EXERCISE 14.8 (20–30 minutes)
(a)
(1)
June 30, 2018
Cash ……………………………………………………….
Bonds Payable …………………………..
(2)
December 31, 2018
Interest Expense
(R$5,376,150 X 12% X 6/12)…………………………..
Cash
(R$5,000,000 X 13% X 6/12) …………………………..
(3)
June 30, 2019
Interest Expense
[(R$5,376,150 – R$2,431)
X 12% X 6/12] …………………………..
Bonds Payable ……………………………………………………….
(4)
December 31, 2019
Interest Expense
[(R$5,376,150 – R$2,431 –
R$2,577) X 12% X 6/12] …………………………..
Bonds Payable ……………………………………………………….
Cash ……………………………………………………….
EXERCISE 14.8 (Continued)
(b)
Non-current Liabilities:
Bonds payable, 13% (due on June 30, 2038) ……………..
(c)
(1)
Interest expense for the period from
January 1 to June 30, 2019 from (a) 3. ……………………
Interest expense for the period from
July 1 to December 31, 2019 from (a) 4. ………………….
Amount of bond interest expense
(2)
Total interest to be paid for the bond
(R$5,000,000 X 13% X 20) ………………………………………
Less: Premium (R$5,376,150 – R$5,000,000) …………….
Total cost of borrowing over the life
EXERCISE 14.9 (15–20 minutes)
(a)
January 1, 2019
Cash ……………………………………………………….
Bonds Payable ……………………………………………….
(b) Schedule of Interest Expense and Bond Premium Amortization
Effective-Interest Method
12% Bonds Sold to Yield 10%
(1)
Cash
(2)
Interest
(3)
Premium
Carrying
Amount of
(c)
December 31, 2019
Interest Expense …………………………………………………….
86,065.18
Bonds Payable ……………………………………………………….
Cash ……………………………………………………….
(d)
December 31, 2021
Interest Expense …………………………………………………….
83,978.87
Bonds Payable ……………………………………………………….
12,021.13
Cash ……………………………………………………….
EXERCISE 14.10 (20–30 minutes)
Unsecured
Bonds
Zero-Coupon
Bonds
Mortgage
Bonds
(1)
Maturity value
$10,000,000
$25,000,000
$15,000,000
(2)
Number of interest
40
10
10
periods (10 X 4)
(3)
Stated rate per period
4
(4)
Effective rate per period
4
(5)
Payment amount per
period
$325,000(a)
0
$ 1,500,000(b)
(6)
Present value
$10,577,900(c)
$8,049,250(d)
$13,304,880(e)
(d)Present value of $25,000,000 discounted
at 12% for 10 periods
($25,000,000 X .32197) …………………………………………….
$ 8,049,250
EXERCISE 14.11 (15–20 minutes)
(a)
1.
January 1, 2019
Land ……………………………………………………….
300,000
Notes Payable…………………………………………………
300,000
(The €300,000 capitalized land
cost represents the present
value of the note discounted
for five years at 11%.)
2.
Equipment……………………………………………………….
297,079*
Notes Payable…………………………………………………
297,079
*Computation of the present value of
the note:
Present value of €400,000
due in 8 years at 11%—
€400,000 X .43393 (PVF8, 11%) ………………………….
Present value of €24,000
payable annually for
8 years at 11% annually—
Present value of the note
(b)
1.
Interest Expense …………………………………………………….
33,000
Notes Payable
(€300,000 X .11) …………………………..
2.
Interest Expense
(€297,079 X .11)…………………………………………………….
32,679
Notes Payable…………………………………………………
Cash (€400,000 X .06) …………………………..
EXERCISE 14.12 (15–20 minutes)
(a)
Face value of the zero-interest-bearing note……………….
Discounting factor [12% for 3 periods (PVF3 12%)] ………..
Carrying value of the note at January 1, 2019 ……………..
Applicable interest rate (12%) …………………………..……….
