PROBLEM 14.2 (Continued)
Entry for accrued interest
Interest Expense ($204,868 X 1/2 X 1/2) …………………….
51,217
Bonds Payable ……………………………………………………….
Cash ($210,000 X 1/2 X 1/2) …………………………..
Entry for reacquisition
Bonds Payable ……………………………………………………….
1,023,055*
Loss on Extinguishment of Debt …………………………..
Cash ……………………………………………………….
*Premium as of 7/1/21 to be written off
($2,046,110 – $2,000,000) X 1/2 = $23,055
PROBLEM 14.3
(a)
Date
(1)
Cash
Paid
(2)
Interest
Expense
@2%
(2) – (1)
Change in
Carrying
Amount
Carrying
Amount of
Note
1/1/19
—
—
—
€32,000
4/1/19
€400
€640
€240
32,240
7/1/19
32,485
10/1/19
32,735
1/1/20
32,990
than at the beginning of the year.
(c) To earn 8% over the next two years the quarterly payments must be
€4,503 computed as follows:
(d)
Date
Cash
Paid
Interest
Expense
Change in
Carrying
Amount
Carrying
Amount of
Note
1/1/20
—
—
—
€32,990
4/1/20
€4,503
€660
€3,843
29,147
7/1/20
25,227
10/1/20
21,229
1/1/21
17,151
4/1/21
12,991
7/1/21
10/1/21
1/1/22
(e) The new sales gimmick may bring people into the showroom the first
time but will drive them away once they learn of the amount of their
PROBLEM 14.4
Dear Samantha,
When a bond is issued at face value, the annual interest expense and the
interest payout equals the face value of the bond times the interest rate
stated on its face. However, if the bond is issued to yield a higher or lower
Assume a premium: the theory behind the effective-interest method is that,
as time passes, the difference between the face value of the bond and its
carrying amount becomes smaller, resulting in a lower interest expense
To amortize the premium applying this method to the data provided, you
must know the bond’s face amount, its stated rate of interest, its effective
rate of interest, and its carrying value.
1. Multiply the stated rate times the face amount. This is the interest
payout.
PROBLEM 14.4 (Continued)
3. Subtract the amount calculated in #2 above from that found in #1. This
is the amount to be amortized for the period.
The schedule below illustrates this calculation. The face value
(R$2,000,000) is multiplied by the stated rate of 11 percent, while the
Follow these steps and you should have no trouble amortizing premiums
and discounts over the life of a bond.
Sincerely,
Attachment to letter
HOBART SA
Interest and Discount Amortization Schedule
11% Bond Issued to Yield 10%
Date
(1)
Cash Paid
(@11%)
(2)
Interest
Expense
(@10%)
(1) – (2)
Premium
Amortized
Carrying
Amount of
Bond
6/30/19
—
—
—
R$2,171,600
12/31/19
R$110,000
R$108,580
R$1,420
2,170,180
108,509
2,168,689
108,434
110,000
108,356
PROBLEM 14.5
(a)
December 31, 2019
Equipment ……………………………………………………….
Notes Payable ………………………………………………..
(Computer capitalized at the present
value of the note—£600,000 X .68301[pv4,10%])
(b)
December 31, 2020
Depreciation Expense ……………………………………………..
67,961.20
Accumulated Depreciation—Equipment
[(£409,806 – £70,000) ÷ 5] …………………………..
Interest Expense …………………………………………………….
40,980.60
Notes Payable ………………………………………………..
Schedule of Note Discount Amortization
Date
Debit, Interest Expense @10%
Credit, Notes Payable
Carrying Amount
of Note
12/31/19
—
£409,806.00
12/31/22
(c)
December 31, 2021
[(£409,806 – £70,000) ÷ 5] …………………………..
Accumulated Depreciation—Equipment …………..
Interest Expense …………………………………………………….
Notes Payable ………………………………………………..
Depreciation Expense
PROBLEM 14.6
(a)
December 31, 2018
Machinery ……………………………………………………….
182,485.20*
Cash ……………………………………………………….
50,000.00
Notes Payable…………………………..
