EXERCISE 14.7 (Continued)
Schedule of Discount Amortization
Effective-Interest Method (12%)
Year
Cash Paid
(10%)
Interest
Expense
(12%)
Discount
Amortized
Carrying
Amount of
Bonds
(1)
(2)
(2) – (1)
Jan. 1, 2020
$1,855,816.00
Dec. 31, 2020
$200,000***
$222,697.92
*
$22,697.92
1,878,513.92
Dec. 31, 2021
200,000
1,903,935.59
Dec. 31, 2022
200,000
1,932,407.86
Dec. 31, 2023
200,000
1,964,296.80
Dec. 31, 2024
200,000
2,000,000.00
EXERCISE 14.8 (15–20 minutes)
Interest paid for the period from January 1 to
June 30; and paid from July 1 to December 31, 2020;
$2,000,000 X .10 X 6/12
$100,000
Less: Premium amortization for the period from
[($2,000,000 X 1.04) – $2,000,000] ÷ 10 X 6/12
4,000
Interest expense to be recorded on July 1 and
Carrying amount of bonds on June 30, 2020
$562,500
Effective-interest rate for the period from June 30
to October 31, 2020 (.10 X 4/12)
EXERCISE 14.9 (20–30 minutes)
1.
June 30, 2020
Cash ……………………………………………………….
Bonds Payable …………………………..
Premium on Bonds Payable …………………………..
2.
December 31, 2020
Interest Expense …………………………..
258,055.20
($4,300,920.00 X .12 X 6/12)
Premium on Bonds Payable …………………………..
Cash ……………………………………………………….
($4,000,000 X .13 X 6/12)
3.
June 30, 2021
Interest Expense …………………………..
257,938.51
[($4,300,920.00 – $1,944.80)
X .12 X 6/12]
Premium on Bonds Payable …………………………..
4.
December 31, 2021
Interest Expense …………………………..
257,814.82
[($4,300,920.00 – $1,944.80 –
$2,061.49) X .12 X 6/12]
Premium on Bonds Payable …………………………..
Cash ……………………………………………………….
($4,000,000 X .13 X 6/12)
EXERCISE 14.9 (Continued)
Long-term Liabilities:
Bonds payable, 13% (due on June 30, 2040)
$4,000,000.00**
Premium on bonds payable*
1.
Interest expense for the period from
January 1 to June 30, 2021 from (a) 3.
$257,938.51
Interest expense for the period from
July 1 to December 31, 2021 from (a) 4.
Amount of interest expense
2.
The amount of bond interest expense reported in 2021 will be
greater than the amount that would be reported if the straight–
line method of amortization were used. Under the straight-line
3.
Total interest to be paid for the bond
($4,000,000 X .13 X 20)
$10,400,000
Total cash outlays for the bond
Cash received at issuance of the bond
(4,300,920)
Total cost of borrowing over the life
4.
They will be the same.
EXERCISE 14.10 (15–20 minutes)
January 1, 2020
Cash ……………………………………………………….
537,907.37
Premium on Bonds Payable …………………………..
37,907.37
Bonds Payable …………………………..…………………..
(b) Schedule of Interest Expense and Bond Premium Amortization
Effective-Interest Method
12% Bonds Sold to Yield 10%
Date
Cash
Paid
(12%)
Interest
Expense
(10%)
Premium
Amortized
Carrying
Amount of
Bonds
(1)
(2)
(1) – (2)
December 31, 2020 (see schedule in b)
Interest Expense …………………………………………………….
53,790.74
Premium on Bonds Payable …………………………..
6,209.26
Cash ……………………………………………………….
60,000.00
December 31, 2022 (see schedule in b)
Interest Expense …………………………………………………….
52,486.79
Premium on Bonds Payable …………………………..
Cash ……………………………………………………….
60,000.00
EXERCISE 14.11 (20–30 minutes)
Unsecured
Bonds
Zero-Coupon
Bonds
Mortgage
Bonds
Maturity value
$10,000,000
$25,000,000
$20,000,000
Number of interest
40 (10 X 4)
10
10
Periods
Stated rate per period
Effective rate per period
period
Present value
(a)$10,000,000 X .15 X 1/4 = $375,000
(b)$20,000,000 X .10 = $2,000,000
(c)Present value of an annuity of $375,000
discounted at 3% per period for
40 periods ($375,000 X 23.11477) =
$ 8,668,039
Present value of $10,000,000 discounted
at 3% per period for 40 periods
($10,000,000 X .30656) =
3,065,600
[$2,000,000 X 5.65022 (PVF-OA10,12%)] =
$11,300,440
Present value of $20,000,000 discounted
at 12% for 10 years
[$20,000,000 X .32197 (PVF10,12%)]
6,439,400
EXERCISE 14.12 (15–20 minutes)
Reacquisition price ($900,000* X 1.01)
$909,000c
Less: Net carrying amount of bonds redeemed:
Par value
$900,000
Unamortized discount
(13,500)
Calculation of unamortized discount—
Original amount of discount:
$900,000 X (1.00 – .97) = $27,000
$27,000/10 = $2,700 amortization per year;
5 X $2,700 = $13,500.
Bonds Payable ……………………………………………………….