(b)
January 1, 2019
Cash ……………………………………………………….
4,000,000
Notes Payable…………………………………………………
2,732,040
Unearned Sales Revenue …………………………..
Carrying value of the note
at January 1, 2019 …………………………..
Applicable interest rate (10%) …………………………..
Interest expense to be
EXERCISE 14.13 (15–20 minutes)
(a)
Cash ……………………………………………………….
500,000
Notes Payable…………………………………………………
396,915
Unearned Sales Revenue
(₺500,000 – ₺396,915) …………………………..
103,085
Face value of note …………………………..
EXERCISE 14.13 (Continued)
December 31, 2019
(b)
Interest Expense (₺396,915 X 8%) …………………………..
31,753
Notes Payable ………………………………………………..
Unearned Sales Revenue (₺103,085 ÷ 3) ……………………
34,362
Sales Revenue ………………………………………………..
EXERCISE 14.14 (20–25 minutes)
(a)
Present value of the principal:
$1,500,000 X .35218 (Table 6-2; 10 years, 11%) …….
$ 528,270
Present value of the interest payments:
Present value (selling price) of the bonds ………………..
$1,411,655
(b) AMORTIZATION SCHEDULE
10-Year, 10% Bonds Sold to Yield 11%
Date
(1)
Cash
Paid
(2)
Interest
Expense
@11%
(2) – (1)
Discount
Amortized
Carrying
Amount of
Bonds
1/2/16
—
—
—
$1,411,655
12/31/16
$150,000
$155,282
$5,282
1,416,937
12/31/17
1,422,800
12/31/18
1,429,308
12/31/19
1,436,532
1,444,551
(c)
Bonds Payable
($1,429,308 X $1,000,000/$1,500,000) ………………………
952,872
Loss on Extinguishment of Debt …………………………..
EXERCISE 14.15 (12–16 minutes)
(a)
June 30, 2020
Bonds Payable (£600,000 – £78,979) …………………………
521,021
Loss on Extinguishment of Debt …………………………..
102,979
Cash ……………………………………………………….
624,000
Reacquisition price (£600,000 X 104%) ……………………..
Net carrying amount of bonds redeemed:
(£600,000 – £78,979) …………………………..
Cash (£800,000 X 112.5513%) …………………………..
900,410
Bonds Payable ……………………………………………….
(b)
December 31, 2020
Interest Expense …………………………………………………….
22,510*
Bonds Payable ……………………………………………………….
Cash ……………………………………………………….
**(.03 X £800,000 = £24,000)
EXERCISE 14.16 (10–15 minutes)
Reacquisition price (¥5,000,000 X 104%) …………………..
¥5,200,000
Less: Net carrying amount of bonds redeemed:
Par value ………………………………………………………
¥5,000,000
Unamortized discount ……………………………………
Bonds Payable ……………………………………………………….
(To record extinguishment of bonds
payable)
Cash (¥5,000,000 X 103%) ………………………………………..
(To record issuance of new bonds)
EXERCISE 14.17 (15–20 minutes)
(a)
Transfer of property on December 31, 2019:
Strickland Company (Debtor):
Notes Payable ………………………………………………..
200,000
Interest Payable ……………………………………………..
18,000
Accumulated Depreciation—Equipment …………..
221,000
Machine…………………………………………………..
390,000
Gain on Disposition of Equipment …………….
Gain on Extinguishment of Debt ……………….
(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, 2019:
Strickland Company (Debtor):
Notes Payable ………………………………………………..
200,000
Interest Payable ……………………………………………..
18,000
Gain on Extinguishment of Debt ……………….
EXERCISE 14.18 (25–30 minutes)
(a) Yes, Barkley can record a gain on extinguishment equal to the
difference between the note’s carrying value and the fair value of the
restructured note (£3,000,000 – £2,126,033 = £873,977).
The note’s fair value is computed as follows:
Present value of restructured cash flows:
Present value of principal £2,400,000
due in 3 years at 15% …………………………..
