14–41
Time and Purpose of Problems (Continued)
Problem 14-9 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to become familiar with the application of GAAP,
involving the exchange of a note, which is payable in equal installments, for machinery. This problem
requires the preparation of the necessary journal entries concerning the exchange and the annual
payments and interest. A Schedule of Note Discount Amortization should be constructed to support the
respective entries.
Problem 14-10 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of a number of areas related to bonds.
Specifically, the classification of bonds, determination of cash received with bond issue costs and
accrued interest, and disclosure requirements.
Problem 14-11 (Time 40–50 minutes)
Purpose—to provide the student with an opportunity to explain what the effective-interest method is,
why it is preferable, and how it is computed. As one part of the problem, an amortization schedule must
be prepared.
*Problem 14-12 (Time 15–25 minutes)
Purpose—to provide the student with a troubled debt situation that requires computation of the creditor’s
loss on restructure, entries to recognize the loss, and discussion of GAAP relating to this situation.
*Problem 14-13 (Time 30–45 minutes)
Purpose—to provide the student with four independent and different restructured debt situations where
losses or gains must be computed and journal entries recorded on the books of the creditor.
*Problem 14-14 (Time 40–50 minutes)
Purpose—to provide the student with a complex troubled debt situation that requires two amortization
schedules, computation of loss on restructure, and entries at different times on both the creditor’s and
debtor’s books.
SOLUTIONS TO PROBLEMS
PROBLEM 14-1
(a) The bonds were sold at a discount of $5,651. Evidence of the discount
is the January 1, 2006 book value of $94,349, which is less than the
maturity value of $100,000 in 2015.
(c) The stated rate is 11% ($11,000 ÷ $100,000). The effective rate is 12%
($11,322 ÷ $94,349).
(d)
Cash ………………………………………………………………………
94,349
Discount on Bonds Payable …………………………..
Bonds Payable ……………………………………………….
(e)
December 31, 2006
Interest Expense …………………………………………………….
11,322
Discount on Bonds Payable …………………………..
322
Interest Payable ………………………………………………
11,000
Interest Payable ………………………………………………………
Cash ……………………………………………………….
December 31, 2013
11,712
Discount on Bonds Payable …………………………..
712
Interest Payable ………………………………………………
11,000
14–43
(a)
Present value of the principal
$2,000,000 X .38554 (PV10, 10%) …………………….
$ 771,080
Present value of the interest payments
$210,000* X 6.14457 (PVOA10, 10%) ………………..
1,290,360
(b)
Date
Cash
Paid
Interest
Expense
Premium
Amortization
Carrying
Amount of
Bonds
1/1/11
$2,061,440
1/1/12
$210,000
$206,144
$3,856
2,057,584
1/1/13
210,000
205,758
4,242
2,053,342
1/1/14
210,000
205,334
4,666
2,048,676
1/1/15
210,000
204,868
5,132
2,043,544
(c)
Carrying amount as of 1/1/14 ………………………….
Less: Amortization of bond premium
(5,132 ÷ 2) ……………………………………………
Carrying amount as of 7/1/14 ………………………….
Reacquisition price ………………………………………..
Carrying amount as of 7/1/14
($2,046,110 ÷ 2) ……………………………………………
Unamortized bond issue costs ($32,500 ÷ 2) ……
Loss on redemption of bonds …………………………
Cash ………………………………………………………………………
Unamortized Bond Issue Costs …………………………..
Bonds Payable ……………………………………………….
Premium Bonds Payable …………………………..
PROBLEM 14-2 (Continued)
Interest Expense …………………………………………………….
51,217
Premium on Bonds Payable
($5,132 X 1/2 X 1/2) …………………………..…………………..
Cash
($210,000 X 1/2 X 1/2) …………………………..
Entry for reacquisition
Bonds Payable ……………………………………………………….
1,000,000
Premium on Bonds Payable …………………………..
23,055*
Loss on Redemption of Bonds …………………………..
58,195
Unamortized Bond Issue Costs ……………………….
16,250**
Cash ……………………………………………………….
