CHAPTER 14
Long-Term Liabilities
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1.
Long-term liability;
classification; definitions.
1, 14
1, 2
10, 11
1, 2
11, 13,
14, 15
10, 11
4.
Retirement and refunding
of debt.
12, 13
9
12, 13,
14, 15
2, 4, 5,
6, 7, 10
2, 3
5.
Imputation of interest on
notes.
14, 15, 16,
17, 18
10, 11, 12,
13
16, 17, 18
8, 9
Fair value option.
19, 20
14
19
7.
Disclosures of long-term
obligations.
13, 21, 22,
23, 24
15
20
10
1, 3, 4
restructuring.
28, 29, 30
24, 25,
26, 27
14
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Questions
Brief Exercises
Exercises
Problems
Concepts
for
Analysis
1. Describe the nature of
1, 2, 3, 4, 5, 6,
1, 2, 3, 4, 5,
1, 2, 3, 4, 5,
1, 2, 4, 5, 6,
CA14-1,
2. Describe the
12, 13
9
12, 13, 14, 15
2, 4, 5, 6,
CA14-2
3. Explain the
14, 15, 16, 17,
10, 11, 12, 13,
16, 17, 18
3, 8, 9
CA14-2
4. Indicate how to
5, 9, 13, 19, 20,
14, 15
19, 20
4, 10
CA14-1
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E14.1
Classification of liabilities.
Moderate
15–20
E14.2
Classification.
Simple
15–20
E14.3
Entries for bond transactions.
Moderate
15–20
E14.4
Entries for bond transactions—straight-line.
Moderate
15–20
E14.5
Entries for bond transactions—effective-interest.
Moderate
15–20
E14.6
Amortization schedule—straight-line.
Moderate
15–20
E14.7
Amortization schedule—effective-interest.
Moderate
15–20
E14.8
Determine proper amounts in account balances.
Moderate
15–20
E14.9
Entries and questions for bond transactions.
Moderate
20–30
E14.10
Entries for bond transactions.
Moderate
15–20
E14.11
Information related to various bond issues.
Moderate
20–30
E14.12
Entry for redemption of bond; bond issue costs.
Moderate
15–20
E14.13
Entries for redemption and issuance of bonds.
Moderate
15–20
E14.14
Entries for redemption and issuance of bonds.
Moderate
12–16
E14.15
Entries for redemption and issuance of bonds.
Moderate
10–15
E14.16
Entries for zero-interest-bearing notes.
Moderate
15–20
E14.17
Imputation of interest.
Moderate
15–20
E14.18
Imputation of interest with right.
Moderate
15–20
E14.19
Fair value option.
Simple
10–15
E14.20
Long-term debt disclosure.
Simple
10–15
*E14.21
Settlement of debt.
Complex
15–20
*E14.22
Term modification without gain—debtor’s entries.
Moderate
20–30
Term modification without gain—creditor’s entries.
25–30
*E14.25
Term modification with gain—creditor’s entries.
Moderate
20–30
Moderate
15–20
*E14.27
Debtor/creditor entries for modification of troubled debt.
Moderate
20–25
P14.1
Analysis of amortization schedule and interest entries.
Simple
15–20
P14.2
Issuance and redemption of bonds.
Moderate
25–30
P14.3
Negative amortization.
Moderate
20–30
P14.4
Issuance and redemption of bonds; income statement
presentation.
Moderate
15–20
P14.5
Comprehensive bond problem.
Complex
50–65
P14.6
Issuance of bonds between interest dates, straight-line,
retirement.
Moderate
20–25
P14.8
Entries for zero-interest-bearing note.
Simple
15–25
P14.10
Comprehensive problem; issuance, classification,
reporting.
Moderate
20–25
P14.11
Effective-interest method.
Moderate
40–50
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item
Description
Level of
Difficulty
Time
(minutes)
*P14.12
Debtor/creditor entries for continuation of troubled debt.
Moderate
15–25
Restructure of note under different circumstances.
Debtor/creditor entries for continuation of troubled debt
with new effective interest.
