Long-Term Liabilities
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Solution 14-117
BE. 14-118—Bond issue price and premium amortization.
On January 1, 2015, Piper Co. issued ten-year bonds with a face value of $3,000,000 and a
stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were
sold to yield 12%. Table values are:
Present value of 1 for 10 periods at 10% …………………………... .386
Present value of 1 for 10 periods at 12% …………………………... .322
Present value of 1 for 20 periods at 5% …………………………….. .377
Present value of 1 for 20 periods at 6% …………………………….. .312
Present value of annuity for 10 periods at 10% …………………… 6.145
Present value of annuity for 10 periods at 12% …………………… 5.650
Present value of annuity for 20 periods at 5% …………………….. 12.462
Present value of annuity for 20 periods at 6% …………………….. 11.470
Instructions
(a) Calculate the issue price of the bonds.
(b) Without prejudice to your solution in part (a), assume that the issue price was $2,652,000.
Prepare the amortization table for 2015, assuming that amortization is recorded on interest
payment dates using the effective-interest method.
Solution 14-118
BE. 14-119—Amortization of discount or premium.
Grider Industries, Inc. issued $10,000,000 of 8% debentures on May 1, 2014 and received cash
totaling $8,872,628. The bonds pay interest semiannually on May 1 and November 1. The maturity
date on these bonds is November 1, 2022. The firm uses the effective-interest method of amortizing
discounts and premiums. The bonds were sold to yield an effective-interest rate of 10%.
Instructions
Calculate the total dollar amount of discount or premium amortization during the first year (5/1/14
through 4/30/15) these bonds were outstanding. (Show computations and round to the nearest
dollar.)
Test Bank for Intermediate Accounting, Fifteenth Edition
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Solution 14-119
EXERCISES
Ex. 14-120—Entries for Bonds Payable.
Prepare journal entries to record the following transactions related to long–term bonds of Quirk Co.
(a) On April 1, 2013, Quirk issued $800,000, 9% bonds for $860,589 including accrued interest.
Interest is payable annually on January 1, and the bonds mature on January 1, 2023.
(b) On July 1, 2015 Quirk retired $240,000 of the bonds at 102 plus accrued interest. Quirk uses
straight-line amortization.
Solution 14-120
Ex. 14-121—Retirement of bonds.
Prepare journal entries to record the following retirement. (Show computations and round to the
nearest dollar.)
The December 31, 2014 balance sheet of Wolfe Co. included the following items:
7.5% bonds payable due December 31, 2022 $2,000,000
Unamortized discount on bonds payable 80,000
The bonds were issued on December 31, 2012 at 95, with interest payable on June 30 and
December 31. (Use straight-line amortization.)
On April 1, 2015, Wolfe retired $400,000 of these bonds at 101 plus accrued interest.
Long-Term Liabilities
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Solution 14-121
Ex. 14-122—Early extinguishment of debt.
Hurst, Incorporated sold its 8% bonds with a maturity value of $6,000,000 on August 1, 2013 for
$5,892,000. At the time of the sale the bonds had 5 years until they reached maturity. Interest on
the bonds is payable semiannually on August 1 and February 1. The bonds are callable at 104 at
any time after August 1, 2015. By October 1, 2015, the market rate of interest has declined and
the market price of Hurst’s bonds has risen to a price of 101. The firm decides to refund the
bonds by selling a new 6% bond issue to mature in 5 years. Hurst begins to reacquire its 8%
bonds in the market and is able to purchase $1,000,000 worth at 101. The remainder of the
outstanding bonds is reacquired by exercising the bonds’ call feature. In the final analysis, how
much was the gain or loss experienced by Hurst in reacquiring its 8% bonds? (Assume the firm
used straight-line amortization.) Show calculations.
Solution 14-122
*Ex. 14-123—Accounting for a troubled debt settlement.
Mann, Inc., which owes Doran Co. $800,000 in notes payable with accrued interest of $72,000, is
in financial difficulty. To settle the debt, Doran agrees to accept from Mann equipment with a fair
value of $760,000, an original cost of $1,120,000, and accumulated depreciation of $260,000.
Instructions
(a) Compute the gain or loss to Mann on the settlement of the debt.
(b) Compute the gain or loss to Mann on the transfer of the equipment.
(c) Prepare the journal entry on Mann ‘s books to record the settlement of this debt.
(d) Prepare the journal entry on Doran‘s books to record the settlement of the receivable.
