Answers - Chapter 2 Vol 2 Rvsed

CHAPTER 2 NON-CURRENT LIABILITIES PROBLEMS 2-1.

(Ruby Corporation) At 8% Bond issue price Nominal interest for 2007 Interest expense for 2007 Premium/discount amortization in 2007 Bond carrying value at December 31, 2007 Nominal interest for 2008 Interest expense for 2008 Premium/discount amortization in 2008 Bond carrying value at December 31, 2008

At 11%

1,081,145 50,000 43,246 6,754

962,280 50,000 52,925 2,925

1,074,391

965,205

100,000 85,671 14,059

100,000 106,342 6,342

1,060,332

971,547

Computations: At 8% Issue price = (1,000,000 x 0.6756) + (50,000 x 8.1109) = 675,600 + 405,545 = 1,081,145

Date

A Interest Paid

B Interest Expense

C Premium Amortization

06/30/07 12/31/07 06/30/08 12/31/08

50,000 50,000 50,000

43,246 42,976 42,695

6,754 7,024 7,035

A B

= =

D Bond Carrying Value 1,081,145 1,074,391 1,067,367 1,060,332

Face value x 5% Carrying value, beg of year x 4%

At 11% Issue price = (1,000,000 x 0.5854) + (50,000 x 7.5376) = 585,430 + 376,880 = 962,280

2-2.

Date

A Interest Paid

B Interest Expense

C Discount Amortization

06/30/07 12/31/07 06/30/08 12/31/08

50,000 50,000 50,000

52,925 53,086 53,256

2,925 3,086 3,256

(Fire Company) (a) Issue price

Present value of face value x 0.5084)

(4,000,000

D Bond Carrying Value 962,280 965,205 968,291 971,547

P2,033, 600

Chapter 2 - Non-Current Liabilities

Present value of interest payments (320,000 x 7.0236) Issue price

(b)

2,247,552 P4,281,152

Amortization Table Date 3/01/07 8/31/07 2/28/08 8/31/08 2/28/09

(c) 03/01/07

Interes t Paid 320,00 0 320,00 0 320,00 0 320,00 0

Interest Expense 299,681

Premium Amortization 20,319

Bond Carrying Value 4,281,152 4,260,833

298,258

21,742

4,239,091

296,736

23,264

4,215,827

295,108

24,892

4,190,935

Cash

4,281,15 2

Bonds Payable

4,000,00 0 281,152

Premium on Bonds Payable 08/31/07

12/31/07

12/28/08

2-3.

Interest Expense Premium on Bonds Payable Cash

299,681 20,319

Interest Expense (298,258 x 4/6) Premium on Bonds Payable Interest Payable (320,000 x 4/6)

198,839 14,494

Interest Expense Premium on Bonds Payable Interest Payable Cash

99,419 7,248 213,333

(Metal Corporation) Market value of bonds Market value of warrants Total issue price (a)

5,000,000 x .98 5,000 x 70

Cash Discount on Bonds Payable Bonds Payable

320,000

213,333

4,900,000 350,000 5,250,000 5,250,00 0 100,000

Share Warrants Outstanding (b)

Cash (5,000 x 20 x 20) Share Warrants Outstanding Ordinary Shares (5,000 x 20 x 15)

10

320,000

5,000,00 0 350,000

2,000,00 0 350,000 1,500,00 0

Chapter 2 - Non-Current Liabilities

Share Premium 2-4.

(Onyx) (a)

850,000

Issue price of bonds with warrants (1,000,000 x 1.03)

Bond price without warrants 1,000,000 x 0.3220 100,000 x 5.6502 Value of share warrants

322,000 565,020

(b)

Interest Expense for 2007 (887,020 x 12% x 10/12

(c)

Bond carrying value, March 1, 2007 Amortization through December 31, 2007 887,020 x 12% x 10/12 1,000,000 x 12% x 10/12 Bond carrying value, December 31, 2007

(d)

Cash (1,000 x 30 x 50)

2-5.

