EXERCISE 14-8 (Continued)
(c)
Carrying amount of bonds on June 30, 2014
$562,500
Effective-interest rate for the period from June 30
to October 31, 2014 (.10 X 4/12)
EXERCISE 14-9 (20–30 minutes)
(a)
1.
June 30, 2014
Cash ……………………………………………………….
4,300,920.00
Bonds Payable …………………………..
Premium on Bonds Payable …………………………..
2.
December 31, 2014
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, 2015
Interest Expense …………………………..
257,938.51
[($4,300,920.00 – $1,944.80)
X 12% X 6/12]
Premium on Bonds Payable …………………………..
Cash ……………………………………………………….
4.
December 31, 2015
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 ……………………………………………………….
EXERCISE 14-9 (Continued)
(b)
Long-term Liabilities:
Bonds payable, 13% (due on June 30, 2034)
Premium on bonds payable*
(c)
1.
Interest expense for the period from
January 1 to June 30, 2015 from (a) 3.
Interest expense for the period from
July 1 to December 31, 2015 from (a) 4.
Amount of interest expense
2.
The amount of bond interest expense reported in 2015 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)
Principal due in 2034
Total cash outlays for the bond
Cash received at issuance of the bond
Total cost of borrowing over the life
4.
They will be the same.
EXERCISE 14-10 (15–20 minutes)
(a)
January 1, 2014
Cash ……………………………………………………….
537,907.37
Premium on Bonds Payable …………………………..
Bonds Payable ……………………………………………….
(b) Schedule of Interest Expense and Bond Premium Amortization
Effective-Interest Method
12% Bonds Sold to Yield 10%
Date
Cash
Paid
Interest
Expense
Premium
Amortized
Carrying
Amount of
Bonds
1/1/14
–
–
–
$537,907.37
12/31/14
$60,000.00*
$6,209.26
12/31/15
12/31/16
(c)
December 31, 2014
Interest Expense …………………………………………………….
53,790.74
Premium on Bonds Payable …………………………..
Cash ……………………………………………………….
(d)
December 31, 2015
Interest Expense …………………………………………………….
52,486.79
Premium on Bonds Payable …………………………..
Cash ……………………………………………………….
EXERCISE 14-11 (20–30 minutes)
Unsecured
Bonds
Zero-Coupon
Bonds
Mortgage
Bonds
(1)
Maturity value
$10,000,000
$25,000,000
$20,000,000
(2)
Number of interest
40
10
10
periods
(3)
Stated rate per period
3.75% (
15%
)
0
10%
4
(4)
Effective rate per period
12%
period
(6)
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
(d)Present value of $25,000,000 discounted
at 12% for 10 periods
($25,000,000 X .32197) =
$ 8,049,250
(e)Present value of an annuity of $2,000,000 discounted
EXERCISE 14-12 (15–20 minutes)
Reacquisition price ($900,000 X 101%)
$909,000
Less: Net carrying amount of bonds redeemed:
Par value
Unamortized discount
(13,500)
Unamortized bond issue costs
Loss on redemption
$ 29,700
Calculation of unamortized discount—
Original amount of discount:
$900,000 X 3% = $27,000
$27,000/10 = $2,700 amortization per year
Amount of discount unamortized:
$2,700 X 5 = $13,500
Calculation of unamortized bond issue costs—
Original amount of costs:
$24,000 X $900,000/$1,500,000 = $14,400
$14,400/10 = $1,440 amortization per year
Amount of costs unamortized:
$1,440 X 5 = $7,200
January 2, 2014
Bonds Payable ……………………………………………………….
900,000
Loss on Redemption of Bonds …………………………..
29,700
Unamortized Bond Issue Costs ……………………….
Discount on Bonds Payable …………………………..
Cash ……………………………………………………….
EXERCISE 14-13 (15–20 minutes)
Cash ………………………………………………………………………
8,820,000
Discount on Bonds Payable (.02 X $9,000,000) ………….
180,000
Bonds Payable ……………………………………………….
(To record issuance of 10% bonds)
EXERCISE 14-13 (Continued)
Bonds Payable ……………………………………………………….
6,000,000
Loss on Redemption of Bonds …………………………..
270,000
Cash ($6,000,000 X 1.02) …………………………..
6,120,000
Discount on Bonds Payable …………………………..
120,000
Unamortized Bond Issue Costs ………………………..
30,000
(To record retirement of 11% bonds)
Reacquisition price …………………………………………………
Less: Net carrying amount of bonds redeemed:
Par value ……………………………………………………….
Unamortized bond discount …………………………..