Test Bank for Intermediate Accounting, Fifteenth Edition
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*Solution 14-123
*Ex. 14-124—Accounting for a troubled debt restructuring.
On December 31, 2013, Short Co. is in financial difficulty and cannot pay a note due that day. It is
a $1,000,000 note with $100,000 accrued interest payable to Bryan, Inc. Bryan agrees to forgive
the accrued interest, extend the maturity date to December 31, 2015, and reduce the interest rate
to 4%. The present value of the restructured cash flows is $856,000.
Instructions
Prepare entries for the following:
(a) The restructure on Short’s books.
(b) The payment of interest on December 31, 2014.
(c) The restructure on Bryan’s books.
*Solution 14-124
Long-Term Liabilities
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*Ex. 14-125—Accounting for troubled debt.
(a) What are the general rules for measuring and recognizing a gain or loss by the debtor on a
settlement of troubled debt which includes the transfer of noncash assets?
(b) What are the general rules for measuring and recognizing a gain and for recording future
payments by the debtor in a troubled debt restructuring?
*Solution 14-125
PROBLEMS
Pr. 14-126—Bond discount amortization.
On June 1, 2013, Everly Bottle Company sold $2,000,000 in long-term bonds for $1,754,200. The
bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The
bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under
the effective-interest method.
Instructions
(a) Construct a bond amortization table for this problem to indicate the amount of interest
expense and discount amortization at each May 31. Include only the first four years. Make
sure all columns and rows are properly labeled. (Round to the nearest dollar.)
(b) The sales price of $1,754,200 was determined from present value tables. Specifically explain
how one would determine the price using present value tables.
(c) Assuming that interest and discount amortization are recorded each May 31, prepare the
adjusting entry to be made on December 31, 2015. (Round to the nearest dollar.)
Test Bank for Intermediate Accounting, Fifteenth Edition
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Solution 14-126
Pr. 14-127—Bond interest and discount amortization.
Grove Corporation issued $4,000,000 of 8% bonds on October 1, 2014, due on October 1, 2019.
The interest is to be paid twice a year on April 1 and October 1. The bonds were sold to yield
10% effective annual interest. Grove Corporation closes its books annually on December 31.
Instructions
(a) Complete the following amortization schedule for the dates indicated. (Round all answers to
the nearest dollar.) Use the effective-interest method.
Debit Credit Carrying Amount
Credit Cash Interest Expense Bond Discount of Bonds
October 1, 2014 $3,691,117
April 1, 2015
October 1, 2015
(b) Prepare the adjusting entry for December 31, 2015. Use the effective-interest method.
(c) Compute the interest expense to be reported in the income statement for the year ended
December 31, 2015.
Solution 14-127
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Solution 14-127 (Cont.)
Pr. 14-128—Entries for bonds payable.
Prepare the necessary journal entries to record the following transactions relating to the long-term
issuance of bonds of Pitts Co.:
March 1
Issued $3,000,000 face value Pitts Co. second mortgage, 8% bonds for $3,270,600, including
accrued interest. Interest is payable semiannually on December 1 and June 1 with the bonds
maturing 10 years from this past December 1. The bonds are callable at 102.
June 1
Paid semiannual interest on Pitts Co. bonds. (Use straight-line amortization of any premium or
discount.)
December 1
Paid semiannual interest on Pitts Co. bonds and purchased $1,500,000 face value bonds at the
call price in accordance with the provisions of the bond indenture.
Solution 14-128
Test Bank for Intermediate Accounting, Fifteenth Edition
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Pr. 14-129—Entries for bonds payable.
Prepare journal entries to record the following transactions relating to long-term bonds of Kirby,
Inc. (Show computations.)
(a) On June 1, 2013, Kirby, Inc. issued $5,000,000, 6% bonds for $4,897,000, which includes
accrued interest. Interest is payable semiannually on February 1 and August 1 with the
bonds maturing on February 1, 2023. The bonds are callable at 102.
(b) On August 1, 2013, Kirby paid interest on the bonds and recorded amortization. Kirby uses
straight-line amortization.
(c) On February 1, 2015, Kirby paid interest and recorded amortization on all of the bonds, and
purchased $3,000,000 of the bonds at the call price. Assume that a reversing entry was
made on January 1, 2015.
Solution 14-129
Pr. 14-130—Fair value option
Harper Company commonly issues long-term notes payable to its various lenders. Harper has
had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on
an annual basis). Harper 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.
