Ch14 180205115701 Answers For The Practice Questions

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Ch14-180205115701 - answers for the practice questions. Financial market & institution (  ‫ ةعم‬  ‫شل‬ ‫)ةقر‬

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Intermediate Accounting IFRS Edition-2nd Questions & Solutions Chapter 14

Non-Current Liabilities

Donald E. Kieso Jerry J. J. Weygan Weygandt dt Terry D. Warfield Warfield Downloaded by Mikaela O. ([email protected]) lOMoARPD9

 

 

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BRIEF EXERCISES (All calculations are to be rounded to nearest whole currency unit, unless otherwise stated.) 3

BE14-1  Whiteside Corpo Corporation ration issues ¥500,000 of 9% bonds, due in 10 years, with interest payable semiannually. At the time of issue, the market rate for such bonds is 10%. Compute the issue price of the  bonds.

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BE14-2  The Colson Company issued 󲂬300,000 of 10% bonds on January 1, 2015. The bonds are due  Januar y 1, 2020, with in  January interest terest payable each each July 1 and January 1. The bo bonds nds are issued at face value. value. Pre Prepare pare Colson’s journal entries for (a) the January issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. BE14-3  Assume the bonds in BE14-2 were issued at 108.11 to yield 8%. Prepare the journal entries for (a) January 1, (b) July 1, and (c) December 31.

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BE14-4  Assume the bonds in BE14-2 were issued at 92.6393 to yield 12%. Prepare the journal entries for (a) January 1, (b) July 1, and (c) December 31.

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BE14-5  Devers Corporation issued £400,000 of 6% bonds on May 1, 2015. The bonds were dated January 1, 2015, and mature January 1, 2017, 2017 , with interest payable July 1 and January 1. The bonds were issued at face value plus accrued interest. Prepare Devers’ journal entries for (a) the May 1 issuance, i ssuance, (b) the July 1 interest

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BE14-7  Assume the bonds in BE14-6 were issued for $644,636 with the effective-interest rate of 6%. Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.

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BE14-8  Tan Corporation issued HK$600,000,000 of 7% bonds on November 1, 2015, for HK$644,636,000. The bonds were dated November 1, 2015, and mature in 10 years, with interest payable each May 1 and November 1. The effective-interest rate is 6%. Prepare Tan’s December 31, 2015, adjusting entry.

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BE14-9  Coldwell, Inc. issued issued a 󲂬100,000, 4-year, 10% note at face value to Flint Hills Bank on January 1, 2015, and received 󲂬100,000 cash. The note requires annual interest payments each December 31. Prepare Coldwell’s journal entries to record (a) the issuance of the note and (b) the December 31 interest payment.

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BE14-10  Samson Corporation issued a 4-year, £75,000, zero-interest-bearing note to Brown Company on

payment, and (c) the December 31 adjusting entry. BE14-6  On January 1, 2015, JWS Corporation issued $600,000 of 7% bonds, due in 10 years. The bonds wer weree issued for $559,224, and pay interest each July 1 and January 1. Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. Assume an effective-interest rate of 8%.

 January 1, 2015, and received cash of £47,664. The implicit interest rate is 12%. Prepare Samson’s journal entries for (a) the January 1 issuance and (b) the December 31 recognition of interest. 5

BE14-11  McCormick Corporation issued a 4-year 4-year,, $40,000, 5% note to Greenbush Company on January 1, 2015, and received a computer that normally sells for $31,495. The note requires annual interest payments each December 31. The market rate of interest for a note of similar risk is 12%. Prepare McCormick’s journal entries for (a) the January 1 issuance and (b) the December 31 interest.

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BE14-12  Shlee Corporation issued a 4-year, 󲂬60,000, zero-interest-bearing note to Garcia Company on  January 1, 2015, and received received cash of 󲂬60,000. In addition, Shlee agreed to sell merchandise to Garcia at an amount less than regular selling price over the 4-year period. The market rate of interest for similar notes is 12%. Prepare Shlee Corporation’s January 1 journal entry entry..

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BE14-13  On January 1, 2015, Henderson Corporation retired $500,000 of bond bondss at 99. At the time of retirement, the unamortized premium was $15,000. Prepare Henderson’s journal entry to record the reacquisition of the bonds.

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Exercises 687 6

BE14-14  Refer to the note issued by Coldwell, Inc. in BE14-9. During 2015, Coldw Coldwell ell experiences financial difficulties. On January 1, 2016, Coldwell negotiates a settlement of the note by issuing to Flint Hills Bank 20,000 󲂬1 par Coldwell ordinary shares. The ordinary shares have a market price of 󲂬4.75 per share on the date of the settlement. Prepare Coldwell’s entries to settle this note.

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BE14-15  Refer to the note issued by Coldwell, Inc. in BE14-9. During 2015, Coldwell experiences financial difficulties. On January 1, 2016, Coldwell negotiates a modification of the terms of the note. Under the modification, Flint Hills Bank agrees to reduce the face value of the note to 󲂬90,000 and to extend the maturity date to January 1, 1 , 2020. Annual interest payments on December 31 will be made at

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a rate of 8%. Coldwell’s market interest rate at the time of the modification is 12%. Prepare Coldwell’s entries for (a)the modification on January 1, 2016, and (b) the first interest payment date on December 31, 2016. BE14-16  Shonen Knife Corporation has elected to use the fair value option for one of its notes payable. The note was issued at an effective rate of 11% and has a carrying value of HK$16,000. At year-end, Shonen Knife’s borrowing rate has declined; the fair value of the note payable is now HK$17,500. (a) Determine the unrealized gain or loss on the note. (b) Prepare the entry to record any unrealized gain or loss, assuming that the change in value was due to general market conditions.

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BE14-17  At December 31, 2015, Hyasaki Corporation has the following account balances: balances: Bonds payable, due January 1, 2023 Interest payable

$1,912,000 80,000

Show how the above accounts should be presented on the December 31, 2015, statement of financial position, including the proper classifications.

EXERCISES (All calculations are to be rounded to nearest whole currency unit, unless otherwise stated.) 2

E14-1 (Classification of Liabilities) Presented below are various account balances. (a)  Bank loans payable of a winery winery,, due March 10, 2018. (The product requires aging for 5 years before sale.) (b)  Serial bonds payable, 󲂬1,000,000, of which 󲂬250,000 are due each July 31. (c)  Amounts w withheld ithheld from employees’ wages for income taxes. (d)  Notes payable due January 15, 2017. (e)  Credit balances in ccustomers’ ustomers’ accounts arising from returns and allowances after co collection llection in full of account. (f)  Bonds payable of 󲂬2,000,000 maturing June 30, 2016. (g)  Overdraft of 󲂬1,000 in a bank account. (No other balances are carried at this bank.) (h)  Deposits made by custo customers mers who have ordered ordered goods. Instructions

Indicate whether each of the items above should be classified on December 31, 2015, as a current liability liability,, a non-current liability, liability, or under some other classi classification. fication. Consider each one independently from all others; that is, do not assume that all of them relate to one particular business. If the classification of some of the items is doubtful, explain why in each case. 2

E14-2  (Classification) The following items are found in the financial statements. (a)  (b)  (c)  (d)  (e)  (f)  (g) 

Interest expense (credit balance). Bond issue costs. Gain on repurchase of debt. Mortgage payable (payable in equal amounts amounts over next 3 years). Debenture bonds payab payable le (maturing in 5 years). Notes payable (d (due ue in 4 years). years). Income bonds payable (due in 3 years).

Instructions

Indicate how each of these items should be classified in i n the financial statements.

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688  Chapter 14 Non-Current Liabilities 3

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E14-3  (Entries for Bond Transactions Transactions)) Presented below are two independent situations.   1.  On January 1, 2015, Divac Company issued 󲂬300,000 of 9%, 10-year bonds at par. Interest is payable quarterly on April 1, July 1, October 1, and a nd January 1.   2.  On June 1, 2015, V Verbitsky erbitsky Company issued 󲂬200,000 of 12%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semiannually on July 1 and January 1. Instructions

For each of these two independent situations, prepare journal entries to record the following. (a)  The issuance of the bonds. (b)  The payment of interest on July 1. (c)  The accrual of interest interest on December 31. 3

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E14-4  (Entries for Bond Transactions)  Foreman Company issued 󲂬800,000 of 10%, 20-year bonds on  January 1, 2015, at 119.792 119.792 to yield 8%. Inter Interest est is payable semiannually on July 1 and January 1. Instructions

Prepare the journal entries to record the following. (a)  The issuance of the bonds. (b)  The payment of inter interest est and the related amortization on July 1, 2015. (c)  The accrual of interest and tthe he related amo amortization rtization on D December ecember 31, 2015. 3

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E14-5  (Entries for Bond Transac Transactions) tions)  Assume the same information as in E14-4, except that that the bonds were issued at 84.95 to yield 12%. 1 2%. Instructions

Prepare the journal entries to record the following. (Round to the nearest euro.) (a)  The issuance of the bonds. (b)  The payment of inter interest est and related amortization amortization on July 1, 2015. (c)  The accrual of interest and tthe he related amo amortization rtization on D December ecember 31, 2015. 3

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E14-6  (Amortization Schedule)  Spencer Company sells 10% bonds bonds having a maturity value of £3,000,000 for £2,783,724. The bonds are dated January 1, 2015, and mature January 1, 2020. Interest is payable annually on January 1. Instructions  Hint: The effective-interest rate must be Set up a schedule of interest expense and discount amortization. ( Hint: computed.)

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E14-7  (Determine Proper Amounts in Account Balances)  Presented below are three independent situations. Instructions

(a)  McEntire Co. sold $2,500,000 of 11%, 10-year bonds bonds at 106.231 to yield 10% on January 1, 2015. T The he  bonds were were dated January 1, 2015, and pay interest on July 1 and January 1. Determine the the amount of interest expense to be reported on July 1, 2015, and December 31, 2015. (b)  Cheriel Inc. issued $60 $600,000 0,000 of 9%, 10-year bonds bonds on June 30, 2015, for $562,500. Th This is price provide provided d a yield of 10% on the bonds. Interest is payable semiannually on December 31 and June 30. Determine the amount of interest expense to record if financial statements are issued on October 31, 2015. (c)  On October 1, 2015, Chinook Company so sold ld 12% bonds having a maturity value of $800,000 for $853,382 plus accrued interest, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2015, and a nd mature January 1, 2020, with interest payable December 31 of each year. Prepare the journal entries at the date of the bond issuance and for the first interest payment. 3

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E14-8  (Entries and Questions for Bond Transactions)   On June 30, 2014, Macias Company issued R$5,000,000 face value of 13%, 20-year bonds at R$5,376,150 to yield 12%. The bonds pay semiannual interest on June 30 and December 31. Instructions

(a)  Prepare the journal entries to record the following ttransactions. ransactions. (1)  The issuance of the bo bonds nds on June 30, 2014. (2)  The payment of interest and the amortization o off the premium on December 31, 2014. (3)  The payment of interest and the amortization o off the premium on June 30, 2015. (4)  The payment of interest and the amortization o off the premium on December 31, 2015.

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Exercises 689 (b)  Show the proper statement ent of financial position presentation fo forr the liability for bonds payable on the December 31,statem 2015, statement of financial position. (c)  Provide the answers answers to the fo following llowing questio questions. ns. (1)  What amount of inter interest est expense is reported reported for 2015? (2)  Determine the total cost of borro borrowing wing over the life of the bond. 3

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E14-9  (Entries for Bond Transaction Transactions) s) On January 1, 2015, Osborn Company sold 12% bonds having a maturity value of £800,000 for £860,651.79, which provides the bondholders with a 10% yield. The  bonds are dated January Jan uary 1, 2015, 2015 , and mature Janua January ry 1, 2020, with interest in terest payable paya ble December 31 of each eac h year. Instructions

(a)  (b)  (c)  (d)  3

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Prepare the journal entry at the date of the bond issuance. Prepare a schedule o off interest expense and bond amortization for for 2015–2017. Prepare the jo journal urnal entry to recor record d the interest paym payment ent and the amortization for 2015. Prepare the jo journal urnal entry to recor record d the interest paym payment ent and the amortization for 2017.

E14-10 (Information Related to Various Bond Issues) Pawnee Inc. has issued three types of debt on  January 1, 2015, the start of the company’s fiscal year. year. (a)  $10 million, 10-year, 13% unsecured bonds, interest payable quarterly quarterly.. Bonds were priced to yield 12%. (b)  $25 million par of 10-year, zero-co zero-coupon upon bonds at a price to yield 12% per year. (c)  $15 million, 10-year 10-year,, 10% mortgage bonds, inter interest est payable annually to yield 12%.

Instructions

Prepare a schedule that identifies the following items for each bond: (1) maturity value, val ue, (2) number of interest periods over life of bond, (3) stated rate per each interest period, (4) effective-interest rate per each interest period, (5) payment amount per period, and (6) present value of bonds at date of issue. 5

E14-11 (Entries for Zero-Interest-Bearing Notes) On January 1, 2015, McLean Company makes the two following acquisitions.   1.  Purchases land h having aving a fair value of 󲂬300,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of 󲂬505,518.   2.  Purchases equipment by issuing a 6%, 8-year promissory n note ote having a maturity value of 󲂬400,000 (interest payable annually).