88,702 83,333

(Celeron Company) (a) Issue price of convertible bonds

88,702

5,369 892,389

750,000 892,980

2,000,00 0

Issue price of bonds without conversion privilege 2,000,000 x 0.5674 1,134,800 200,000 x 3.6048 720,960 Allocation to equity (b)

887,020 142,980

887,020

1,500,00 0 142,980

Share Warrants Outstanding Ordinary Share (30,000 x 25) Share Premium

1,030,00 0

1,855,76 0 144,240

Amortization Table Date

Interest Paid

07/01/06 06/30/07 200,000 06/30/08 200,000 06/30/08 06/30/08 06/30/09 80,000 06/30/10 80,000 06/30/11 80,000 *Adjusted; difference is due to

(c) 07/01/06

Interest Expense

Premium Amortization

222,691 225,414

22,691 25,414

91,386 92,572 94,316* rounding off.

11,386 12,752 14,316

Cash Discount on Bonds Payable

11

2,000,00 0 144,240

Bond Carrying Value 1,855,760 1,878,451 1,903,865 (1,142,319) 761,546 772,932 785,684 800,000

Chapter 2 - Non-Current Liabilities

Bonds Payable

2,000,00 0 144,240

PIC Arising from Bond Conversion Privilege

06/30/07

Interest Expense Discount on Bonds Payable Cash

222,691

06/30/08

Interest Expense Discount on Bonds Payable Cash

225,414

06/30/08

Bonds Payable PIC Arising from Conversion Privilege Discount on Bonds Payable Ordinary Share Share Premium

25,414 200,000 1,200,00 0 86,544 57,681 960,000 268,863

Carrying value,bonds converted (1,903,865 x 120/200

Face value of bonds converted Discount on bonds payable cancelled Value of equity converted (144,240 x 120/200) Par value of ordinary shares issued (120 x 80 x 100)

06/30/09

06/30/10

06/30/11

06/30/11

Interest Expense Discount on Bonds Payable Cash

91,386

Interest Expense Discount on Bonds Payable Cash

92,752

Interest Expense Discount on Bonds Payable Cash

94,316

Bonds Payable

PIC Arising from Bond Conversion Privilege

14,316 80,000 800,000 57,69 6

(144,240 – 86,544)

2,000,00 0 Premium on Bonds Payable (450,000 x 2/20) 45,000 PIC Arising from Bond Conversion Privilege(320,000 x 32,000

12

960,000

12,752 80,000

Cash

(Iron Company) Bonds Payable

1,142,31 9 1,200,00 0 57,681 86,544

11,386 80,000

PIC from Unexercised Bond Conversion Privilege

2-6

22,691 200,000

800,000 57,696

Chapter 2 - Non-Current Liabilities

2/20)

Ordinary Shares (1,000 x 60 x 20)

1,200,00 0 877,000

Share Premium 2-7

(Lim Corporation) (a)

Cash

5,500,00 0

Bonds Payable

5,000,00 0 200,000 300,000

Premium on Bonds Payable

PIC Arising from Bond Conversion Privilege

(b)

Bonds Payable Premium on Bonds Payable (5,000 x 1/5) PIC Arising Privilege

from

Bond

1,000,00 0 10,000

Conversion

60,000

Ordinary Share (200 x 40 x 100) Share Premium 300,000 x 1/5 = 60,000 (c)

Bonds Payable Premium on Bonds Payable (5,000 x 2/5) PIC Arising Privilege

from

Bond

Conversion

800,000 270,000 2,000,00 0 20,000 120,000

Cash (2,000,000 x 1.04) Gain on Retirement of Bonds

PIC from Unexercised Bond Conversion Privilege

Retirement price Retirement price on account of

2,080,00 0

liability

2,000,000 x 1.005 Retirement price on account of equity

Carrying value of bonds retired Face value

2,010,00 0 70,000

Unamortized premium (50,000 x

2,000,00 0 ___20,000

Retirement price of bonds (2M x

2,020,00 0 2,010,00

2/5)

13

2,080,00 0 10,000 50,000

Chapter 2 - Non-Current Liabilities

0 10,000

1.005)

Gain on retirement of bonds Carrying value of equity

120,000

Retirement price on account of

70,000

Gain on cancellation taken to

50,000

cancelled equity

equity 2-8.