Carrying Value Fair Value
December 31, 2013 $81,000 $81,000
December 31, 2014 67,000 64,000
December 31, 2015 54,000 58,000
Instructions
(a) Prepare the journal entry at December 31 (Harper’s year-end) for 2013, 2014, and 2015 to
record the fair value option for these notes.
(b) At what amount will the note be reported on Harper’s 2014 balance sheet?
(c) What is the effect of recording the fair value option on these notes on Harper’s 2015 income?
Long-Term Liabilities
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Solution 14-130
*Pr. 14-131—Accounting for a troubled debt restructuring.
Ludwig, Inc., which owes Giffin Co. $1,600,000 in notes payable, is in financial difficulty. To
eliminate the debt, Giffin agrees to accept from Ludwig land having a fair value of $1,220,000 and
a recorded cost of $900,000.
Instructions
(a) Compute the amount of gain or loss to Ludwig, Inc. on the transfer (disposition) of the land.
(b) Compute the amount of gain or loss to Ludwig, Inc. on the restructuring of the debt.
(c) Prepare the journal entry on Ludwig ‘s books to record the restructuring of this debt.
(d) Compute the gain or loss to Giffin Co. from restructuring of its receivable from Ludwig.
(e) Prepare the journal entry on Giffin’s books to record the restructuring of this receivable.
*Solution 14-131
Test Bank for Intermediate Accounting, Fifteenth Edition
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Solution 14-131 (Cont.)
IFRS QUESTIONS
True/False
1. IFRS requires the use of straight-line method for amortization of a discount or premium.
2. U.S. GAAP and IFRS have the same accounting guideline for bond issue cost.
3. Under IFRS, bond issue costs are recorded as an asset.
4. Under IFRS, all troubled-debt restructurings are accounted for as extinguishments.
5. Under IFRS the required procedure for amortization of a discount or premium is the effective-
interest method.
Answers to True/False:
Multiple Choice Questions
6. IFRS generally assumes that all restructurings be accounted for as:
a. extinguishments of debt.
b. loss on debt.
c. amortization expense.
d. bad-debt expense.
7. Which of the following is not a difference between IFRS and U.S. GAAP in accounting for
non-current liabilities?
a. Non-current liabilities follow current liabilities on the statement of financial position under
U.S. GAAP, but precede current liabilities under IFRS.
b. The criteria for recognizing environmental liabilities is more stringent under U.S. GAAP
compared to IFRS.
c. Bond issuance cost are recorded as a reduction of the carrying value of the debt under
U.S. GAAP but are recorded as an asset and amortized to expense over the term of the
debt under IFRS.
d. Under U.S. GAAP, bonds payable is recorded at the face amount and any premium or
discount is recorded in a separate account. Under IFRS, bonds payable is recorded at the
carrying value so no separate premium or discount accounts are used.
Long-Term Liabilities
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8. All of the following are differences between IFRS and U.S. GAAP in accounting for liabilities
except:
a. When a bond is issued at a discount U.S. GAAP records the discount in a separate
contra-liability account. IFRS records the bond net of the discount.
b. Under IFRS, bond issuance costs reduces the carrying value of the debt. Under U.S.
GAAP, these costs are recorded as an asset and amortized to expense over the term of
the bond.
c. U.S. GAAP, but not IFRS uses the term “troubled debt restructurings.”
d. U.S. GAAP, but not IFRS uses the term “provisions” for contingent liabilities which are
accrued.
9. IFRS requires bond issue costs:
a. to be recorded as an asset.
b. to be excluded while computing the interest expense.
c. to be netted against the carrying amount of the bonds.
d. to be considered when computing income tax payable.
10. Both IFRS and U.S. GAAP permit valuation of long-term debt and other liabilities at
a. present value discounted at the firm’s cost of capital.
b. current market values of the obligations, based on changes in the discount rate with
unrealized gains and losses reflected in a separate account in stockholders’ equity.
c. fair value with gains and losses on changes in fair value recorded in income in certain
situations.
d. historic costs without reflecting changes in valuation as obligations will be retired at their
maturity date.
Answers to multiple choice:
6. a
7. c
8. d
9. c
10. c
IFRS Short Answer:
1. Briefly describe some of the differences between U.S. GAAP and IFRS with respect to the
accounting for long-term liabilities.
Test Bank for Intermediate Accounting, Fifteenth Edition
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2. Briefly discuss how accounting convergence efforts addressing liabilities is related to the
IASB/FASB conceptual framework project.