E14-17B (15–20 minutes)
(a)
Face value of the zero-interest-bearing note…………………
$500,000
Discounting factor (15% for 5 periods) …………………………
X 0.49718
Amount to be recorded for the land at January 1, 2015 ……
$248,590
Carrying value of the note at January 1, 2015 ……………….
Applicable interest rate (12%) ……………………………………..
X 0.15
Interest expense to be reported in 2015 ……………………….
$ 37,289
(b)
January 1, 2015
Cash ……………………………………………………….
1,000,000
Discount on Notes Payable …………………………..
288,220
Notes Payable…………………………………………………
1,000,000
Unearned Revenue …………………………..
*$1,000,000 – ($1,000,000 X 0.71178) = $288,220
Carrying value of the note
at January 1, 2015 …………………………..
Applicable interest rate (12%) …………………………..
Interest expense to be
reported for 2015 …………………………..
**$1,000,000 – $288,220 = $711,780
E14-18B (15–20 minutes)
(a)
Cash ………………………………………………………………………
200,000
Discount on Notes Payable …………………………..
41,234
Notes Payable…………………………………………………
Unearned Revenue
($200,000 – $158,766) …………………………..
Face value
for 3 years
E14-18B (Continued)
Discount on Notes Payable …………………………..
12,701
Unearned Revenue ($41,234 ÷ 3) …………………………..
Sales ……………………………………………………….
13,745
E14–19B (10–15 minutes)
Year Ending
Carrying
Value
Fair Value
Unrealized
Holding Gain
(Loss)
Change in
Unrealized
Holding
Gain (Loss)
2014
$50,000
$54,000
$ (4,000)
$ (4,000)
2016
(a)
2014
Unrealized Holding Gain or Loss—Income. ……………….
4,000
Notes Payable …………………………..………..
4,000
Notes Payable ……………………………………………………….
2016
Unrealized Holding Gain or Loss—Income. ……………….
Notes Payable …………………………..………..
(b) The fair value of $38,000.
(c) Unrealized holding loss of $3,500.
E14–20B (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
10,500,000
2017
($6,000,000 + $10,500,000)
2018
($18,000,000 + $10,500,000)
2019
10,500,000
*E14-21B (15–20 minutes)
(a)
Transfer of property on December 31, 2014:
Nixim Company (Debtor):
Note Payable ………………………………………………….
800,000
Interest Payable ………………………………………………
121,000
Loss on Disposition of Land …………………………..
Land ……………………………………………………….
Gain on Debt Restructuring ………………………
2nd State Bank (Creditor):
Land ……………………………………………………….
680,000
Allowance for Doubtful Accounts …………………….
241,000
Note Receivable……………………………………….
Interest Receivable …………………………..
*E14-21B (Continued)
(b) “Loss on Land” and the “Gain on Debt Restructuring” should be
reported as an ordinary item on the income statement.
(c)
Granting of equity interest on December 31, 2014:
Nixim Company (Debtor):
Note Payable …………………………………………………..
800,000
Interest Payable ………………………………………………
121,000
Common Stock ………………………………………..
Additional Paid-in Capital …………………………
Gain on Debt Restructuring ………………………
2nd State Bank (Creditor):
Investment (Trading) ……………………………………….
680,000
Allowance for Doubtful Accounts …………………….
241,000
Note Receivable ……………………………………….
Interest Receivable …………………………..
*E14-22B (20–30 minutes)
(a) No. The gain recorded by Larkin is not equal to the loss recorded by
Zettlein Bank under the debt restructuring agreement. (You will see why
(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):
Principal …………………………………………………………
Interest ($8,000,000 X 10% X 3) ………………………..
*E14-22B (Continued)
(c) The interest payment schedule is prepared as follows:
LARKIN COMPANY
Interest Payment Schedule After Debt Restructuring
Effective-Interest Rate 1.4276%
Date
Cash
Interest
(10%)
Effective
Interest
(1.4276%)
Reduction
of Carrying
Amount
Carrying
Amount of
Note
12/31/14
$10,000,000
12/31/15
$ 800,000a
$142,760b
$ 657,240c
9,342,760
12/31/16
800,000
12/31/17
800,000
8,000,000
Total
$2,400,000
$400,000
(d)
Interest payment entry for Larkin Company is:
December 31, 2016
Note Payable ……………………………………………………….
666,623
Interest Expense …………………………………………………….
133,377
Cash ……………………………………………………….
(e)
The payment entry at maturity is:
January 1, 2018
Note Payable ……………………………………………………….
Cash ……………………………………………………….
*E14-23B (25–30 minutes)
(a) Zettlein 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
$10,000,000
Less: Present value of restructured future cash flows:
Present value of principal $8,000,000
due in 3 years at 12%
paid annually for 3 years at 12%
(c) The interest receipt schedule is prepared as follows:
ZETTLEIN BANK
Interest Receipt Schedule After Debt Restructuring
Effective-Interest Rate 12%
Date
Cash
Interest
(10%)
Effective
Interest
(12%)
Increase
in Carrying
Amount
Carrying
Amount of
Note
12/31/14
$7,615,704
12/31/17
*E14-23B (Continued)
(d)
Interest receipt entry for Zettlein Bank is:
December 31, 2016
Cash ………………………………………………………………………
800,000
Allowance for Doubtful Accounts …………………………..
127,551
Interest Revenue …………………………………………….
(e)
The receipt entry at maturity is:
January 1, 2018
Cash ………………………………………………………………………
Allowance for Doubtful Accounts …………………………..