(b) The amortization schedule is prepared as follows:
BARKLEY plc
Amortization Schedule After Debt Modification
Market-Interest Rate 15%
Date
(1)
Cash
Paid
(@10%)
(2)
Interest
Expense
(@15%)
(2) – (1)
Amortization
Carrying
Value
12/31/19
—
—
—
£2,126,023
12/31/20
£240,000a
£318,903b
£ 78,903c
2,204,926
12/31/21
2,295,665
12/31/22
2,400,000
EXERCISE 14.18 (Continued)
(c)
Interest payment entry for Barkley Company is:
December 31, 2021
Interest Expense …………………………………………………….
Notes Payable ………………………………………………..
Cash ……………………………………………………….
(d)
The payment entry at maturity is:
January 1, 2023
Notes Payable ……………………………………………………….
Cash ……………………………………………………….
EXERCISE 14.19 (20–30 minutes)
(a)
The note’s fair value can be calculated as
follows:
Present value of restructured cash flows:
Present value of principal £1,900,000
due in 3 years at 15% ……………………………………………
Present value of interest £190,000
(£1,900,000 X .10)
paid annually for 3 years at 15% …………………………..
December 31, 2019
Notes Payable (Old) ………………………………………………..
3,000,000
Gain on Extinguishment of Debt ………………………
Notes Payable (New) ……………………………………….
EXERCISE 14.19 (Continued)
(b) The amortization schedule is prepared as follows:
BARKLEY plc
Amortization Schedule After Debt Modification
Market-Interest Rate 15%
Date
(1)
Cash
Paid
(@10%)
(2)
Interest
Expense
(@15%)
(2) – (1)
Amortization
Carrying
Value
12/31/19
—
—
—
£1,683,102
12/31/20
£190,000a
£252,465b
£ 62,465c
1,745,567
12/31/21
1,817,402
EXERCISE 14.19 (Continued)
(c)
Interest payment entries for Barkley are:
December 31, 2020
Interest Expense …………………………………………………….
252,465
Notes Payable ………………………………………………..
62,465
Cash ……………………………………………………….
190,000
December 31, 2021
Interest Expense …………………………………………………….
Notes Payable ………………………………………………..
71,835
Cash ……………………………………………………….
December 31, 2022
Interest Expense …………………………………………………….
272,598
Notes Payable ………………………………………………..
82,598
Cash ……………………………………………………….
(d)
The payment entry at maturity is:
January 1, 2023
Notes Payable ……………………………………………………….
1,900,000
Cash ……………………………………………………….
EXERCISE 14.20 (15–20 minutes)
(a)
Gottlieb’s entry:
Notes Payable ……………………………………………………….
199,800
Land ……………………………………………………….
Gain on Disposition of Land
(€140,000 – €90,000) …………………………………….
Gain on Extinguishment of Debt ………………………
(b)
Present value of restructured cash flows:
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…………………………………………………….
Vargo Corp.’s entries:
December 31, 2019
2019 Notes Payable (Old) …………………………………………
270,000
Gain on Extinguishment of Debt ……………….
Note Payable (New) …………………………..
December 31, 2020
2020 Interest Expense ($208,231 X 8%) …………………….
Notes Payable ………………………………………….
Cash (5% X $220,000) …………………………..
December 31, 2021
2021 Interest Expense
[($208,231 + $5,658) X 8%] ………………………..
Notes Payable ………………………………………….
213,889
EXERCISE 14.21 (10–15 minutes)
(a)
December 31, 2019
December 31, 2020
December 31, 2021
(b) The note will be reported at €42,500 on Fallen’s 2020 statement of
financial position.
(c) Fallen’s 2021 income is €3,500 lower since the change in fair value is
reported as part of net income (as a deduction).
