Last revised April 2022
SOLUTIONS MANUAL
to accompany
Fundamental Accounting Principles
17th Canadian Edition
by Larson/Dieckmann/Harris
Prepared by:
John Harris, Seneca College
Technical checks by:
Rhonda Heninger, Southern Alberta Institute of Technology
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill Ltd. 14-1
,Last revised April 2022
Chapter 14 Bonds and Long-Term Notes Payable
Chapter Opening Critical Thinking Challenge Questions*
- Why would ZooShare consider pursuing a public bond offering in lieu of obtaining a bank
loan or other investors?
ZooShare would consider pursuing a public bond offering in lieu of obtaining a bank loan or other
investors for several reasons
ZooShare decided on a community bond offering to raise funds instead of a bank loan or raising
funds via other equity investors because green bonds enabled them to rally up support in the
community for this environmentally sustainable cause. Also, the structure of the cooperative and
its mandate are different than typical goals of for-profit organizations, which doesn't align well with
raising funds through equity investments. Rather than focusing on distributions of profits to equity
holders, the cooperative is mandated to reinvest further earnings into biogas projects and
education programs aimed at shifting the way people think about their waste.
Other reasons why companies prefer to issue bonds than obtaining a bank loan or equity
investors:
- Lower interest rates on issuing bonds than on bank loans. Quite often the costs
associated with interest paid on issuing bonds is lower than interest rates offered by banks;
- Higher degree of independence in issuing bonds than compared to bank loans. Banks
can require certain criteria to be met e.g. maintaining a certain debt-to-equity ratio or other
specific requirements, whereas bond issue does not usually involve any specific
requirements.
- Higher independence with a bond issue rather than other investors. Often investors want
a say in how the business is run, through voting rights. To keep control within the
company, issuing bonds or can be a better fit for the company.
*The Chapter 14 Critical Thinking Challenge questions are asked on the first page of Chapter
14, immediately below the Chapter 14 opening story. Students are reminded at the conclusion
of Chapter 14 to refer to the Critical Thinking Challenge questions at the beginning of the
chapter. The solutions to the Critical Thinking Challenge questions are available here in the
Solutions Manual and accessible to students on Connect.
Note to instructor: Present value factors are found in Appendix 14A and a printable version is
available online as EYK 14-4. You may prefer to have your students use their business
calculator PV function. Solutions that suggest the use of the PV tables also show the answer
using the business calculator PV function.
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill Ltd. 14-2
,Last revised April 2022
Knowledge Check-Up Questions
1. b) 2. a) 3. d) 4. c) 5. d)
6. b) 7. b) 8. a) 9. c) 10. a)
Concept Review Questions
1. Notes payable are used for short- and long-term lending and generally involve borrowing
from a single creditor, whereas bonds payable are usually sold to many different lenders for
terms greater than one year.
2. A common share is a unit of ownership. A bond is a liability of the issuing company.
3. Bonds can allow company owners to increase their return on equity without investing
additional amounts, as long as the rate of return on the assets purchased with the borrowed
cash is greater than the interest rate paid on the bonds. Also, interest expense appears on
the income statement and lowers profit which decreases tax payable. Bonds help the
current owners remain in control of the company.
4. A bond indenture is a legal contract between the issuing company and the bondholders that
states the obligations and rights of both parties. It specifies such items as the par value of
the bonds, the contract interest rate, the due dates for interest payments, and the maturity
date of the bonds. It also may name a trustee or describe the bond issue in detail.
5. Issuing corporations must repay the bondholders the principal they have invested at the end
of the term of the bonds. They must also pay interest on the bonds per the frequency cited
in the bond indenture.
6. The details regarding the composition of December 31, 2020 $59 million balance in long-
term lease liabilities for Spin Master is located in the notes to the financial statements, note
24.
7. The contract interest rate is the rate that is identified in the bond indenture. It is applied to
the par value to determine the size of the cash interest payments. The market interest rate
is the consensus rate that a company is willing to pay and that investors are willing to accept
for a specific bond.
8. In general, the supply of and demand for bonds affect market interest rates. The interest
rate for a particular bond issue is also affected by risks unique to the issuer and the length
of time until the bonds mature.
9. The market value of bonds can be estimated by using the market interest rate to find the
present value of both the cash flows at maturity and the periodic interest payments.
