Problem One Long-term liabilities:

1. Issuance of bonds:

Compute the issue price of the following bond:

$25,000,000 face value, zero-coupon bonds due in 15 years, priced on the market to yield 8 percent compounded annually.

Determine the issue price of the following bond:

$5,000,000 face value, 10 percent semi-annual coupon bonds, with interest payable each six months and principal due in 16 years. Bonds were issued at par. You may assume that interest compounds semi-annually.

How would your answer to part (c) differ if the bonds were instead priced on the market to yield 8%?

Problem One Long-term liabilities - continued:

2. Accounting for bonds

[hint: see worksheets for problem P9-55 for Kasznik Corp in course notes #8 as a guide to this problem]:

Schwarber Corporation issued $10,000,000-face value, 9-year bonds on January 1, 2017. The annual coupons, payable on December 31 of each year, each promise 8 percent of face value. The market initially priced the bonds to yield a 9 percent annual rate. You may assume that interest compounds annually.

Compute the proceeds from the issuance of the bonds on January 1, 2017 and show the journal entry to record the issuance at this date.

Show the journal entry (including amounts) to record interest expense for the 2017.

Compute the book value of the bonds at January 1, 2018 using the information in parts (a) and (b).

Problem One Long-term liabilities - continued:

2. Accounting for bonds - continued

Use present value computations to verify the book value of the bonds on January 1, 2018 that you computed in part (c) above.

On January 1, 2018, Schwarber Corporation reacquired the bonds on the open market for $9,700,000 and retired them. Show the journal entry to record the repurchase of the bonds, including any gain or loss on retirement of the bonds assuming that the firm had used the effective-interest method of amortizing bond premium and discount.

Problem Two Operating vs. Capital leases:

Heyward Company entered into a six-year lease for a printing press on January 1, 2017. The lease requires Heyward to make equal payments of $75,000 at the end of each of the six years of the lease. Heyward 's incremental borrowing rate is 6 percent. Heyward uses straight-line depreciation and zero estimated salvage value for its office equipment. Heywards fiscal year ends December 31.

Required:

Assuming that the lease is an operating lease, give the journal entries that Heyward Company would make during fiscal 2017 to account for the leased printing press. Consider both the inception date of the lease and the date that the lease payment occurs.

Date of lease signing:

December 31:

Repeat (a), assuming that the lease is a capital lease.

Date of lease signing:

December 31:

Problem Two Operating vs. Capital leases (continued):

c.	Determine the total expense over the six years of the lease, assuming it is an operating lease.

Compute the total expense over the six years of the lease, assuming it is a capital lease. Show separately the interest and depreciation components of the expense.