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Problem 14–20 (concluded)
Requirement 4
Microsoft’s note states that “Because the convertible debt may be wholly or
partially settled in cash, we are required to separately account for the liability and
Requirement 5
FASB ASC 470–20–25–22: “Debt–Debt with Conversion and Other Options–
Recognition–Liability and Equity Components.”
14–102 Intermediate Accounting, 8/e
Problem 14–21
List A List B
j_ 1. Effective rate times balance a. Straight-line method
h_ 2. Promises made to bondholders b. Discount
Problem 14–22
Requirement 1
Interest $ 32,000 x 17.15909* = $549,091
Principal $800,000 x 0.14205 ** = 113,640
January 1
Cash 662,731
Requirement 2
June 30
Interest expense (5% x $662,731) 33,137
Requirement 3
December 31
Interest expense (5% x [$662,731 + 1,137]) 33,193
Problem 14–23
Requirement 1
At January 1, the book value of the bonds was the initial issue price, $331,364.
The liability, though, was increased by three months’ interest that has accrued for the
quarter but has not been paid. This is recorded in an adjusting entry in preparation for
the quarterly financials:
Interest expense (5% x $331,364 x 3/6) 8,284
Problem 14–23 (continued)
Requirement 2
If the fair value on March 31 is $350,000, Appling needs to compare that amount
with the amortized initial measurement on that date. That amount was increased when
Appling recorded interest on June 30:
Interest expense (5% x $331,364* x 3/6) 8,284
14–106 Intermediate Accounting, 8/e
Problem 14–23 (continued)
Requirement 3
If the fair value on June 30 is $340,000, Appling needs to compare that amount
with the amortized initial measurement on that date. That amount, though, has
increased by three months’ interest that has accrued for the quarter but has not been
paid. This is recorded in an adjusting entry in preparation for the quarterly financials:
Interest expense (5% x [$331,364 + 284 + 284] x 3/6) 8,298
Discount on bonds payable (difference) 298
Problem 14–23 (continued)
Requirement 4
If the fair value on December 31 is $342,000, Appling needs to compare that
amount with the amortized initial measurement on that date. That amount was
increased when Appling recorded interest on December 31:
Interest expense (5% x [$331,364 + 284 + 284] x 3/6) 8,298
14–108 Intermediate Accounting, 8/e
Problem 14–23 (continued)
Appling’s 2016 statement of comprehensive income will include the interest
expense for all four quarters as well as the gains and losses (OCI) from adjusting to
fair value:
Interest expense, 1st quarter $ 8,284
The same result can be reached by comparing fair values at the beginning and end
of the year and including semiannual interest amounts rather than quarter-by-quarter:
If the fair value on December 31 is $342,000, Appling needs to compare that
amount with the amortized initial measurement on that date. The liability, though,
was increased when Appling recorded interest on June 30 and December 31:
Problem 14–23 (concluded)
Appling would record the $9,471 loss as OCI in the 2016 statement of
comprehensive income:
Unrealized holding loss–OCI 9,471
14–110 Intermediate Accounting, 8/e
Problem 14–24
Requirement 1
2016
July 1
Bond investment (face amount) ...................................... 16,000,000
Discount on bond investment (difference) ................. 300,000
Dec. 31 Accrued interest
Bracecourt
Interest receivable ($16,000,000 x 10% x 6/12) ................. 800,000
Problem 14–24 (continued)
2017
Jan. 1
Cash (10% x $16,000,000 x 6/12) ....................................... 800,000
Interest receivable (from adjusting entry) .................... 800,000
14–112 Intermediate Accounting, 8/e
Problem 14–24 (continued)
Dec. 1
Cash (12% x $15,000,000 x 6/12) ........................................ 900,000
Premium on investment* ................................................. 30,000
Problem 14–24 (continued)
Feb. 28
Interest receivable (12% x $15,000,000 x 2/12) ................. 300,000
Premium on investment ($10,000 x 2 months x 15/30) .... 10,000
14–114 Intermediate Accounting, 8/e
Problem 14–24 (concluded)
Requirement 2
2016
Interest revenue—Dec. 1 $ 580,000
Interest revenue—Dec. 31 807,500
Problem 14–25
1. Liabilities at September 30, 2016
Bonds payable (face amount) ..................................... $160,000,000
2. Interest expense for year ended September 30, 2016
3. Statement of cash flows for year ended September 30, 2016
Baddour would report the cash inflow of $140,000,000(6) from the sale of the
14–116 Intermediate Accounting, 8/e
Problem 14-25 (concluded)
Calculations:
March 1, 2016
Cash ($140(6) million plus accrued interest) .................... 142,666,667
Problem 14–26
Requirement 1
($ in millions)
Land ............................................................................. 3
Gain on disposal ..................................................... 3
Requirement 2
Analysis: Book value: $20 million + 2 million = $22,000,000
Future payments: ($1 million x 4) + $15 million = 19,000,000
Gain to debtor $ 3,000,000
($ in millions)
14–118 Intermediate Accounting, 8/e
Problem 14–26 (continued)
Requirement 3
Analysis: Book value: $20,000,000 + 2,000,000 = $22,000,000
Calculation of the new effective interest rate:
(a) January 1, 2016
[Since the total future cash payments are not less than the book value of the debt,
no reduction of the existing debt is necessary and no entry is required at the time
of the debt restructuring.]
Amortization Schedule (not required)
Cash Effective Increase in Outstanding
Dec.31 Payment Interest Balance Balance
6% x Outstanding Balance
22,000,000
Problem 14–26 (concluded)
(b) December 31, 2016
Interest expense .................................................. 1,320,000
Interest payable ............................................... 1,320,000
14–120 Intermediate Accounting, 8/e
CASES
Communication Case 14–1
Suggested Grading Concepts and Grading Scheme:
Content (80%)
20 Convertible bonds
Entire proceeds of the bond issue should be allocated to the debt
and the related premium or discount accounts.
20 Bonds with detachable warrants
Proceeds should be allocated between debt and warrants.
Basis of allocation is their relative fair values.
Relative values are usually determined by the price at which the
respective instruments are traded in the open market.
Portion of the proceeds assigned to the warrants
should be accounted for as equity.
20 Reasons why all the proceeds of convertible bonds
should be allocated to the debt
The option is inseparable from the debt: no way to
retain one right while selling the other.
The valuation presents practical problems: would be subjective.
20 Arguments that accounting for convertible debt should be the same as
for debt issued with detachable stock purchase warrants
Convertible debt has features of both debt and shareholders’
equity, and separate recognition should be given to the
fundamental elements at the time of issuance.
Difficulties in separating the relative values of the
features are not insurmountable.
Bonus (5) Other relevant arguments not mentioned above
80–85 points
Writing (20%)
5 Terminology and tone appropriate to the audience (CFO).
6 Organization permits ease of understanding.
Introduction that states purpose.
Paragraphs separate main points.
9 English.
Word selection.
Spelling.
Grammar.
20 points