132,485.20
*To record machinery at the
present value of the note plus
the immediate cash payment:
PV of $40,000 annuity @ 8%
for 4 years ($40,000 X 3.31213) …………………………..
$132,485.20
Down payment ……………………………………………………….
50,000.00
Capitalized value of machinery …………………………..
$182,485.20
(b)
December 31, 2019
Notes Payable ……………………………………………………….
40,000.00
Cash ……………………………………………………….
40,000.00
Interest Expense …………………………..
10,598.82
Notes Payable…………………………..
10,598.82
Schedule of Note Discount Amortization
Date
(1)
Cash Paid
(2)
Interest
Expense
@8%
(1) – (2)
Amortization
Carrying
Amount of Note
12/31/18
—
—
—
$132,485.20
12/31/19
$40,000.00
$10,598.82
$29,401.18
103,084.02*
71,330.74
37,037.20
2,962.80**
PROBLEM 14.6 (Continued)
(c)
December 31, 2020
Notes Payable ……………………………………………………….
40,000.00
Cash ……………………………………………………….
40,000.00
Interest Expense …………………………..
Notes Payable …………………………..
(d)
December 31, 2021
Notes Payable ……………………………………………………….
40,000.00
Cash ……………………………………………………….
40,000.00
Interest Expense …………………………..
Notes Payable …………………………..
(e)
December 31, 2022
Notes Payable ……………………………………………………….
40,000.00
Cash ……………………………………………………….
40,000.00
Interest Expense …………………………..
Notes Payable …………………………..
PROBLEM 14.7
(a)
Entry to record the issuance of the 11% bonds on December 18, 2019:
Cash (¥40,000,000 X 102%) ………………………………………
40,800,000
Bonds Payable ……………………………………………….
40,800,000
Entry to record the retirement of the 9% bonds on January 2, 2020:
Bonds Payable (¥30,000,000 – ¥1,842,888) ………………..
Loss on Extinguishment of Debt …………………………..
[The loss represents the excess of the
cash paid (¥31,200,000) over the
(¥28,157,112).]
(b) The loss is reported as an other income and expense item.
Note 1. Loss on Bond Extinguishment
The loss represents a loss of ¥3,042,888 from the extinguishment and
PROBLEM 14.8
1. Sanford Co.
March 1, 2019
Cash ………………………………………………………………………
472,090*
Bonds Payable ……………………………………………….
472,090
*Present value of $500,000 due in 7 periods at 6%
[($500,000 X .66506) (PVF7, 6%)] (Table 6-2) ………………
Present value of interest payable semiannually
[($25,000* X 5.58238) (PVF – OA7, 6%)] (Table 6-4) ……
Proceeds from sale of bonds ………………………………….
September 1, 2019
Interest Expense …………………………………………………….
28,325*
Bonds Payable ……………………………………………….
3,325
Cash …………………………..………………………………….
25,000
(See amortization table on next page)
December 31, 2019
Interest Expense …………………………………………………….
19,017
Bonds Payable
($3,525 X 4/6) ……………………………………………….
2,350
Interest Payable ($25,000 X 4/6) ……………………….
16,667
Interest Expense …………………………………………………….
Interest Payable ………………………………………………………
16,667
Bonds Payable
($3,525 X 2/6) ……………………………………………….
1,175
Cash …………………………..………………………………….
25,000
September 1, 2020
Interest Expense …………………………………………………….
28,736
Bonds Payable ……………………………………………….
3,736
Cash …………………………..………………………………….
25,000
December 31, 2020
Interest Expense …………………………………………………….
19,308
Bonds Payable
($3,961 X 4/6) ……………………………………………….
2,641
Interest Payable ………………………………………………
16,667
PROBLEM 14.8 (Continued)
Schedule of Bond Discount Amortization
Effective-Interest Method
10% Bonds Sold to Yield 12%
Date
(1)
Cash
Paid
(2)
Interest
Expense
(2) – (1)
Discount
Amortized
Carrying
Amount of
Bonds
3/1/19
—
—
—
$472,090
9/1/19
$25,000
$28,325
$3,325
475,415
3/1/20
25,000
28,525
3,525
478,940
9/1/20
25,000
28,736
3,736
482,676
486,637
9/1/21
25,000
29,198
4,198
490,835
3/1/22
25,000
29,450
4,450
495,285
500,000
2. Titania Co.
June 1, 2019
Cash ………………………………………………………………………
425,853
Bonds Payable ………………………………………………..