1,065,000
**($50,000 X 1/2) ÷ 10 = $2,500 per year
$2,500 X 3.5 = $8,750
14–45
(a)
Date
Cash
Paid
Interest
Expense
Discount
Amortized
Carrying
Amount of
Note
1/1/12
$32,000
4/1/12
$400
$640
$240
32,240
7/1/12
400
645
245
32,485
10/1/12
400
650
250
32,735
1/1/13
400
655
255
32,990
(d)
Date
Cash
Paid
Interest
Expense
Discount
Amortized
Carrying
Amount of
Note
1/1/12
$32,990
4/1/12
$4,503
$660
$3,843
29,147
7/1/12
4,503
583
3,920
25,227
10/1/12
4,503
505
3,998
21,229
1/1/13
425
17,151
4/1/13
4,503
343
4,160
12,991
7/1/13
4,503
260
4,243
8,748
10/1/13
175
4,420
1/1/14
4,503
83*
4,420
0
*rounded up $5
(e) The new sales gimmick may bring people into the showroom the first
PROBLEM 14-4
(a)
Entry to record the issuance of the 11% bonds on December 18, 2012:
Cash ………………………………………………………………………
4,080,000
Bonds Payable ……………………………………………….
4,000,000
Premium on Bonds Payable …………………………..
80,000
Entry to record the retirement of the 9% bonds on January 2, 2013:
Bonds Payable ……………………………………………………….
3,000,000
Loss on Redemption of Bonds …………………………..
Discount on Bonds Payable …………………………..
60,000
($150,000 X 10/25)
Cash ($3,000,000 X 104%) …………………………..
3,120,000
[The loss represents the excess of the
cash paid ($3,120,000) over the
carrying amount of the bonds
($2,940,000).]
(b) The loss is reported as an ordinary loss.
Note 1. Loss on Bond Redemption
1. Sanford Co.
Schedule of Bond Discount Amortization
Effective-Interest Method
10% Bonds Sold to Yield 12%
Date
Cash
Paid
Interest
Expense
Discount
Amortized
Carrying
Amount of
Bonds
3/1/12
$472,090
9/1/12
$25,000
$28,325
$3,325
475,415
3/1/13
9/1/13
482,676
3/1/14
486,637
9/1/14
3/1/15
495,285
9/1/15
500,000
*Rounded $2
3/1/12
Cash ……………………………………………………….
472,090
Discount on Bonds Payable …………………………..
27,910*
Bonds Payable ……………………………………………….
500,000
*Maturity value of bonds payable ……………………………..
Present value of $500,000 due in 7 periods at 6%
($500,000 X .66506) ………………………………………………
Present value of interest payable semiannually
($25,000 X 5.58238) ………………………………………………
Proceeds from sale of bonds ………………………………….
9/1/12
Interest Expense ……………………………………………………..
28,325*
Discount on Bonds Payable …………………………..
3,325
Cash ……………………………………………………….
(See amortization table above)
14–48
PROBLEM 14-5 (Continued)
12/31/12
Interest Expense …………………………………………………….
19,017
Discount on Bonds Payable
($3,525 X 4/6) ……………………………………………….
2,350
Interest Payable ($25,000 X 4/6) ……………………….
16,667
9/1/13
Interest Expense …………………………………………………….
28,736
Discount on Bonds Payable …………………………..
3,736
Cash ……………………………………………………….
25,000
12/31/13
Interest Expense …………………………………………………….
19,308
Discount on Bonds Payable
($3,961 X 4/6) ……………………………………………….
2,641
Interest Payable …………………………..
16,667
2. Titania Co.
Date
Cash
Paid
Interest
Expense
Premium
Amortized
Carrying
Amount of
Bonds
6/1/12
$425,853
12/1/12
$24,000
$21,293
$2,707
423,146
6/1/13
420,303
12/1/13
6/1/14
414,184
6/1/15
12/1/15
403,810
6/1/16
400,000
3/1/13
Interest Expense …………………………………………………….
Interest Payable ……………………………………………………..
16,667
Discount on Bonds Payable
($3,525 X 2/6) ……………………………………………….
1,175
Cash ……………………………………………………….
25,000
PROBLEM 14-5 (Continued)
6/1/12
Cash ……………………………………………………….
425,853
Premium on Bonds Payable …………………………..
25,853
Bonds Payable ……………………………………………….
400,000
Maturity value of bonds payable ………………………………
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 …………………………………..
Premium on bonds payable ……………………………………..
12/1/12
Interest Expense ……………………………………………………..
21,293*
Premium on Bonds Payable …………………………..
2,707
Cash ($400,000 X .12 X 6/12) …………………………..
24,000
12/31/12
Interest Expense ($21,157 X 1/6) …………………………..
3,526
Premium on Bonds Payable
($2,843 X 1/6) ……………………………………………………….
474
Interest Payable ($24,000 X 1/6) ………………………..
4,000
6/1/13
Interest Expense ($21,157 X 5/6) …………………………..
Interest Payable ………………………………………………………
Premium on Bonds Payable
($2,843 X 5/6) ……………………………………………………….
2,369
Cash ……………………………………………………….