40–50
CA14.1
Bond theory: balance sheet presentations, interest rate,
premium.
Moderate
25–30
CA14.2
Bond theory: price, presentation, and redemption.
CA14.4
Off-balance-sheet financing.
CA14.5
Bond issue, ethics.
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. Debenture bonds are unsecured. The interest payments for
income bonds depend on the existence of operating income in the issuing company. Callable
3. (a) Yield rate—the rate of interest actually earned by the bondholders; it is synonymous with the
effective and market rates.
(b) Nominal rate—the rate set by the party issuing the bonds and expressed as a percentage of
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.
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. Discount (premium) on bonds payable should be reported in the balance sheet as a direct
7. Bond discount and bond premium may be amortized on a straight-line basis or on an effective-
interest basis. The profession recommends the effective-interest method but permits the straight-
line method when the results obtained are not materially different from the effective-interest
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
9. Bond issuance costs should be recorded as a reduction to the issue amount and then amortized
10. Amortization of Discount on Bonds Payable 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.
11. 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
Questions Chapter 14 (Continued)
12. 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.
13. Gains or losses from extinguishment of debt should be aggregated and reported in income.
For extinguishment of debt transactions disclosure is required of the following items:
(1) A description of the transactions, including the sources of any funds used to extinguish debt
14. 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
15. 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
16. 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
17. 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
value of the debt instrument by discounting, at that imputed rate, all future payments on the debt
instrument. In imputing interest, the objective is to approximate the rate which would have resulted
Questions Chapter 14 (Continued)
18. 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
19. The fair value option is an accounting option where the company can elect to record fair values
in their accounts for most financial assets and liabilities, including bonds and notes payable.
With bonds at fair value, we assume that the decline in value of the bonds is due to an interest
rate increase. If not related to changes in credit risks, these gains and losses are recorded in
20. (a) Unrealized Holding Gain or Loss—Income …………………………….. 2,600
Notes Payable ($22,600 – $20,000) …………………………………… 2,600
21. The required disclosures at the balance sheet date are future payments for sinking fund
22. 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:
(1) Many believe removing debt enhances the quality of the balance sheet and permits credit to
be obtained more readily and at less cost.
23. Forms of off-balance-sheet financing include (1) investments in non-consolidated subsidiaries for
which the parent is liable for the subsidiary debt and (2) use of special purpose entities (SPEs),
24. Under GAAP, 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
Questions Chapter 14 (Continued)
*25. Two different types of situations result with troubled debt: (1) Impairments, and (2) Restructurings.
Restructurings can be further classified into:
(a) Settlements.
*26. 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 a troubled debt restructuring. In these
situations, the noncash assets or equity interest given should be accounted for at fair value. The
*27. (a) The creditor will grant concessions in a troubled debt situation because it appears to be the
more likely way to maximize recovery of the investment.
(b) The creditor might grant any one or a combination of the following concessions:
1. Reduce the face amount of the debt.
*28. When a loan is restructured, the creditor should calculate the loss due to restructuring by
subtracting the present value of the restructured cash flows (using the historical effective rate)
from the carrying value of the loan. Interest revenue is calculated at the original effective rate
*29. “Accounting symmetry” between the entries recorded by the debtor and the creditor in a troubled
debt restructuring means that there is a correspondence or agreement between the entries
Questions Chapter 14 (Continued)
*30. A transaction would be recorded as a troubled debt restructuring by only the debtor if the amount
for which the liability is settled is less than its carrying amount on the debtor’s books, but equal to
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 14.1
Present value of the principal
$500,000 X .37689 (PVF20**, 5%***) ………………………………
$188,445
Present value of the interest payments
$22,500* X 12.46221 (PVF-OA20**, 5%***) ……………………..
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 ($300,000 X .10 X 6/12) …………….
BRIEF EXERCISE 14.3
(a)
Cash ($300,000 X .98) ………………………………………………
294,000
Discount on Bonds Payable ($300,000 – $294,000) …………
6,000
Bonds Payable ………………………………………………..
