CHAPTER 14
Non-Current Liabilities
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1.
Non-current liability;
classification; definitions.
1, 10, 11,
19, 20, 22,
23, 24
1, 2
10
1, 2, 3
2.
Issuance of bonds; types
of bonds.
2, 3, 4,
9, 17
1, 2, 3, 4,
5, 6, 7
3, 4, 5, 6,
7, 8, 9, 10
1, 2, 3,
7, 8, 9,
10, 14
1, 3, 6
3.
Premium and discount;
amortization schedules.
5, 6, 7, 8,
10, 17
3, 4, 6, 7, 8
4, 5, 6, 7, 8,
9, 10, 15
1, 2, 3, 4,
7, 8, 9,
10, 14
1, 2, 3, 4
4.
Retirement and refunding
of debt.
18, 21
13
14, 15, 16
2, 7, 8, 9,
10, 14
3, 4, 5
5.
Imputation of interest on
notes.
11, 12, 13,
14, 15
9, 10,
11, 12
11, 12, 13
5, 6
6.
Disclosures of non-
current obligations.
24, 25, 26
17
22
14
1, 3, 5
7.
Debt extinguishment.
16, 19, 20,
14, 15
11, 17, 18,
19, 20
12, 13
11
Fair value option.
22, 23
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1. Describe the nature of bonds and
indicate the accounting for bond
issuances.
1, 2, 3, 4,
5, 6, 7, 8
1, 2, 3, 4, 5,
6, 7, 8, 9, 10,
14, 15, 16
1, 2, 3, 4, 7,
8, 9, 10, 14
1, 2, 3, 4,
6
notes payable.
9, 10, 11, 12
11, 12, 13
5, 6
3. Describe the accounting for the
extinguishment of non-current
liabilities.
13, 14, 15
14, 15, 16,
17, 18, 19, 20
2, 7, 8, 9,
10, 11, 12,
13, 14
3, 4
analyze non-current liabilities.
16, 17
21, 22
7, 14
1, 2, 3, 4,
5
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E14.1
Classification of liabilities.
Simple
15–20
E14.2
Classification.
Simple
15–20
E14.3
Entries for bond transactions.
Simple
15–20
E14.4
Entries for bond transactions.
Simple
15–20
E14.5
Entries for bond transactions.
Simple
15–20
E14.6
Amortization schedule.
Simple
15–20
E14.7
Determine proper amounts in account balances.
Moderate
15–20
E14.8
Entries and questions for bond transactions.
Moderate
20–30
E14.9
Entries for bond transactions.
Moderate
15–20
E14.10
Information related to various bond issues.
Simple
20–30
E14.11
Entries for zero-interest-bearing notes.
Simple
15–20
E14.12
Imputation of interest.
Simple
15–20
E14.13
Imputation of interest with right.
Moderate
15–20
E14.14
Entry for retirement of bond; bond issue costs.
Simple
20–25
E14.15
Entries for retirement and issuance of bonds.
Simple
12–16
E14.16
Entries for retirement and issuance of bonds.
Simple
10–15
E14.17
Settlement of debt.
Moderate
15–20
E14.18
Loan modification.
Moderate
20–30
E14.19
Loan modification.
Moderate
25–30
E14.20
Entries for settlement of debt.
Moderate
20–25
E14.21
Fair value option.
Moderate
20–25
E14.22
Simple
10–15
P14.1
Analysis of amortization schedule and interest entries.
Simple
15–20
P14.2
Issuance and retirement of bonds.
Moderate
25–30
P14.3
Negative amortization.
Moderate
20–30
P14.4
Effective-interest method.
Moderate
40–50
P14.5
Entries for zero-interest-bearing note.
Simple
15–25
P14.8
Comprehensive bond problem.
Moderate
50–65
P14.9
Issuance of bonds between interest dates, retirement.
Moderate
20–25
P14.10
Entries for life cycle of bonds.
Moderate
20–25
P14.11
Modification of debt.
Moderate
15–20
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item
Description
Level of
Difficulty
Time
(minutes)
CA14.1
Bond theory: statement of financial position
presentations, interest rate, premium.
Moderate
25–30
CA14.2
Various non-current liability conceptual issues.
Moderate
10–15
CA14.4
Bond theory: amortization and gain or loss recognition.
20–25
CA14.5
Off-balance-sheet financing.
Moderate
20–30
ANSWERS TO QUESTIONS
1. (a) Funds might be obtained through long-term debt from the issuance of bonds, and from the
signing of long-term notes and mortgages.