24,000
10/1/13
Interest Expense
($21,015 X .3* X 4/6) ………………………………………………
Premium on Bonds Payable
($2,985 X .3 X 4/6) ………………………………………………….
597
Cash ……………………………………………………….
*$120,000 ÷ $400,000 = .3
14–50
PROBLEM 14-5 (Continued)
10/1/13
Bonds Payable ……………………………………………………….
120,000
Premium on Bonds Payable …………………………..
5,494
Gain on Redemption of Bonds …………………………
4,294*
Cash ……………………………………………………….
121,200
12/1/13
Interest Expense ($21,015 X .7*)…………………………..
14,711
Premium on Bonds Payable
($2,985 X .7) ……………………………………………………….
2,089
Cash ($24,000 X .7) …………………………..
16,800
*($400,000 – $120,000) ÷ $400,000 = .7
12/31/13
Interest Expense ($20,866 X .7 X 1/6) ………………………..
2,434
Premium on Bonds Payable
($3,134 X .7 X 1/6) …………………………………………………
Interest Payable
($24,000 X .7 X 1/6) …………………………..
6/1/14
Interest Expense ($20,866 X .7 X 5/6) ………………………..
12,172
Interest Payable ……………………………………………………..
2,800
Premium on Bonds Payable
($3,134 X .7 X 5/6) …………………………………………………
1,828
Cash ($24,000 X .7) …………………………..
16,800
12/1/14
Interest Expense ($20,709 X .7) …………………………..
14,496
Premium on Bonds Payable
($3,291 X .7) ……………………………………………………….
2,304
Cash ($24,000 X .7) …………………………..
16,800
*Reacquisition price
Par value
Unamortized premium
[.3 X ($25,853 – $2,707 – $2,843)] – $597
May 1, 2012
Cash
($900,000 X 106%) + ($900,000 X 12% X 4/12) ………….
990,000.00
Bonds Payable ……………………………………………….
900,000.00
Premium on Bonds Payable …………………………..
54,000.00
Interest Expense ($900,000 X 12% X 4/12) …………
36,000.00
Interest Expense ($900,000 X 12%) …………………………..
108,000.00
Premium on Bonds Payable …………………………………….
Interest Expense
($54,000 X 8/116* = $3,724.14) ……………………….
January 1, 2013
Interest Payable ………………………………………………………
108,000.00
Cash ………………………………………………………………
108,000.00
Bonds Payable ……………………………………………………….
360,000.00
Premium on Bonds Payable …………………………………….
Interest Expense ($360,000 X .12 X 3/12) …………………..
Cash ($367,200 + $10,800) …………………………..
378,000.00
Gain on Redemption of Bonds …………………………
Reacquisition price (including accrued interest)
($360,000 X 102%) + ($360,000 X 12% X 3/12) ………….
Net carrying value of bonds redeemed:
Par value ………………………………………………………………..
$360,000.00
Unamortized premium
[$54,000 X ($360,000 ÷ $900,000) X 105/116]……………
Accrued interest ($360,000 X 12% X 3/12) …………………
14–52
PROBLEM 14-6 (Continued)
December 31, 2013
Interest Expense ($540,000 X .12) …………………………..
64,800.00
Interest Payable ………………………………………………
64,800.00
Premium on Bonds Payable …………………………………….
Interest Expense ……………………………………………..
Amortization per year on $540,000
($54,000 X 12/116 X .60*) ……………………………………….
$3,351.72
Amortization on $360,000 for 3 months
($54,000 X 3/116 X .40**) ………………………………………..
**$360,000 ÷ $900,000 = .4
(a)
4/1/12
Cash (15,000 X $1,000 X 97%) …………………………..
14,550,000
Discount on Bonds Payable …………………………..
450,000
Bonds Payable …………………………..
15,000,000
(b)
10/1/12
Interest Expense ………………………………………………………
840,000
Cash ……………………………………………………….
Discount on Bonds Payable …………………………..
*$15,000,000 X .11 X 6/12 =
$825,000
**$450,000 ÷ 180 months =
$2,500/mo.; $2,500/mo.
X 6 months = $15,000
(c)
12/31/12
Interest Expense ………………………………………………………
420,000
Interest Payable
($825,000 X 3/6) …………………………..
412,500
Discount on Bonds Payable
($2,500 X 3 months) …………………………..
7,500
Interest Expense ………………………………………………………
112,000
Cash ……………………………………………………….
Discount on Bonds Payable …………………………..
*Cash paid to retiring
bondholders: $6,000,000
X .11 X 5/12 = $275,000
**$2,500/mo. X 2 months X
At March 1, 2013 the carrying amount of the retired
bonds is:
Bonds payable ………………………………………………………………
$6,000,000
Less: Unamortized discount …………………………………………
169,000*
14–54
PROBLEM 14-7 (Continued)
The reacquisition price: 200,000 shares X $31 = $6,200,000.