300,000
(b)
Interest Expense ($15,000 + $600) …………………………..
Discount on Bonds Payable
($6,000 X 1/10) ………………………………………………
Cash ($300,000 X .10 X 6/12) …………………………..
(c)
Interest Expense ($15,000 + $600) …………………………..
Discount on Bonds Payable
($6,000 X 1/10 = $600) …………………………..
BRIEF EXERCISE 14.4
(a)
Cash ($300,000 X 1.03) …………………………………………….
309,000
Bonds Payable ……………………………………………….
300,000
Premium on Bonds Payable …………………………..
9,000
(b)
Interest Expense …………………………………………………….
Premium on Bonds Payable
($9,000 X 1/10 = $900) …………………………………………..
Cash ($300,000 X .10 X 6/12) …………………………..
(c)
Interest Expense …………………………………………………….
Premium on Bonds Payable
($9,000 X 1/10) ……………………………………………………..
Interest Payable ($300,000 X .10 X 6/12) ……………
BRIEF EXERCISE 14.5
(a)
Cash ………………………………………………………………………
408,000
Bonds Payable ……………………………………………….
400,000
Interest Expense ($400,000 X .06 X 4/12) …………..
8,000
(b)
Interest Expense …………………………………………………….
Cash ($400,000 X .06 X 6/12) …………………………..
(c)
Interest Expense …………………………………………………….
Interest Payable ($400,000 X .06 X 6/12) ……………
BRIEF EXERCISE 14.6
(a)
Cash ………………………………………………………………………
559,224
Discount on Bonds Payable …………………………………….
Bonds Payable ……………………………………………….
600,000
(b)
Interest Expense ($559,224 X .08 X 6/12) …………………..
Cash ($600,000 X .07 X 6/12) …………………………..
Discount on Bonds Payable ………………………………….
1,369
BRIEF EXERCISE 14.6 (Continued)
(c)
Interest Expense ($560,593* X .08 X 6/12) ………………….
22,424
Interest Payable ($600,000 X .07 X 6/12) …………………
Discount on Bonds Payable …………………………………………..
BRIEF EXERCISE 14.7
(a)
Cash ……………………………………………………………………….
644,636
Bonds Payable ………………………………………………..
600,000
Premium on Bonds Payable …………………………..
44,636
(b)
Interest Expense ($644,636 X .06 X 6/12)……………………
Premium on Bonds Payable ……………………………………..
Cash ($600,000 X .07 X 6/12) …………………………..
(c)
Interest Expense ($642,975* X .06 X 6/12) ………………….
Premium on Bonds Payable ……………………………………..
Interest Payable ($600,000 X .07 X 6/12) …………….
BRIEF EXERCISE 14.8
Interest Expense ($644,636 X .06 X 2/12) …………………..
6,446
Premium on Bonds Payable …………………………………….
Interest Payable ($600,000 X .07 X 2/12) ……………
BRIEF EXERCISE 14.9
Bonds Payable …………………………..…………………………………
500,000
Premium on Bonds Payable ………………………………………….
15,000
Gain on Redemption of Bonds ………………………………
Cash ($500,000 x .99) ……………………………………………
BRIEF EXERCISE 14.10
(a)
Cash ………………………………………………………………………
100,000
Notes Payable ………………………………………………..
100,000
(b)
Interest Expense …………………………………………………….
10,000
Cash ($100,000 X .10) ……………………………………..
BRIEF EXERCISE 14.11
(a)
Cash ………………………………………………………………………
47,664
Discount on Notes Payable ……………………………………..
27,336
Notes Payable ………………………………………………..
(b)
Interest Expense …………………………………………………….
Discount on Notes Payable ($47,664 X .12) ………
BRIEF EXERCISE 14.12
(a)
Equipment ……………………………………………………….
31,495
Discount on Notes Payable ………………………………………
8,505
Notes Payable …………………………………………………
(b)
Interest Expense ($31,495 X .12) …………………………..
3,779
Cash ($40,000 X .05) ………………………………………..
Discount on Notes Payable …………………………..