(b) A bond indenture is a contractual agreement (signed by the issuer of bonds) between the
2. If the entire bond matures on a single date, the bonds are referred to as term bonds. Mortgage
bonds are secured by real estate. Collateral trust bonds are secured by the securities of other
corporations. Debenture bonds are unsecured. The interest payments for income bonds depend on
the existence of operating income for the issuing company. Callable bonds may be called and
3. (a) Yield rate—the rate of interest actually earned by the bondholders; it is synonymous with the
effective and market rates.
4. (a) Maturity value—the face value of the bonds; the amount which is payable upon maturity.
(b) Face value—synonymous with par value and maturity value.
Questions Chapter 14 (Continued)
5. A discount on bonds payable results when investors demand a rate of interest higher than the rate
stated on the bonds. The investors are not satisfied with the nominal interest rate because they
can earn a greater rate on alternative investments of equal risk. They refuse to pay par for the
6. The amortization of a bond premium decreases interest expense while the amortization of a bond
discount increases interest expense over the life of a bond.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
7. Bond discount and bond premium are amortized on an effective-interest basis. The effective–
interest method results in an increasing or decreasing amount of interest each period. This is
8. The annual interest expense will decrease each period throughout the life of the bonds. Under the
effective-interest method the interest expense each period is equal to the effective or yield interest
9. Bond issuance costs should be recorded as a reduction to the issue amount of the bond payable
and amortized into expense over the life of the bond, through an adjustment to the effective-
interest rate.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
10. Amortization of bond discount will increase interest expense. A discount on bonds payable results
when investors demand a rate of interest higher than the rate stated on the bonds. The investors
11. The entire arrangement must be evaluated and an appropriate interest rate imputed. This is done
by (1) determining the fair value of the property, goods, or services exchanged or (2) determining
12. If a note is issued for cash, the present value is assumed to be the cash proceeds. If a note is
issued for noncash consideration, the present value of the note should be measured by the fair
Questions Chapter 14 (Continued)
13. When a debt instrument is exchanged in a bargained transaction entered into at arm’s length, the
stated interest rate is presumed to be fair unless: (1) no interest rate is stated, or (2) the stated
14. Imputed interest is the interest factor (a rate or amount) assumed or assigned which is different
from the stated interest factor. It is necessary to impute an interest rate when the stated interest
rate is presumed to be unreasonable. The imputed interest rate is used to establish the present
15. A fixed-rate mortgage is a note that requires payment of interest by the mortgagor at a rate that
does not change during the life of the note. A variable-rate mortgage is a note that features an
16. Three different types of situations result with extinguishments (1) Settlement in cash;
(2) Exchanging assets or securities; and (3) Modification of terms.
LO: 3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
17. The call feature of a bond issue grants the issuer the privilege of purchasing, after a certain date
at a stated price, outstanding bonds for the purpose of reducing indebtedness or taking advantage
18. It is sometimes desirable to reduce bond indebtedness in order to take advantage of lower
prevailing interest rates. Also, the company may not want to make a very large cash outlay all at
once when the bonds mature.
Questions Chapter 14 (Continued)
19. A transfer of noncash assets (real estate, receivables, or other assets) or the issuance of the
debtor’s stock can be used to settle a debt obligation in an extinguishment. In these situations, the
20. (a) The creditor will grant concessions in debt modification situation because it appears to be
the more likely way to ensure the highest possible collection on the loan.
(b) The creditor might grant the debtor any one or a combination of the following concessions:
1. Reduce the face amount of the debt.
21. The debtor will record a gain when the discounted restructured cash flows are less than the
22. The fair value option gives companies the choice to record their non-current liabilities at fair value.
The controversy in applying the fair value option involves companies recording an unrealized gain
23. Unrealized Holding Gain or Loss-Income ……………………………………………….. 2,600
24. The required disclosures at the statement of financial position date are future payments for sinking
fund requirements and the maturity amounts of long-term debt during each of the next five years.
LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
25. Off-balance-sheet financing is an attempt to borrow monies in such a way that the obligations are
not recorded. Reasons for off-balance-sheet financing are:
Questions Chapter 14 (Continued)
26. Forms of off-balance-sheet financing include (1) investments in non-consolidated subsidiaries for
27. Under IFRS, a parent company does not have to consolidate a subsidiary company that is less
than 50 percent owned. In such cases, the parent therefore does not report the assets and
liabilities of the subsidiary. All the parent reports on its statement of financial position is the
investment in the subsidiary. As a result, users of the financial statements may not understand
that the subsidiary has considerable debt for which the parent may ultimately be liable if the
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 14.1
Present value of the principal
¥500,000 X .37689 …………………………………………………
Present value of the interest payments
¥22,500 X 12.46221 ……………………………………………….