425,853
Present value of $400,000 due in 8 periods at 5%
($400,000 X .67684) ……………………………………………….
Present value of interest payable semiannually
($24,000* X 6.46321) ……………………………………………..
Proceeds from sale of bonds …………………………………..
December 1, 2019
Interest Expense ……………………………………………………..
21,293*
Bonds Payable ……………………………………………………….
2,707
Cash ($400,000 X .12 X 6/12) …………………………..
24,000
(See amortization table on Page 14–51)
December 31, 2019
Interest Expense ($21,157 X 1/6) ………………………………
Bonds Payable
PROBLEM 14.8 (Continued)
June 1, 2020
Interest Expense ($21,157 X 5/6) ………………………………
17,631
Interest Payable ………………………………………………………
Bonds Payable ($2,843 X 5/6) …………………………………..
Cash …………………………..………………………………….
October 1, 2020
Interest Expense
($21,015 X .3* X 4/6) ………………………………………………
Bonds Payable ($2,985 X .3 X 4/6) …………………………..
Cash …………………………..………………………………….
*$120,000 ÷ $400,000 = .3
October 1, 2020
Bonds Payable ……………………………………………………….
125,494
Gain on Extinguishment of Bonds ……………………
4,294*
Cash …………………………..………………………………….
121,200
*Reacquisition price
$126,000 – ($120,000 X 12% X 4/12)
($420,303* X .30) – $597 ………………………………..
Gain on extinguishment ………………………………….
December 1, 2020
Interest Expense ($21,015 X .7*) ……………………………….
14,711
Bonds Payable ($2,985 X .7) …………………………………….
Cash ($24,000 X .7) ………………………………………….
*($400,000 – $120,000) ÷ $400,000 = .7
PROBLEM 14.8 (Continued)
December 31, 2020
Interest Expense ($20,866 X .7 X 1/6) ………………………..
2,434
Bonds Payable ($3,134 X .7 X 1/6) …………………………..
Interest Payable ($24,000 X .7 X 1/6) …………………
June 1, 2021
Interest Expense ($20,866 X .7 X 5/6) ………………………..
12,172
Interest Payable …………………………..………………………….
Bonds Payable ($3,134 X .7 X 5/6) …………………………..
Cash ($24,000 X .7) ………………………………………….
December 1, 2021
Interest Expense ($20,709 X .7) …………………………..
14,496
Bonds Payable ($3,291 X .7) …………………………………….
Cash ($24,000 X .7) ………………………………………….
Date
(1)
Cash
Paid
(2)
Interest
Expense
@5%
(1) – (2)
Premium
Amortized
Carrying
Amount of
Bonds
6/1/19
—
—
—
$425,853
12/1/19
$24,000
$21,293
$2,707
423,146
6/1/20
24,000
21,157
2,843
420,303
12/1/20
24,000
21,015
2,985
417,318
6/1/21
24,000
20,866
3,134
414,184
12/1/21
24,000
20,709
3,291
410,893
6/1/22
24,000
20,545
3,455
407,438
12/1/22
24,000
20,372
3,628
403,810
6/1/23
24,000
3,810
400,000
PROBLEM 14.9
July 1, 2019
Cash
(€900,000 X 1.12290) + (€900,000 X 12% X 6/12) ………
1,064,610.00
Bonds Payable ……………………………………………….
1,010,610.00
Interest Expense (€900,000 X 12% X 6/12) …………
54,000.00
December 31, 2019
Interest Expense (€900,000 X 12%) …………………………..
108,000.00
Bonds Payable ……………………………………………………….
Interest Expense
January 1, 2020
Interest Payable ………………………………………………………
108,000.00
Cash …………………………..………………………………….
108,000.00
January 2, 2020
Bonds Payable ……………………………………………………….
Cash (€360,000 X 102%) …………………………………..
