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Assignment 7

Arun Chaitanya Salivendra


11.35
a. Capital Lease Liability, December 31, 2012
$ 1,088
Plus Interest Expense (Plug)
102
Plus New Capital Leases Signeda
0
Less Cash Payment on Capital Leases
(263)
Capital Lease Liability, December 31, 2013
. $ 927
A comparison of the commitments under capital leases on December 31, 2012
and December 31, 2013 indicates that Northern Airlines did not sign any new
capital leases during 2013.
b. $102/$1,088 = 9.375%.
c. Capitalized Leased Asset, December 31, 2012
$ 1,019
Plus New Capital Leases Signeda
0
Less Depreciation on Capital Leases (Plug)
(154)
Capital Leased Asset, December 31, 2013
$ 865
d. December 31, 2013 Interest Expense
102
Lease Liability
161
Cash
263
December 31, 2013 Depreciation Expense
154
Accumulated Depreciation
154
e. December 31, 2013 Rent Expense
1,065
Cash
1,065
f.

Year

Payments

Present Value
Factor at 10.0%

Present Value

2014
998
2015
853
2016
698
2017
587
2018
531
After

$ 1,098

0.90909

1,032

0.82645

929

0.75131

860

0.68301

855

0.62092

6,710a
5.26685b X 0.62092c
2,796
Total .................................................................................
6,463

2018

g.

Long-Term Debt Ratio Based on Reported Amounts:


December 31, 2012:
$13,456/$29,495 = 45.6%
December 31, 2013: $12,041/$29,145 = 41.3%

h.

Long-Term Debt Ratio Including Capitalization of Operating


Leases:
December 31, 2012: ($13,456 + $6,604 $968)/($29,495 + $6,604) =52.9%
December 31, 2013: ($12,041 + $6,463 $998)/($29,145 + $6,463) = 49.2%

i.

Lessees prefer the operating lease treatment because the capital lease
treatment leads the lessee to show more debt on its balance sheet and
higher debt-equity ratios.

11.30
a. $483 million = $1,550 million/3.20714; Alternatively, $483 million = $1,550 X
0.31180;
b. 5.82% = ($1,550/$500)1/20 1 = 3.101/20 1. That is, for each dollar of the
initial issue proceeds (of the $500 million), Time Warner must pay $3.10 (=
$1,550/$500) at maturity of the notes. You can find the periodic interest rate to
make $1.00 grow to $3.10 in 20 periods by trial and error or by using the
exponential function on your computer or calculator. Note that you can state an
equation to solve, as follows:
(1 + r)20 = 3.10; solve for r.
You can see from Table 1 that 5.82% is approximately correct.
c. $28 million = 0.07 X $400 million.
d. $101.4 million. Ask, first, what must the carrying value of the notes be at the end
of 2031. Then, compute interest for the year on that amount. The carrying value of

the notes at the end of 2031 must be $1,448.6 (= $1,550/1.07) million. Interest for
one year at 7% on $1,448.6 million is $101.4 (= 0.07 X $1,448.6 = $1,550.0
$1,448.6) million. You can check this approach to finding the answer by noting that:
$1,448.6 X 1.07 = $1,550.0.
e. The carrying value of the $700 million face value of zero coupon bonds is $391
million (= $700 X 0.55839; see Table 2, 6% column and 10period row). The market
value of the $700 million face value of zero coupon bonds is $324 million (= $700 X
0.46319; see Table 2, 8% column and 10-period row). The journal entry to record
the repurchase and retirement of the bonds is:
December 31, 2022 Bonds Payable
391
Cash
324
Gain on Bonds Retirement
67
To record the repurchase and retirement of $700 million face value bonds.

11.29
a. Interest Expense First Six Months: 0.05 X $301,512 = $15,076. Second Six
Months: 0.05($301,512 + $15,076) = $15,829. Carrying value of bonds on
December 31, 2013: $301,512 + $15,076 + $15,829 = $332,417.
b. Carrying Value of Bonds on December 31, 2012
Interest: $35,000 X 8.11090 = $ 283,882
Principal: $1,000,000 X 0.67556 = 675,560
Total
$ 959,442
Carrying Value of Bonds, December 31, 2012
$ 959,442
Add Interest Expense for 2013
?
Subtract Coupon Payments during 2013
(70,000)
Carrying Value of Bonds, December 31, 2013
$ 966,336
Interest expense for 2013 is
$76,894.
c. Carrying Value of Bonds on July 1, 2013
Carrying Value of Bonds, December 31, 2012
$ 1,305,832
Plus Interest Expense for First Six Months of 2013:
0.03 X $1,305,832
39,175
Subtract Coupon Payment during First Six Months of 2013
(45,000)
Carrying Value of Bonds, July 1, 2013
$ 1,300,007

Carrying Value of One-Half of Bonds


$ 650,004
July 1, 2013 Bonds Payable
650,004
Cash
526,720
Gain on Bonds Retirement
123,284
d. Interest Expense for Second Six Months 0.03 X $650,004 = $19,500.

11.25
a. This lease is a capital lease because the lease period of 20 years exceeds 75% of
the expected life of the aircraft. The lease does not meet any other capital lease
criteria. The aircraft reverts to Boeing at the end of 20 years. The present value of
the lease payments when discounted at 10% is $51.1 million (= $6 million X
8.51356), which is less than $54 million (= 90% of the fair value of $60 million).
b. This lease is a capital lease because the present value of the lease payments of
$54.8 million (= $7.2 million X 7.60608) exceeds 90% of the $60 million fair value of
the aircraft.
c. The lease is not a capital lease. The present value of the required lease
payments of $36.9 million (= $5.5 million X 6.71008) is less than $54 million (=
90% of the fair value of the aircraft). The life of the lease is less than 75% of the
expected useful life of the aircraft. The purchase option price coupled with the
rental payments provides Boeing with a present value of all cash flows exceeding
$62.4 million [= ($5.5 million X 6.71008) + ($55 million X 0.46319)]. This amount
exceeds the usual sales price of $60 million, so there does not appear to be a
bargain purchase option.
d. This lease is not a capital lease. The present value of the minimum required
lease payments is $50.9 million (= $6.2 million X 8.20141). The fee contingent on
usage could be zero, so the calculations exclude it. The life of the lease is less than
75% of the useful life of the aircraft. The aircraft reverts to Boeing at the end of the
lease period.

11.18
a. $100,000 X 0.67556
$5,000 X 8.11090
Issue Price
b.

$ 67,556
40,555
$ 108,111

Six
Month
Period

Liability at
the start of
the period

0
1
$ 108,111
5,000
$ (676)
2
107,435
5,000
(703)
3
106,732
5,000
(731)
4
106,001
5,000
(760)
5
105,241
5,000
(790)
6
104,451
5,000
(822)
7
103,629
5,000
(855)
8
102,774
5,000
(889)
9
101,885
5,000
(925)
10
100,960
5,000
(960)
Total ....................

Interest
at 4%
per
period

Cash
Payment

c. Carrying Value of Bonds: $10,363.


Bonds Payable
Gain on Bond Retirement
Cash

4,324
4,297
4,269
4,240
4,210
4,178
4,145
4,111
4,075

Decrease
in carrying
value of
liability

4,040

Liability
at end of
the period

$
108,111
107,435
106,732
106,001
105,241
104,451
103,629
102,774
101,885
100,960
100,000

$ 41,889

$
10,363
63
10,300