The loss on redemption of bonds is:
Reacquisition price ……………………………………………….
$6,200,000
Less: Carrying amount …………………………..
The entry to record extinguishment of the bonds is:
Bonds Payable ……………………………………………….
Loss on Redemption of Bonds ………………………..
Discount on Bonds Payable ……………………..
Common Stock ………………………………………..
(a)
December 31, 2012
Equipment ……………………………………………………….
409,806.00
Discount on Notes Payable …………………………..
190,194.00
Notes Payable ………………………………………………..
600,000.00
(Computer capitalized at the present
value of the note—$600,000 X .68301)
(b)
Depreciation Expense …………………………..…………………
[($409,806 – $70,000) ÷ 5] …………………………..
Interest Expense …………………………………………………….
Discount on Notes Payable …………………………..
Schedule of Note Discount Amortization
Date
Debit, Interest Expense Credit,
Discount on Notes Payable
Carrying Amount
of Note
12/31/12
$409,806.00
12/31/13
$40,980.60
450,786.60
12/31/14
45,078.66
495,865.26
12/31/15
49,586.53
545,451.79
12/31/16
54,548.21*
600,000.00
*3.03 adjustment due to rounding.
Depreciation Expense …………………………..…………………
Accumulated Depreciation—Equipment …………..
Interest Expense …………………………………………………….
Discount on Notes Payable …………………………..
14–56
PROBLEM 14-9
(a)
12/31/11
Machinery ……………………………………………………….
182,485.20
Discount on Notes Payable …………………………..
27,514.80
3.31213)] ………………………………………………………
$132,485.20
Down payment…………………………..
50,000.00
Capitalized value of
Machinery …………………………..
$182,485.20
(b)
12/31/12
Notes Payable ……………………………………………………….
40,000.00
Cash ……………………………………………………….
40,000.00
Interest Expense …………………………..
10,598.82
Discount on Notes Payable …………………………..
10,598.82
Cash ……………………………………………………….
50,000.00
Notes Payable …………………………..
[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
PROBLEM 14-9 (Continued)
(c)
12/31/13
Notes Payable ……………………………………………………….
40,000.00
Cash ……………………………………………………….
40,000.00
Interest Expense …………………………..
8,246.72
Discount on Notes Payable …………………………..
8,246.72
(d)
12/31/14
Notes Payable ……………………………………………………….
40,000.00
Cash ……………………………………………………….
40,000.00
Interest Expense …………………………..
5,706.46
Discount on Notes Payable …………………………..
5,706.46
(e)
12/31/15
Notes Payable ……………………………………………………….
40,000.00
Cash ……………………………………………………….
40,000.00
Interest Expense …………………………..
2,962.80
Discount on Notes Payable …………………………..
2,962.80
14–58
PROBLEM 14-10
(a)
Wilke Co.
Selling price of the bonds ($4,000,000 X 103%) ……
$4,120,000
(b)
Langley Co.
Carrying amount of the bonds on 1/1/12 ……………..
$656,992
Effective-interest rate (10%) ……………………………….
X 0.10
Interest expense to be reported for 2012 …………….
$ 65,699
(c)
Tweedie Building Co.
$400,000
$200,000
(d)
Beckford Inc.
Accrued interest from January 1 to February
28, 2013 ($4,000,000 X 9% X 2/12) …………………….
Total cash received from issuance of the bonds ….
Less: Bond issuance costs ………………………………..
27,000
Net amount of cash received ………………………………
14–59
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
One method of amortization is the straight-line method whereby the amount of
the premium or discount is divided by the number of interest periods in the
bond’s life. The result is an even amount of amortization for every period.
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 premium.
1. Multiply the stated rate times the face amount. This is the interest
payout.
PROBLEM 14-11 (Continued)
3. Subtract the amount calculated in #2 from that found in #1. This is the
amount to be amortized for the period.
The schedule below illustrates this calculation. The face value ($2,000,000)
is multiplied by the stated rate of 11 percent, while the carrying amount
($2,171,600) is multiplied by the effective rate of 10 percent. Because this
bond pays interest semiannually, you must also multiply these amounts by
Follow these steps and you should have no trouble amortizing premiums
and discounts over the life of a bond.
Sincerely,
Attachment to letter
HOBART COMPANY
Interest and Discount Amortization Schedule
11% Bond Issued to Yield 10%
Date
Cash
Paid
(11%)
Interest
Expense
(10%)
Premium
Amortized
Carrying
Amount of
Bond