The company has to pay 11% interest for funds from its bank. Instructions

(a)  Record the tw two o journal entries that should be recorded recorded by McLean Company Company for the two purchases on January 1, 2015. (b)  Record the interest at the end of the first year on both both notes. 5

E14-12  (Imputation of Interest) Presented below are two independent situations. Instructions

(a)  On January 1, 2015, Spartan Inc. purchased land that had an assessed value of $390,000 at th thee time of purchase. A $600,000, zero-interest-bearing note due January 1, 2018, was given in exchange. There was no established exchange price for the land, nor a ready market price for the note. The interest rate charged on a note of this type is 12%. Determine at what amount the land should be recorded at January 1, 2015, and the interest expense to be reported in 2015 related to this transaction. (b)  On January 1, 2015, Geimer Furniture Co. borrowed $4,000,000 (face value) from Aurora Co., a

major customer, through a zero-interest-bearing due in years. Because the note was zerointerest-bearing, Geimer Furniture agreed to sell note furniture to 4this customer at lower than market price. A 10% rate of interest is normally charged on this type of loan. l oan. Prepare the journal entry to record this transaction and determine the amount of interest expense to report for 2015. 5

E14-13  (Imputation of Interest with Right)  On January 1, 2015, Durdil Co. borrowed and received 500,000 from a major customer evidenced by a zero-interest-bearing note due in 3 years. As consideration for the zero-interest-bearing feature, Durdil agrees to supply the customer’s inventory needs for the loan period at lower than the market price. The appropriate rate at which to impute interest is 8%.

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690  Chapter 14 Non-Current Liabilities Instructions

(a)  Prepare the journal entry to record the initial transaction on January 1, 2015. (b)  Prepare the journal entry to reco record rd any adjusting entries needed at Decemb December er 31, 2015. Assume that the sales of Durdil’s product to this customer occur evenly over the 3-year period. 3

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E14-14  (Entry for Retirement of Bond; Bond Issue Costs)  On January 2, 2012, Prebish Prebish Corporation issued $1,500,000 of 10% bonds to yield 11% due December 31, 2021. Interest on the bonds is payable annually each December 31. The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2015, Prebish called $1,000,000 face amount of the bonds and retired them. Instructions

(a)  Determine the price of the Prebish bonds when issued on on January 2, 2012. (b)  Prepare an am amortization ortization schedule fo forr 2012–2016 for the bonds. (c)  Ignoring income taxes, compute the amount of loss, if any, to be recognized by Prebish as a result of retiring the $1,000,000 of bonds in 2015 and prepare the journal entry to record the retirement. 3

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E14-15  (Entries for Retirement and Issuance of Bonds)   On June 30, 2007, Mendenhal Company Company issued 8% bonds with a par value of £600,000 due in 20 years. They were issued at 82.8414 to yield 10% and were callable at 104 at any date after June 30, 2015. Because of lower interest rates and a significant change in the

company’s credit rating, it was decided to call the entire issue on June 30, 2016, and to issue new bonds. New 6% bonds were sold in the amount of £800,000 at 112.5513 to yield 5%; they mature in 20 years. Interest payment dates are December 31 and June 30 for both old and new bonds. Instructions

(a)  Prepare journal entries to rrecord ecord the retir retirement ement of the old issue and th thee sale of the new issue on  June 30, 2016. Unamortized discount discount is £78,979. (b)  Prepare the entry required o on n December 31, 2016, to record th thee payment of the first 6 months’ interest and the amortization of premium on the bonds. 3

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E14-16  (Entries for Retirement and Issuance of Bonds)  Kobiachi Company had bonds outstanding outstanding with

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a maturity value of ¥5,000,000. On April 30, 2016, when these bonds had an unamortized discount of ¥100,000, they were called in at 104. To pay for these bonds, Kobiachi had issued iss ued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 103 (face value ¥5,000,000). Instructions

Ignoring interest, compute the gain or loss and record this refunding transaction. 6

E14-17  (Settlement of Debt) Strickland Company owes $200,000 plus $18,000 of accrued interest to Moran State Bank. The debt is a 10-year, 10% note. During 2015, Strickland’s business deteriorated due to a faltering regional economy. economy. On December 31, 2015, Moran State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of $390,000, accumulated depreciation of $221,000, and a fai fairr value of $180,000. Instructions

(a)  Prepare journal entries fo forr Strickland Company to record record this debt debt settlement. (b)  How should Strickland report th thee gain or loss on the disposition of machine and on restructuring restructuring of debt in its 2015 income statement? (c)  Assume that, instead of transferring the m machine, achine, Strickland dec decides ides to grant 15,000 of of its ordinary shares ($10 par), which have a fair value of $180,000 in full settlement of the loan obligation. Prepare the entries to record the transaction. 6

E14-18  (Loan Modification)  On December 31, 2015, Sterling Bank enters into a debt restructuring restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, £3,000,000 note receivable by the following modifications:   1.  Reducing the principal obligation fro from m £3,000,000 to £2,400,000.   2.  Extending the maturity date from December December 31, 2015, to January 1, 2019.   3.  Reducing the intere interest st rate from 12% to 10%. Barkley’s market rate of inter interest est is 15%.

Barkley pays interest at the end of each year. On January 1, 2019, Barkley Company pays £2,400,000 in cash to Sterling Bank.

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Problems 691 Instructions

(a)  (b)  (c)  (d)  6

Can Barkley Company reco record rd a gain under the term modification mentioned mentioned above? Explain. Prepare the amort amortization ization schedule of the n note ote for Barkley Company after the debt modification. modification. Prepare the interest payment entry for Barkley Company on December 31, 2017. What entry sho should uld Barkley make on January 1, 2019?

E14-19  (Loan Modification)  Use the same information as in E14-18 except that that Sterling Bank reduced the principal to £1,900,000 rather than £2,400,000. On January 1, 2019, Barkley pays £1,900,000 in cash to Sterling Bank for the principal. Instructions

(a)  (b)  (c)  (d)  6

Prepare the jo journal urnal entries to recor record d the loan modification modification for Barkley Barkley.. Prepare the amort amortization ization schedule of the n note ote for Barkley Company after the debt modification. modification. Prepare th thee interest payment payment entries for Barkle Barkley y Company on December December 31 of 2016, 2017, and 2018. 2018. What entry sho should uld Barkley make on January 1, 2019?

E14-20  (Entries for Settlement of Debt)   Consider the following following independent situations. Instructions

(a)  Gottlieb Co. owes 󲂬199,800 to Ceballos Inc. The debt is a 10-year, 11% note. Because Gottlieb Co. is in financial trouble, Ceballos Inc. agrees to accept some land and cancel the entire debt. The land has a book value of 󲂬90,000 and a fair value of 󲂬140,000. Prepare the journal entry on Gottlieb’s  books for debt settlement. settlement. (b)  V argo Corp. owes $270,000 First Trust. Trust. The debt a 10-year, note due December 2015. Because Vargo Corp. is in to financial trouble, First is Trust agrees12% to extend the maturity31, date to December 31, 2017, reduce the principal to $220,000, and reduce the interest rate to 5%, payable annually on December 31. Vargo’s market rate of interest is 8%. Prepare the journal entries on Vargo’s books on December 31, 2015, 2016, and 2017. 7

E14-21 (Fair Value Option)  Fallen Company commonly issues long-term notes payable to its various lenders. Fallen has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Fallen has elected to use the fair value option for the long-term notes issued to Barclay’s Bank and has the following data related to the carrying and fair value for these notes. (Assume that changes in fair value are due to general market interest rate changes).   December 31, 2015 December 31, 2016 December 31, 2017

Carrying Value

Fair Value

󲂬54,000

󲂬54,000

44,000 36,000

42,500 38,000

Instructions

(a)  Prepare the jo journal urnal entry at December 31 (Fallen’s year-end) for 2015, 2016, and 2017, to record the

(b)  (c)  (d)  (e)  9

fair value option for these notes. At what amount w will ill the note be reported reported on Fallen’s 2016 statemen statementt of financial position? What is the effect of recording the fair value option on these notes on Fallen’s Fallen’s 2017 income? Assuming that general marke markett interest rates have been stable over over the period, does the fair value data for the notes indicate that Fallen’s creditworthiness has improved or declined in 2017? Explain. Assuming the conditions that ex exist ist in (d), what is the effect of re recording cording the fair value option on these notes in Fallen’s income statement in 2015, 2016, 201 6, and 2017?

E14-22 (Long-T (Long-Term erm Debt Disclosure) At December 31, 2015, Redmond Company has outstanding three long-term debt issues. The first is a $2,000,000 note payable which matures June 30, 2018. The second is a $6,000,000 bond issue which matures September 30, 2019. The third is a $12,500,000 sinking fund debenture with annual sinking fund payments of $2,500,000 in each of the years 2017 through 2021. Instructions

Prepare the required note disclosure for the long-term debt at December 31, 2015.

PROBLEMS 3

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(All calculations are to be rounded to nearest whole currency unit, unless otherwise stated.) P14-1 (Analysis of Amortization Schedule and Interest Entries)  The amortization and interest schedule on page 692 reflects the issuance of 10-year bonds by Capulet Corporation on January 1, 2009, and the subsequent interest payments and charges. The company’s year-end is December 31, and financial statements are prepared once yearly.

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692  Chapter 14 Non-Current Liabilities  

Amortization Schedule

   

Year

Cash

Interest

   

1/1/2009 2009

󲂬11,000

󲂬11,322

                

2010 2011 2012 2013 2014 2015 2016 2017 2018

11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000

11,361 11,404 11,452 11,507 11,567 11,635 11,712 11,797 11,894

Amount Unamortized Unamorti zed

Book Value

󲂬5,651

󲂬  94,349

5,329

94,671

4,968 4,564 4,112 3,605 3,038 2,403 1,691 894

95,032 95,436 95,888 96,395 96,962 97,597 98,309 99,106 100,000

Instructions

(a)  Indicate whether the bond bondss were issued at a premium or a discount and how you can determine determine this fact from the schedule. (b)  Determine the stated interest rate and the ef effective-interest fective-interest rate. (c)  On the basis of the schedule, prepare the journal entry to record the issuance of the bonds on  January 1, 2009. (d)  On the basis of the schedule, prepar preparee the journal entry or entries to reflect reflect the bond transactions and accruals for 2009. (Interest is paid January 1.) (e)  On the basis of the schedule, prepar preparee the journal entry or entries to reflect reflect the bond transactions and accruals for 2016. Capulet Corporation does not use reversing entries. 3

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P14-2  (Issuance and Retirement of Bonds)  Venzuela Co. is building a new hockey arena at a cost of $2,500,000. It received a down payment of $500,000 from local businesses to support the project and now needs to borrow $2,000,000 to complete the project. It therefore decides to issue $2,000,000 of 10.5%, 10-year  bonds. These bonds were issued on January 1, 2014, and pay interest annually on each January 1. The  bonds yield 10%. Instructions

(a)  Prepare the jo journal urnal entry to recor record d the issuance of the bonds on January 1, 2014. (b)  Prepare a bond amortization schedule up to and including January 1, 2018. (c)  Assume that on July 1, 2017, V Venzuela enzuela Co. retires half of the bonds at a cost of $1,065,000 plus accrued interest. Prepare the journal entry to record this retirement. 3

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P14-3  (Negative Amortization)  Good-Deal Inc. developed developed a new sales gimmick to help sell its inventory of new automobiles. Because many new car buyers need financing, Good-Deal offered a low down payment and low car payments for the first year after purchase. It believes that this promotion will bring in some new buyers.

On January 1, 2015, a customer purchased a new 󲂬33,000 automobile, making a down payment of The customer signed a note indicating that the annual rate of interest would be 8% and that quarterly payments would be made over 3 years. For the first year, Good-Deal required a 󲂬400 quarterly payment to be made on April 1, July 1, 1 , October 1, and January 1, 2016. 201 6. After this one-year period, the customer was required to make regular quarterly payments that would pay off the loan as a s of January 1, 201 2018. 8. 󲂬1,000.

Instructions

(a)  Prepare a note am amortization ortization schedule for the first year. (b)  Indicate the amount the custom customer er owes on the contract at the end of the first year year.. (c)  Compute the amount of the the new quarterly quarterly payments. (d)  Prepare a note amortization schedule for these ne new w payments for the next 2 years. (e)  What do you th think ink of the new sales pr promotion omotion used by G Good-Deal? ood-Deal? 4

P14-4  (Effective-Interest Method)  Samantha Cordelia, an intermediate accounting student, is having difdifficulty amortizing bond premiums and discounts using the effective-interest method. Furthermore, she cannot understand why IFRS requires that this method be used. She has come to you with the following problem, looking for help. On June 30, 2015, Hobart Company issued R$2,000,000 face value of 11%, 20-year bonds at R$2,171,600,

adiscounts. yield of The 10%.bonds Hobart uses the effective-interest to 31. amortize bond or payCompany semiannual interest on June 30 and method December Compute thepremiums amortization schedule for four periods.

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Problems 693 Instructions

Using the data above for illustrative purposes, write a short memo (1–1.5 pages double-spaced) to Samantha, explaining what the effective-interest method is, why it is preferable, and how it is computed. (Do not forget to include an amortization schedule, referring to it whenever necessary necessary.) .) 5

P14-5  (Entries for Zero-Interest-Bearing Note)  On December 31, 2015, Faital Company acquired a computer from Plato Corporation by issuing a £600,000 zero-interest-bearing note, payable in full on December 31, 2019. Faital Company’s credit rating permits it to borrow funds from its several lines of credit at 10%. The computer is expected to have a 5-year life and a £70,000 residual value. Instructions

(a)  Prepare the jo journal urnal entry for the purch purchase ase on December 31, 2015. (b)  Prepare any necessary adjusting entries relative to depreciation depreciation (use straight-line) and amortization on December 31, 2016. (c)  Prepare any nece necessary ssary adjusting entries relative to depreciation and am amortization ortization on December December 31, 2017. 5

P14-6  (Entries for Zero-Interest-Bearing Note; Payable in Installments) Sabonis Cosmetics Co. purchased machinery on December 31, 2014, paying $50,000 down and agreeing to pay the balance in four equal installments of $40,000 payable each December 31. An assumed interest of 8% is implicit in the purchase price. Instructions

Prepare the journal entries that would be recorded for the purchase and for the payments and interest on the following dates. (a)  December 31, 2014. (b)  December 31, 2015. (c)  December 31, 2016. 3

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(d)  December 31, 2017. (e)  December 31, 2018.

