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Unformatted text preview: unt. The bond market has determined that purchasers of Hartl
Enterprises' bonds should earn an annual return on their investment of 10%. However, Hartl Enterprises is
offering interest equal to only 8%. Since the stated interest rate cannot be changed, the only way that the
investors can earn their 10% return is to invest a smaller amount in Hartl Enterprises. They will still receive
the same future cash flows. Consequently, the bonds will be issued at a price that allows the investors to
earn a return of exactly 10% on their investment. b. Face value $
10,000 Present value (i = 5%, n = 20)
PV of maturity receipt
($10,000 .3769 from Table
$
3,769 4 in Appendix A)
PV of interest receipts ($400 12.4622 from Table
4,985 5 in Appendix A)
Total present value
8,754
Discount $
1,246 Cash (+A)
Discount on Bonds Payable (–L) 8,754
1,246
Bonds Payable (+L) 10,000
Issued bonds.
c. Interest Expense (E, –SE) Payable (+L) 218.85a
Discount on Bonds
18.85b
Interest Payable (+L)
200.00c Accrued interest payable.
a $218.85
b $18.85
c $200.00 d. =
=
=
=
= Book value Effective rate per period Portion of period outstanding
$8,754 5% 3/6
Interest expense – Interest payable
Face value Stated rate per period Portion of period outstanding
$10,000 4% 3/6
Interest Expense (E, –SE)
Interest Payable (–L) 218.85
200.00
Discount on Bonds Payable (+L) 18.85
Cash (–A)
400.00 Made interest payment. P11–3
a. LT Debt/Equity Ratio b. Proceeds = Total LongTerm Liabilities ÷ Total Stockholders' Equity
= $40,000 ÷ $100,000
= 0.4 = Present Value of Future Cash Flows Discounted at 11% for 5 Periods
= $40,000 .59345 (from Table 4 in Appendix A)
= $23,738 If Manheim Corporation borrows this $40,000, its longterm debt/equity ratio would be .637 [($40,000 +
$23,738) ÷ $100,000].
c. Proceeds = Present Value of Future Cash Flows Discounted at 4% for 40 Periods
= Present Value of the Face Value + Present Value of Interest Payments
= ($40,000 .20829 from Table 4 in Appendix A) + [($40,000 5%) 19.7927...
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 Fall '08
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 Accounting

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