Problem 10-32B Effect of financing transactions on financial statements
Required
Show the effect of each of the following independent accounting events on the financial statements using a horizontal statements model like the following one. Use + for increase, − for decrease, and NA for not affected. The first event is recorded as an example.
a. Issued a bond at a premium.
b. Made an interest payment on a bond that had been issued at a premium and amortized the premium.
c. Borrowed funds using a line of credit.
d. Made an interest payment for funds that had been borrowed against a line of credit.
e. Made a cash payment on a note payable for both interest and principal.
f. Issued a bond at face value.
g. Made an interest payment on a bond that had been issued at face value.
h. Issued a bond at a discount.
i. Made an interest payment on a bond that had been issued at a discount and amortized the discount.
Problem 10-33B Effective interest versus straight-line amortization
On January 1, Year 1, Mason Corp. sold $100,000 of its own 6 percent, 10-year bonds. Interest is payable annually on December 31. The bonds were sold to yield an effective interest rate of 5 percent.
Mason Corp. uses the effective interest rate method. The bonds sold for $104,330.
Required
a. Prepare the journal entry for the issuance of the bonds.
b. Prepare the journal entry for the amortization of the bond premium and the payment of the interest on December 31, Year 3. (Assume effective interest amortization.)
c. Prepare the journal entry for the amortization of the bond premium and the payment of interest on December 31, Year 3. (Assume straight-line amortization.)
d. Calculate the amount of interest expense for Year 4. (Assume effective interest amortization.)
e. Calculate the amount of interest expense for Year 4. (Assume straight-line amortization.)
Problem 10-34B Using ratios to make comparisons
The following information pertains to Tacoma and Olympia companies:
| Account Title | Tacoma Co. | Olympia Co. |
|---|---|---|
| Current assets | $60,000 | $60,000 |
| Total assets | $1,000,000 | $1,000,000 |
| Current liabilities | $55,000 | $50,000 |
| Total liabilities | $800,000 | $600,000 |
| Stockholders’ equity | $200,000 | $400,000 |
| Interest expense | $60,000 | $45,000 |
| Income tax expense | $95,000 | $100,000 |
| Net income | $145,000 | $155,000 |
Required
a. Compute each company’s debt-to-assets ratio, current ratio, and times interest earned (EBIT must be computed). Identify the company with the greater financial risk.
b. Compute each company’s return-on-equity ratio and return-on-assets ratio. Use EBIT instead of net income when computing the return-on-assets ratio. Identify the company that is managing its assets more effectively. Identify the company that is producing the higher return from the stockholders’ perspective. Explain how one company was able to produce a higher return on equity than the other.
Senior lecturer at University. 12+ years tutoring algebra and calculus..