Unamortized bond issue costs …………………………
EXERCISE 14-14 (12–16 minutes)
(a)
June 30, 2015
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
Par value ……………………………………………………….
Unamortized discount …………………………..
(.02 X $800,000 X 11/20)
Cash ($1,000,000 X 102%) …………………………..
Premium on Bonds Payable …………………………..
Bonds Payable ……………………………………………….
Less: Net carrying amount of bonds
(b)
December 31, 2015
Interest Expense …………………………………………………….
49,500
Premium on Bonds Payable
EXERCISE 14-15 (10–15 minutes)
Reacquisition price ($300,000 X 104%) ……………………..
$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 ……………………………………………………….
300,000
Loss on Redemption of Bonds …………………………..
Discount on Bonds Payable …………………………..
(To record redemption of bonds
payable)
Cash ($300,000 X 1.03) …………………………..………………..
306,000
Unamortized Bond Issue Costs…………………………..
Premium on Bonds Payable …………………………..
Bonds Payable ……………………………………………….
(To record issuance of new bonds)
EXERCISE 14-16 (15–20 minutes)
(a)
1.
January 1, 2014
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
Present value of $15,000
payable annually for 8 years
at 11% annually—$15,000
X 5.14612
Present value of the note
Discount
(b)
1.
Interest Expense ……………………………………………………..
22,000.00
Discount on Notes Payable …………………………..
($200,000 X .11)
2.
Interest Expense ……………………………………………………..
20,424.17
($185,674.30 X .11)
Discount on Notes Payable …………………………..
Cash ($250,000 X .06) …………………………..
EXERCISE 14-17 (15–20 minutes)
(a)
Face value of the zero-interest-bearing note
Discount factor (12% for 3 periods)
Amount to be recorded for the land at January 1, 2014
Carrying value of the note at January 1, 2014
Applicable interest rate (12%)
(b)
January 1, 2014
Cash ……………………………………………………….
5,000,000
Discount on Notes Payable …………………………..
1,584,950
Notes Payable…………………………………………………
Unearned Sales Revenue …………………………..
EXERCISE 14-17 (Continued)
Carrying value of the note
at January 1, 2014
Applicable interest rate (10%)
Interest expense to be
**$5,000,000 – $1,584,950 = $3,415,050
EXERCISE 14-18 (15–20 minutes)
(a)
Cash ……………………………………………………….
400,000
Discount on Notes Payable …………………………..
82,468
Notes Payable ………………………………………………..
400,000
Unearned Sales Revenue …………………………..
82,468
($400,000 – $317,532)
Face value
(b)
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
2014
$54,000
$54,000
$ 0
$ 0
2016
(a)
2014
No Entry (Carrying value = Fair Value)
2015
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, 2014, disclosures would be as follows:
Maturities and sinking fund requirements on long-term debt are as follows:
2015
$ 0
2016
($2,000,000 + $2,500,000)
*EXERCISE 14-21 (15–20 minutes)
(a)
Transfer of property on December 31, 2014:
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 …………………………..
(c)
Granting of equity interest on December 31, 2014:
Strickland Company (Debtor):
Notes Payable ………………………………………………..
200,000
Interest Payable ……………………………………………..
18,000
Common Stock ………………………………………..
Gain on Restructuring of Debt ………………….
Moran State Bank (Creditor):
Equity Investments …………………………………………
180,000
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
(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):
(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
12/31/14
$3,000,000
12/31/15
$240,000a
$ 42,828b
$197,172c
2,802,828
12/31/16
240,000
40,013
199,987
2,602,841
12/31/17
*EXERCISE 14-22 (Continued)
(d)
Interest payment entry for Barkley Company is:
December 31, 2016
Notes Payable ……………………………………………………….
Interest Expense …………………………………………………….
Cash ……………………………………………………….
(e)
The payment entry at maturity is:
Notes Payable ……………………………………………………….
2,400,000
Cash ……………………………………………………….
*EXERCISE 14-23 (25–30 minutes)
(a) American Bank should use the historical interest rate of 12% to
calculate the loss.
(b)
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%
December 31, 2014
Bad Debt Expense …………………………………………………..
715,289
Allowance for Doubtful Accounts …………………….
715,289
*EXERCISE 14-23 (Continued)
(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
12/31/14
$2,284,711
12/31/15
$240,000a
$274,165b
$ 34,165c
2,318,876
12/31/16
12/31/17
(d)
Interest receipt entry for American Bank is:
December 31, 2016
Cash ………………………………………………………………………
240,000
Allowance for Doubtful Accounts …………………………..
Interest Revenue …………………………………………….
