Exercise 14–30 (concluded
Rapid will report the loss from the change in the fair value of the bonds in net
income if the entire change is due to the change in general interest rates. But any
change in the fair value caused by a change in the credit risk associated with the
securities is reported as other comprehensive income (OCI) in the statement of
comprehensive income. Credit risk is the risk that the investor in the bonds will
not receive the promised interest and maturity amounts at the times they are due.
Exercise 14–31
Requirement 1
If the bonds are not traded on a market exchange, their fair value is not readily
observable. As a result, the next most preferable way to determine fair value is to
calculate the fair value as the present value of the remaining cash flows discounted
at the current interest rate. At December 31, 18 of the original 20 payments remain.
If the current interest rate is 9% (4.5% semi-annually), as we’re assuming now,
that present value would be $751,360:
Present Values
¥ (8% / 2) x $800,000
Requirement 2
June 30, 2018
Requirement 3
December 31, 2018
Exercise 14–31 (concluded)
Requirement 4
$700,302 January 1 book value
Essence will report the loss from the increase in the fair value of the bonds in
net income because the entire change is due to the change in general interest
rates. If any change in the fair value had been caused by a change in the credit
To increase the book value to $751,360, Essence needs the following entry:
Balances:
Bonds payable, Dec. 31 $800,000
Exercise 14–32
Requirement 1
face annual
fraction of the accrued
amount rate
annual period interest
Requirement 2
($ in millions)
Exercise 14–33
Land ($450,000 – 325,000)……………………………………. 125,000
Gain on disposition of assets………………………….. 125,000
Exercise 14–34
Analysis: Book value: $12 million + 1.2 million = $13,200,000
1. January 1, 2018
Interest payable (10% x $12,000,000)…………………….. 1,200,000
*Establishes a balance in the note account equal to the total cash payments under the
new agreement.
2. December 31, 2019
Note: No interest should be recorded after the restructuring. All subsequent cash payments
result in reductions of principal.
3. December 31, 2020
Notes payable………………………………………………….. 1,000,000
Exercise 14–35
Analysis: Book value: $240,000 + (10% x $240,000) = $264,000
In row 2 of Table 2, the value .961 is in the 2% column. So, this is the new
effective interest rate. A financial calculator will produce the same rate.
1. January 1, 2018
No entry needed.
2. December 31, 2018
[Unpaid interest is accrued at the effective rate times the book value of the debt.]
3. December 31, 2019
*rounded
Exercise 14–36
Requirement 2
The specific citation that specifies the accounting treatment of legal fees and other
Requirement 3
Problem 14–1
Requirement 1
¥ 5% x $50,000,000
Problems
Bonds payable (face amount)…………………………….
Requirement 2
Interest $ 2,500,000 x 18.40158 * = $46,003,950
** Present value of $1: n = 40, i = 4.5% (Table 2)
Bonds payable (face amount)…………………………….
Requirement 3
Cash (price calculated above)………………………………
Problem 14–2
1. Liabilities at September 30, 2018
Bonds payable (face amount)……………………………….. $160,000,000
Less: discount………………………………………………….. 20 ,000,000
2. Interest expense for year ended September 30, 2018
3. Statement of cash flows for year ended September 30, 2018
Problem 14–2 (concluded)
Calculations:
January 1, 2018***
Cash (price: given)……………………………………………… 140,000,000
June 30, 2018*
Interest expense (6% x $140,000,000)………………………… 8,400,000
September 30, 2018**
Interest expense (6% x [$140,000,000 + 400,000] x 3/6). . 4,212,000
Problem 14–3
Requirement 1
Cash Effective Increase in Outstanding
Payment Interest Balance Balance
4.5% x Face Amount 5% x Outstanding Balance
96,768
1 4,500 .05 (96,768) = 4,838 338 97,106
* rounded.
Requirement 2
Cash Recorded Increase in Outstanding
Payment Interest Balance Balance
4.5% x Face Amount Cash plus Discount Reduction $3,232 ÷ 8
96,768
1 4,500 (4,500 + 404) = 4,904 404 97,172
2 4,500 (4,500 + 404) = 4,904 404 97,576
3 4,500 (4,500 + 404) = 4,904 404 97,980