P14-7  (Issuance and Retirement of Bonds; Income Statement Presentation) Chen Company issued its 9%, 25-year mortgage bonds in the principal amount of ¥30,000,000 on January 2, 2001, at a discount of ¥2,722,992 (effective rate of 10%). The indenture securing the issue provided that the bonds could be called for redemption in total but not in part at any time before maturity at 104% of the principal amount, but it did not provide for any sinking fund. On December 18, 2015, the company issued its 11%, 20-year debenture bonds in the principal amount of ¥40,000,000 at 102, and a nd the proceeds were used to redeem the 9%, 25-year mortgage bonds on January 2, 2016. The indenture securing the new issue did not provide for any sinking fund or for retirement before maturity.. The unamortized discount at retirement was ¥1,842,888. maturity Instructions

(a)  Prepare journal entrie entriess to record the issuance of the 11% 11% bonds and the retirement of the 9% (b)  bonds. Indicate the income statement treatment of the gain or loss from retirement and the note disclosure required. 3

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P14-8  (Comprehensive Bond Problem)  In each of the following independent cases, the com company pany closes its books on December 31.   1.  Sanford Co. sells $500,000 of 10% bonds on March 1, 2015. The bonds pay interest on Septe September mber 1 and March 1. The due date of the bonds is September 1, 2018. The bonds yield 12%. Give entries through December 31, 2016.   2.  Titania Co. sells $400,000 of 12% bonds o on n June 1, 2015. The bonds pay interest on D December ecember 1 and

 June 1. The due date of the bonds is June 1, 2019. The bonds yield 10%. On October 1, 2016, Titania  buys back $120,000 worth of bonds for $126,000 (includes accrued interest). Give entries through December 1, 2017. Instructions

For the two cases, prepare all of the relevant journal entries from the time of sale until the date indicated. (Construct amortization tables where applicable.) Amortize premium or discount on interest dates and at year-end. (Assume that no reversing entries were made; round to the nearest dollar.)

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694  Chapter 14 Non-Current Liabilities 3

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P14-9  (Issuance of Bonds Between Interest Dates, Retirement)   Presented below are selected transactions transactions on the books of Simonson Corporation.

 July 1, 2015

Dec. 31  Jan. 1, 2016  Jan. 2 Dec. 31

Bonds payable with a par value o off 󲂬900,000, which are dated January 1, 2015, 2 015, are sold at 119.219 plus accrued interest to yield 10%. They are coupon bonds, bear interest at 12% (payable annually at January 1), and mature January 1, 20 2025. 25. (Use interest expense account for accrued interest.) Adjusting entries are made to record the accrued interest on the bonds, and the amortization amortizati on of the proper amount of premium. Interest on th thee bonds is paid. Bonds of par value of 󲂬360,000 are called at 102 and extinguished. Adjusting entries are made to record the accrued interest on the bonds, and the proper amount of premium amortized.

Instructions

Prepare journal entries for the transactions above. 3

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P14-10  (Entries for Life Cycle of Bonds)  On April 1, 2015, Sarkar Company Company sold 15,000 of its 111%, 1%, 15-year, R$1,000 face value bonds to yield 12%. Interest payment dates are April 1 and a nd October 1. On April 2, 2016, Sarkar took advantage of favorable prices of its shares to extinguish 6,000 of the bonds by issuing 200,000 of its R$10 par value ordinary shares. At this time, the accrued interest was paid in cash. The company’s shares were selling for R$31 per share on April 2, 2016. Instructions

Prepare the journal entries needed on the books of Sarkar Company to record the following. (a)  April 1, 2015: issuance of the bonds. (b)  October 1, 2015: payment of semiannual interest. (c)  December 31, 2015: accrual of interest expense. (d)  April 2, 2016: extinguishment of 6,000 bonds. (No reversing reversing entries made.) 5

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P14-11 (Modification of Debt)  Daniel Perkins is the sole shareholder of Perkins In Inc., c., which is currently under protection of the U.S. bankruptcy court. As a “debtor in possession,” he has negotiated the following revised loan agreement with United Bank. Perkins Inc.’s $600,000, 12%, 10-year note was refinanced with a $600,000, 5%, 10-year note. Perkins has a market rate of interest of 15%. Instructions

(a)  What is the accounting natur naturee of this ttransaction? ransaction? (b)  Prepare the journal entry to reco record rd this refinancing on the books books of Perkins Inc. 5

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P14-12 (Modification of Note under Different Circumstances) Circumstances)  Halvor Corporation is having financial difficulty and therefore has asked Frontenac National Bank to restructure its $5 million milli on note outstanding. The present note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value. Instructions

Presented below are three independent situations. Prepare the journal entry that Halvor would make for each of these restructurings. (a)  Frontenac National Bank agre agrees es to take an equity interest in Halvor by accepting ordinary ordinary shares valued at $3,700,000 in exchange for relinquishing its claim on this note. The ordinary shares have a par value of $1,700,000. (b)  Frontenac National Bank agrees to acc accept ept land in exchange for relinquishing its claim on this note. The land has a book value of $3,250,000 and a fair value of $4,000,000. (c)  Frontenac National Bank agrees to mod modify ify the terms of the note, indicating that Halvor does not have to pay any interest on the note over the 3-year period. 6

P14-13  (Debtor/Creditor Entries for Continuation of Debt with New Effective Interest)   Crocker Corp. owes D. Yaeger Corp. a 10-year, 10% note in the amount of £330,000 plus £33,000 of accrued interest. The note is due today, December 31, 2015. Because Crocker Corp. is in financial trouble, D. Yaeger Corp. agrees to forgive the accrued interest, £30,000 of the principal and to extend the maturity date to December 31, 2018. Interest at 10% of revised principal will continue to be due on 12/31 each year. Given Crocker’s financial difficulties, the market rate for its loans is 12%. Instructions

(a)  Prepare the amortization schedule for the years 2015 through 2018.

(b)  Prepare all the necessary journal entries on the books of Crocker Crocker Corp. for the years 2015, 2016, and 2017.

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Concepts for Analysis 695 3

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P14-14 (Comprehensive Problem: Issu Issuance, ance, Classification, Reporting) Presented below are three independent situations. Instructions

(a)  On January 1, 2015, Langley Co. issued 9% bonds with a face value o off $700,000 for $656,992 to yield 10%. The bonds are dated January 1, 2015, and pay interest annually. What amount is reported for interest expense in 2015 related to these bonds? (b)  Tweedie Building Co. has a number of long-term bonds outstanding at December 31, 2015. These long-term bonds have the following sinking fund requirements and maturities for the next 6 years.   2016 2017 2018 2019 2020 2021

Sinking Fund

Maturities

$300,000 100,000 100,000 200,000 200,000 200,000

$100,000 250,000 100,000 — 150,000 100,000

  Indicate how this information should be reported in the the financial statements statements at December December 31, 2015. (c)  In the long-term debt structure of Beckford Inc., the following three bonds were reported: mortgage  bonds payable $10,000,000; collateral trust bonds $5,000,000; bonds maturing in installments, installments, secured  by plant equipment equipment $4 $4,000,000. ,000,000. Determine Determine the total amo amount, unt, if any, any, of debe debenture nture bonds bonds outst outstanding. anding.

C O N C E P T S F O R A N A LY S I S CA14-1  (Bond Theory: Statement of Financial Position Presentations, Interest Rate, Premium)   On  January 1, 2016, Nichols Company issued for $1,085,800 its 20-year, 20-year, 11% bonds bonds that have a maturity value of $1,000,000 and pay interest semiannually on January 1 and July 1. Bond issue costs were not material in amount. Below are three presentations of the non-current liability section of the statement of financial position that might be used for these bonds at the issue date. 1. Bonds payable (maturing January 1, 2036)

$1,085,800

2. Bonds payable—principal (face value $1,000,000 maturing January 1, 2036)   Bonds payable—interes payable—interestt (semiannual payment $55,000)

$ 142,050a 943,750b

 

$1,085,800

Total bond liability

3. Bonds payable—principal (maturing January 1, 2036)   Bonds payable—interes payable—interestt ($55,000 per period for 40 periods)

$1,000,000 2,200,000

 

$3,200,000

Total bond liability

a

The present value of $1,000,000 due at the end of 40 (6-month) periods at the yield rate of 5% per period. The present value of $55,000 per period for 40 (6-month) periods at the yield rate of 5% per period.

b

Instructions

(a)  Discuss the concep conceptual tual merit(s) of each of the date-of-issue statement of financial position presenpresentations shown above for these bonds. (b)  Explain why inve investors stors would pay $1,085,800 $1,085,800 for bonds that have a maturity maturity value of only $1,000,000. $1,000,000. (c)  Assuming that a discount rate is ne needed eded to compute the carrying value of the obligations obligations arising from a bond issue at any date during the life of the bonds, discuss the conceptual merit(s) of using for this purpose: (1)  The coupon or nominal nominal rate. (2)  The effec effective tive or yield rate at date o off issue. (d)  If the obligations arising from th these ese bonds are to be carried carried at their present value compute computed d by means of the current market rate of interest, how would the bond valuation at dates subsequent to the date of issue be affected by an increase or a decrease in the market rrate ate of interest?

CA14-2  (Various (Various Non-Current Liability Conceptual Issues)  Schrempf Company has completed a number of transactions during 2015. In January, the company purchased under contract a machine at a total price of 󲂬1,200,000, payable over 5 years with installments of 󲂬240,000 per year. The seller has considered the transactrans action as an installment sale with the title transferring to Schrempf at the time of the final payment.

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696  Chapter 14 Non-Current Liabilities On March 1, 2015, Schrempf issued 󲂬10 million of general revenue bonds priced at 99 with a coupon of 10% payable July 1 and January 1 of each of the next 10 years. The July 1 interest was paid and on December 30, the company transferred 󲂬1,000,000 to the trustee, Flagstad Company, for payment of the  January 1, 2016, interest. As the accountant for Schrempf Company, Company, you have prepared the statement of financial position as of December 31, 2015, and have presented it to the president of the company. You are asked the following questions about it.   1.  Why has depreciation been charged on equipment being purchased under contract? Title has not passed to the company as yet and, therefore, it is not our asset. Why should the company not show on the left side of the statement of financial position only the amount paid to date instead of showing the full contract price on the left side and the unpaid portion on the right side? After all, the seller considers

the transaction an installment sale.   2.  Bond interest is shown as a current liability liability.. Did we not pay our trustee, Flagstad Company, Company, the full amount of interest due this period? Instructions

Outline your answers to these questions by writing a brief paragraph that will justify your treatment. CA14-3  (Bond Theory: Price, Presentation, and Retirement)  On March 1, 2016, Sealy Company sold its 5-year, £1,000 face value, 9% bonds dated March 1, 2016, at an effective annual interest rate (yield) of 11%. Interest is payable semiannually, and the first interest payment date is September 1, 2016. Sealy uses the effective-interest method of amortization. The bonds can be called by Sealy at 101 at any time on or after March 1, 2017. Instructions

(a)  (1)  How would tthe he selling price of the bond bond be determined? (2)     Specify how all items related to th thee bonds would be presente presented d in a statement of financial position prepared immediately after the bond issue was sold. (b)  What items related to the bond issue would be inc included luded in Sealy’s 2016 income statement, and

would each beof determined? (c)  how Would the amount bon bond d discount amortization using the ef effective-interest fective-interest metho method d of amortization be lower in the second or third year of the life of the bond issue? Why? (d)  Assuming that the bonds w were ere called in and extinguished o on n March 1, 2017, how should should Sealy report the retirement of the bonds on the 2017 income statement? CA14-4  (Bond Theory: Amortization and Gain or Loss Recognition) Part I: The required method of amortizing a premium or discount on issuance of bonds is the effectiveinterest method. Instructions

How is amortization computed using the effective-interest method, and why and how do amounts obtained using the effective-interest method prov provide ide financial statement readers useful information about the cost of borrowing? Part II:  Gains or losses from the early extinguishment of debt that is refunded can theoretically be accounted for in three ways:   1.  Amortized over remaining life of old debt.   2.  Amortized over the life of tthe he new deb debtt issue.   3.  Recognized in the period of extinguishment. Instructions

(a)  Develop supporting argume arguments nts for each of the three theoretical method methodss of accounting for gains and losses from the early extinguishment of debt. (b)  Which of the methods abo above ve is generally accepted under IFRS and how should th thee appropriate amount of gain or loss be shown in a company’s financial statements? CA14-5  (Off-Balance-Sheet Financing)  Matt Ryan Corporation Corporation is interested in building its own soda can manufacturing plant adjacent to its existing plant in Partyville, Kansas. The objective would be to ensure a steady supply of cans at a stable price and to minimize transportation costs. However, the company has  been experiencing some financial problems and has been reluctant to borrow any additional cash to fund the project. The company is not concerned with the cash flow problems of making payments but rather with the impact of adding additional long-term debt to its statement of financial fi nancial position.

