GENERAL JOURNAL PAGE

DATE PARTICULARS PR DEBIT CREDIT Show calculations here

### ↓
Oct 1 A/P - $ 100,000.00 100,000.00*(4%/8)
Notes Payable - 100,000.00 500
8 mnth, 4% note payable to A/P

Dec 31 Interest Expense - 500.00

Interest Payable - 500.00
To record accrual of interest

###
Jun 1 Interest Payable - 500.00
Cash - 500.00
To record paid interest owing
a) Calculate the amount of JJ Dollars that were given away in October

$50,000 x 4%
2,000
2,000-1,900

Dollar value of points given: $100.00

Calculate the amount of JJ Dollars from October that will be redeemed (based on
b) the estimate given).

$2,000 x 95%
$1,900

Dollar value of points redeemed: $1,900.00

c) & d)
DATE PARTICULARS PR DEBIT CREDIT

Oct 31 Net Sales - $100.00

Cash - 100.00
To record dollar value of points given

Oct 31 Sales discount on rebate - $1,900.00

Rebate liability - 1,900.00
To record dollar value of points redeemed
 (a) (b)
Issue Equity Issue Debt
Profit before interest and income tax $1,000,000 $1,000,000 debt interest rate
Interest expense 150,000.00 5,000,000.00 3%
Profit before income tax $1,000,000.00 $850,000.00 0.35 $150,000.00
Income tax expense (35%) $350,000.00 $297,500.00
Profit $650,000.00 $552,500
Number of shares 15,000,000.00 15,000,000.00
Earnings per share $0.04 $0.04
Total equity 20,000,000.00 20,000,000.00 1,000,000 5
Return on equity 3.35% 2.76% 5000000 15,000,000
20,000,000
c) Which results in the higher rate of return for shareholders? How do you know?
The owners receive a better return on equity (ROE) when debt is issued.
This is due to the fact that borrowing money results in higher earnings
per share and a higher return on equity for the owners. Since equity is
the denominator of ROE, as debt rises, equity contracts, which in turn
boosts ROE.

d) Why option is riskier? Why?

Debt carries a higher risk than equity because you must pay interest on a
regular basis and repay the principal at maturity when you finance with
debt. If you are unable to, your creditors may require the sale of your
assets to cover the obligation.
1,200,000 Return on Equity= Net Income/Shareholders Equity*100
270,000
930,000 650,000.00/20,000,000.00
279,000 $0.0325 *100
651,000 $3.2500
200,000 3.255
3.255 552,500/20,000.00
$0.0276 *100
$2.7625
 Show calculations here
a) Calculate the present value of the bond if J&J’s were to use a 3% coupon rate. ↓

Bond Value
Number of periods 20 10 year x 2 times a year
Market rate 2.50% 5%/2
Present Value Factor 0.61027
Present Value of the Face Value of the Bond $3,051,350.00 5000000 x 0.61027=
5000000 x (3%/2)
Actual Interest payment $75,000.00
75000 x 15.58916
Interest Value 3051350 + 1,169,187.00
Present Value Factor 15.58916 $4,220,537.00
Present value of the Interest Payments $1,169,187.00
5000000*(3%/10)
Present Value of the Bond $4,220,537 15000

Record the entry for the issue, first interest payment at June 1st, accrual of interest
b) at December 31st and the second interest payment for (a) on January 1st.
DATE PARTICULARS PR DEBIT CREDIT
###
Jun 1 Cash - $ 4,220,537.00
Bonds Payable - 4,220,537.00
Issued 10-year, 5% bond payable
Semi-annually

July 1 Interest Expense - 105,513.43

Cash - 75,000.00
Bond Payable 30,513.43
Made semi-annual interest payment

Dec 31 Interest Expense - 106,276.26

Interest Payable - 75,000.00
Bond Payable 31,276.26
To accrue interest on bond

###
Jan 1 Interest Payable - 75,000.00
Cash - 75,000.00
Made semi-annual interest payment
ow calculations here

0.025
year x 2 times a year

00000 x 0.61027= 3051350

00000 x (3%/2)

000 x 15.58916
51350 + 1,169,187.00
5000000 3% 10
15000
00000*(3%/10)

Interest expense
4,220,537 x 2.5%
$105,513.43

Carrying Val of bond

4,220,537 + 30,513.43
4,251,050.43

Interest Expense 2.50%

4,251,537 x 2.5%
$106,276.26
c) Calculate the present value of the bond if J&J’s were to use a 9% coupon rate.

