Exercise 14–20
1. January 1, 2016
2. Amortization schedule
$4,000,000 ÷ 3.16987 = $1,261,881
Cash Effective Decrease in Outstanding
Dec.31 Payment Interest Balance Balance
10% x Outstanding Balance Balance Reduction
4,000,000
3. December 31, 2016
Interest expense (10% x outstanding balance) ………………………… 400,000
4. December 31, 2018
Interest expense (10% x outstanding balance) ………………………… 219,005
14–42 Intermediate Accounting, 8/e
Exercise 14–21
1. November 1, 2016
2. November 30, 2016
Interest expense (1% x outstanding balance) ………………………….. 240,000
3. December 31, 2016
November (1% x $24,000,000) $240,000
Exercise 14–22
The FASB Accounting Standards Codification represents the single source of
authoritative U.S. generally accepted accounting principles. The specific citation for
each of the following items is:
1. Disclosure requirements for maturities of long-term debt:
2. How to estimate the value of a note when a note having no ready market and
no interest rate is exchanged for a noncash asset without a readily available
3. When the straight-line method can be used as an alternative to the interest
14–44 Intermediate Accounting, 8/e
Exercise 14–23
Bonds payable (face amount) ……………………………….. 90,000,000
Exercise 14–24
Requirement 1
Gless (Issuer)
Cash (101% x $12 million) ……………………………………. 12,120,000
Requirement 2
Gless (Issuer)
Interest expense ($540,000 – 6,000) ……………………………. 534,000
Requirement 3
Gless (Issuer)
Convertible bonds payable (10% of the account balance) 1,200,000
14–46 Intermediate Accounting, 8/e
Exercise 14–25
Under US GAAP, the entire issue price of convertible debt is recorded as debt:
Cash (101% x $12 million) ………………………………………… 12,120,000
Under IFRS, convertible debt is divided into its liability and equity elements. We
achieve separation by measuring the fair value of a similar liability that does not have
an associated equity component. In the exercise, we know that bonds similar in all
Exercise 14–26
Requirement 1
Cash (given) …………………………………………………….. 40,800,000
Requirement 2
Requirement 3
Exercise 14–27
Requirement 1
Under U.S. GAAP, the entire issue price of convertible debt is recorded as debt:
Cash (given) …………………………………………………………….. 40,800,000
Convertible bonds payable (face amount) ………………… 40,000,000
Exercise 14–27 (concluded)
Requirement 2
Interest expense ($1,200,000 + 20,000) ………………………. 1,220,000
Convertible bonds payable* ($400,000 ÷ 20) …….. 20,000
Requirement 3
Interest expense ($1,200,000 + 20,000) ………………………. 1,220,000
Convertible bonds payable* ($400,000 ÷ 20) …….. 20,000
14–50 Intermediate Accounting, 8/e
Exercise 14–28
Requirement 1
($ in millions)
Limbaugh (Issuer)
Cash (104% x $30 million) …………………………………………….. 31.2
Requirement 2
($ in millions)
Limbaugh (Issuer)
Exercise 14–29
Requirement 1
At January 1, 2016, the book value of the bonds was the initial issue price,
$739,814,813. The liability, though, was increased when Federal recorded interest
during 2016:
June 30, 2016
Interest expense (6% x $739,814,813) …………………… 44,388,889
14–52 Intermediate Accounting, 8/e
Exercise 14–29 (continued)
Because none of the change is due to the change in general interest rates, Federal can
assume that the entire change in fair value is caused by a change in the general (risk-
free) interest rate to be the result of credit risk. 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. Federal records the $10,615,924 as a gain
in 2016 as other comprehensive income (OCI):
December 31, 2016
Fair value adjustment 10,615,924
Unrealized holding gain–OCI 10,615,924
Exercise 14–29 (continued)
Requirement 2
If the fair value at December 31, 2017, is $736,000,000 a year later, Federal needs
June 30, 2017
Interest expense (6% x [$739,814,813 + 388,889 + 412,222]) 44,436,955
December 31, 2017
Interest expense (6% x [$739,814,813 + 388,889 + 412,222 + 436,955]) 44,463,173
14–54 Intermediate Accounting, 8/e
Exercise 14–29 (continued)
Comparing the amortized initial amount at December 31, 2017, with the fair value on
that date provides the fair value adjustment balance needed:
December 31, 2017, book value (amortized initial amount) $741,516,052
December 31, 2017, fair value (736,000,000)
Exercise 14–29 (concluded)
In the balance sheet, the bonds are reported among long-term liabilities at their
$736,000,000 fair value:
Bonds payable $800,000,000
Less: Discount on bonds payable (58,483,948)
14–56 Intermediate Accounting, 8/e
Exercise 14–30
Requirement 1
June 30, 2016
Interest expense (5% x $184 million) 9,200,000
Requirement 2
December 31, 2016
Interest expense (5% x [$184 million + 1.2 million]) 9,260,000
Requirement 3
The interest entries increased the book value from $184,000,000 to
$186,460,000:
$200,000,000 Face amount
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
14–58 Intermediate Accounting, 8/e
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
Requirement 2
June 30, 2016
Interest expense (5% x $700,302) 35,015
Exercise 14–31 (concluded)
Requirement 4
The interest entries increased the book value from $700,302 to $706,483:
$700,302 January 1 book value
3,015 June 30 increase
14–60 Intermediate Accounting, 8/e
Exercise 14–32
Requirement 1
$100 million x 12% x 2/12 = $2 million
Requirement 2
($ in millions)
Cash ($99 million plus accrued interest) …………………………….. 101
Exercise 14–33
Land ($450,000 – 325,000) ……………………………………. 125,000