10.22

(a) Current ratio

2022  $6,244 ÷ $4,503 = 1.39:1
2021  $3,798 ÷ $2,619 = 1.45:1

(b) Current ratio

($6,244 – $1,500) ÷ ($4,503 – $1,500) = 1.58:1

It would make its current ratio increase (from 1.39:1 to 1.58:1).

(c) The liquidity ratios would not change but having access to a line of
credit means that cash is available on a short-term basis and therefore
the assessment of the company’s short-term liquidity would improve.
LO 4 BT: AN Difficulty: EASY TOT: 7 min. AACSB: Analytic AICPA FC: Measurement and Reporting

10-12 Copyright © 2018 John Wiley & Sons, Inc.   Kimmel, Financial Accounting, 9/e, Solutions Manual   (For Instructor Use Only)
EXERCISE 10.23

(a) The company does not have to record these contingencies because
they have determined that they are not likely to occur and the impact
would be immaterial in any event.

(b) For financial statement users it is important to understand the possible

implications that the contingencies could have on the financial results
of the company. If the contingencies result in material losses for the
company it will negatively impact the company’s financial results and
affect the decisions made by the users of the financial statements.

LO 4 BT: C Difficulty: Medium TOT: 6 min. AACSB: None AICPA FC: Reporting

EXERCISE 10.24
5
______ (a) The value today of an amount to be received at some date
in the future after taking into account current interest rates.
10 (b) Bonds that have specific assets of the issuer pledged as
______
collateral.
9
______ (c) Events with uncertain outcomes that may represent potential
liabilities.
15 (d) Bonds that can be converted into common stock at the
______
bondholder’s option.
1
______ (e) A legal document that indicates the name of the issuer, the
face value of the bonds, and other data such as the contractual
interest rate and the maturity date of the bonds.
7
______ (f) Bonds that the issuing company can redeem (buy back) at a
stated dollar amount prior to maturity.
6
______ (g) The date on which the final payment on a bond is due from the
bond issuer to the investor.
11 (h) Rate used to determine the amount of interest the issuer pays
______
and the investor receives

Copyright © 2018 John Wiley & Sons, Inc.   Kimmel, Financial Accounting, 9/e, Solutions Manual   (For Instructor Use Only) 10-13
EXERCISE 10.24 (Continued)
3
______ (i) The difference between the face value of a bond and its selling
price when a bond is sold for less than its face value.
4
______ (j) A measure of a company’s solvency, calculated by dividing the
sum of net income, interest expense, and income tax expense
by interest expense.
8
______ (k) The rate investors demand for loaning funds to the
corporation.
14 (I)
______ Amount of principal due at the maturity date of the bond.
12 (m) Bonds issued against the general credit of the borrower.
______
13 (n) The intentional effort by a company to structure its financing
______
arrangements so as to avoid showing liabilities on its balance
sheet.
2
______ (o) The difference between the selling price and the face value of a
bond when a bond is sold for more than its face value.

LO 1,2,3,4 BT: K Difficulty: Ensg TOT: 7 min. AACSB: None AICPA FC: Measurement

*EXERCISE 10.25

2022
(a) Jan. 1 Cash ($500,000 X 103%)....................... 515,000
Bonds Payable............................... 500,000
Premium on Bonds Payable.........  15,000
(Cash received = Face value of bond X Issue %)
($515,000 = $500,000 x 103%)

(b) Dec. 31 Interest Expense...................................  29,500

Premium on Bonds Payable
($15,000 X 1/30).................................. 500
Interest Payable
($500,000 X 6%)..........................  30,000
(Amortization of premium = Premium on bonds payable ÷ Number of interest periods)
($500 = $15,000 ÷ 30)

10-14 Copyright © 2018 John Wiley & Sons, Inc.   Kimmel, Financial Accounting, 9/e, Solutions Manual   (For Instructor Use Only)
EXERCISE 10.25 (Continued)

2023
(c) Jan. 1 Interest Payable.....................................  30,000
Cash................................................  30,000

2052
(d) Jan. 1 Bonds Payable...................................... 500,000
Cash................................................ 500,000

LO 3, 5 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

*EXERCISE 10.26

2021
(a) Dec. 31 Cash....................................................... 288,000
Discount on Bonds Payable................. 12,000
Bonds Payable............................... 300,000

2022
(b) Dec. 31 Interest Expense...................................  24,800
Cash ($300,000 X 8%)....................  24,000
Discount on Bonds Payable
($12,000 X 1/15)...........................   800
(Amortization of discount = Discount on Bonds Payable ÷ Number of interest periods)
($800 = $12,000 ÷ 15)