BRIEF EXERCISE 14.13
Cash ………………………………………………………………………
60,000
Discount on Notes Payable ……………………………………..
21,869
Notes Payable…………………………………………………
Unearned Sales Revenue
[$60,000 – ($60,000 X .63552 (PVF4, 12%)] …………
BRIEF EXERCISE 14.14
(a) Fair Value – Book Value = $17,500 – $16,000 = $1,500 unrealized holding
loss.
Notes Payable …………………………………………………
BRIEF EXERCISE 14.15
Current liabilities
Interest Payable ………………………………………………
$ 80,000
Long-term liabilities
Bonds Payable, due January 1, 2029 ………………..
Less: Discount on Bonds Payable …………………..
SOLUTIONS TO EXERCISES
EXERCISE 14.1 (15–20 minutes)
(a) Valuation account relating to the long-term liability, bonds payable
(sometimes referred to as an adjunct account). The $3,000 would
continue to be reported as long-term.
current.
(f) Current liability.
(g) Current liability unless (a) a fund for liquidation has been
accumulated which is not classified as a current asset or (b)
EXERCISE 14.2 (15–20 minutes)
(a) Discount on bonds payable—Contra account to bonds payable in
long-term liabilities on balance sheet.
EXERCISE 14.2 (Continued)
(f) Debenture bonds—Classify as long-term liability on balance sheet.
EXERCISE 14.3 (15–20 minutes)
1.
Simon Company:
1/1/20
(a)
Cash …………………………..…………………………..
200,000
Bonds Payable …………………………..
200,000
(b)
Interest Expense …………………………………………………….
($200,000 X .09 X 3/12)
Cash ……………………………………………………….
(c)
Interest Expense ($200,000 X .09 X 3/12) …………………………..
Interest Payable …………………………..
2.
Garfunkel Company:
6/1/20
(a)
Cash …………………………..…………………………..
105,000
Bonds Payable …………………………..
100,000
Interest Expense …………………………..
5,000
($100,000 X .12 X 5/12)
EXERCISE 14.3 (Continued)
(b)
Interest Expense …………………………..
6,000
Cash ……………………………………………………….
($100,000 X .12 X 6/12)
(c)
Interest Expense …………………………..
6,000
Interest Payable …………………………..
Note to instructor: Some students may credit Interest Payable on
6/1/20. If they do so, the entry on 7/1/20 will have a debit to Interest
EXERCISE 14.4 (15–20 minutes)
1/1/20
(a)
Cash ($600,000 X 1.02) …………………………..
612,000
Bonds Payable ……………………………………………….
600,000
Premium on Bonds
Payable ……………………………………………………….
12,000
7/1/20
(b)
Interest Expense …………………………………………………….
29,700
Premium on Bonds Payable …………………………..
($12,000 ÷ 40*)
Cash ……………………………………………………….
30,000
($600,000 X .10 X 6/12)
(c)
Interest Expense …………………………………………………….
29,700
EXERCISE 14.5 (15–20 minutes)
1/1/20
(a)
Cash ($600,000 X 1.02) …………………………..
612,000
Bonds Payable …………………………..…………………..
600,000
Premium on Bonds Payable
12,000
7/1/20
(b)
Interest Expense …………………………………………………….
($612,000 X .097705 X 1/2)
*Premium on Bonds Payable …………………………..
Cash ……………………………………………………….
($600,000 X .10 X 6/12)
EXERCISE 14.6 (15–20 minutes)
Schedule of Discount Amortization
Straight-Line Method
Year
Cash Paid
(10%)
Interest
Expense
Discount
Amortized
Carrying
Amount of
Bonds
Jan. 1, 2020
(1)
(1) + (2)
(2)
$1,855,816.00
Dec. 31, 2020
$200,000*
$228,836.80***
$28,836.80**
1,884,652.80
Dec. 31, 2021
1,913,489.60
Dec. 31, 2022
1,942,326.40
Dec. 31, 2023
1,971,163.20
Dec. 31, 2024
2,000,000.00
EXERCISE 14.7 (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 ($1,134,860)*