CHAPTER 14
Long-Term Liabilities
SOLUTIONS TO B PROBLEMS
PROBLEM 14-1B
(a) The bonds were sold at a premium of $16,158. Evidence of the
discount is the January 1, 2010 book value of $266,158, which is less
than the maturity value of $250,000 in 2017.
(b) The interest allocation and bond discount amortization are based
(d)
January 1, 2010
Cash ………………………………………………………………………
266,158
Premium on Bonds Payable …………………………..
16,158
Bonds Payable ……………………………………………….
250,000
(e)
December 31, 2010
Interest Expense …………………………………………………….
13,308
Premium on Bonds Payable …………………………..
Interest Payable ……………………………………………..
(f)
January 1, 2015 (Interest Payment)
Interest Payable ……………………………………………………..
15,000
Cash ……………………………………………………….
December 31, 2015
Interest Expense …………………………………………………….
12,840
Premium on Bonds Payable …………………………..
(a)
Present value of the principal
$5,000,000 X 0.14864 (PV20, 10%) …………………..
$ 743,200
Present value of the interest payments
$400,000* X 8.51356 (PVOA20, 10%) ……………….
Cash ………………………………………………………………………
Unamortized Bond Issue Costs…………………………..
Discount on Bonds Payable …………………………..
Bonds Payable ……………………………………………….
(b)
Date
Cash
Paid
Interest
Expense
Discount
Amortization
Carrying
Amount of
Bonds
1/1/13
$4,148,624
1/1/14
$400,000
$414,862
$14,862
4,163,486
1/1/15
416,349
4,179,835
1/1/16
1/1/17
419,782
4,217,601
(c)
Carrying amount as of 1/1/16 ………………………….
$4,197,819
Plus: Amortization of bond discount
(19,782 ÷ 2) …………………………………………..
9,891
Carrying amount as of 7/1/16 ………………………….
$4,207,710
Reacquisition price ………………………………………..
Carrying amount as of 7/1/16
($4,207,710 X 40%) ………………………………………
Unamortized bond issue costs ($49,500 X 40%) .
Loss on redemption of bonds …………………………
PROBLEM 14-2B (Continued)
Entry for accrued interest
Interest Expense …………………………………………………….
83,956
Discount on Bonds Payable
($19,782 X 1/2 X 40%) …………………………..
3,956
Cash
($400,000 X 1/2 X 40%) …………………………..
Entry for reacquisition
Bonds Payable ……………………………………………………….
2,000,000
Loss on Redemption of Bonds …………………………..
376,716
Discount on Bonds Payable …………………………..
316,916*
Unamortized Bond Issue Costs ……………………….
19,800**
Cash ……………………………………………………….
2,040,000
*Premium as of 7/1/16 to be written off
($4,207,710 – $5,000,000) X 40% = $316,916
$1,200 X 3.5 = $4,200
Remaining Balance: $24,000 – $4,200 = $19,800 on 40% of Bonds
(a)
Date
Cash
Paid
Interest
Expense
Discount
Amortized
Carrying
Amount of
Note
1/1/14
$59,000
4/1/14
$500
$1,770
$1,270
60,270
7/1/14
10/1/14
1/1/15
500
64,813
PROBLEM 14-3B (Continued)
(d)
Date
Cash
Paid
Interest
Expense
Discount
Amortized
Carrying
Amount of
Note
1/1/15
$64,813
4/1/15
$5,160
$1,944
3,216
61,597
7/1/15
5,160
1,848
3,312
58,285
10/1/15
5,160
1,749
3,411
54,874
1/1/16
5,160
1,646
3,514
51,360
4/1/16
5,160
1,541
3,619
47,741
7/1/16
5,160
1,432
3,728
44,013
10/1/16
5,160
1,320
3,840
40,173
1/1/17
5,160
1,205
3,955
36,218
4/1/17
5,160
1,087
4,073
32,145
7/1/17
5,160
4,196
27,949
10/1/17
5,160
839
4,321
23,628
1/1/18
5,160
709
4,451
19,177
4/1/18
5,160
575
4,585
14,592
7/1/18
5,160
438
4,722
10/1/18
5,160
296
4,864
1/1/19
5,160
154
*
5,006
*rounded up $4
(e) The new sales gimmick may bring people in the first time but will
drive them away once they learn of the amount of their required
payments in years 2 through 5. Many will not have budgeted for these
(a)
Entry to record the issuance of the 10% bonds on December 1, 2014:
Cash ………………………………………………………………………
2,525,000
Bonds Payable ……………………………………………….