(Emerald Corporation) The following table may facilitate the computations required in this problem. Date 12/01/05 06/01/06 12/01/06 06/01/07 12/01/07 06/01/08 12/01/08 06/01/09 12/01/09 06/01/10 12/01/10

Interes t Paid 300,00 0 300,00 0 300,00 0 300,00 0 300,00 0 180,00 0 180,00 0 180,00 0 180,00 0 180,00 0

Interest Expense 269,304

Premium Amortization 30,696

Bond Carrying Value 5,386,072 5,355,376

267,769

32,231

5,323,145

266,157

33,843

5,289,302

264,465

35,535

5,253,767

262,688

37,312

5,216,455

156,494

23,506

3,106,367

155,318

24,682

3,081,685

154,084

25,916

3,055,769

152,788

27,212

3,028,557

151,443*

28,557

3,000,000

*Adjusted; difference is due to rounding off. (a)

Carrying value, December 1, 2006 (see, table)

Amortization for one month (33,843 x 1/6) Carrying value, December 31, 2006 (b)

Interest Expense for year 2006 January 1-June 1, 2006 (269,304 x 5/6) June 1-December 1, 2006 December 1-31, 2006 (266,157 x 1/6) Total

(c)

Carrying value of bonds retired on December 1, 2007

5,253,767 x 2/5 Amortization through April 1, 2008 (37,312 x 4/6 x

14

5,323,14 5 ____5,640 5,317,50 5 224,420 267,769 _44,360 536,549

2,101,50 7 ____9,950

Chapter 2 - Non-Current Liabilities

2/5)

(d)

Carrying value of bonds retired on April 1, 2008

2,091,55 7

Carrying value of bonds retired

2,091,55 7 2,080,00 0 11,557

Redemption price (2,000,000 x 1.04) Gain on redemption of bonds

(e)

(f)

Carrying value of remaining bonds, December 1, 2007 Amortization through December 31, 2007 (24,682 x 1/6) Carrying value of remaining bonds, December 31, 2007

On bonds redeemed:

January 1-June 1, 2008 (262,688 x 3/5 x

5/6)

June 1-December 1, 2008 December 1-31, 2008 (155,318 x 1/6) January 1-June 1, 2009 (155,318 x 5/6) June 1-December 1, 2009 December 1-31, 2009 (152,788 x 1/6) Interest Expense 2-9.

(Ohio Company) Date 01/01/06 12/31/06 12/31/07 12/31/07 12/31/09 12/31/10 12/31/11

4,114 3,102,253

2008 52,538

January 1-April 1, 2008 (262,688 x 2/5 x 3/6)

On remaining bonds

3,106,367

2009

131,34 4 156,494 25,886 129,432 ______

154,084 25,465

366,262

308,981

Partial Amortization Table Interest Paid 1,200,00 0 1,200,00 0 1,200,00 0 1,200,00 0 600,00 0 600,00 0

Interest Expense 1,014,73 0 999,90 8 983,90 1 966,61 3 473,97 1 463,88 9

Premium Amortization 185,270

Bond Carrying Value 12,684,120 12,498,850

200,092

12,298,758

216,099

12,082,659

233,387

11,849,272

126,029

5,798,607

136,111

5,662,496

(a)

Effective interest (12,734,120 – 50,000) x 8% Nominal interest (10,000,000 x 12% Amortization of premium for 2006

1,014,730 1,200,000 185,270

(b)

Carrying value of bonds on December 31, 2009 (see table)

11,849,27 2

15

Chapter 2 - Non-Current Liabilities

(c)

Carrying value of bonds called (11,849,272 x 5/10) Call price/retirement price (5,000,000 x 110%) Gain on retirement of bonds

(d)

Interest Expense for year 2011 (see table)

(e)

Unamortized premium on bonds payable, Dec. 31, 2011

(b)

662,496

Partial Amortization Table Nominal Interest

Effective Interest

Premium Amortization

09/01/06

85,000

88,335

3,335

1,966,335

03/01/07

85,000

88,485

3,485

1,969,820

09/01/07

85,000

88,642

3,642

1,973,462

03/01/08

85,000

88,806

3,806

1,977,268

09/01/08

85,000

88,977

3,977

1,981,245

03/01/09

85,000

89,156

4,156

1,985,401

09/01/09

85,000

89,343

4,343

1,989,744

Date 03/01/06

(a)