Loss on Redemption of Bonds …………………………..
Discount on Bonds Payable …………………………..
Cash ……………………………………………………….
EXERCISE 14.13 (15–20 minutes)
Cash ($9,000,000 X .98) ……………………………………………
8,820,000
Discount on Bonds Payable (.02 X $9,000,000) ………….
Bonds Payable ………………………………………………..
(To record issuance of 10% bonds)
EXERCISE 14.13 (Continued)
Bonds Payable ……………………………………………………….
6,000,000
Loss on Redemption of Bonds …………………………..
240,000
Cash ($6,000,000 X 1.02) …………………………..
6,120,000
Discount on Bonds Payable …………………………..
120,000
(To record retirement of 11% bonds)
Reacquisition price …………………………………………………
Less: Net carrying amount of bonds redeemed:
Par value ……………………………………………………….
Unamortized bond discount …………………………..
(120,000)
EXERCISE 14.14 (12–16 minutes)
June 30, 2021
Bonds Payable ……………………………………………………….
800,000
Loss on Redemption of Bonds …………………………..
40,800
Discount on Bonds Payable …………………………..
8,800
Cash ……………………………………………………….
832,000
Reacquisition price ($800,000 X 104%) ……………………..
$832,000
Less: Net carrying amount of bonds
Par value ……………………………………………………….
Unamortized discount …………………………..
[.02 X $800,000 X (20 – 9)/20]
Cash ($1,000,000 X 1.02) …………………………..
Premium on Bonds Payable …………………………..
Bonds Payable ……………………………………………….
December 31, 2021
Interest Expense …………………………………………………….
49,500
Cash (.10 X $1,000,000 X 6/12) …………………………
Premium on Bonds Payable
EXERCISE 14.15 (10–15 minutes)
Reacquisition price ($300,000 X 1.04) ……………………….
$312,000
Less: Net carrying amount of bonds redeemed:
Par value ……………………………………………………….
$300,000
Unamortized discount ……………………………………
(10,000)
290,000
Loss on redemption ………………………………………………..
$ 22,000
Bonds Payable ……………………………………………………….
Loss on Redemption of Bonds …………………………..
Discount on Bonds Payable …………………………..
Cash ……………………………………………………….
(To record redemption of bonds
payable)
Cash ($300,000 X 1.03) …………………………………………….
Premium on Bonds Payable (.03 x $300,000) ………….
Bonds Payable ………………………………………………..
(To record issuance of new bonds)
EXERCISE 14.16 (15–20 minutes)
1.
January 1, 2020
Land ……………………………………………………….
200,000.00
Discount on Notes Payable
137,012.00
Notes Payable …………………………………………………
(The $200,000 capitalized land
cost represents the present
value of the note discounted
for five years at 11%.)
2.
Equipment ……………………………………………………….
185,674.30
Discount on Notes Payable …………………………..
Notes Payable …………………………………………………
EXERCISE 14.16 (Continued)
*Computation of the discount on
notes payable:
Maturity value
Present value of $250,000 due in
8 years at 11%—$250,000
X .43393 (PVF8,11%)
Present value of $15,000
payable annually for 8 years
at 11% annually—$15,000
X 5.14612 (PVF-OA8,11%)
Present value of the note
Discount
1.
Interest Expense …………………………………………………….
22,000.00
Discount on Notes Payable …………………………..
22,000.00
($200,000 X .11)
2.
Interest Expense …………………………………………………….
20,424.17
($185,674.30 X .11)
Discount on Notes Payable …………………………..
Cash ($250,000 X .06) …………………………..
15,000.00
EXERCISE 14.17 (15–20 minutes)
Face value of the zero-interest-bearing note
$550,000
Discount factor (12% for 3 periods) – PVF3,12%
X .71178
Amount to be recorded for the land at January 1, 2020
$391,479
Carrying value of the note at January 1, 2020
Applicable interest rate (12%)
Interest expense to be reported in 2020
Cash ……………………………………………………….
Discount on Notes Payable …………………………..
Notes Payable ………………………………………………..
Unearned Sales Revenue …………………………..
EXERCISE 14.17 (Continued)
Carrying value of the note
at January 1, 2020
$3,415,050
Applicable interest rate (10%)
Interest expense to be
EXERCISE 14.18 (15–20 minutes)
Cash ……………………………………………………….