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Using Your Judgment 697 The president of Ryan, Andy Newlin, approached the president of the Aluminum Can Company (ACC), its major supplier, to see if some agreement could be reached. ACC was anxious to work out an arrangement since it seemed inevitable that Ryan would begin its own can production. Aluminum Can

Company could not afford to lose the account. After some discussion, a two-part plan was worked out. First, ACC was to construct the plant on Ryan’s land adjacent to the existing plant. Second, Ryan would sign a 20-year purchase agreement. Under the purchase agreement, Ryan would express its intention to buy all of its cans from ACC, paying a unit price which at normal capacity would cover labor and material, an operating management fee, and the debt service requirements on the plant. The expected unit price, if transportation costs are taken into consideration, is lower than current market. If Ryan did not take enough production in any one year and if the excess cans could not be sold at a high enough price on the open market, Ryan agrees to make up any cash shortfall so that ACC could make the payments on its debt. The bank will be willing to make a 20-year loan for the plant, taking the plant and the purchase agreement as collateral. At the end of 20 years, the plant is to become the property of Ryan. Instructions

(a)  What are project financing arrangements using special purpo purpose se entities? (b)  What are take-or-pay contracts? (c)  Should Ryan rrecord ecord the plant as an asset together together with the related obligatio obligation? n? If not, should Ryan Ryan record an asset relating to the future commitment? (d)  What is m meant eant by off-balance-sheet financing? CA14-6  (Bond Issue)  Donald Lennon is the president, founder, and majority owner of W Wichita ichita Medical Corporation, an emerging medical technology products company. Wichita is in dire need of additional capital to keep operating and to bring several promising products to final development, testing, and production. Donald, as owner of 51% of the outstanding shares, manages the company’s operations. He places heavy emphasis on research and development and long-term growth. The other principal shareholder is Nina Friendly who, as a non-employee investor, owns 40% of the shares. Nina would like to deemphasize the R & D functions and emphasize the marketing function to maximize short-run sales and profits from existing products. She believes this strategy would raise the market price of Wichita’s shares.

Allthat of Donald’s personal capital shares and borrowing is tied up in his because 51% share ownership. knows any offering of additional will dilutepower his controlling interest he won’t be ableHe to participate in such an issuance. But, Nina has money and would likely buy enough shares to gain control of Wichita. She then would dictate the company’s future direction, even if it meant replacing Donald as president and CEO. The company already has considerable debt. Raising additional debt will be costly, will adversely affect Wichita’s credit rating, and will increase the company’s reported losses due to the growth in interest expense. Nina and the other minority shareholders express opposition to the assumption of additional debt, fearing the company will be pushed to the brink of bankruptcy. Wanting to maintain his control and to preserve the direction of “his” “his ” company, Donald is doing everyth everything ing to avoid a share issuance aand nd is contemplating a large issuance of bonds, even if it means the bonds are issued with a high effectiveinterest rate. Instructions

(a)  Who ar aree the stakeholders in this situation? (b)  What are the ethical issues in this case? (c)  What would you do if you were were Donald?

 

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 14-1 Present value of the principal ¥500,000 ¥500 ,000 X .37689 .37689.......... ............... .......... .......... .......... .......... .......... .......... .......... .......... ........ ... Present value of the interest payments ¥22,500 X 12.46221........................................................ Issue price ...............................................................

¥188,445 ¥188,445 280,400 ¥468,845

BRIEF EXERCISE 14-2 (a)

(b)) (b

(c) (c)

Cash Cash ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. Bonds Payable .............................................

300 300,00 ,000 0

In Inte tere rest st Ex Expe pens nse e.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Cash (€300,000 X 10% X 6/12) .....................

15,0 15,000 00

In Inte tere rest st Ex Expe pens nse e.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Interest Payable............................................

15,0 15,000 00

300,000

15,000

15,000

BRIEF EXERCISE 14-3 (a)

(b)) (b

(c)

Cash Cash (€3 (€300, 00,000 000 X 1.0 1.0811 811)) ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. Bonds Payable .............................................

324 324,33 ,330 0

Inte Intere rest st Ex Expe pens nse e (€32 (€324, 4,33 330 0 X 8% X 6/12 6/12)) .. .... .... .... .... .... .. Bond Bo nds s Pa Paya yabl ble e.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Cash (€300,000 X 10% X 6/12) .....................

12,9 12,973 73 2, 2,02 027 7 15,000

Interest Expense

 

(€324,330 – €2,027) X 8% X 6/12 ..................... ........................ ... Bonds Bond s Pa Pay yable able.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Interest Payable............................................

  14-10

324,330

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12,892 2, 2,10 108 8

Kieso, IFRS, 2/e, Solutions Manual 

15,000

(For Instructor Use Only) 

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BRIEF EXERCISE 14-4 (a) (a) (b)) (b

(c)

Ca Cash sh (€ (€30 300, 0,00 000 0 X .926 .92639 393) 3) .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Bonds Payable .............................................

277, 277,91 918 8

In Inte tere rest st Ex Expe pens nse e (€27 (€277, 7,91 918 8 X 12 12% % X 6/ 6/12 12)) .. .... .... .... .... .. Bonds Payable ............................................. Cash (€300,000 X 10% X 6/12) ....................

16,6 16,675 75

Interest Expense (€277,918 + €1,675) X 12% X 6/12) .................. .................... .. Bonds Payable ............................................. Interest Payable ...........................................

  16,776

277,918 1,675 15,000

1,776 15,000

BRIEF EXERCISE 14-5 (a)

Cash Cash ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... ..

408,00 408,000 0

Bonds Payable ............................................. Interest Expense (£400,000 X 6% X 4/12 = £8,000) .............. (b)) (b (c) (c)

400,000 8,000

Inte Intere rest st Ex Expe pens nse e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Cash (£400,000 X 6% X 6/12 = £12,000) .....

12,0 12,000 00

Inte Intere rest st Ex Expe pens nse e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ....

12,0 12,000 00

12,000

Interest Payable ...........................................

12,000

BRIEF EXERCISE 14-6 (a) (b)) (b

Cash Cash ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. Bonds Payable .............................................

559,22 559,224 4

In Inte tere rest st Ex Expe pens nse e ($55 ($559, 9,22 224 4 X 8% X 6/ 6/12 12)) .. .... .... .... .... .... .. Cash ($600,000 X 7% X 6/12) ...................... Bonds Payable .............................................

22,3 22,369 69

559,224 21,000 1,369

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BRIEF EXERCISE 14-6 (Continued)

(c)

Interest Expense [($56 [($ 560, 0,59 593 3 X 8% X 6 6/1 /12 2=$ $22 22,4 ,424 24)]. )]... .... .... .... .... .... .... .... .... .... .... Interest Payable.............................................. Bonds Payable ...............................................

22,4 22,424 24 21,000 1,424

BRIEF EXERCISE 14-7 (a)

Cash ...................... ............................................. .......................................... ................... 644,636,000 Bonds Payable ...................................... 644,636,000

(b)

Interest Interest Expe Expense nse..... .......... ......... ......... .......... .......... ......... ......... .......... ....... .. 19,339,00 19,339,000 0 Bonds Bon ds Payabl Payable e...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... 1,6 1,661, 61,000 000 Cash ....................................................... ($644,636 X 6% X 6/12 = $19,339,000) ($600,000 X 7% X 6/12 = $21,000,000)

21,000,000

14-11 

(c)

Interest Expense ($6 ($ 642,975 X 6% X 6 6//12 = $19,289) ...............

19,289

Bond Bo nds s P .... ..y .... .... .... .. .. InPay teayab reable st le Pa a b l.... e.... ..... ..... ........ ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... ........ ...... ...... .... ..

1,7 ,711 11

21,000

BRIEF EXERCISE 14-8 Interest Expense .................................... ........................................................... .......................... ... 6,446,360* Bonds Payable ............................................... ................................................................. .................. 553,640 Interest Payable ........................................... ...................................................... ........... 7,000,000** *HK$644,636,000 *HK$644,636, 000 X 6 6% % X 2/12 = HK$6,446,360 **HK$600,000,000 **HK$600,000,0 00 X 7% X 2/12 = HK$7,000,0 HK$7,000,000 00

  14-12

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BRIEF EXERCISE 14-9 (a)

(b)) (b

Cash Cash ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. Notes Payable ..............................................

100,00 100,000 0

Inte Intere rest st Ex Expe pens nse e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Cash (€100,000 X 10% = €10,000) ...............

10,0 10,000 00

100,000

10,000

BRIEF EXERCISE 14-10 (a) (a)

(b)) (b

Ca Cash sh .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Notes Payable ..............................................

47,6 47,664 64

In Inte tere rest st Ex Expe pens nse e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ....

5, 5,72 720 0

47,664

Notes Payable .............................................. (£47,664 X 12%)

5,720

BRIEF EXERCISE 14-11 (a) (a)

(b)) (b

Eq Equi uipm pmen entt .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Notes Payable ..............................................

31,4 31,495 95

In Inte tere rest st Ex Expe pens nse e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ....

3, 3,77 779 9

31,495

Cash ..............................................................

2,000

Notes Payable .............................................. ($31,495 X 12% = $3,779) ($40,000 X 5% = $2,000)

1,779

BRIEF EXERCISE 14-12 Cash Cas h ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... Notes Payable ......................................................... Unearned Sales Revenue [€60,000 – (€60,000 X .63552) = €21,869] ...........

60,000 60,000 38,131 21,869

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BRIEF EXERCISE 14-13 Bonds Bon ds Pay Payabl able e ($500,0 ($500,000 00 + $15, $15,00 000) 0) ...... ......... ...... ...... ...... ...... ...... ...... ...... ... Gain on Extinguishment of Debt ........................... Cash (.99 X $500,000) .............................................

515,00 515,000 0 20,000 495,000

BRIEF EXERCISE 14-14 Notes Paya Payable ble .......... ............... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ....... Share Capital—Ordinary ........................................ Share Premium—Ordinary (€4.75 – €1) X 20,000 ..................... ........................................... ...................... Gain on Extinguishment of Debt ...........................

100,000 100,000 20,000   75,000 5,000

BRIEF EXERCISE 14-15 (a)

Present value of restructured cash flows: Present value of principal €90,000 due in 4 years years at 12% (€90,00 (€90,000 0 X .63552 .63552)) ...... ......... ...... ...... ...... ...... ... € 57,1 57,197 97 Present value of interest €7,200 paid annually for 4 years at 12% (€7,200 X 3.03735) ............... 21,869 Fair value value of note..... ......... ......... .......... .......... .......... .......... .......... .......... .......... ....... .. € 79,066

Notes Not es Payable Payable (Old) (Old) .... ....... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... Gain on Extinguishment of Debt ................

100,00 100,000 0

20,934

14-13 

Notes Payable (New) .................................... (b)) (b

In Inte tere rest st Ex Expe pens nse e.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Cash (€90,000 X 8%) .................................... Notes Payable...............................................

79,066 9, 9,48 488* 8* 7,200 2,288

*€79,066 X 12%

  14-14

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BRIEF EXERCISE 14-16 (a) (b)

Unrealized loss = HK$17,500 – HK$16,000 = HK$1,500 Unrealized Holding Gain or Loss—Income ........ 1,500 Notes Payable ..............................................

1,500

BRIEF EXERCISE 14-17 Non-current liabilities Bonds Payable, due January 1, 2023 ................... Current liabilities Interest Payable ......................................................

$1,912,000 $

80,000

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SOLUTIONS TO EXERCISES EXERCISE 14-1 (15–20 minutes) (a)

Current liability if current assets are used to satisfy the debt.

(b) (c) (d)

Current liability, €250,000; long-term liability, €750,000. Current liability. Probably non-current, although if operating cycle is greater than one year and current assets are used, this item would be classified as current. Current liability. Current liability unless (a) a fund for liquidation has been accumulated which is not classified as a current asset or (b) arrangements have been made for refinancing. Current liability. Current liability.

(e) (f)

(g) (h)

EXERCISE 14-2 (15–20 minutes) (a)

Interest expense (credit balance)—Reclassify to interest payable on statement of financial position.

(b)

Bond issue costs—Reduction of the issue amount of the bond payable.

(c)

Gain on repurchase of debt—Classify as part of Other income and expense on the income statement.

(d)

Mortgage payable—Classify one-third as current liability and the remainder as non-current liability on statement of financial position.

(e)

Debenture bonds payable—Classify statement of financial position.

(f)

Notes payable—Classify as non-current liability on statement of financial position.

as

non-current

liability

on

14-15 

(g)   14-16

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EXERCISE 14-3 (15–20 minutes) 1.

Divac Company: (a)

1/1/15 1/1/15

(b) 7/1/15

(c) (c)

2.

Cash .......... ............... .......... .......... .......... .......... .......... .......... .......... ........ ... 300,000 300,000 Bonds Payable ........................... Interest Expense (€30 (€300, 0,00 000 0 X 9% X 3 3/1 /12) 2) .. .... .... .... .... .... .... .... .... .... .. Cash ............................................

12/3 12/31/ 1/15 15 Inte Intere rest st Ex Expe pens nse e .. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Interest Payable .........................

300,000

6, 6,75 750 0 6,750 6, 6,75 750 0 6,750

Verbitsky Company: (a)

6/1/15 6/1/15

(b) 7/1/15 7/1/15

Cash .......... ............... .......... .......... .......... .......... .......... .......... .......... ........ ... 210,000 210,000 Bonds Payable ........................... Interest Expense (€200,000 X 12% X 5/12) ......... Int Intere erest st Exp Expens ense e ... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... Cash (€200,000 X 12% X 6/12) ..

12,000 12,000

(c) 12/31/ 12/31/15 15 Int Intere erest st Exp Expens ense e ... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... Interest Payable .........................

12,000 12,000

200,000 10,000 12,000

12,000

Note to instructor: Some students may credit Interest Payable on 6/1/15. If they do so, the entry on 7/1/15 will have a debit to Interest Payable for  €10,000 and a debit to Interest Expense for €2,000.

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EXERCISE 14-4 (15–20 minutes) (a)

(b)

1/1/15 1/1/15

7/1/15

Cash (€800 (€800,000 ,000 X 1.19 1.19792) 792).......... ............... .......... ......... .... 958,336 958,336 Bonds Payable ................................. Interest Expense (€95 (€958, 8,33 336 6 X 8% X 6/12 6/12)) .... ...... .... .... .... .... .... .... .... .... .... .... .... Bond Bo nds s Pa Paya yabl ble e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..