5,050,000 874,636 463,889

5,662,496 – 5,000,000 2-10. (Sim Company)

5,924,636

Bond Carrying value P1,963,000

Interest expense recorded on September 1, 2006 Discount amortization recorded on September 1, 2006 Carrying amount of the bonds, September 1, 2006

88,335 3,335 1,966,335

Amortization through December 31, 2006 (3,485 x 4/6)

2,323

Carrying amount of the bonds, December 31, 2006

1,968,658

(c)

Retirement price (at face value) Accrued interest (2,000,000 x 8.5% x 4/12) Amount of cash paid on June 30, 2009

2,000,000 56,667 2,056,667

(d)

Carrying value, March 1, 2009 (see table) Amortization through June 30, 2009 (4,343 x 4/6) Carrying value, June 30, 2009 Retirement price (at face value) Loss on retirement of bonds

1,985,401 2,895 1,988,296 2,000,000 11,704

2-11. (Lim Company) (a)

Issue price of the bonds Principal Interest Due Date Due Due 12/31/08 2,000,00 800,000 0 12/31/09 2,000,00 640,000 0

16

Amount Due 2,800,000

PV Factor 0.8929

Present Value 2,500,120

2,640,000

0.7972

2,104,608

Chapter 2 - Non-Current Liabilities

12/31/10

2,000,00 0 12/31/11 2,000,00 0 12/31/12 2,000,00 0 Selling price of bonds (b) Principal Due

Due Date

480,000

2,480,000

0.7118

1,765,264

320,000

2,320,000

0.6355

1,474,360

160,000

2,160,000

0.5674

1,225,584 P9,069,93 6

Amortization Table Interest Effective Discount Due Interest Amortizatio n

Carrying Value, end

12/31/07 12/31/08

2,000,00 0 12/31/09 2,000,00 0 12/31/10 2,000,00 0 12/31/11 2,000,00 0 12/31/12 2,000,00 0 *Adjusted; difference is due

800,000

1,088,392

288,392

P9,069,9 36 7,358,328

640,000

882,999

242,999

5,601,327

480,000

672,159

192,159

3,793,486

320,000

455,218

135,218

1,928,704

160,000

231,296

71,296*

-0-

to rounding off.

(c)

12/31/07

Cash

9,069,93 6 930,064

Discount on Bonds Payable Bonds Payable 12/31/08

10,000,00 0

Interest Expense

1,088,39 2

Discount on Bonds Payable Cash Bonds Payable

288,392 800,000 2,000,00 0

Cash 12/31/09

2,000,000

Interest Expense Discount on Bonds Payable Cash Bonds Payable

882,999 242,999 640,000 2,000,00 0

Cash

2,000,000

2-12. (Blue Sapphire Corporation) (a) Issue price of the bonds Due Date 12/31/07

Principal Due

Interest Due

Amount Due

2,000,00 0

960,000

2,960,000

17

PV Factor 0.9259

Present Value 2,740,664

Chapter 2 - Non-Current Liabilities

12/31/08

2,000,00 0 12/31/09 2,000,00 0 12/31/10 2,000,00 0 Selling price of bonds

(b) Principal Due

Due Date

720,000

2,720,000

0.8573

2,331,856

480,000

2,480,000

0.7938

1,968,624

240,000

2,240,000

0.7355

1,646,400 P8,687,54 4

Amortization Table Interest Effectiv Discount Due e Amortizatio Interest n

01/01/07 12/31/07

2,000,00 960,000 0 12/31/08 2,000,00 720,000 0 12/31/09 2,000,00 480,000 0 12/31/10 2,000,00 240,000 0 *Adjusted; difference is due to rounding

Carrying Value, end

695,004

264,996

8,687,544 6,422,548

513,804

206,196

4,216,352

337,308

142,692

2,073,660

166,340 * off.