400,000
Discount on Notes Payable …………………………..
82,468
Notes Payable…………………………………………………
400,000
Unearned Sales Revenue …………………………..
82,468
($400,000 – $317,532)
Face value
$400,000
Interest Expense ($317,532 X 8%) …………………………..
25,403
Discount on Notes Payable …………………………..
25,403
Unearned Sales Revenue ($82,468 ÷ 3)
27,489
Sales ……………………………………………………….
27,489
EXERCISE 14.19 (10–15 minutes)
Year Ending
Carrying
Value
Fair Value
Unrealized
Holding Gain
or Loss
Change in
Unrealized
Holding
Gain or Loss
2020
$54,000
$54,000
$ 0
$ 0
2022
2020
No Entry (Carrying value = Fair Value)
2021
Notes Payable ……………………………………………………….
Unrealized Holding Gain or Loss—Income ……………….
Notes Payable …………………………………….
(b) The fair value of $42,500.
(c) Unrealized holding loss of $3,500.
EXERCISE 14.20 (10–15 minutes)
At December 31, 2020, disclosures would be as follows:
Maturities and sinking fund requirements on long-term debt are as follows:
2021
$ 0
2022
2,500,000
2023
($2,000,000 + $2,500,000)
2024
($6,000,000 + $2,500,000)
2025
2,500,000
*EXERCISE 14.21 (15–20 minutes)
Transfer of property on December 31, 2020:
Strickland Company (Debtor):
Notes Payable…………………………………………………
200,000
Interest Payable ………………………………………………
18,000
Accumulated Depreciation—Machinery ……………
221,000
Machinery ……………………………………………….
390,000
Gain on Disposal of Machinery …………………
Gain on Restructuring of Debt ………………….
Moran State Bank (Creditor):
Machinery ………………………………………………………
180,000
Allowance for Doubtful Accounts …………………….
38,000
Notes Receivable ……………………………………..
200,000
Interest Receivable …………………………..
18,000
(b) “Gain on Disposal of Machinery” and the “Gain on Restructuring of
Debt” should be reported in the income statement.
*EXERCISE 14.21 (Continued)
Granting of equity interest on December 31, 2020:
Strickland Company (Debtor):
Notes Payable ………………………………………………..
200,000
Interest Payable ……………………………………………..
18,000
Common Stock (15,000 X $10) ………………….
Gain on Restructuring of Debt ………………….
Equity Investments …………………………………………
Allowance for Doubtful Accounts …………………….
Notes Receivable …………………………………….
Interest Receivable …………………………..
*EXERCISE 14.22 (20–30 minutes)
(a) No. The gain recorded by Barkley is not equal to the loss recorded by
American Bank under the debt restructuring agreement. (You will see
GAAP for the creditor.
(b) No. There is no gain under the modified terms because the total future
cash flows after restructuring exceed the total pre-restructuring carrying
amount of the note (principal):
Total future cash flows after restructuring are:
Principal ………………………………………………………..
Interest ($2,400,000 X .10 X 3) ………………………….
*EXERCISE 14.22 (Continued)
(c) The interest payment schedule is prepared as follows:
BARKLEY COMPANY
Interest Payment Schedule After Debt Restructuring
Effective-Interest Rate 1.4276%
Date
Cash
Paid
(10%)
Interest
Expense
(1.4276%)
Reduction
of Carrying
Amount
Carrying
Amount of
Note
(1)
(2)
(1)- (2)
Interest payment entry for Barkley Company is:
December 31, 2022
Notes Payable ……………………………………………………….
199,987
Interest Expense …………………………………………………….
Cash ……………………………………………………….
The payment entry at maturity is:
Notes Payable ……………………………………………………….
Cash ……………………………………………………….
*EXERCISE 14.23 (25–30 minutes)
(a) American Bank should use the historical interest rate of 12% to
calculate the loss.
The loss is computed as follows:
Pre-restructuring carrying amount of note
$3,000,000
Less: Present value of restructured future cash flows:
Present value of principal $2,400,000
due in 3 years at 12%
paid annually for 3 years at 12%
Bad Debt Expense …………………………………………………..
Allowance for Doubtful Accounts …………………….
(c) The interest receipt schedule is prepared as follows:
AMERICAN BANK
Interest Receipt Schedule After Debt Restructuring
Effective-Interest Rate 12%
Date
Cash
Received
(10%)
Interest
Revenue
(12%)
Increase
in Carrying
Amount
Carrying
Amount of
Note
12/31/20
(1)
(2)
(2) – (1)
$2,284,711
*EXERCISE 14.23 (Continued)
(d)
Interest receipt entry for American Bank is:
December 31, 2022
Cash ………………………………………………………………………
Allowance for Doubtful Accounts …………………………..
Interest Revenue …………………………………………….