Note Receivable ……………………………………………..
*E14-24B (25–30 minutes)
(a) Yes. Larkin Company can record a gain under this term modification.
The gain is calculated as follows:
Total future cash flows after restructuring are:
Principal ……………………………………………………….
Interest ($6,500,000 X 10% X 3) ………………………..
Total pre-restructuring carrying amount of note
(principal): ……………………………………………………….
$10,000,000
Therefore, the gain = $10,000,000 – $8,450,000 = $1,550,000.
(b)
The entry to record the gain on December 31, 2014:
Note Payable …………………………..…………………………..
Gain on Debt Restructuring …………………………..
*E14-24B (Continued)
(c)
Because the new carrying value of the note ($10,000,000 – $1,550,000 =
(d) The interest payment schedule is prepared as follows:
LARKIN COMPANY
Interest Payment Schedule After Debt Restructuring
Effective-Interest Rate 0%
Date
Cash
Interest
(10%)
Effective
Interest
(0%)
Reduction
of Carrying
Amount
Carrying
Amount of
Note
12/31/14
$8,450,000
12/31/15
$ 650,000
12/31/17
650,000
(e)
Cash interest payment entries for Larkin Company are:
December 31, 2015, 2016, and 2017
Note Payable ……………………………………………………….
650,000
The payment entry at maturity is:
Note Payable ……………………………………………………….
*E14-25B (20–30 minutes)
(a)
The loss can be calculated as follows:
Pre-restructuring carrying amount of note ……………….
$10,000,000
Less: Present value of restructured future
Cash flows:
Present value of principal $6,500,000
due in 3 years at 12% …………………………..
Present value of interest $650,000
paid annually for 3 years at 12% ……………………
6,187,760
December 31, 2014
Bad Debt Expense …………………………………………………..
3,812,240
Allowance for Doubtful Accounts …………………….
3,812,240
(b) The interest receipt schedule is prepared as follows:
ZETTLEIN BANK
Interest Receipt Schedule After Debt Restructuring
Effective-Interest Rate 12%
Date
Cash
Interest
(10%)
Effective
Interest
(12%)
Increase
in Carrying
Amount
Carrying
Amount of
Note
12/31/14
$6,187,760
12/31/17
650,000
*E14-25B (Continued)
(c)
Interest receipt entries for Zettlein Bank are:
December 31, 2015
Cash ………………………………………………………………………
650,000
Allowance for Doubtful Accounts …………………………..
92,531
Interest Revenue …………………………………………….
742,531
Cash ………………………………………………………………………
Allowance for Doubtful Accounts …………………………..
Interest Revenue …………………………………………….
753,635
Cash ………………………………………………………………………
Allowance for Doubtful Accounts …………………………..
Interest Revenue …………………………………………….
766,074
(d)
The receipt entry at maturity is:
January 1, 2018
Cash ………………………………………………………………………
6,500,000
Allowance for Doubtful Accounts …………………………..
Note Receivable ………………………………………………
E14-26B (15–20 minutes)
(a)
Weaver Co.’s entry:
Notes Payable ……………………………………………………….
1,398,600
Property……………………………………………………….
Gain on Property Disposition …………………………..
Gain on Restructuring …………………………..
*$1,398,600 – $840,000
E14-26B (Continued)
(b)
McBride Inc.’s entry:
Property ……………………………………………………….
Allowance for Doubtful Accounts …………………………..
(or Bad Debt Expense) ………………………………………….
Notes Receivable ……………………………………………
1,398,600
*E14-27B (20–25 minutes)
Because the carrying amount of the debt, $600,000 exceeds the total future
cash flows $590,000 [$500,000 + ($30,000 X 3)], a gain is recognized and no
interest is recorded by the debtor.
(a)
Vista Corp.’s entries:
2014 Note Payable ………………………………………………….
10,000
Gain on Restructuring…………………………..
10,000
2015 Note Payable ………………………………………………….
30,000
Cash (6% X $500,000) …………………………..
Cash (6% X $500,000) …………………………..
2017 Note Payable ………………………………………………….
530,000
Cash
[$500,000 + (6% X $500,000)] ………………….
(b)
First National’s entry on December 31, 2014:
Bad Debt Expense …………………………………………………..
149,734
Allowance for Doubtful Accounts …………………….
149,734
Pre-restructure carrying amount
$600,000
Present value of restructured cash flows:
Present value of $500,000 due in 3 years
at 10%, interest payable annually
(Table 6-2); (500,000 X 0.75132) ……………………..
Present value of $30,000 interest payable
annually for 2 years at 10% (Table 6-4);
($30,000 X 2.48685)……………………………………….
*E14-27B (Continued)
Date
Cash
Interest
Effective-
Interest
Increase
in Carrying
Amount
Carrying
Amount of
Note
12/31/14
$450,266
12/31/15
$30,000a
$45,027b
$15,027c
465,293
12/31/16
481,822
12/31/17
December 31, 2015
Cash……………………………………………………………………….
30,000
Allowance for Doubtful Accounts …………………………..
Interest Revenue ……………………………………………..
December 31, 2016
Cash……………………………………………………………………….
30,000
Allowance for Doubtful Accounts …………………………..
16,529
Interest Revenue ……………………………………………..
December 31, 2017
Cash……………………………………………………………………….
30,000
Allowance for Doubtful Accounts …………………………..
18,178
Interest Revenue ……………………………………………..
Cash……………………………………………………………………….
Allowance for Doubtful Accounts …………………………..
Note Receivable ………………………………………………