73,660

-0-

(c)

01/01/07

Cash

8,687,54 4

Bonds Payable

8,000,00 0 687,544

Premium on Bonds Payable 12/31/07

Interest Expense Premium on Bonds Payable Cash Bonds Payable

695,004 264,996 2,000,00 0

Cash 12/31/08

960,000

2,000,00 0

Interest Expense Premium on Bonds Payable Cash Bonds Payable

513,804 206,196 720,000 2,000,00 0

Cash

2,000,00 0

2-13. (KFC Delivery Service) (a) 6,949,800/9,000,000 = 0.7722 This present value factor for three periods is under the rate of 9% (Table II, Present Value of a Single Payment). Hence, effective yield for this transaction is 9%. (b)

Date

Amortization

09/01/07

18

Carrying Value of Note 6,949,800

Chapter 2 - Non-Current Liabilities

08/31/08 08/31/09 08/31/10

9% x 6,949,800 = 625,482 9% x 7,575,282 = 681,775 9% x 8,257,057 = 742,943*

*Adjusted; difference is due to rounding off.

(c)

7,575,282 8,257,057 9,000,000

Interest expense for 2007 (625,482 x 4/12)

208,494

Carrying value, September 1, 2007

6,949,80 0 280,494 7,158,29 4

Amortization through December 31, 2007 Carrying value, December 31, 2007 (d) 09/01/07

Land

6,949,80 0 2,050,20 0

Discount on Notes Payable Notes Payable 12/31/07 09/01/08 12/31/08 09/01/09

Interest Expense Discount on Notes Payable

208,494

Interest Expense (625,482 -208,494) Discount on Notes Payable

416,988

Interest Expense (681,775 x 4/12) Discount on Notes Payable

227,258

Interest Expense (681,775 227,258) Discount on Notes Payable

12/31/09

Interest Expense (742,943 x 4/12) Discount on Notes Payable

09/01/10

Interest Expense (742,943 247,648) Discount on Notes Payable

2-14. (JFC) (a)

2007 6,949,800 x 9%= 625,482 625,482 x 4/12 625,482 x 8/12 6,949,800 x 1.09 = 7,575,282 7,575,282 x 9%= 681,775 681,775 x 4/12 681,775 x 8/12 7,575,282 x 1.09 = 8,253,057 8,253,057 x 9%= 743,135 743,135 x 4/12 Totals

(b)

Notes Payable

9,000,00 0 208,494 416,988 227,258

–

454,517 454,517 247,648

–

247,648

495,295 495,295 2008

2009

208,494 416,988

227,258 454,517

_______ 208,494

_______ 644,246

247,712 702,229 6,949,800

19

Chapter 2 - Non-Current Liabilities

(c)

Accrued interest Total, December 31, 2007

208,494 7,158,294

Notes Payable Accrued interest (208,494 + 644,246) Total, December 31, 2008

6,949,800 852,740 7,802,540

Notes Payable Accrued interest (208,494+644,246+702,229) Total, December 31, 2009

6,949,800 1,554,969 8,504,769

(d)

09/01/07

Land

6,949,80 0

Notes Payable 12/31/07 12/31/08 12/31/09 12/31/10

Interest Expense Interest Payable

208,494

Interest Expense Interest Payable Interest Expense Interest Payable

644,246

6,949,80 0 208,494

702,229

644,246 702,229

Interest Expense (adjusted) Interest Payable Notes Payable

495,231 1,554,96 9 6,949,80 0

Cash

9,000,00 0

2-15. (Wendy’s Catering Service) (a) Present value of note (800,000 x 3.2397) 2,591,760 (b) Date Principal Due Carrying Value of Note 4/01/06 3/31/07 3/31/08 3/31/09 3/31/10

800,000 800,000 800,000 800,000

Amortization

233,258 182,252 126,654 66,076*

2,591,760 2,025,018 1,407,270 733,924 -0-

*Adjusted; difference is due to rounding off. (c)

04/01/07

Equipment Discount on Notes Payable Notes Payable

12/31/07 03/31/08

2,591,76 0 608,240

Interest Expense (233,258 x 9/12) Discount on Notes Payable

174,944

Notes Payable

800,000

20

3,200,00 0 174,944

Chapter 2 - Non-Current Liabilities

Interest Expense Cash

58,314 800,000 58,314

Discount on Notes Payable (233,258174,944)