38,3 38,333 33 1, 1,66 667 7

Cash (€800,000 X 10% X 6/12) ......... (c)

12/31/15 Interest Expense (€95 (€958, 8,33 336 6 – €1 €1,6 ,667 67)) X 8% X 6/1 6/12 2 .. .... .... .... .... .... .. Bond Bo nds s Pa Paya yabl ble e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Interest Payable ...............................

958,336

40,000 38,2 38,267 67 1, 1,73 733 3 40,000

EXERCISE 14-5 (15–20 minutes) (a)

(b)

(c)

  14-18

1/1/15 1/1/15

7/1/15 7/1/15

Cash (€800 (€800,000 ,000 X .8495 .8495)) ..... .......... .......... .......... .......... ........ ... 679,600 679,600 Bonds Payable ................................. Interest Expense (€679, (€6 79,600 600 X 1 12% 2% X 1 1/2) /2) ...... ......... ...... ...... ...... ...... ...... ...... ... Bonds Payable........................................... Cash (€800,000 X 10% X 6/12) .........

12/31/15 Interest Expense [(€67 [(€ 679, 9,60 600 0 + €7 €776 76)) X 12% 12% X 1/2] 1/2] .. .... .... .... .... .... .. Bonds Payable ................................. Interest Payable ...............................

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EXERCISE 14-6 (15–20 minutes) The effective-interest or yield rate is 12%. It is determined through trial and error using Table 6-2 for the discounted value of the principal (£1,702,290) and Table 6-4 for the discounted value of the interest (£1,081,434); £1,702,290 plus £1,081,434 equals the proceeds of £2,783,724. (A financial calculator may be used to determine the rate of 12%.) Schedule of Discount Amortization Effective-Interest Method (12%)

 Year

Cash Paid

(1) Jan. 1, 2015 Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019

(2) — £300,000 300,000 300,000 300,000 300,000

Interest Expense (3) — £334,046.88 * 338,132.51 342,708.41 347,833.42 353,554.78 **

Discount Amortized

Carrying Amount of Bonds

(4) — £34,046.88 38,132.51 42,708.41 47,833.42 53,554.78

£2,783,724.00 2,817,770.88 2,817,770.8 8 2,855,903.39 2,855,903.3 9 2,898,611.80 2,898,611.8 0 2,946,445.22 2,946,445.2 2 3,000,000.00 3,000,000.0 0

*£334,046.88 = £2,783,724 X .12. **Rounded. EXERCISE 14-7 (15–20 minutes) (a)

Bond selling price ($2,500,000 X 1.06231) ...................... ........................ ..

$ 2,655,775

July 1, 2015 Interest expense reported ($2,655,775 X 10% X 6/12) ......

$

132,789

$

265,578*

December 31, 2015 Interest expense reported ..................... ............................................ ............................. ...... *$2,655,775 X 10% X 6/12 = $132,789 ($2,655,775 – $132,789) X 10% X 6/12 = $132,779   Copyright © 2014 John Wiley & Sons, Inc.  

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EXERCISE 14-7 (Continued) (b)

June 30, 2015

(For Instructor Use Only) 

14-19 

Carrying amount of bonds ........................ ............................................... ......................... .. Effective-interest rate for the period from June 30 to October 31, 2015 (.10 X 4/12) ...................................... ...................................... Interest expense to be recorded on October 31, 2015 ....

$562,500 X.033333 $ 18,750*

*Alternative computation: $562,500 X .10 X 4/12 (c)

October 1, 2015 Cash Cas h ($853 ($853,38 ,382 2 + $72 $72,00 ,000) 0) .. ..... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... Bonds payable ................................................. Interest Expense ($800,000 X 12% X 9/12) ....

925,38 925,382 2 853,382 72,000

December 31, 2015 Interest Intere st Exp Expens ense e ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... Bond Bo nds s Pa Paya yabl ble e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Cash ($800,000 X 12%) ....................................

93,335 93,335 2, 2,66 665* 5* 96,000

*($800,000 X 12%) – $72,000 = $24,000 net cash paid ($853,382 X 10% X 3/12) (21,335) interest expense $2,665 premium amortized  

  14-20

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EXERCISE 14-8 (20–30 minutes) (a)

(1)

June 30, 2014 Cash Ca sh .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Bonds Payable ..........................

(2)

5, 5,37 376, 6,15 150 0

December 31, 2014

5,376,150

Interest Expense (R$5,376,150 X 12% X 6 6//12) ............ Bonds Payable ................................... Cash (R$5,000,000 X 13% X 6/12) ... (3)

322,569 2,431 325,000

June 30, 2015 Interest Expense [(R$5,376,150 – R$2,431) X 12% X 6/12] ................................. Bonds Payable ................................... Cash ...........................................

(4)

322,423 2,577 325,000

December 31, 2015 Interest Expense [(R$5,376,150 – R$2,431 – R$2,577) X 12% X 6/12] ................. Bonds Payable ................................... Cash ...........................................

322,268 2,732 325,000

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EXERCISE 14-8 (Continued) (b)

Non-current Liabilities: Bonds paya payable, ble, 13% (due on June 30, 2034) 2034) ..... .......... ........ ...

R$5,368, R$5,368,410* 410*

*R$5,376,150 – (R$2,431 + R$2,577 + R$2,732) = R$5,368,410 (c)

(1)

Interest expense for the period from Januar Jan uary y 1 to June June 30, 20 2015 15 fro from m (a) 3.... ...... ...... ...... ..... Interest expense for the period from July Ju ly 1 to Dece Decemb mber er 31, 31, 20 2015 15 fro from m (a (a)) 4. .. .... .... .... .... ..

R$

322,42 322,423 3 322, 322,26 268 8

14-21 

Amount of bond interest expense report rep orted ed for 201 2015 5 ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. (2)

  14-22

R$

Total interest to be paid for the bond (R$5,0 (R$ 5,000, 00,000 000 X 13% X 20)...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ..... Less Le ss:: Prem Premiu ium m (R (R$5 $5,3 ,376 76,0 ,000 00 – R$ R$5, 5,00 000, 0,00 000) 0) .. .... .. Total cost of borrowing over the life of the bond bond ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...

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644,69 644,691 1

R$13,0 R$13,000, 00,000 000 376, 376,15 150 0 R$12,6 R$12,623, 23,850 850

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EXERCISE 14-9 (15–20 minutes) (a)

January 1, 2015 Cash Ca sh ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... Bonds Payable ..................................

(b)

860,65 860,651.7 1.79 9 860,651.79

Schedule of Interest Expense and Bond Premium Amortization Effective-Interest Method 12% Bonds Sold to Yield 10%

Date 1/1/15

Cash Paid

Interest Expense

Premium Amortized

Carrying Amount of Bonds

—

—

—

£860,651.79

12/31/15 12/31/16 12/31/17

£96,000.00 96,000.00 96,000.00

£86,065.18 85,071.70 83,978.87

(c)

£ 9,934.82 10,928.30 12,021.13

850,716.97 839,788.67 827,767.54

December 31, 2015 In Inte tere rest st Exp Expen ense se .. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..

86,0 86,065 65.1 .18 8

Bon onds ds Pay Payable able .. .... .... .... .... .... .... .... .... .... .... .... .... .... .... ...... .... .... .... .... .... .. Cash ...................................................

9,9 ,934 34.8 .82 2

(d)

96,000.00

December 31, 2017 In Inte tere rest st Exp Expen ense se .. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Bond Bo nds s Pa Pay yab able le .. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Cash ...................................................

83,9 83,978 78.8 .87 7 12,0 12,021 21.1 .13 3 96,000.00

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EXERCISE 14-10 (20–30 minutes) Unsecured (1)

Maturity value

(2)

Number of interest periods (10 X 4)

(3)

Stated rate per period

(4)

Effective rate per period

Zero-Coupon

Bonds $10,000,000

Bonds $25,000,000

Bonds $15,000,000

40

10

10

3.25% (

13% ) 4

0

10%

3% (

12% ) 4

12%

12%

(a)

(5)

Payment amount per period

(6)

Present value

(b)

$325,000  

0

$ 1,500,000  

$10,577,900(c) 

$8,049,250(d) 

$13,304,880(e) 

(a)

$10,000,000 X 13% X 1/4 = $325,000

(b)

Mortgage

$15,000,000 X 10% = $1,500,000

14-23 

(c)

Present value of an annuity of $325,000 discounted at 3% per period for 40 pe peri riod ods s ($ ($3 325,0 25,000 00 X 23.11 3.1147 477) 7).... ...... .... .... ........ ...... .... .... .... .... .... Present value of $10,000,000 discounted at 3% per period for56) 40 ($ ($10 10,0 ,000 00,0 ,000 00 X .306 .30656 ) .... ..periods .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..

$ 7,5 7,512 12,,30 300 0 3, 3,06 065, 5,60 600 0 $10,577,900

(d)

Present value of $25,000,000 discounted at 12% for 10 periods ($ ($25 25,0 ,000 00,0 ,000 00 X .321 .32197 97)) .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..

$ 8,04 8,049, 9,25 250 0

(e)

Present value of an annuity of $1,500,000 discounted at 12% for 10 periods ($ ($1, 1,50 500, 0,00 000 0 X 5.65 5.6502 022) 2).... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Present value of $15,000,000 discounted at 12% for 10 years ($ ($15 15,0 ,000 00,0 ,000 00 X .321 .32197 97)) .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..

  14-24

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EXERCISE 14-11 (15–20 minutes) (a)

1.

2.

January 1, 2015 Land La nd... ..... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Notes Payable ................................. (The €300,000 capitalized land cost represents the present value of the note discounted for five years at 11%.)

300, 300,00 000 0

Eq Equi uipm pmen entt .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Notes Payable .................................

29 297, 7,07 079* 9*

300,000

297,079

*Computation of the present value of the note: Present value of €400,000 € 400,000 due in 8 years at 11%—  €400,000 X .43393........................ .......................... Present value of €24,000 payable annually for 8 years at 11% annually—  €24,000 (€400,000 (€400,000 X .06) X 5.14612 ..................... .......................................... ..................... Present value of the note

€173,572

  123,507 €297,079

(b)) (b

1.

In Inte tere rest st Ex Expe pens nse e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..

33,0 33,000 00

Notes (€300Payable ,000 X .11) ............................ 2.

Interest Expense (€29 (€297, 7,07 079 9 X .11) .11) .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Notes Payable ................................. Cash (€400,000 X .06) .....................

33,000 32,6 32,679 79 8,679 24,000

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EXERCISE 14-12 (15–20 minutes) (a)

Face value of the zero-interest-bearing note ................... Discounting factor (12% for 3 periods)............................. ............................. Amount to be recorded for the land at January 1, 2015 ....

$600,000 X .71178 $427,068

Carrying value of the note at January 1, 2015 ................. Applicable interest rate (12%) ........................................... ........................................... Interest expense to be reported in 2015 ..................... ........................... ......

$427,068 X .12 $ 51,248

(b)

January 1, 2015 Cash ..................... ............................................ ......................................... .................. Notes Payable ..................................... Unearned Sales Revenue ..................

4,000,000 2,732,040 1,267,960*

*$4,000,000 – ($4,000,000 X .68301 (Table 6-2; 4 years, 10%)) = $1,267,960

 

Carrying value of the note at January 1, 2015 2015 ..... .......... .......... .......... .......... .......... ....... $2,7 $2,732,0 32,040 40 Applicable interest rate (10%)............ ................... ....... X .10 Interest expense to be reported report ed for 2015 ......... .............. .......... .......... .......... ........ ... $ 273, 273,204 204

EXERCISE 14-13 (15–20 minutes) (a (a))

Cash Cash .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..

500, 500,00 000 0

14-25 

Notes Payable ..................................... Unearned Sales Revenue ( 500,000 – 396,915) ....................... ₺

103,085

₺

Face value ......................................... ......................................... Present value of 1 at 8% 8% for 3 years ...................................... ...................................... Present value ......................... .................................... ...........   14-26

396,915

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500,000   X .79383 396,915

 

₺

 

₺

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EXERCISE 14-13 (Continued) (b)

Interest Expense ( 396,915 X 8%) ................ Notes Payable ......................................

31,753

Unearned Sales Revenue ( 103,085 ÷ 3) ..... Sales Revenue......................................

34,362

₺

31,753

₺

34,362

EXERCISE 14-14 (20–25 minutes)

(a)

Present value of the principal: $1,500,000 X .35218 (Table 6-2; 10 years, 11%) ....... Present value of the interest payments: ($1,500,000 X 10%) X 5.88923 (Table 6-4; 10 years, 11%) ..................... ............................................ ...................................... ............... Present value (selling price) of the bonds .....................

(b)

$ 528,270

883,385 $1,411,655

AMORTIZATION SCHEDULE 10-Year, 10% Bonds Sold to Yield 11%

Date 1/2/12 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16

Cash Paid

Interest Expense

Discount Amortized

Carrying Amount of Bonds

—

—

—

$1,411,655

$150,000 150,000 150,000 150,000 150,000

$155,282 155,863 156,508 157,224 158,019

$5,282 $5, 282 5,863 6,508 7,224 8,019

1,416,937 1,422,800 1,429,308 1,436,532 1,444,551

(c)

Bonds Payable ($1, ($1,42 429, 9,30 308 8 X $1, $1,00 000, 0,00 000/ 0/$1 $1,5 ,500 00,0 ,000 00)) ... ..... .... .... .. Loss Lo ss on Ex Exti ting ngui uish shme ment nt of of De Debt bt .. .... .... .... .... .... .... .... .... .... Cash ($1,0 ($1,000,0 00,000 00 X 101% 101%)) ..... .......... .......... .......... .......