2,500,000
Premium on Bonds Payable …………………………..
25,000
Entry to record the retirement of the 8% bonds on January 2, 2015:
Bonds Payable ……………………………………………………….
1,000,000
Loss on Redemption of Bonds …………………………..
Discount on Bonds Payable …………………………..
45,000
($60,000 X 15/20)
Cash ($1,000,000 X 110%) …………………………..
1,100,000
[The loss represents the excess of the
cash paid ($1,100,000) over the
carrying amount of the bonds
($955,000).]
(b) The loss is reported as an ordinary loss.
Note 1. Loss on Bond Redemption
The loss represents a loss of $135,000 from the redemption and re–
PROBLEM 14-5B
1. Lime Co.
Schedule of Bond Discount Amortization
Effective-Interest Method
9% Bonds Sold to Yield 8%
Date
Cash
Paid
Interest
Expense
Premium
Amortized
Carrying
Amount of
Bonds
4/1/14
$622,306
10/1/14
$27,000
$24,892
2,108
620,198
10/1/15
24,720
4/1/17
24,436
10/1/18
*
4/1/14
Cash ……………………………………………………….
622,306
Premium on Bonds Payable …………………………..
22,306*
Bonds Payable ……………………………………………….
600,000
*Maturity value of bonds payable ……………………………..
$600,000
Present value of $600,000 due in 9 periods at 4%
($600,000 X 0.70259) …………………………………………….
Present value of interest payable semiannually
($27,000 X 7.43533) ………………………………………………
Proceeds from sale of bonds ………………………………….
Interest Expense ……………………………………………………..
Premium on Bonds Payable …………………………..
Cash ……………………………………………………….
PROBLEM 14-5B (Continued)
12/31/14
Interest Expense …………………………………………………….
12,404
Premium on Bonds Payable
($2,192 X 3/6) ……………………………………………………….
1,096
Interest Payable ($27,000 X 3/6) ……………………….
13,500
4/1/15
Interest Expense …………………………………………………….
12,404
Interest Payable ……………………………………………………..
13,500
Premium on Bonds Payable
($2,192 X 3/6) ……………………………………………………….
1,096
Cash ……………………………………………………….
27,000
10/1/15
Interest Expense …………………………………………………….
24,720
Premium on Bonds Payable …………………………..
Cash ……………………………………………………….
12/31/15
Interest Expense …………………………………………………….
12,314
Premium on Bonds Payable
($2,371 X 3/6) ……………………………………………………….
Interest Payable …………………………..
13,500
2. Lemon Co.
Date
Cash
Paid
Interest
Expense
Discount
Amortized
Carrying
Amount of
Bonds
8/1/14
$950,827
2/1/15
$50,000
$57,050
$7,050
957,877
8/1/15
57,473
965,350
2/1/16
57,921
8/1/16
58,396
981,667
8/1/17
59,434
PROBLEM 14-5B (Continued)
8/1/14
Cash ……………………………………………………….
950,827
Discount on Bonds Payable …………………………..
49,173
Bonds Payable ……………………………………………….
1,000,000
Maturity value of bonds payable ………………………………
$1,000,000
Present value of $1,000,000 due in 6 periods at 6%
($1,000,000 X 0.70496) …………………………………………..
Present value of interest payable semiannually
($50,000 X 4.91732) ……………………………………………….
Proceeds from sale of bonds …………………………………..
Premium on bonds payable ……………………………………..
12/31/14
Interest Expense …………………………..…………………………
47,542
Discount on Bonds Payable
($7,050 X 5/6) ………………………………………………..
5,875
Interest Payable ($50,000 X 5/6) ………………………..
41,667
2/1/15
Interest Expense …………………………..…………………………
9,508
Interest Payable ………………………………………………………
41,667
Discount on Bonds Payable …………………………..
Cash ($1,000,000 X 0.10 X 6/12) ………………………..
Interest Expense …………………………..…………………………
57,743
Discount on Bonds Payable …………………………..
Cash ……………………………………………………….
Interest Expense
($57,921 X 0.20* X 2/6)…………………………..
Discount on Bonds Payable
($7,921 X 0.20 X 2/6) …………………………..
Cash ($50,000 X 0.20 X 2/6) …………………………..