Gain on Extinguishment of Debt ………………………
Reacquisition price
(€360,000 X 102%) ………………………………………………..
Net carrying value of bonds redeemed:
PROBLEM 14.9 (Continued)
December 31, 2020
Interest Expense (€540,000* X 12%) ………………………….
64,800.00
Interest Payable ………………………………………………
*$900,000 – $360,000
Bonds Payable ……………………………………………………….
Interest Expense
€402,856.20) X .10] – €64,800 ……………………….
PROBLEM 14.10
(a)
April 1, 2019
Cash ……………………………………………………….
13,967,634*
Bonds Payable …………………………..
13,967,634
*Present value of R$15,000,000
due in 30 periods at 6%
(Table 6-2) ……………………………………………………….
Present value of interest
(b)
October 1, 2019
Interest Expense ………………………………………………………
838,058*
Cash ……………………………………………………….
Bonds Payable …………………………..
*R$13,967,634 X .12 X 6/12
= R$838,058
**R$15,000,000 X .11 X 6/12
= R$825,000
(c)
December 31, 2019
Interest Expense ………………………………………………………
419,421*
Interest Payable …………………………..
Bonds Payable …………………………..
(e)
Interest Payable ……………………………………………………….
412,500
Interest Expense ………………………………………………………
419,628*
Cash ……………………………………………………….
Bonds Payable …………………………..
PROBLEM 14.10 (Continued)
The reacquisition price: 200,000 shares X R$31 = R$6,200,000.
The loss on extinguishment of the bonds is:
Reacquisition price ……………………………………………….
Less: Carrying amount
(R$13,987,613 + R$7,128) X 40% …………………………..
The entry to record extinguishment of the bonds is:
April 2, 2020
Bonds Payable ……………………………………………….
5,597,896
Loss on Extinguishment of Debt ……………………..
Share Capital—Ordinary …………………………..
Share Premium—Ordinary ………………………..
PROBLEM 14.11
(a) It is an extinguishment of debt with modification of terms.
(b)
Notes Payable (Old) ………………………………………………..
600,000
Gain on Extinguishment of Debt ………………………
Notes Payable (New) ……………………………………….
*Calculation of gain.
Pre-restructure carrying amount …………………………..
$600,000
Present value of restructured cash flows:
PROBLEM 14.12
(a)
Notes Payable ……………………………………………………….
5,000,000
Share Capital—Ordinary …………………………..
1,700,000
Share Premium—Ordinary …………………………..
2,000,000
Gain on Extinguishment of Debt ………………………
1,300,000
Carrying amount of debt …………………………..
Fair value of equity …………………………..
(3,700,000)
Gain on extinguishment
(b)
Notes Payable ……………………………………………………….
5,000,000
Land ……………………………………………………….
3,250,000
Gain on Disposition of Land …………………………..
750,000
Gain on Extinguishment of Debt ………………………
1,000,000
Fair value of land …………………………..
$4,000,000
Book value of land …………………………..
Gain on disposition of
Note payable (carrying
amount) ……………………………………………………….
$5,000,000
Fair value of land …………………………..
Gain on extinguishment
PROBLEM 14.12 (Continued)
(c)
Notes Payable (Old) ………………………………………………..
5,000,000
Gain on Extinguishment of Debt ………………………
Notes Payable (New) ……………………………………….
*Calculation of gain.
Pre-restructure carrying amount …………………………..
$ 5,000,000
Less: Present value of restructured cash flows:
Present value of $5,000,000 due in
3 years at 12% (Table 6-2);
($5,000,000 X .71178) ………………………………..
3,558,900
PROBLEM 14.13
(a)
Present value of restructured cash flows:
(£30,000 X 2.40183) …………………………………………….
Present value of principal £300,000 due in
AMORTIZATION SCHEDULE AFTER DEBT MODIFICATION
MARKET INTEREST RATE 12%
Date
(1)
Cash
Paid
(2)
Interest
Expense
@12%
(2) – (1)
Amortization
Carrying
Value
12/31/19
—
—
—
£285,589
12/31/20
£30,000
£34,271*
£4,271
289,860
12/31/21
30,000
294,643
12/31/22
30,000
300,000