952, 952,87 872 2 57,1 57,128 28 1,010 1,010,000 ,000

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EXERCISE 14-15 (12–16 minutes) (a)

June 30, 2016 Bonds Bond s Payab Payable le (£ (£60 600, 0,00 000 0 – £7 £78, 8,97 979) 9).... ...... .... .... .... .... Loss Lo ss on Ex Exti ting ngui uish shme ment nt of Debt Debt.... ...... .... .... .... .... .... .... .... Cash........................................................

 

624,000

Reacquisition price (£600,000 X 104%)......... Net carrying amount of bonds redeemed: (£600,000 – £78,979) ............................. Loss on extinguishment ................................ Cash Ca sh (£80 (£800, 0,00 000 0 X 112. 112.55 5513 13%) %) .... ...... .... .... .... .... .... .... .... .... .... .. Bonds Payable .......................................

(b)

52 521, 1,02 021 1 102, 102,97 979 9 £ 624,000 (521,021) £ 102,979 900, 90 0,41 410 0 900,410

December 31, 2016 Inte Intere rest st Ex Expe pens nse e .. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Bon onds ds Pay Payable able .... ...... .... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... .... ........ ...... ..

22,5 22,510 10** 1,4 ,490 90

Cash........................................................ *(£900,410 X 5% X 6/12) **(.03 X £800,000 = £24,000)

24,000**

EXERCISE 14-16 (10–15 minutes) Reacquisition price (¥5,000,000 X 104%) ............... Less: Net carry carrying ing amount of bonds redeemed: Par value value ..... .......... .......... .......... .......... ......... ......... .......... .......... .......... .......... ....... ¥5,000,0 ¥5,000,000 00 Unamortize Unam ortized d disc discount ount .......... ............... .......... .......... .......... ......... .... (100,000 (100,000))

  4,900,000

Loss on Extinguishment of Debt ............................ ............................

¥ 300,000

Bonds Paya Payable ble ..... .......... .......... .......... .......... .......... .......... .......... .......... .......... ......... ....... ... Loss Lo ss on E Ext xtin ingu guis ishm hmen entt of D Deb ebtt .... ...... .... .... .... .... .... .... .... .... .... .... .... .. Cash ............................................................... (To record extinguishment of bonds payable)

4,900,00 4,900,000 0 300, 300,00 000 0

Cash (¥5,0 (¥5,000,0 00,000 00 X 103% 103%)) .......... ............... .......... .......... .......... .......... ......... ....

5,150,00 5,150,000 0

¥5,200,000

5,200,000

14-27 

Bonds Payable .............................................. (To record issuance of new bonds)   14-28

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EXERCISE 14-17 (15–20 minutes) (a)

Transfer of property on December 31, 2015: Strickland Company (Debtor): Note No tes s Pa Paya yabl ble e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. In Inte tere rest st Pa Pay yab able le ... ..... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..

200,00 200, 000 0 18,0 18,000 00

Accu Ac cumu mula d..D Dep M aclate hited ne ..epre ....reci ....ciat ...atio ...ion— ...n—Eq ......Equi .....uipm ...pmen .....ent. ....t... ..... ....

221, 221,00 000 0

Gain on Disposition of Equipment ..... Gain on Extinguishment of Debt ........

390,000 11,000a  38,000b 

a

$180,000 – ($390,000 – $221,000) = $11,000. ($200,000 + $18,000) – $180,000 = $38,000.

b

(b)

“Gain on Disposition of Equipment” and the “Gain on Extinguishment of Debt” should be reported under Other income and expense in the income statement.

(c)

Granting of equity interest on December 31, 2015: Strickland Company (Debtor): Note No tes s Pa Paya yabl ble e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. In Inte tere rest st Pa Pay yab able le ... ..... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Share Capital—Ordinary ($15,000 X $10) ....... ............................... ........................... ... Share Premium—Ordinary ($180,000 – $150,000)..................... ........................ ... Gain on Extinguishment of Debt ........

200,00 200, 000 0 18,0 18,000 00   150,000   30,000 38,000

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EXERCISE 14-18 (25–30 minutes) (a)

Yes, Barkley can record a gain on ex extinguishment tinguishment equal to the difference between the note’s carrying value and the fair value of the restructured note. The note’s fair value is computed as follows: Present value of restructured cash flows: Present of at principal £2,400,000 due in value 3 years years 15% ..... .......... .......... .......... .......... .......... ....... Present value of interest £240,000 (£2,400,000 X .10) paid annually for f or 3 years at 15% .............   Fair value of note .............................................. .................................................. ....

£1,578,04 £1,578,048 8a  54 5 47,975b  £2,126,023

a

£2,400,000 X .65752 = £1,578,048. £240,000 X 2.28323 = £547,975.

b

(b)

The amortization schedule is prepared as follows: BARKLEY COMPANY Amortization Schedule After Debt Modification Market-Interest Rate 15%

Date

Cash Paid (10%)

Interest Expense (15%)

12/31/15 12/31/16 12/31/17 12/31/18

— £240,000a  240,000 240,000

— £318,903b  330,739 344,335*

Total

£720,000

£993,977

 

Amortization

Carrying Value

— £ 78,903c  90,739 104,335

£2,126,023 2,204,926 2,295,665 2,400,000

£273,977

a

£2,400,000 X 10% = £240,000. b £2,126,023 X 15% = £318,903. c £318,903 – £240,000 = £78,903. *Rounded £15.

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EXERCISE 14-18 (Continued) (c)

Interest payment entry for Barkley Company is: December 31, 2017 Intere Int erest st Exp Expens ense e ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. Notes Payable ............................................. Cash .............................................................

(d)

330,73 330,739 9 90,739 240,000

The payment entry at maturity is: January 1, 2019 Notes Pay Payable able..... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ..... 2,400,00 2,400,000 0 Cash...............................................................

2,400,000

EXERCISE 14-19 (20–30 minutes) (a)

The note’s fair value can be calculated as follows: Present value value of restructured cash flow flows: s: Present value of principal £1,900,000 due in 3 years at 15% ...................... ....................................... ................. £1,249,288a  Present value of interest £190,000 (£1,900,000 X .10) paid annually for 3 years at 15%..................... 433,814b  Fair value of note ........................ .............................................. ........................ .. £1,683,102 a

£1,900,000 X .65752 = £1,249,288 b £190,000 X 2.28323 = £433,814 December 31, 2015 Notes Pay Payable able (Old) .... ......... .......... .......... .......... .......... .......... ......... ......... ....... .. 1,900,00 1,900,000 0 Gain on Extinguishment of Debt ............... Notes Payable (New)...................................

216,898 1,683,102

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EXERCISE 14-19 (Continued) (b)

The amortization schedule is prepared as follows:

(For Instructor Use Only) 

14-31 

BARKLEY COMPANY Amortization Schedule After Debt Modification Market-Interest Rate 15% Cash Paid Date 12/31/15 12/31/16 12/31/17 12/31/18 Total

(10%) — £190,000a  190,000 190,000 £570,000

Interest Expense

Carrying

(15%) — £252,465b  261,835 272,598 £786,898

Amortization — £ 62,465c  71,835 82,598 £216,898

Value £1,683,102 1,745,567 1,817,402 1,900,000

a

£1,900,000 X 10% = £190,000. £1,683,102 X 15% = £252,465. c £252,465 – £190,000 = £62,465.

b

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EXERCISE 14-19 (Continued) (c)

Interest payment entries for Barkley Company are: December 31, 2016 Intere Int erest st Exp Expens ense e ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. Notes Payable ............................................. Cash .............................................................

252,46 252,465 5 62,465 190,000

December 31, 2017 Intere Int erest stoExp Expens ense eb...... ... N tes P aya le...... ....... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... .......... ........ .... ..

261,8 261,835 35

71,835 190,000

Cash ............................................................. December 31, 2018 Intere Int erest st Exp Expens ense e ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. Notes Payable ............................................. Cash ............................................................. (d)

272,59 272,598 8 82,598 190,000

The payment entry at maturity is: January 1, 2019 Notes Pay Payable able..... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ..... 1,900,00 1,900,000 0 Cash .............................................................

1,900,000

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EXERCISE 14-20 (15–20 minutes) (a)

Gottlieb Co.’s entry: Notes Paya Payable ble ..... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ....... .. Land ................................................................ Gain on Disposition of Land (€140,000 – €90,000) .................................. Gain on Extinguishment of Debt .................. *€199,800 – €140,000.

(b)

Present value of restructured cash flows:

199,800 199,800 90,000 50,000 59,800*

14-33 

Present value of $220,000 due in 2 years at 8%, interest payable annually (Table 6-2); ($220,000 X .85734) ................ Present value of $11,000 interest payable annually for 2 years at 8% (Table 6-4); ($11,000 X 1.78326)..................................... Fair value of note ....................................................

$188,615

19,616 $208,231

Vargo Corp.’s entries: December 31, 2015 2015 Notes Paya Payable ble (Old) (Old) ..... .......... .......... .......... .......... .......... .......... ......... .... Gain on Extinguishment of Debt .......... Note Payable (New) ...............................

270,000 270,000 61,769 208,231

December 31, 2016 2016 20 16 Int Inter eres estt Expen Expense se (($2 $208 08,2 ,231 31 X 8 8% %) .... ...... .... .... .... .... .... .. Notes Payable ........................................ Cash (5% X $220,000) ............................

16,6 16,658 58 5,658 11,000

December 31, 2017 2017 Interest Expense [($208, [($20 8,23 231 1 + $5,6 $5,658 58)) X .08] .08] .... ...... .... .... .... .... .... .... .... .. Notes Not es Pay Payabl able e ....... .......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... Cash [$220,000 + (5% X $220,000)] ....................... ......................... ..

  14-34

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EXERCISE 14-21 (10–15 minutes) (a)

December 31, 2015 No entry since the carrying value is equal to the notes’ fair value. December 31, 2016 Notes Not es Pay Payabl able e (€4 (€44,0 4,000 00 – € €42, 42,500 500)) ... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... Unrealized Holding Gain or Loss—Income ........

1,500 1,500 1,500

December 31, 2017 Unre Un real aliz ized ed Hold Holdin ing g Gai Gain n or Lo Loss ss—I —Inc ncom ome e.. .... .... .... .... .... .... .... .... .. Notes Payable [(€38,000 – €36,000) + €1,500]..... (b)

3, 3,50 500 0 3,500

The note will be reported at €42,500 on Fallen’s 2016 statement of financial position.

(c)

Fallen’s 2017 income is €3,500 lower since the change in fair value is reported as part of net income.

(d)

Fallen’s creditworthiness has declined since the fair value of its debt declined. Since the general market interest rates have been stable, the fair value decline must have been caused by a decline in Fallen’s creditworthiness.

(e)

When the value value of a liability changes due to a c company’s ompany’s specific credit risk, this change in value is reported in other comprehensive income (assuming a company has chosen the fair value option), as a result changes in value do not affect net income or net loss.

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EXERCISE 14-22 (10–15 minutes) At December 31, 2015, disclosures would be as follows: Maturities and sinking fund requirements on long-term debt are as follows: 2016 2017 2018 2019 2020

$ 0 2,500,000 4,500,000 8,500,000 2,500,000

($2,000,000 + $2,500,000) ($6,000,000 + $2,500,000)

14-35 

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SOLUTIONS TO PROBLEMS PROBLEM 14-1

(a)

The bonds were sold at a discount of €5,651. Evidence of the discount is the January 1, 2009 book value of €94,349, which is less than the maturity value of €100,000 in 2018.

(b)

The stated rate is 11% (€11,000 ÷ €100,000). The effective rate is 12% (€11,322 ÷ €94,349).

(c)

January 1, 2009 Cash Ca sh .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Bonds Payable ............................................

(d)

94,349

December 31, 2009 Inte Intere rest st Ex Expe pens nse e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Bonds Payable ............................................ Interest Payable ..........................................

(e)

94,3 94,349 49

11,3 11,322 22 322 11,000

January 1, 2016 (Interest Payment) Inte Intere rest st Pa Paya yabl ble e.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..

11,0 11,000 00

Cash .............................................................

11,000

December 31, 2016 Inte Intere rest st Ex Expe pens nse e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Bonds Payable ............................................ Interest Payable ..........................................

11,7 11,712 12 712 11,000

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PROBLEM 14-2

(a)

Present value of the principal $2,000,000 X .38554 (PV10, 10%).......................... ..........................

$ 771,080

Present value of the interest payments $210,000* X 6.14457 (PVOA10, 10%) ....................

1,290,360

Present value (selling price of the bonds) ........

$2,061,440

*$2,000,000 X 10.5% = $210,000 Cash ......... .............. .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ....... Bonds Payable ............................................

2,061,44 2,061,440 0

(b) Date 1/1/14 1/1/15 1/1/16 1/1/17 1/1/18 (c)

2,061,440

Cash Paid

Interest Expense

Premium Amortization

Carrying Amount of Bonds

— $210,000 210,000 210,000 210,000

— $206,144 205,758 205,334 204,868

— $3,856 4,242 4,666 5,132

$2,061,440 2,057,584 2,053,342 2,048,676 2,043,544

Carrying amount as of 1/1/17 ...................... ............................... ......... Less: Amortization of bond premium ($5,132 ÷ 2) ............................................. .................................................. .....

$2,048,676 2,566

14-39 

 

  14-40

Carrying amount as of 7/1/17 ...................... ............................... .........

$2,046,110

Reacquisition price ....................... .............................................. ......................... Carrying amount as of 7/1/17 ($2,046,110 ÷ 2) ....................... .............................................. ............................ ..... Loss ..................... ............................................ ............................................... ............................ ....