12/31/08 03/31/09

Interest Expense (182,252 x 9/12) Discount on Notes Payable

136,689

Notes Payable Interest Expense Cash

800,000 45,463

136,689

Discount on Notes Payable (182,252136,689)

12/31/09

Interest Expense (126,654 x 9/12) Discount on Notes Payable

03/31/10

Notes Payable Interest Expense Cash

94,991

03/31/11

800,000 31,663

Interest Expense (66,076 x 9/12) Discount on Notes Payable

49,557 49,557

Notes Payable Interest Expense Cash

800,000 16,519

Discount on Notes Payable (66,07649,557)

2-16. (Burgee’s Food Corporation) (a) Date 04/01/07 03/31/08 03/31/09 03/31/10 03/31/11

94,991

800,000 31,663

Discount on Notes Payable (126,65494,991)

12/31/10

800,000 45,563

800,000 16,519

Annual Payment

Interest

Principal Payment

Carrying Value

800,000 800,000 800,000 800,000

233,258 182,252 126,654 66,053

566,742 617,748 673,346 733,947*

2,591,760 2,025,018 1,407,270 733,924 -0-

*Adjusted (b) 04/01/07

Equipment

2,591,76 0

Notes Payable

2,591,76 0

12/31/07

Interest Expense (233,258 x 9/12) Interest Payable

174,944

04/01/08

Interest Payable Interest Expense (233,258 – 174,944) Notes Payable Cash

174,944 58,314 566,748

Interest Expense (182,252 x 9/12)

136,689

12/31/08

21

174,944

800,000

Chapter 2 - Non-Current Liabilities

Interest Payable 04/01/09

136,689

Interest Payable Interest Expense (182,252 – 136,689) Notes Payable Cash

12/31/09

Interest Expense (126,654 x 9/12) Interest Payable

04/01/10

Interest Payable Interest Expense (126,654 – 94,991) Notes Payable Cash

94,991

12/31/10

Interest Expense (66,053 x 9/12) Interest Payable

04/01/11

Interest Payable Interest Expense (66,053 – 49,540) Notes Payable Cash

(c)

Current portion at 2008 Notes Payable Interest Payable

December

136,689 45,563 617,748

94,991 31,663 673,346 49,540 49,540 16,513 733,947

800,000 94,991

800,000 49,540

800,000

31, 617,748 136,689

Noncurrent portion at December 31, 2008 Notes Payable

1,407,27 0

2-17. (a)

(b)

(South Company Notes Payable Interest Payable Cost of Sales Inventory of Machine Parts Sales Gain on Debt Restructuring (Jay Company) Bonds Payable

900,000 90,000 650,000 650,000 800,000 190,000 10,000,00 0 900,000

Interest Payable Ordinary Share Share Premium (c)

(Capshell Company) Notes Payable

10,000,00 0 1,200,000

Interest Payable

22

7,500,00 0 3,400,00 0

Chapter 2 - Non-Current Liabilities

Restructured Notes Payable

7,459,26 4 3,740,73 6

Gain on Debt Restructuring Present value of future payments 8,000,000 x 0.7972 = 6,377,600 8,000,000 x 8% x 1.6901 = 1,081,664 Total 7,459,264 Carrying value of liability 11,200,000 Gain on debt restructuring 3,740,736

Alternatively, the recorded as: Notes Payable

entry

may

be

Interest Payable Discount on Restructured Notes Payable Restructured Notes Payable

10,000,00 0 1,200,000 540,736 8,000,00 0 3,740,73 6

Gain on Debt Restructuring (d)

(Solid Company) Notes Payable Interest Payable Restructured Notes Payable

3,000,000 330,000 3,111,02 4 218,976

Gain on Debt Restructuring Present value of future payments 3,000,000 x 0.5935 = 1,780,500 3,000,000 x 12% x 3.6959 = 1,330,524 Total 3,111,024 Carrying value of liability 3,330,000 Gain on debt restructuring 218,976

Alternatively, the recorded as: Notes Payable Interest Payable

entry

may

be

Premium on Restructured Notes Payable

Restructured Notes Payable Gain on Debt Restructuring

23

3,000,000 330,000

111,024 3,000,00 0 218,976