BRIEF EXERCISE 14.2
(a)
Cash ………………………………………………………………………
300,000
Bonds Payable ……………………………………………….
300,000
(b)
Interest Expense …………………………………………………….
Cash (€300,000 X 10% X 6/12) ………………………….
(c)
Interest Expense …………………………………………………….
Interest Payable ……………………………………………..
BRIEF EXERCISE 14.3
(a)
Cash (€300,000 X 1.0811) …………………………………………
324,330
Bonds Payable ……………………………………………….
324,330
(b)
Interest Expense (€324,330 X 8% X 6/12)…………………..
Bonds Payable (€15,000 – €12,973) …………………………..
Cash (€300,000 X 10% X 6/12) ………………………….
Bonds Payable ……………………………………………………….
BRIEF EXERCISE 14.4
(a)
Cash (€300,000 X .926393)………………………………………..
277,918
Bonds Payable ………………………………………………..
277,918
(b)
Interest Expense (€277,918 X 12% X 6/12) …………………
Bonds Payable (€16,775 – €15,000) ……………………
Cash (€300,000 X 10% X 6/12) …………………………..
Bonds Payable (€16,776 – €15,000) ……………………
Interest Payable ………………………………………………
BRIEF EXERCISE 14.5
(a)
Cash (£400,000 + £8,000) ………………………………………….
408,000
Bonds Payable ………………………………………………..
400,000
Interest Expense
(£400,000 X 6% X 4/12 = £8,000) ……………………..
(b)
Interest Expense ……………………………………………………..
Cash (£400,000 X 6% X 6/12 = £12,000) ……………..
(c)
Interest Expense ……………………………………………………..
Interest Payable ………………………………………………
BRIEF EXERCISE 14.6
(a)
Cash ……………………………………………………………………….
559,224
Bonds Payable ………………………………………………..
559,224
(b)
Interest Expense ($559,224 X 8% X 6/12) …………………..
Cash ($600,000 X 7% X 6/12) …………………………..
Bonds Payable ………………………………………………..
BRIEF EXERCISE 14.6 (Continued)
(c)
Interest Expense *
[($560,593 X 8% X 6/12 = $22,424)] …………………………
22,424
Interest Payable ……………………………………………..
Bonds Payable ……………………………………………….
BRIEF EXERCISE 14.7
(a)
Cash ……………………………………………………….
644,636
Bonds Payable ……………………………………………….
644,636
(b)
Interest Expense ($644,636 X 6% X 6/12)…………………..
Bonds Payable ……………………………………………………….
Cash ($600,000 X 7% X 6/12) …………………………..
(c)
Interest Expense
($642,975 X 6% X 6/12 = $19,289) …………………………..
Bonds Payable ……………………………………………………….
Interest Payable ……………………………………………..
BRIEF EXERCISE 14.8
Interest Expense ……………………………………………………..
6,446,360*
Bonds Payable (HK$7,000,000 – HK$6,446,360) …………
553,640
Interest Payable ………………………………………………
7,000,000**
*HK$644,636,000 X 6% X 2/12 = HK$6,446,360
**HK$600,000,000 X 7% X 2/12 = HK$7,000,000
BRIEF EXERCISE 14.9
(a)
Cash ……………………………………………………………………….
100,000
Notes Payable …………………………………………………
100,000
(b)
Interest Expense ……………………………………………………..
Cash (€100,000 X 10% = €10,000) ……………………..
10,000
BRIEF EXERCISE 14.10
(a)
Cash ……………………………………………………………………….
47,664
Notes Payable …………………………………………………
47,664
(b)
Notes Payable …………………………………………………
BRIEF EXERCISE 14.11
(a)
Equipment ……………………………………………………….
31,495
Notes Payable …………………………………………………
31,495
(b)
Interest Expense ($31,495 X 12%)…………………………..
Cash ($40,000 X 5%) ………………………………………..
Notes Payable ($3,779 – $2,000) ………………………..
BRIEF EXERCISE 14.12
Cash ………………………………………………………………………
60,000
Notes Payable [€60,000 X .63552 (PVF4, 12%)] ……..
38,131
Unearned Sales Revenue (€60,000 – €38,131) …
21,869
BRIEF EXERCISE 14.13
Bonds Payable ($500,000 + $15,000) …………………………
515,000
Gain on Extinguishment of Debt ………………………
Cash (.99 X $500,000) ………………………………………
495,000
BRIEF EXERCISE 14.14
Notes Payable …………………………………………………………
100,000
Share Capital—Ordinary ………………………………….