10. The cash price of a $2,000 bond sold at 98 1/4 is 98.25% of $2,000, or $1,965. The cash
price of a $6,000 bond priced at 101 1/2 is 101.5% of $6,000, or $6,090.
11. When issuing bonds between interest dates, a company collects accrued interest from the
purchasers to avoid keeping detailed records of bond purchasers and the dates on which
they purchased bonds. If the company did not collect accrued interest, special cheques
would be needed to pay the correct amount of interest to each purchaser. By collecting in
advance, the issuer merely distributes the same size cheque to all bondholders, regardless
of when they purchased the bonds.
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill Ltd. 14-3
, Last revised April 2022
12. Instalment notes usually require one of two payment patterns: (1) payments of accrued
interest plus equal amounts of principal, and (2) equal payments that consist of changing
amounts of interest and principal.
13. Similar to secured bonds, other secured loans and borrowings are backed by specific assets
of the company. In the event of default on the loan, debt holders can demand that the
secured assets be sold and the proceeds be used to pay for the debt obligation. Spin Master
Corp’s secured revolving credit facility is secured by a general pledge against all present
and future personal property, assets and undertakings of the credit parties. This is a
significant pledge that impacts future resources available to shareholders in the event of
default, therefore it is important for current and future investors to be aware of this
arrangement.
14. A lease creates an asset for the lessee if the lease agreement gives the lessee essentially
the same risks and potential benefits as would outright ownership of the asset. With such
a lease, the lessee also assumes essentially the same obligations as if the asset were
purchased on credit.
15. ZooShare's initial bond offering had a higher degree of risk associated it, as the government
approvals to sell the electricity back to the Ontario power grid had not yet been received. To
compensate Founders’ Club members for taking on this higher level of risk in the
development phase, ZooShare offered a higher interest rate. Investments of $10,000–
49,999 received an 11.5% annual return; investments of $50,000–$99,000 received 12%,
and investments greater than $100,000 received 12.5%.
Once the project had required approvals in place, it raised $2.2 million in additional funds to
pay for the construction of the biogas facility through a secondary bond offering. This
second bond offering had a lower level of risk, because approvals were already in place and
they were moving onto the building phase, they offered a lower interest rate of 7% to
community bondholders.
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill Ltd. 14-4
SOLUTIONS MANUAL
to accompany
Fundamental Accounting Principles
17th Canadian Edition
by Larson/Dieckmann/Harris
Prepared by:
John Harris, Seneca College
Technical checks by:
Rhonda Heninger, Southern Alberta Institute of Technology
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill Ltd. 14-1
,Last revised April 2022
Chapter 14 Bonds and Long-Term Notes Payable
Chapter Opening Critical Thinking Challenge Questions*
- Why would ZooShare consider pursuing a public bond offering in lieu of obtaining a bank
loan or other investors?
ZooShare would consider pursuing a public bond offering in lieu of obtaining a bank loan or other
investors for several reasons
ZooShare decided on a community bond offering to raise funds instead of a bank loan or raising
funds via other equity investors because green bonds enabled them to rally up support in the
community for this environmentally sustainable cause. Also, the structure of the cooperative and
its mandate are different than typical goals of for-profit organizations, which doesn't align well with
raising funds through equity investments. Rather than focusing on distributions of profits to equity
holders, the cooperative is mandated to reinvest further earnings into biogas projects and
education programs aimed at shifting the way people think about their waste.
Other reasons why companies prefer to issue bonds than obtaining a bank loan or equity
investors:
- Lower interest rates on issuing bonds than on bank loans. Quite often the costs
associated with interest paid on issuing bonds is lower than interest rates offered by banks;
- Higher degree of independence in issuing bonds than compared to bank loans. Banks
can require certain criteria to be met e.g. maintaining a certain debt-to-equity ratio or other
specific requirements, whereas bond issue does not usually involve any specific
requirements.
- Higher independence with a bond issue rather than other investors. Often investors want
a say in how the business is run, through voting rights. To keep control within the
company, issuing bonds or can be a better fit for the company.
*The Chapter 14 Critical Thinking Challenge questions are asked on the first page of Chapter
14, immediately below the Chapter 14 opening story. Students are reminded at the conclusion
of Chapter 14 to refer to the Critical Thinking Challenge questions at the beginning of the
chapter. The solutions to the Critical Thinking Challenge questions are available here in the
Solutions Manual and accessible to students on Connect.