2036
(c) Dec. 31 Bonds Payable...................................... 300,000
Cash................................................ 300,000

LO 3, 5 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

Copyright © 2018 John Wiley & Sons, Inc.   Kimmel, Financial Accounting, 9/e, Solutions Manual   (For Instructor Use Only) 10-15
*EXERCISE 10.27

2022
(a) Jan. 1 Cash......................................................... 360,727
Discount on Bonds Payable..................  39,273
Bonds Payable................................ 400,000

(b) Dec. 31 Interest Expense ($360,727 X 8%)........  28,858

Interest Payable
   ($400,000 X 7%)............................ 28,000
Discount on Bonds Payable..........     858
(Interest expense = Carrying value of bond X effective interest rate)
($28,858 = $360,727 x 8%)

2023
(c) Jan. 1 Interest Payable......................................  28,000
Cash.................................................  28,000

For explanation of calculations, see the following table.

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 *EXERCISE 10.27 (Continued)
Copyright © 2018 John Wiley & Sons, Inc.   Kimmel, Financial Accounting, 9/e, Solutions Manual   (For Instructor Use Only)

(b), (c)
(A) (B) (C) (D) (E)
Interest Expense
to Be Recorded
Interest to (8% X Preceding Discount Unamortized Bond
Interest Be Paid Bond Carrying Value) Amortization Discount Carrying Value
  Periods     (7% X             [(E) X .08]                (B) – (A)           (D) – (C)        [$400,000 –
$400,000)  (D)] 
Issue date 39,273 360,727
1 28,000 28,858 858 38,415 361,585
2 28,000 28,927 927 37,488 362,512

LO 3, 6 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting
10-32
*EXERCISE 10.28

2022
(a) Jan. 1 Cash........................................................ 407,968
Bonds Payable................................ 380,000
Premium on Bonds Payable..........  27,968

(b) Dec. 31 Interest Expense ($407,968 X 6%)........  24,478

Premium on Bonds Payable..................   2,122
Interest Payable
   ($380,000 X 7%)............................  26,600
(Interest expense = Carrying value of bond X effective interest rate)
($24,478 = $407,968 x 6%)

2023
(c) Jan. 1 Interest Payable......................................  26,600
Cash.................................................  26,600

For explanation of calculations, see the following table.

 10-34
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*EXERCISE 10.28 (Continued)

(b), (c)
(A) (B) (C) (D) (E)
Interest Expense
to Be Recorded
Interest to (6% X Preceding Premium Unamortized Bond
Interest Be Paid Bond Carrying Value) Amortization Premium Carrying Value
  Periods     (7% X             [(E) X .06]                (A) – (B)           (D) – (C)        [$380,000 +
$380,000)  (D)] 

Issue date 27,968 407,968

1 26,600 24,478 2,122 25,846 405,846
2 26,600 24,351 2,249 23,597 403,597
LO 3, 6 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

Copyright © 2018 John Wiley & Sons, Inc.   Kimmel, Financial Accounting, 9/e, Solutions Manual   (For Instructor Use Only) 10-19
*EXERCISE 10.29

Issuance of Note
2022 Dec. 31 Cash.................................................. 300,000
Mortgage Payable.................... 300,000

First Installment Payment

2023 Dec 31 Interest Expense
  ($300,000 X 10%)............................ 30,000
Mortgage Payable............................ 20,000
Cash.......................................... 50,000

Second Installment Payment

2024 Dec. 31 Interest Expense
  [($300,000 – $20,000) X 10%]........ 28,000
Mortgage Payable............................ 22,000
Cash.......................................... 50,000

(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 $300,000

12/31/23 $50,000 $30,000 $20,000 280,000
12/31/24 50,000 28,000 22,000 258,000

LO 7 BT: AP Difficulty: Medium TOT: 12 min. AACSB: Analytic AICPA FC: Reporting
*EXERCISE 10.30

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

Annual Interest Reduction Principal
Interest Cash Expense of Principal Balance
Period Payment (D) X 10% (A) – (B) (D) – (C)
1/1/2022 $50,000
1/1/2023 $8,137 $5,000 $3,137 46,863
s

WAITE CORPORATION
Balance Sheet (Partial)
December 31, 2022

Current liabilities
    Notes payable................................................................................ $3,137
    Interest payable............................................................................. 5,000

Long-term liabilities
    Notes payable................................................................................ 46,863

LO 7 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

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