20,000
(€4.75 – €1) X 20,000 …………………………………….
75,000
[€100,000 – (€20,000 + €75,000)] …………………..
BRIEF EXERCISE 14.15
(a)
Present value of restructured cash flows:
Present value of principal €90,000 due in
4 years at 12% [(€90,000 X .63552 (PVF4, 12%)] …………
Present value of interest €7,200 paid annually
for 4 years at 12% (€7,200 X 3.03735) …………………….
Fair value of note ……………………………………………………
Notes Payable (Old) ………………………………………………..
100,000
Gain on Extinguishment of Debt ………………………
Notes Payable (New) ……………………………………….
(b)
Interest Expense (€79,066 X 12%) …………………………..
9,488
Cash (€90,000 X 8%) ……………………………………….
Notes Payable ………………………………………………..
BRIEF EXERCISE 14.16
(a)
Unrealized loss = HK$17,500 – HK$16,000 = HK$1,500
(b)
Unrealized Holding Gain or Loss—Income ………………..
Notes Payable …………………………………………………
BRIEF EXERCISE 14.17
Non-current liabilities
Bonds Payable, due January 1, 2027 ………………..
Current liabilities
Interest Payable ………………………………………………
SOLUTIONS TO EXERCISES
EXERCISE 14.1 (15–20 minutes)
(a) Current liability if current assets are used to satisfy the debt.
(b) Current liability, €250,000; non-current liability, €750,000.
(c) Current liability.
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.
EXERCISE 14.3 (15–20 minutes)
1.
Divac SA:
(a)
1/1/19
Cash ……………………………………………………….
300,000
Bonds Payable …………………………..
300,000
(b)
7/1/19
Interest Expense
(€300,000 X 9% X 3/12) …………………………..
Cash ……………………………………………………….
(€300,000 X 9% X 3/12) …………………………..
Interest Payable …………………………..
2.
Verbitsky AG:
(a)
6/1/19
Cash ……………………………………………………….
210,000
Bonds Payable …………………………..
200,000
Interest Expense
(€200,000 X 12% X 5/12) …………………………..
(b)
7/1/19
Interest Expense …………………………..
Cash (€200,000 X 12% X 6/12) ………………………….
(c)
12/31/19
Interest Expense …………………………..
Interest Payable …………………………..
EXERCISE 14.4 (15–20 minutes)
(a)
1/1/19
Cash (€800,000 X 1.19792) …………………………..
958,336
Bonds Payable ……………………………………………….
958,336
(b)
7/1/19
Interest Expense
(€958,336 X 8% X 6/12) …………………………..
Bonds Payable ……………………………………………………….
Cash (€800,000 X 10% X 6/12) ………………………….
(c)
12/31/19
Interest Expense
(€958,336 – €1,667) X 8% X 6/12 …………………………..
Bonds Payable ……………………………………………………….
Interest Payable …………………………..
EXERCISE 14.5 (15–20 minutes)
(a)
1/1/19
Cash (€800,000 X .8495) …………………………..
679,600
Bonds Payable ……………………………………………….
679,600
(b)
7/1/19
Interest Expense
(€679,600 X 12% X 1/2) …………………………..
Bonds Payable ………………………………………………..
Cash (€800,000 X 10% X 6/12) ………………………….
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 =
Schedule of Discount Amortization
Effective-Interest Method (12%)
Year
Cash
Paid
Interest
Expense
(@12%)
Discount
Amortized
(3 – 2)
Carrying
Amount of
Bonds
(1)
(2)
(3)
(4)
Jan. 1, 2019
—
—
—
£2,783,724.00
Dec. 31, 2019
£300,000
£334,046.88
*
£34,046.88
2,817,770.88
Dec. 31, 2019
2,855,903.39
Dec. 31, 2021
2,898,611.80
Dec. 31, 2022
2,946,445.22
Dec. 31, 2023
3,000,000.00
EXERCISE 14.7 (15–20 minutes)
(a)
Bond selling price ($2,500,000 X 1.06231) ……………………
$ 2,655,775
July 1, 2019
Interest expense reported ($2,655,775 X 10% X 6/12) ……
$ 132,789
$265,342
(b)
June 30, 2019
Carrying amount of bonds ………………………………………….
$562,500
Effective-interest rate for the period from June 30
to October 31, 2019 (.10 X 4/12) ………………………………..
X.033333
(c)
October 1, 2019
Cash ($853,382 + $72,000) ………………………………………….
925,382
Bonds payable …………………………………………………..
853,382
Interest Expense ($800,000 X 12% X 9/12) ……………
72,000