$1,065,000

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PROBLEM 14-2 (Continued) Entry for accrued interest In Inte tere rest st E Exp xpen ense se (($2 $204 04,8 ,868 68 X 1 1/2 /2 X 1/2 1/2)) .. .... .... .... .... .... .. Bond Bo nds s Pa Paya yabl ble e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..

51,2 51,217 17 1, 1,28 283 3

Cash ($210,000 X 1/2 X 1/2) ....................... Entry for reacquisition Bonds Payable ........................ ............................................... ............................ ..... 1,023,055* Loss Lo ss on Ex Extin tingu guis ishm hmen entt o off Deb Debtt .. .... .... .... .... .... .... .... .... .... .... .... 41 41,9 ,945 45 Cash ............................................................ *Premium as of 7/1/17 to be written off ($2,046,110 – $2,000,000) X 1/2 = $23,055 The loss is reported as other income and expense.

52,500

1,065,000

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PROBLEM 14-3

(a)

Date 1/1/15 4/1/15 7/1/15 10/1/15 1/1/16

Cash Paid — €400 400 400 400

Interest Expense — €640 645 650 655

Discount Amortized — €240 245 250 255

Carrying Amount of Note €32,000 32,240 32,485 32,735 32,990

(b)

At this point, we see that the c customer ustomer owes €32,990, or €990 more than at the beginning of the year.

(c)

To earn 8% over the next two years the quarterly payments must be  €4,503 computed as follows:  €32,990 ÷ 7.32548 (PVOA8, 2%) = €4,503

(d)

Date 1/1/16 4/1/16 7/1/16 10/1/16 1/1/17 4/1/17 7/1/17 10/1/17 1/1/18

Cash Paid — €4,503 4,503 4,503 4,503 4,503 4,503 4,503 4,503

Interest Expense — €660 583 505 425 343 260 175 83*

Discount Amortized — €3,843 3,920 3,998 4,078 4,160 4,243 4,328 4,420

Carrying Amount of Note €32,990 29,147 25,227 21,229 17,151 12,991 8,748 4,420 0

*rounded up €5 (e)

The new sales gimmick may bring people into the showroom the first time but will drive them away once they learn of the amount of their year 2 and year 3 payments. Many will not have budgeted for these

14-41 

increases, and will be in a bind because they owe more on their car than it’s worth. One should question the ethics of a dealer using this tactic.   14-42

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PROBLEM 14-4

Dear Samantha, When a bond is issued at face value, the annual interest expense and the interest payout equals the face value of the bond times the interest rate stated on its face. However, if the bond is issued to yield a higher or lower interest rate than what is stated on its face, the interest expense and the actual interest payout will differ. Labeled as a discount or premium respectively, this difference in interest must be systematically associated with the interest periods which occur over the bond’s life through a process called amortization. Assume a premium: the theory behind the effective-interest method is that, as time passes, the difference between the face value of the bond and its carrying amount becomes smaller, resulting in a lower interest expense every period. (The carrying amount equals the face value of the bond plus any unamortized portion of the premium.) Because the carrying amount of the bond becomes smaller over time, the interest expense also does. Since the stated interest rate remains constant, the resulting difference between the actual interest payout and the interest expense recognized must be reflected when whe n interest interest e expen xpense se is recorded reco rded for the period. To amortize the premium applying this method to the data provided, you must know the bond’s face amount, its stated rate of interest, its effective rate of interest, and its carrying value. 1. Multiply the stated rate times the fac face e amount. This is the interest payout. 2. Multiply the bond’s carry carrying ing amount by the effective rate which gives you the actual interest expense.

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PROBLEM 14-4 (Continued) 3. Subtract the amount calc calculated ulated in #2 abo above ve from that found in #1. This is the amount to be amortized for the period. 4. Subtract the difference computed in #3 from the carrying amount. The process begins all over when you apply the effective rate to this new carrying amount for the following period. The schedule below illustrates this calculation. The face value (R$2,000,000) is multiplied by the stated rate of 11 percent, while the carrying amount (R$2,171,600) is multiplied by the effective rate of 10 percent. Because this bond pays interest semiannually, you must also multiply these amounts by 6/12. The result is the interest payout of R$110,000 and interest expense of R$108,580. The difference (R$1,420) is amortized, lowering the carrying amount of the bond to R$2,170,180. For the next period, this new carrying amount will be multiplied by the effective rate times 6/12 and subtracted from the constant R$110,000. Obviously this time the interest expense will be lower than it was last period, resulting in a greater amount of amortization in the next period. Follow these steps and you should have no trouble amortizing premiums and discounts over the life of a bond. Sincerely,

Attachment to letter HOBART COMPANY Interest and Discount Amortization Schedule 11% Bond Issued to Yield 10%

Date 6/30/15 12/31/15 6/30/16 12/31/16 6/30/17   14-44

Cash Paid (11%) — R$110,000 110,000 110,000 110,000

Interest Expense (10%) — R$108,580 108,509 108,434 108,356

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Premium Amortized — R$1,420 1,491 1,566 1,644

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Carrying Amount of Bond R$2,171,600 2,170,180 2,168,689 2,167,123 2,165,479

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PROBLEM 14-5

(a)

December 31, 2015 Equipment........................................... ............................................................. .................. 409,806.00 Notes Payable ............................................. (Computer capitalized at the present value of the note—£600,000 X .68301[pv4,10%])

(b)

409,806.00

December 31, 2016 Deprecia Depr eciation tion Expense Expense..... .......... .......... .......... .......... .......... .......... .......... ....... .. 67,961.2 67,961.20 0 Accumulated Depreciation—Equipme Depreciation—Equipment nt [(£409,806 – £70,000) ÷ 5] ........................

67,961.20

Interest Inter est Ex Expense pense ..... .......... .......... .......... ......... ......... .......... .......... .......... .......... ....... 40,980.6 40,980.60 0 Notes Payable .............................................

40,980.60

Schedule of Note Discount Amortization Date

Debit, Interest Expense Credit, Notes Payable

Carrying Amount of Note

12/31/15 12/31/16 12/31/17 12/31/18 12/31/19

— £40,980.60 45,078.66 49,586.53 54,548.21*

£409,806.00 450,786.60 495,865.26 545,451.79 600,000.00

*£3.03 adjustment due to rounding. (c)

December 31, 2017 Deprecia Depr eciation tion Expense Expense..... .......... .......... .......... .......... .......... .......... .......... ....... .. 67,961.2 67,961.20 0 Accumulated Depreciation—Equipment...

67,961.20

Interest Inter est Expe Expense nse ....... .......... .......... .......... .......... .......... .......... .......... .......... ......... .... 45,078.6 45,078.66 6 Notes Payable .............................................

45,078.66

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PROBLEM 14-6

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14-45 

(a)

December 31, 2014 Machinery ........................ ........................................... ................... 182,485.20 182,485.20** Cash........................................... 50,000.00 Notes Payable ........................... 132,485.20 *To record machinery at the present value of the note plus the immediate cash payment: PV of $40,000 annuity @ 8% for 4 years ($40,000 X 3.31213) ......... $132,485.20 Down payment ................................... 50,000.00 Capitalized value of machinery ........ $182,485.20

(b)

December 31, 2015 Notes Not es Payabl Payable e ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... Cash...........................................

40, 40,00 000.0 0.00 0

Intere Int erest st Expe Expense nse ...... ......... ...... ...... ...... ...... ...... ...... ...... ..... .. Notes Payable ...........................

10, 10,59 598.8 8.82 2

40,000.00

10,598.82

Schedule of Note Discount Amortization Date

Cash Paid

Interest Expense

12/31/14 12/31/15 12/31/16 12/31/17

— $40,000.00 40,000.00 40,000.00

— $10,598.82 8,246.72 5,706.46

12/31/18

40,000.00

Amortization

Carrying Amount of Note

— $29,401.18 31,753.28 34,293.54

$132,485.20 103,084.02* 71,330.74 37,037.20

37,037.20

—

2,962.80**

*$103,084.02 = $132,485.20 – $29,401.18. $29,401.18. **$0.18 adjustment due to rounding.

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PROBLEM 14-6 (Continued) (c)

December 31, 2016 Notes Not es Payabl Payable e...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... Cash ..........................................

40,000 40,000.00 .00

Inte Intere rest st Ex Expe pens nse e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... ....

8, 8,24 246. 6.72 72

40,000.00

Notes Payable ..........................

(d)

December 31, 2017 Notes Not es Payabl Payable e...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... Cash .......................................... Inte Intere rest st Ex Expe pens nse e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... Notes Payable ..........................

(e)

8,246.72

40,000 40,000.00 .00 40,000.00 5, 5,70 706. 6.46 46 5,706.46

December 31, 2018 Notes Not es Payabl Payable e...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... Cash ..........................................

40,000 40,000.00 .00

Inte Intere rest st Ex Expe pens nse e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... Notes Payable ..........................

2, 2,96 962. 2.80 80

40,000.00

2,962.80

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PROBLEM 14-7 (a)

Entry to rec record ord the issuance of the 11% bonds on D December ecember 18, 2015: Cash (¥4 (¥40,000,000 0,000,000 X 102%) 102%) ....................... ................................. .......... 40,800,000 Bonds Payable ............................................

40,800,000

Entry to record the retirement r etirement of the 9% bonds on January 2, 2016: Bonds Payable (¥30,000,000 (¥30,000,000 – ¥1,8 ¥1,842,8 42,888) 88)........ ........ 28,157,1 28,157,112 12 Loss Los s on Ext Exting inguis uishme hment nt of Debt Debt...... ......... ...... ...... ...... ...... ...... ... 3,042, 3,042,888 888

14-47 

Cash (¥30,000,000 X 104%) ........................ [The loss represents the excess of the cash paid (¥31,200,000) over the carrying amount of the bonds (¥28,157,112).]

31,200,000

(b) The loss is reported as an other income and expense item. Note 1. Loss on Bond Extinguishment The loss represents a loss of ¥3,042,888 from the extinguishment and retirement of ¥30,000,000 of the Company’s outstanding bond issue due in 2026. The funds used to purchase the mortgage bonds represent a portion of the proceeds from the sale of ¥40,000,000 of 11% debenture bonds issued December 18, 2015 and due in 2035.

  14-48

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PROBLEM 14-8 1. Sanford Co. March 1, 2015 Cash Cas h ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. Bonds Paya Payable ble ..... .......... .......... .......... .......... .......... .......... .......... .......... ......... ........ ....

472,09 472,090* 0* 472, 472,090 090

*Present value of $500,000 due in 7 periods at 6% ($500,000 X .66506) .................................................... Present value of interest payable semiannually ($25,000* X 5. 5.58238) ..................................................

$332,530   139,560 $472,090

Proceeds X from ...................................... ............... *$500,000 .1 Xsale 1/2 of bonds ....................... September 1, 2015 Inte Intere rest st Ex Expe pens nse e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..

28,3 28,325 25**

Bonds Payable ..................................................... Cash ......................................................................

3,325 25,000

(See amortization table on next page) December 31, 2015 Inte Intere rest st E Exp xpen ense se.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Bonds Payable ($3,525 X 4/6) .....................................................

19,0 19,017 17 2,350

Interest Payable ($25,000 X 4/6) .......................... March 1, 2016 In Inte tere rest st Ex Expe pens nse e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Inte Intere rest st Pa Paya yabl ble e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Bonds Payable ($3,525 X 2/6) ..................................................... Cash ......................................................................

16,667 9, 9,50 508 8 16,6 16,667 67 1,175 25,000

September 1, 2016 Inte Intere rest st E Exp xpen ense se.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Bonds Payable ..................................................... Cash ...................................................................... December 31, 2016 Inte Intere rest st E Exp xpen ense se.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Bonds Payable ($3,961 X 4/6) ..................................................... Interest Payable ....................................................

28,7 28,736 36 3,736 25,000 19,3 19,308 08 2,641 16,667

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PROBLEM 14-8 (Continued) Schedule of Bond Discount Amortization Effective-Interest Method 10% Bonds Sold to Yield 12%

Date 3/1/15 9/1/15 3/1/16 9/1/16 3/1/17 9/1/17 3/1/18 9/1/18

Cash Paid — $25,000 25,000 25,000 25,000 25,000 25,000 25,000

Interest Expense — $28,325 28,525 28,736 28,961 29,198 29,450 29,715*

*Rounded $2. 2. Titania Co. June 1, 2015

Discount Amortized — $3,325 3,525 3,736 3,961 4,198 4,450 4,715

Carrying Amount of Bonds $472,090 475,415 478,940 482,676 486,637 490,835 495,285 500,000

14-49 

Cash Cas h ... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... Bonds Payable ..................................................... Present value of $400,000 due in 8 periods at 5% ($400,000 X .67684) ..................................................... Present value of interest payable semiannually ($24,000* X 6.46321) .................................................... Proceeds from sale of bonds........................ ........................................ ................ *$400,000 X .12 X 1/2 December 1, 2015 In Inte tere rest st Exp Expen ense se .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Bond Bo nds s Pa Pay yable able .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Cash ($400,000 X .12 X 6/12) ...............................

425,85 425,853 3 425,853 $270,736   155,117 $425,853

21,2 21,293 93** 2, 2,70 707 7 24,000

(See amortization table on Page 14–52) December 31, 2015 Inte Intere rest st E Exp xpen ens se ($ ($2 21, 1,15 157 7 X 1/6) 1/6) ........ ...... .... .... .... .... .... .... .... .... ...... .... .... .... .. Bonds Payable ($2, ($2,84 843 3 X 1/ 1/6) .... ...... .... .... .... .... .... .... .... .... .... .... .... .... ........ ...... .... .... .... .... .... .... .... .... ...... .... .... .... .. Interest Payable ($24,000 X 1/6) .........................   14-50

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PROBLEM 14-8 (Continued) June 1, 2016 Inte In rest st Expe pens nse $21, 1,15 157 7 X.... 5/6) 5/.... 6) .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ... Inte Intere tere rest st Ex Pa Paya yabl ble ee.... ..(($2 .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ... Bond Bo nds s Pay Payab able le ($2, ($2,84 843 3X5 5/6 /6)) .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Cash ......................................................................