PROBLEM 14-5B (Continued)
10/1/15
Bonds Payable ……………………………………………………….
200,000
Loss on Redemption of Bonds …………………………..
21,069*
Discount on Bonds Payable …………………………..
6,402
Cash ……………………………………………………….
214,667
*Reacquisition price
$218,000 – ($200,000 X 10% X 2/12)
Par value
Unamortized discount
[0,20 X ($49,173 – $7,050 – $7,473)] – $528
12/31/15
Interest Expense ($57,921 X 0.80* X 4/6) …………………..
38,614
Discount on Bonds Payable
($7,921 X 0.80 X 5/6) …………………………..
5,281
Interest Payable
($50,000 X 0.80 X 5/6) …………………………..
33,333
*($1,000,000–$200,000)÷$1,000,000=0.80
2/1/16
Interest Expense ($57,921 X 0.80 X 1/6) …………………….
Interest Payable
33,333
Discount on Bonds Payable
($7,921 X 0.80 X 1/6) …………………………..
1,056
Cash ($50,000 X 0.80)…………………………..
PROBLEM 14-6B
June 1, 2014
Cash
($600,000 X 98%) + ($600,000 X 8% X 5/12) ……………..
608,000
Discount on Bonds Payable …………………………………….
12,000
Bonds Payable ……………………………………………….
600,000
Interest Expense ($600,000 X 8% X 5/12) …………..
20,000
December 31, 2014
Interest Expense ($600,000 X 8%) …………………………..
48,000
Interest Payable ………………………………………………
Interest Expense
Discount on Bonds Payable …………………………..
($12,000 X 7/115* = $3,724.14) ……………………….
*(12 X 10) – 5 = 115
January 1, 2015
Interest Payable ………………………………………………………
48,000
Cash ………………………………………………………………
48,000
August 1, 2015
Bonds Payable ……………………………………………………….
240,000
Interest Expense ($240,000 X 8% X 7/12) …………………..
11,200
Loss on Redemption of Bonds …………………………………
Cash ($242,400 + $11,200) …………………………..
Discount on Bonds Payable …………………………..
Reacquisition price (including accrued interest)
($240,000 X 101%) + ($240,000 X 8% X 7/12) ……………
Net carrying value of bonds redeemed:
Par value ………………………………………………………………..
Unamortized discount
[$12,000 X ($240,000 ÷ $600,000) X 101/115]……………
Accrued interest ($240,000 X 8% X 7/12) …………………..
PROBLEM 14-6B (Continued)
December 31, 2015
Interest Expense ($360,000 X 8%) …………………………..
28,800
Interest Payable ………………………………………………
28,800
Interest Expense ……………………………………………………..
1,043
Discount on Bonds Payable …………………………..
1,043
Amortization per year on $360,000
($12,000 X 12/115 X 0.60*) ……………………………………..
Amortization on $240,000 for 7 months
($12,000 X 7/115 X 0.40**) ………………………………………
PROBLEM 14-7B
(a)
6/1/14
Cash (6,000 X $1,000 X 98%) …………………………..
5,760,000
Discount on Bonds Payable …………………………..
240,000
Bonds Payable …………………………..
6,000,000
(b)
12/1/14
Interest Expense ………………………………………………………
186,000
Cash (6,000,000 X 6% X 6/12) …………………………..
Discount on Bonds Payable …………………………..
($240,000 ÷ 240 months =
$1,000/mo.; $1,000/mo.
X 6 months = $6,000)
(c)
12/31/14
Interest Expense ………………………………………………………
31,000
Interest Payable
($180,000 X 1/6) …………………………..
Discount on Bonds Payable
($1,000 X 1 month) …………………………..
(d)
2/1/15
Interest Payable ……………………………………………………….
20,000
Interest Expense ………………………………………………………
20,667
Cash ……………………………………………………….
40,000*
Discount on Bonds Payable …………………………..
*Cash paid to retiring
bondholders: $4,000,000
X 6% X 2/12 = $40,000
At February 1, 2015 the carrying amount of the retired
bonds is:
Bonds payable ………………………………………………………………
$4,000,000
Less: Unamortized discount …………………………..…………….
PROBLEM 14-7B (Continued)
The reacquisition price: 500,000 shares X $8.50 = $4,250,000.
The loss on redemption of bonds is:
Reacquisition price …………………………..…………………..
$4,250,000
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 ………………………………………..