278,265
(e)
The receipt entry at maturity is:
January 1, 2024
Allowance for Doubtful Accounts …………………………..
Notes Receivable ……………………………………………
*EXERCISE 14.24 (25–30 minutes)
(a) Yes. Barkley Company can record a gain under this term modification.
The gain is calculated as follows:
Total future cash flows after restructuring are:
Principal ……………………………………………………….
Interest ($1,900,000 X .10 X 3) ………………….
Therefore, the gain = $3,000,000 – $2,470,000 = $530,000.
The entry to record the gain on December 31, 2020:
Gain on Restructuring of Debt ………………….
Because the new carrying value of the note ($3,000,000 – $530,000 =
$2,470,000) equals the sum of the undiscounted future cash flows
*EXERCISE 14.24 (Continued)
(d) The interest payment schedule is prepared as follows:
BARKLEY COMPANY
Interest Payment Schedule After Debt Restructuring
Effective-Interest Rate 0%
Date
Cash
Paid
(10%)
Interest
Expense
(0%)
Reduction
of Carrying
Amount
Carrying
Amount of
Note
12/31/20
(1)
(2)
(1) – (2)
$2,470,000
Cash interest payment entries for Barkley Company are:
December 31, 2021, 2022, and 2023 (see schedule)
Notes Payable ……………………………………………………….
Cash ……………………………………………………….
The payment entry at maturity is:
Notes Payable ……………………………………………………….
Cash ……………………………………………………….
*EXERCISE 14.25 (20–30 minutes)
The loss can be calculated as follows:
Pre-restructuring carrying amount of note ……………….
$3,000,000
Less: Present value of restructured future
cash flows:
Present value of principal $1,900,000
due in 3 years at 12% …………………………..
Present value of interest $190,000
paid annually for 3 years at 12% ………………….
December 31, 2020
Bad Debt Expense …………………………………………………..
1,191,270
Allowance for Doubtful Accounts …………………….
1,191,270
(b) The interest receipt schedule is prepared as follows:
AMERICAN BANK
Interest Receipt Schedule After Debt Restructuring
Effective-Interest Rate 12%
Date
Cash
Received
(10%)
Interest
Revenue
(12%)
Increase
in Carrying
Amount
Carrying
Amount of
Note
12/31/20
(1)
(2)
(2) – (1)
$1,808,730
12/31/22
*EXERCISE 14.25 (Continued)
Interest receipt entries for American Bank are: (see schedule)
December 31, 2021
Cash ……………………………………………………….……………..
190,000
Allowance for Doubtful Accounts …………………………..
27,048
Interest Revenue …………………………………………….
Cash ……………………………………………………….……………..
Allowance for Doubtful Accounts …………………………..
Interest Revenue …………………………………………….
Cash ……………………………………………………….……………..
190,000
Allowance for Doubtful Accounts …………………………..
Interest Revenue …………………………………………….
The receipt entry at maturity is:
January 1, 2024
Cash ……………………………………………………….……………..
Allowance for Doubtful Accounts …………………………..
Notes Receivable ……………………………………………
*EXERCISE 14.26 (15–20 minutes)
Gottlieb Co.’s entry:
Notes Payable ……………………………………………………….
199,800
Land ……………………………………………………….
Gain on Disposal of Land
($140,000 – $90,000) …………………………..
Gain on Restructuring of Debt …………………………
*$199,800 – $140,000
Ceballos Inc. entry:
Land ………………………………………………………………………
140,000
Allowance for Doubtful Accounts …………………………..
*EXERCISE 14.27 (20–25 minutes)
Because the carrying amount of the debt, $270,000 exceeds the total future
cash flows $242,000 [$220,000 + ($11,000 X 2)], a gain and a loss are
recognized and no interest is recorded by the debtor.
Vargo Corp.’s entries:
2020 Notes Payable ($270,000 – $242,000) …………………
28,000
Gain on Restructuring of Debt ………………….
28,000
2021 Notes Payable…………………………………………………
11,000
Cash (.05 X $220,000) …………………………..
11,000
2022 Notes Payable…………………………………………………
Cash
[$220,000 + (.05 X $220,000)] ………………….
First Trust’s entry on December 31, 2020:
Bad Debt Expense …………………………………………………..
76,027
Allowance for Doubtful Accounts …………………….
76,027
Present value of restructured cash flows:
Present value of $220,000 due in 2 years
at 12%, interest payable annually
(Table 6-2); ($220,000 X .79719) ……………………..
Present value of $11,000 interest payable
annually for 2 years at 12% (Table 6-4);
($11,000 X 1.69005)……………………………………….
Date
Cash
Interest
Effective-
Interest
Increase
in Carrying
Amount
Carrying
Amount of
Note
12/31/20
$193,973
12/31/22