17,6 17 ,631 31 4, 4,00 000 0 2, 2,36 369 9 24,000

October 1, 2016 Interest Expense ($21 ($21,0 ,015 15 X .3 .3** X 4/6) 4/6) .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Bonds Pa Payable (($ $2,985 X ..3 3X4 4//6)................................ Cash ......................................................................

4, 4,20 203 3 597 4,800

*$120,000 ÷ $400,000 = .3 October 1, 2016 Bonds Bon ds Payabl Payable e ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... Gain on Extinguishment of Bonds ..................... Cash ...................................................................... *Reacquisition price $126,000 – ($120,000 X 12% X 4/12) Net carrying amount of bonds redeemed: r edeemed: ($420,303* X .30) – $597 ....................................

125,49 125,494 4 4,294* 121,200

$121,200 (125,494)

 

Gain on extinguishment ...................................... ......................................

$ (4,294)

*From amortization table on page 14–52 December 1, 2016 Inte Intere rest st E Exp xpen ense se (($2 $21, 1,01 015 5 X .7 .7*) *).... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Bond Bo nds s Pay Payab able le ($2, ($2,98 985 5 X ..7) 7) .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Cash ($24,000 X .7) ...............................................

14,7 14,711 11 2, 2,08 089 9 16,800

*($400,000 – $120,000) ÷ $400,000 = .7

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PROBLEM 14-8 (Continued) December 31, 2016 Interest E Ex xpense (($ $20,866 X ..7 7X1 1//6) ...................

2,434

Bonds ea(y$a3b ,1le 34($X24.7,0X001/X6).7 ...X ....1../.6..)....................... InP tearyeasbt lP

366

2,800

June 1, 2017 In Inte tere rest st Ex Expe pens nse e (($2 $20, 0,86 866 6 X .7 X 5/6) 5/6) .... ...... .... .... .... .... .... .... .... In Inte tere rest st Pa Paya yabl ble e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Bon onds ds Pa Pay yable able ($ ($3, 3,13 134 4 X .7 X 5/6) /6) .... ...... .... .... .... .... .... .... .... .... ..... Cash ($24,000 X .7) .......................................

12,1 12,172 72 2, 2,80 800 0 1,8 ,828 28 16,800

December 1, 2017 In Inte tere rest st Ex Expe pens nse e (($2 $20, 0,70 709 9 X .7) .7) .... ...... .... .... .... .... .... .... .... .... .... .... .... .. Bon onds ds Pa Pay yable able ($ ($3, 3,29 291 1 X .7) ..... ...... .... .... .... .... .... .... .... .... .... .... .... .... ..... Cash ($24,000 X .7) .......................................

14 14,4 ,496 96 2,3 ,304 04 16,800

Cash Paid

Interest Expense

Premium Amortized

Carrying Amount of Bonds

6/1/15

—

—

—

$425,853

12/1/15

$24,000

$21,293

$2,707

423,146

6/1/16

24,000

21,157

2,843

420,303

12/1/16

24,000

21,015

2,985

417,318

6/1/17

24,000

20,866

3,134

414,184

Date

14-51 

12/1/17

24,000

20,709

3,291

410,893

6/1/18

24,000

20,545

3,455

407,438

12/1/18

24,000

20,372

3,628

403,810

6/1/19

24,000

20,190*

3,810 3, 810

400,000

*$.50 adjustment due to rounding.

  14-52

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PROBLEM 14-9 July 1, 2015 Cash (€900,000 X 1.19219) 1.19219) + (€900, (€900,000 000 X 12% X 6 6/12) /12) . 1,126,971.00 Bonds Pay Payable .................................................. 1,072,971.00 Interest Expense (€900,000 X 12% X 6/12) .... 54,000.00 December 31, 2015 Intere Int erest st Expen Expense se (€900 (€900,00 ,000 0 X 12% 12%)) ...... ......... ...... ...... ...... ...... ...... ..... Interest Payable ...............................................

108,00 108,000.0 0.00 0

Bond Bo nds s Pa Pay yable able.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Interest Expense [(€108,000 – €54,000) – (€1,072,971 X 10% X 6/12)] .......................... ..........................

351. 351.45 45

108,000.00

  351.45

January 1, 2016 Interest Inter est P Payab ayable le ..... .......... .......... .......... .......... .......... ......... ......... .......... .......... .......... ....... .. Cash .................................................................

108,000. 108,000.00 00 108,000.00

January 2, 2016 Bonds Payable ............................................ ............................................................. ................. 429,047.82* Cash (€360,000 X 102%) .................................... 367,200.00 Gain on Extinguishment of Debt....................... 61,847.82 *[(€360,000 ÷ €900,000) X (€1,072,971 – €351.45)]. Reacquisition price (€360,000 X 102%)................................................ Net carrying value of bonds redeemed: (€1,072,971 – €351.45) X (€360,000 €900,000) ... Gain on redemption..................... ............................................ ........................... ....

€367,200.00  (  (429,047.82) 429,047.82)  € (61,847.82) (61,847.82)

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PROBLEM 14-9 (Continued) December 31, 2016 Intere Int erest st Exp Expens ense e (€540 (€540,00 ,000* 0* X .12) ...... ......... ...... ...... ...... ...... ...... ...... ..... Interest Payable ................................................. *$900,000 – $360,000

64,800 64,800.00 .00

Bond Bo nds s Pa Paya yabl ble e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Interest Expense [(€1,072,971 – €351.45 –  €429,047.82)) X .10] – €64,8  €429,047.82 €64,800 00 ....................... .......................

442. 442.83 83

64,800.00

  442.83

14-53 

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PROBLEM 14-10

(a)

April 1, 2015 Cash Ca sh ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. Bonds Payable ...............................

13,967 13,967,63 ,634* 4*

*Present value of R$15,000,000 R$15,000,000 due in 30 periods at 6% (R$15,000,000 X .17411) ........................ Present value of interest payable semiannually semiannually (R$825,000 X 13.76483) ............................ (b)

13,967,634

R$ 2,611,650   11,355,984 R$13,967,634

October 1, 2015 In Inte tere rest st Ex Expe pens nse e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Cash ................................................ Bonds Payable ...............................

838, 838,05 058* 8* 825,000** 13,058

*R$13,967,634 = R$838,058X .12 X 6/12 **R$15,000,000 X .11 X 6/12 = R$825,000 (c)

December 31, 2015 In Inte tere rest st Ex Expe pens nse e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... 419, 419,42 421* 1* Interest Payable ............................. Bonds Payable ...............................

412,500 6,921

*(R$13,967,634 *(R$13,967,63 4 + R$13,058) X .12 X 3/12 (d)

April 1, 2016 In Inte tere rest st Pa Pay yab able le .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. In Inte tere rest st Ex Expe pens nse e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Cash ................................................ Bonds Payable ...............................

412, 412,50 500 0 419, 419,62 628* 8* 825,000** 7,128

*R$15,000,000 X .11 X 6/12 **R$13,987,613 X .12 X 3/12

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PROBLEM 14-10 (Continued) The reacquisition price: 200,000 shares X R$31 = R$6,200,000 R$6,200,000.. The loss on extinguishment of the bonds is: Reacquisi Reac quisition tion price ..... .......... .......... .......... .......... .......... .......... .......... .......... .......... ......... .... R$6,200, R$6,200,000 000 Less: Carrying amount (R$13,987,613 + R$7,128) X 40% ........................ ................................. ......... 5,597,896  

Loss..... .......... .......... ......... ......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ..... R$ 602,104 602,104 The entry to record extinguishment of the t he bonds is: April 2, 2016 Bonds Paya Payable ble..... .......... .......... .......... .......... .......... .......... .......... ........ ... 5,597,89 5,597,896 6 Loss Lo ss on Ex Exti ting ngui uish shme ment nt of Debt Debt .... ...... .... .... .... .... 602, 602,10 104 4 Share Capital—Ordinary ................... Share Premium—Ordinary ...............

  14-56

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2,000,000 4,200,000

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PROBLEM 14-11

(a)

It is an extinguishment of debt with modification of terms.

(b)

Notes Notes Pay Payabl able e (Ol (Old) d) ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... Gain on Extinguishment of Debt ............... Notes Payable (New) ..................................

600,00 600,000 0 301,123* 298,877

*Calculation of gain. Pre-restructure carrying amount ........................ Present value of restructured cash flows: Present value of $600,000 due in 10 years at   15%, interest payable annually (Table 6-2); ($600,000 X .24719) .............. ..................................... ........................... .... $148,314 Present value of $30,000 interest payable  

 

annually for 10 years at 15% (Table 6-4); ($30,000 X 5.01877) .......... ................................. ............................... ........ Debtor’s gain on extinguishment .......................

150,563

$600,000

(298,877) $301,123

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PROBLEM 14-12

(a)

Notes Paya Payable ble .......... ............... ......... ......... .......... .......... .......... .......... .......... ......... ....

5,000,00 5,000,000 0

14-57 

Share Capital—Ordinary ........................... Share Premium—Ordinary ....................... Gain on Extinguishment of Debt..............

1,700,000 2,000,000 1,300,000

Carrying Carry ing amount amount of debt.... $5,0 $5,000,0 00,000 00 Fair value of equity ............ ((3 3,700,000) Gain on extinguishment of debt debt .............................. .............................. $1,300,000 (b)

Notes Paya Payable ble .......... ............... ......... ......... .......... .......... .......... .......... .......... ......... .... 5,000,00 5,000,000 0 Land ............................................................ Gain on Disposition of Land .................... Gain on Extinguishment of Debt.............. Fair value Fair value of land ...... ......... ...... ...... ...... ...... ...... ..... Book value of land....................... Gain on disposition of reall est rea estate ate...... ......... ...... ...... ...... ...... ...... ...... ...... ...... .....

$4, $4,000 000,00 ,000 0 (3,250,000) $ 750 750,00 ,000 0

Note payable (carrying amount) amo unt) ... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... Fair value of land ......................... Gain on extinguishment of debt debt ....... .......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... ..

  14-58

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3,250,000 750,000 1,000,000

$5, $5,000 000,00 ,000 0 (4,000,000) $1, $1,000 000,00 ,000 0

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PROBLEM 14-12 (Continued) (c)

Notes Pay Payable able (Old) ..... .......... ......... ......... .......... .......... .......... .......... .......... ..... 5,000,00 5,000,000 0 Gain on Extinguishment of Debt .............. Notes Payable (New) .................................

1,441,100* 3,558,900

*Calculation of gain. Pre-restructure carrying amount .....................

$ 5,000,000

Less: Present va value lue of restructured ca cash sh flows: Present value of $5,000,000 due in 3 years at 12% (Table 6-2); ($5, ($5,00 000, 0,00 000 0 X .711 .71178 78)) .. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Debto De btor’ r’s s ga gain in on ex exti ting ngui uish shme ment nt .. .... .... .... .... .... .... .... .... .... .... .... .... .... .... ....

3, 3,58 588, 8,90 900 0 $ 1, 1,44 441, 1,10 100 0

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PROBLEM 14-13

(a)

Present value of restructured cash flows: Present value of principal £300,000 due in 3 years at 12% (£300,000 X .71178) ............... Present value of interest £30,000 paid annually for 3 years at 12% (£30,000 X 2.40183)..................... ......................................... .................... Fair value of note ..................................................

  £213,534   72,055 £285,589

14-59 

AMORTIZATION SCHEDULE AFTER DEBT MODIFICATION MARKET INTEREST RATE 12% Date 12/31/15 12/31/16 12/31/17 12/31/18

Cash Paid

Interest Expense

Amortization

Carrying Value

— £30,000 30,000 30,000

— £34,271* 34,783 35,357

— £4,271 4,783 5,357

£285,589 289,860 294,643 300,000

*£34,271 = £285,589 X 12%.

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*PROBLEM 14-13 (Continued) (b) December 31, 2015 Interest Paya Interest Payable ble ..... .......... .......... .......... ......... ......... .......... .......... .......... .......... ......... .... 33,000 33,000 Notes Pay Payable able (Old) ... ........ .......... .......... .......... .......... .......... ......... ......... .......... ..... 300,000 300,000 Gain on Extinguishment of Debt ................. Note Payable (New) ......................................

47,411* 285,589

*(£300,000 + £33,000) – £285,589 December 31, 2016 Intere Int erest stoExpen Expense se ..... N te tes s Pay ab.. l...... e ....... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ........ .... .. Cas ash h ... ....... ...... .... .... .... .... .... .... .... .... .... .... .... .... ...... .... .... .... .... .... .... .... .... .... .... .... .... ...... December 31, 2017

34,271 34,271

4,271 30,0 30,00 00

Interest Expense ............................... .................................................... ..................... Notes Payable ............................................... Cas ash h ... ....... ...... .... .... .... .... .... .... .... .... .... .... .... .... ...... .... .... .... .... .... .... .... .... .... .... .... .... ......

34,783 4,783 30,0 30,000 00

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PROBLEM 14-14

(a)

(b)

Langley Co. Carrying amount of the bonds on 1/1/15 ................. Effective-interest rate (10%) ....................... ..................................... .............. Interest expense to be reported for 2015 ................

Tweedie Building Co. Maturities and sinking fund requirements on long-term debt for  the next five year are as follows: 2016 $400,000 2017 350,000 2018 200,000

(c)

$656,992 X 0.10 $ 65,699

2019 2020

$200,000 350,000

Beckford Inc. Since the three bonds reported by Beckford Inc. are secured by

14-61