1. Price of the bonds at January 1, 2011

Interest $4,000,000^¥ x 11.46992 ^* = $45,879,680 Principal $80,000,000 x 0.31180 ^** = 24,944,000 Present value (price) of the bonds $70,823,680

^¥ 5% x $80,000,000

^* present value of an ordinary annuity of $1: n=20, i=6% (Table 4)

^** present value of $1: n=20, i=6% (Table 2)

2. January 1, 2011

Cash(price determined above) 70,823,680 Discount on bonds (difference) 9,176,320 Bonds payable (face amount) 80,000,000

3. June 30, 2011

Interest expense(6% x $70,823,680)4,249,421 Discount on bonds payable (difference) 249,421 Cash(5% x $80,000,000) 4,000,000

Partial amortization schedule (not required)

Cash Effective Increase in Outstanding Payment Interest Balance Balance 5% x Face Amount 6% x Outstanding Balance Discount Reduction

70,823,680

1 4,000,000 .06 (70,823,680) = 4,249,421 249,421 71,073,101

2 4,000,000 .06 (71,073,101) = 4,264,386 264,386 71,337,487

   

   

4. December 31, 2011

Interest expense(6% x [$70,823,680 + 249,421])4,264,386 Discount on bonds payable (difference) 264,386 Cash(5% x $80,000,000) 4,000,000

Exercise 14-4

1. January 1, 2011

Interest $4,000,000^¥ x 11.46992 ^* = $45,879,680 Principal $80,000,000 x 0.31180 ^** = 24,944,000 Present value (price) of the bonds $70,823,680

^¥ 5% x $80,000,000

^* present value of an ordinary annuity of $1: n=20, i=6% (Table 4)

^** present value of $1: n=20, i=6% (Table 2)

Bond investment (face amount) 80,000,000 Discount on bond investment (difference) 9,176,320 Cash(price determined above) 70,823,680

2. June 30, 2011

Cash(5% x $80,000,000) 4,000,000 Discount on bond investment (difference) 249,421 Interest revenue(6% x $70,823,680)4,249,421

3. December 31, 2011

Cash(5% x $80,000,000) 4,000,000 Discount on bond investment (difference) 264,386 Interest revenue(6% x [$70,823,680 + 249,421])4,264,386

Exercise 14-5

1. Liability at December 31, 2011

Bonds payable (face amount) $320,000,000

Less: discount 36,705,280

Initial balance, January 1, 2011 $283,294,720

June 30, 2011 discount amortization 997,683*

Dec. 31, 2011 discount amortization 1,057,544**

December 31, 2011 net liability $285,349,947

2. Interest expense for year ended December 31, 2011

June 30, 2011 interest expense $16,997,683*

Dec. 31, 2011 interest expense 17,057,544**

Interest expense for 2011 $34,055,227

3. Statement of cash flows for year ended December 31, 2011

Myriad would report the cash inflow of $283,294,720*** from the sale of the bonds as a cash inflow from financing activities in its statement of cash flows.

The $32,000,000 ($16,000,000* + 16,000,000**) cash interest paid is cash outflow from operating activities because interest is an income statement (operating) item.

Exercise 14-5 (concluded)

Calculations:

January 1, 2011***

Cash(price given) 283,294,720 Discount on bonds (difference) 36,705,280 Bonds payable (face amount) 320,000,000

June 30, 2011*

Interest expense(6% x $283,294,720)16,997,683 Discount on bonds payable (difference) 997,683 Cash(5% x $320,000,000) 16,000,000

December 31, 2011**

Interest expense(6% x [$283,294,720 + 997,683])17,057,544 Discount on bonds payable (difference) 1,057,544 Cash(5% x $320,000,000) 16,000,000

Exercise 14-6