(d) Fallen’s creditworthiness has declined since the fair value of its debt
EXERCISE 14.22 (10–15 minutes)
At December 31, 2019, disclosures would be as follows:
Maturities and sinking fund requirements on long-term debt are as follows:
2020
$ 0
2021
2,500,000
2022
4,500,000
($2,000,000 + $2,500,000)
2023
8,500,000
($6,000,000 + $2,500,000)
2024
2,500,000
TIME AND PURPOSE OF PROBLEMS
Problem 14.1 (Time 15–20 minutes)
Purpose—to provide the student with the opportunity to interpret a bond amortization schedule. This
Problem 14.2 (Time 25–30 minutes)
Purpose—to provide the student with an understanding of how to make the journal entry to record the
Problem 14.3 (Time 20–30 minutes)
Purpose—to provide the student with an understanding of how interest rates can be used to deceive
a customer. The problem is challenging because for the first year of this transaction, negative amortization
results.
Problem 14.4 (Time 40–50 minutes)
Problem 14.5 (Time 15–25 minutes)
Purpose—to provide the student with an opportunity to become familiar with the application of IFRS,
Problem 14.6 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to become familiar with the application of IFRS,
Problem 14.7 (Time 15–20 minutes)
Purpose—to provide the student with an understanding of the relevant journal entries which are necessi–
tated when there is a bond issuance and bond retirement. This problem also provides an opportunity for
the student to learn the footnote disclosure required.
Problem 14.8 (Time 50–65 minutes)
Purpose—to provide the student with an understanding of the relevant journal entries which are neces-
Time and Purpose of Problems (Continued)
Problem 14.9 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of the relevant journal entries which are
Problem 14.10 (Time 20–25 minutes)
Purpose—to provide the student with a series of transactions from bond issuance, payment of bond
Problem 14.11 (Time 15–25 minutes)
Purpose—to provide the student with a debt modification situation that requires computation of the
Problem 14.12 (Time 30–45 minutes)
Purpose—to provide the student with three independent and different restructured debt situations
where gains must be computed and journal entries recorded on the books of the debtor.
Problem 14.13 (Time 40–50 minutes)
Purpose—to provide the student with a complex debt modification situation that requires two
Problem 14.14 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of a number of areas related to bonds.
disclosure requirements.
SOLUTIONS TO PROBLEMS
PROBLEM 14.1
(a) The bonds were sold at a discount of €5,651 (€100,000 – €94,349).
(b) The stated rate is 11% (€11,000 ÷ €100,000). The effective rate is 12%
(€11,322 ÷ €94,349).
(c)
January 1, 2013
Cash ………………………………………………………………………
94,349
Bonds Payable ……………………………………………….
94,349
Interest Expense …………………………………………………….
11,322
Bonds Payable ……………………………………………….
Interest Payable ……………………………………………..
11,000
Interest Payable ……………………………………………………..
11,000
Cash ……………………………………………………….
11,000
December 31, 2020
Interest Expense …………………………………………………….
11,712
Bonds Payable ……………………………………………….
712*
Interest Payable ……………………………………………..
11,000
PROBLEM 14.2
(a)
Present value of the principal
$2,000,000 X .38554 (PV10, 10%) (Table 6-2) ……
$ 771,080
Present value of the interest payments
$210,000* X 6.14457 (PVOA10, 10%) (Table 6-4)
Cash ………………………………………………………………………
Bonds Payable ……………………………………………….
(b)
Date
(1)
Cash
Paid
(2)
Interest
Expense
@10%
(1) – (2)
Premium
Amortization
Carrying
Amount of
Bonds
1/1/18
—
—
—
$2,061,440
1/1/19
$210,000
$206,144
$3,856
2,057,584
2,048,676
2,043,544
(c)
Carrying amount as of 1/1/21 ………………………….
$2,048,676
Less: Amortization of bond premium
($5,132 ÷ 2) …………………………………………..
2,566
Reacquisition price ………………………………………..
$1,065,000
Carrying amount as of 7/1/21
($2,046,110 ÷ 2) ……………………………………………