(e)
The receipt entry at maturity is:
January 1, 2018
Cash ………………………………………………………………………
2,400,000
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 ……………………………………………………….
$1,900,000
Interest ($1,900,000 X 10% X 3) ………………..
570,000
$2,470,000
Therefore, the gain = $3,000,000 – $2,470,000 = $530,000.
(b)
The entry to record the gain on December 31, 2014:
Notes Payable ………………………………………………..
530,000
Gain on Restructuring of Debt ………………….
530,000
(c)
Because the new carrying value of the note ($3,000,000 – $530,000 =
(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
12/31/14
$2,470,000
Total
*EXERCISE 14-24 (Continued)
(e)
Cash interest payment entries for Barkley Company are:
December 31, 2015, 2016, and 2017
Notes Payable ……………………………………………………….
Cash ……………………………………………………….
(f)
The payment entry at maturity is:
January 1, 2018
Notes Payable ……………………………………………………….
Cash ……………………………………………………….
*EXERCISE 14-25 (20–30 minutes)
(a)
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, 2014
Bad Debt Expense …………………………………………………..
Allowance for Doubtful Accounts …………………….
*EXERCISE 14-25 (Continued)
(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
12/31/14
$1,808,730
12/31/17
(c)
Interest receipt entries for American Bank are:
December 31, 2015
Cash ………………………………………………………………………
190,000
Allowance for Doubtful Accounts …………………………..
27,048
Interest Revenue …………………………………………….
217,048
December 31, 2016
Cash ………………………………………………………………………
Allowance for Doubtful Accounts …………………………..
Interest Revenue …………………………………………….
Cash ………………………………………………………………………
Interest Revenue …………………………………………….
223,929
(d)
The receipt entry at maturity is:
January 1, 2018
Cash ………………………………………………………………………
1,900,000
Notes Receivable …………………………..……………….
*EXERCISE 14-26 (15–20 minutes)
(a)
Gottlieb Co.’s entry:
Notes Payable ……………………………………………………….
199,800
Land ……………………………………………………….
Gain on Disposal of Plant Assets
($140,000 – $90,000) …………………………..
Gain on Restructuring of Debt …………………………
*$199,800 – $140,000
(b)
Ceballos Inc. entry:
Land ………………………………………………………………………
140,000
Allowance for Doubtful Accounts …………………………..
Notes Receivable ……………………………………………
*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.
(a)
Vargo Corp.’s entries:
2014 Notes Payable…………………………………………………
28,000
Gain on Restructuring of Debt ………………….
28,000
2015 Notes Payable…………………………………………………
Cash (5% X $220,000) …………………………..
11,000
2016 Notes Payable…………………………………………………
Cash
[$220,000 + (5% X $220,000)] ………………….
*EXERCISE 14-27 (Continued)
(b)
First Trust’s entry on December 31, 2014:
Bad Debt Expense …………………………………………………..
76,027
Allowance for Doubtful Accounts …………………….
76,027
Pre-restructure carrying amount
$270,000
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
12/31/14
$193,973
12/31/16
13,750
December 31, 2015
Cash ………………………………………………………………………
11,000
Allowance for Doubtful Accounts …………………………..
12,277
Interest Revenue …………………………………………….
23,277
December 31, 2016
Cash ………………………………………………………………………
11,000
Allowance for Doubtful Accounts …………………………..
13,750
Interest Revenue …………………………………………….
Cash ………………………………………………………………………
Allowance for Doubtful Accounts …………………………..
TIME AND PURPOSE OF PROBLEMS
Problem 14-1 (Time 15–20 minutes)
Purpose—to provide the student with the opportunity to interpret a bond amortization schedule. This
Problem 14-2 (Time 25–30 minutes)
Problem 14-3 (Time 20–30 minutes)
Purpose—to provide the student with an understanding of how interest rates can be used to deceive
a customer. The problem is challenging because for the first year of this transaction, negative amortization
results.
Problem 14-4 (Time 15–20 minutes)
Purpose—to provide the student with an understanding of the relevant journal entries which are necessi–
Problem 14-5 (Time 50–65 minutes)
Purpose—to provide the student with an understanding of the relevant journal entries which are neces-
Problem 14-6 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of the relevant journal entries which are
Problem 14-7 (Time 20–25 minutes)
Purpose—to provide the student with a series of transactions from bond issuance, payment of bond
interest, accrual of bond interest, amortization of bond discount, and bond retirement. Journal entries
are required for each of these transactions.
Problem 14-8 (Time 15–25 minutes)
Purpose—to provide the student with an opportunity to become familiar with the application of GAAP,