Bond Value
Number of periods 20
Market rate 2.50%
Present Value Factor 0.61027
Present Value of the Face Value of the Bond $3,051,350.00

Actual Interest payment $225,000.00

Interest Value
Present Value Factor 15.58916
Present value of the Interest Payments $3,507,561.00

Present Value of the Bond $6,558,911.00

Record the entry for the issue, first interest payment, accrual of interest at
d) December 31st and the second interest payment for (b).
DATE PARTICULARS PR DEBIT CREDIT
###
Jun 1 Cash - $ 6,558,911.00
Bonds Payable - 6,558,911.00
Issued 10-year, 5% bond payable
Semi-annually

July 1 Interest Expense - 163,972.78

Cash - 225,000.00
Bond Payable - 61,027.23
Made semi-annual interest payment

Dec 31 Interest Expense - 162,447.09

Interest Payable - 225,000.00
Bond Payable - 62,552.91
To accrue interest on bond

###
Jan 1 Interest Payable - 225,000.00
Cash - 225,000.00
Made semi-annual interest payment
Show calculations here
↓

10 year x 2 times a year

5%/2

5000000 x 0.61027= 3051350

5000000 x (9%/2)
225000

225000 x 15.58916 $3,507,561.00

,051,350.00 + 3,507,561.00

5000000 9% 10
5000000*(9%/10)
45000

Interest expense
6558911 x 2.5% 2.50%
163972.775

Carrying Val of Bond

6558911 + (-61,027.23)
6,497,883.77

Interest Expense
6,497,883.77 x 2.5%
$162,447.09
 The owner of J&J’s wants to issue at a premium because he sees that he will
e) get more money today. What is the mistake in his thinking?
It would be presumptuous for the owner to believe that he will get more
money from selling his company, given that the market rate is always shifting
and it is difficult to predict whether it will sell for more or less than its face
value. However, if the interest rate on the market is less than the interest rate
specified in the contract. Investors will then be required to pay a premium over
the bonds' face value. That is to say, the issuer will need more money from
the investors if the difference between the market and contractual interest
rates is 4% and 5%, respectively. Bonds trade at a premium in these
circumstances.
a) Fixed payment $2,750
Interest Cash Interest Reduction of Principal
Period Payment Expense Principal Balance
Issue 500,000
Period 1 $4,417 1,667 $2,750 497,250
Period 2 $4,408 1,658 $2,750 494,500
Period 3 $4,398 1,648 $2,750 491,750
Period 4 $4,389 1,639 $2,750 489,000
Period 5 $4,380 1,630 $2,750 486,250

a) Blended payment $3,021 + interest(4%)

Interest Cash Interest Reduction of Principal
Period Payment Expense Principal Balance
Issue 500,000
Period 1 $3,021 $1,667 $1,354 498,646
Period 2 $3,021 $1,662 $1,359 497,287
Period 3 $3,021 $1,658 $1,363 495,923
Period 4 $3,021 $1,653 $1,368 494,556
Period 5 $3,021 $1,649 $1,372 493,183

Both principle and interest are paid in the $3,021 payment.

 Show calculations here
↓
a) Working capital 1,700,000.00 2.1=
Current ratio 1.94444444444444
Acid test ratio 1,800,000.00

you calculated in (a). Identify other sources of information that would make your
b) analysis even better.
It is better if the ratio is 2:1 when determining the ability of short-term lenders to
be paid back because this indicates that the company has twice as many
current assets as liabilities to pay off its debts. However, there is cause for
concern because all of the above ratios are below 2:1. It's acceptable as long
as the ratio isn't 1 or below because that indicates that the company doesn't
have enough liquid assets to cover its liabilities. Other sources of information
that would support this include cash flow analysis, liquidity analysis,
and horizontal analysis.

Show calculations here

↓
c) Debt ratio 722.22% 13,000,000 1,800,000 722.22%
Interest coverage ratio 800.00% 400,000.00 50,000 800.00%

calculated in (c). Identify other sources of information that would make your
d) analysis even better.
The higher the ratio, the better it is for long-term solvency. Additionally, if the
ratio falls to 1.5 or lower, it indicates that the company in question is having
trouble covering the interest on its debt. Given that the aforementioned ratios for
J&J are far higher than 1.5, it is safe to say that everything is in order. Other
sources of information that would support this point include the equity ratio, the
debt-to-equity (D/E) ratio, the debt-to-assets ratio, and the interest coverage
ratio since they all look at a company's capacity to pay its long-term debts and
commitments.

getting rid of all the company’s debt. Are they correct in their thinking? Why or
e) why not?
The CEO of J&J's would undoubtedly be right in his assumptions given that
buying the company back will increase shareholders' returns on equity, which is
how J&J reduces its debt. Since debt decreases as ROE(return on equity)
increases.
3,500,000 1.9444444444 3500000 - 1800000= 1,700,000 500000 + 800,000
1,800,000 Current Ratio Working Capital 1,800,000

1800000
Acid test ratio
500000
800,000