Note to instructor: Present value factors are found in Appendix 14A and a printable version is
available online as EYK 14-4. You may prefer to have your students use their business
calculator PV function. Solutions that suggest the use of the PV tables also show the answer
using the business calculator PV function.
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill Ltd. 14-2
,Last revised April 2022
Knowledge Check-Up Questions
1. b) 2. a) 3. d) 4. c) 5. d)
6. b) 7. b) 8. a) 9. c) 10. a)
Concept Review Questions
1. Notes payable are used for short- and long-term lending and generally involve borrowing
from a single creditor, whereas bonds payable are usually sold to many different lenders for
terms greater than one year.
2. A common share is a unit of ownership. A bond is a liability of the issuing company.
3. Bonds can allow company owners to increase their return on equity without investing
additional amounts, as long as the rate of return on the assets purchased with the borrowed
cash is greater than the interest rate paid on the bonds. Also, interest expense appears on
the income statement and lowers profit which decreases tax payable. Bonds help the
current owners remain in control of the company.
4. A bond indenture is a legal contract between the issuing company and the bondholders that
states the obligations and rights of both parties. It specifies such items as the par value of
the bonds, the contract interest rate, the due dates for interest payments, and the maturity
date of the bonds. It also may name a trustee or describe the bond issue in detail.
5. Issuing corporations must repay the bondholders the principal they have invested at the end
of the term of the bonds. They must also pay interest on the bonds per the frequency cited
in the bond indenture.
6. The details regarding the composition of December 31, 2020 $59 million balance in long-
term lease liabilities for Spin Master is located in the notes to the financial statements, note
24.
7. The contract interest rate is the rate that is identified in the bond indenture. It is applied to
the par value to determine the size of the cash interest payments. The market interest rate
is the consensus rate that a company is willing to pay and that investors are willing to accept
for a specific bond.
8. In general, the supply of and demand for bonds affect market interest rates. The interest
rate for a particular bond issue is also affected by risks unique to the issuer and the length
of time until the bonds mature.
9. The market value of bonds can be estimated by using the market interest rate to find the
present value of both the cash flows at maturity and the periodic interest payments.
10. The cash price of a $2,000 bond sold at 98 1/4 is 98.25% of $2,000, or $1,965. The cash
price of a $6,000 bond priced at 101 1/2 is 101.5% of $6,000, or $6,090.
11. When issuing bonds between interest dates, a company collects accrued interest from the
purchasers to avoid keeping detailed records of bond purchasers and the dates on which
they purchased bonds. If the company did not collect accrued interest, special cheques
would be needed to pay the correct amount of interest to each purchaser. By collecting in
advance, the issuer merely distributes the same size cheque to all bondholders, regardless
of when they purchased the bonds.
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill Ltd. 14-3
, Last revised April 2022
12. Instalment notes usually require one of two payment patterns: (1) payments of accrued
interest plus equal amounts of principal, and (2) equal payments that consist of changing
amounts of interest and principal.
13. Similar to secured bonds, other secured loans and borrowings are backed by specific assets
of the company. In the event of default on the loan, debt holders can demand that the
secured assets be sold and the proceeds be used to pay for the debt obligation. Spin Master
Corp’s secured revolving credit facility is secured by a general pledge against all present
and future personal property, assets and undertakings of the credit parties. This is a
significant pledge that impacts future resources available to shareholders in the event of
default, therefore it is important for current and future investors to be aware of this
arrangement.
14. A lease creates an asset for the lessee if the lease agreement gives the lessee essentially
the same risks and potential benefits as would outright ownership of the asset. With such
a lease, the lessee also assumes essentially the same obligations as if the asset were
purchased on credit.
15. ZooShare's initial bond offering had a higher degree of risk associated it, as the government
approvals to sell the electricity back to the Ontario power grid had not yet been received. To
compensate Founders’ Club members for taking on this higher level of risk in the
development phase, ZooShare offered a higher interest rate. Investments of $10,000–
49,999 received an 11.5% annual return; investments of $50,000–$99,000 received 12%,
and investments greater than $100,000 received 12.5%.
Once the project had required approvals in place, it raised $2.2 million in additional funds to
pay for the construction of the biogas facility through a secondary bond offering. This
second bond offering had a lower level of risk, because approvals were already in place and
they were moving onto the building phase, they offered a lower interest rate of 7% to
community bondholders.
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill Ltd. 14-4
