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NON-CURRENT LIABILITIES
TRUE FALSE—Conceptual
1. Companies usually make bond interest payments
payments semiannually,
semiannually, although the interest rate
is generally expressed as an annual rate.
4. If the market
market rate is greater than the stated rate, bonds will be sold at a premium.
7. The proceeds of a bond with a face amount of ¥100,000,000 which sells at 102 will be
¥100,200,000.
9. When bonds are issued at a discount, the bonds payable account is credited for the
proceeds from the issue.
11. At any point during the term of the bond, the balance in the bonds payable
payable account should
be the carrying value of the bond.
17. The cash paid for interest will always be greater than interest expense when using effective-
effective-
interest amortization for a bond.
19. The process of interest-rate approximation is called imputation, and the resulting interest
interest
rate is called an imputed interest rate.
Non-Current Liabilities 14 - 3
21. Amortization of
of the discount
discount on a zero-interest bearing note decreases the balance in notes
payable.
23. The IASB’s position is that fair value measurement for financial liabilities is more relevant
and understandable than amortized cost.
24. Under IFRS, subsidiaries in in which the parent company holds a less than 50 percent
percent
interest do not have to be included in consolidated
consolidated financial statements.
27. If a company
company plans to retire long-term debt from a bond retirement fund, it should report the
debt as current.
MULTIPLE CHOICE—Conceptual
31. The covenants and other terms of
of the agreement between
between the issuer of bonds and the
lender are set forth in the
a. bond indenture.
b. bond debenture.
c. registered bond.
d. bond coupon.
32. The term used for bonds that are unsecured as to principal is
a. junk bonds.
b. debenture bonds.
c. indebenture bonds.
d. callable bonds.
P
33. Bonds for which the owners’ names are not registered with the issuing corporation are
called
a. bearer bonds.
b. term bonds.
c. debenture bonds.
d. secured bonds.
S
34. Bonds that pay no interest unless the issuing company is profitable are called
a. collateral trust bonds.
b. debenture bonds.
c. revenue bonds.
d. income bonds.
40. Under the effective-interest method of bond discount or premium amortization, the periodic
periodic
interest expense is equal to
a. the stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds.
d. the market rate multiplied by the beginning-of-period
beginning-of-period carrying amount of the bonds.
47. An extinguishment
extinguishment of
of bonds payable, which were originally issued at a premium, is made
by purchase of the bonds between interest dates. At the time of reacquisition
a. any costs of issuing the bonds must
must be amortized
amortized up to the purchase date.
b. the premium must be amortized up to the purchase date.
c. interest must be accrued from the last interest date to the purchase date.
date.
d. All of these answer choices are correct.
P
48. “In-substance defeasance“ is a term used to refer to an arrangement whereby
a. a company gets another company to cover its payments due on long-term debt.
b. a governmental unit issues
issues debt instruments to corporations.
corporations.
c. a company provides
provides for the future repayment of a long-term debt by placing purchased
purchased
securities in an irrevocable trust.
d. a company legally extinguishes
extinguishes debt before its due date.
P
49. A corporation borrowed money from a bank to build build a building. The long-term
long-term note signed
by the corporation is secured by a mortgage that pledges title to the building as security for
the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the
loan. Which of the following relationships can you expect to apply to the situation?
a. The balance of mortgage payable at a given statement of financial position date will be
reported as a non-current liability.
b. The balance of mortgage payable will remain a constant amount over the 10-year
period.
c. The amount of interest expense will decrease each period the loan is outstanding, while
the portion of the annual payment applied to the loan principal will increase each period.
d. The amount of of interest expense will remain constant over
over the 10-year period.
S
50. A debt instrument with no ready market is exchanged for property whose fair value is
currently indeterminable. When such a transaction takes place
a. the present value of the the debt instrument must be approximated using an imputed
interest rate.
b. it should not be recorded
recorded on the books of either party until the fair value of
of the property
becomes evident.
c. the board of directors
directors of the entity
entity receiving the property should estimate
estimate a value
value for the
property that will serve as a basis for the transaction.
d. the directors of both
both entities involved in the transaction should
should negotiate a value
value to be
assigned to the property.
Non-Current Liabilities 14 - 7
S
58. Many companies believe that off-balance-sheet financing
a. is attempting to conceal the debtdebt from shareholders by having no information
information about the
debt included in the balance sheet.
b. wishes to confine allall information related to the debt to the income statement
statement and the
statement of cash flows.
c. can enhance the the quality of its financial position and perhaps permit
permit credit to
to be obtained
more readily and at less cost.
d. is in violation of IFRS.
S
59. Long-term debt that matures within
within one year and is to be converted
converted into shares should be
reported
a. as a current liability.
b. in a special section
section between liabilities and equity.
c. as part current and part non-current.
d. as non-current if the refinancing agreement
agreement is completed by the end of the year.
61. Note disclosures for long-term debt generally include all of the following except
a. assets pledged as security.
b. call provisions and conversion privileges.
c. restrictions imposed by the creditor.
d. names of specific creditors.
64. Which of the following is not a difference between IFRS and U.S. GAAP in according for
non-current liabilities?
a. Non-current liabilities follow current liabilities on the statement of financial position under
U.S. GAAP, but precede current liabilities under IFRS.
b. The criteria for recognizing environment
environment liabilities is more stringent under U.S. GAAP
compared to IFRS.
c. Bond issuance costs are recorded as a reduction of of the carrying
carrying value of the debt under
U.S. GAAP but are recorded as an asset and amortized to expense over the term of the
debt under IFRS.
d. Under U.S. GAAP, bonds payable is recorded at the face amount and any premium or
discount is recorded in a separate account. Under IFRS, bonds payable is recorded at
the carrying value so no separate premium or discount accounts are used.
65. All of the following are differences between IFRS and U.S. GAAP in according for liabilities
except :
a. When a bond is issued
issued at a discount,
discount, U.S. GAAP records the discount in a separate
contra-liability account. IFRS records the bond net of the discount.
b. Under IFRS, bond issuance costs reduces the carrying
carrying value of the debt. Under
Under U.S.
GAAP, these costs are recorded as an asset and amortized to expense over the term
of the bond.
c. U.S. GAAP, but not IFRS uses the term “troubled debt restructurings.”
d. U.S. GAAP, but not IFRS uses the term “provisions” for contingent liabilities which are
accrued.
MULTIPLE CHOICE—Computational
Use the following information for questions 66 through 68:
On January 1, 2015, Ellison Co. issued eight-year bonds with a face value of $1,000,000 and a
stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were
sold to yield 8%. Table values are:
Present value of 1 for 8 periods at 6% ......................................... .627
Present value of 1 for 8 periods at 8% ......................................... .540
Present value of 1 for 16 periods at 3% ....................................... .623
Present value of 1 for 16 periods at 4% ....................................... .534
Present value of annuity for 8 periods at 6% ................................ 6.210
Present value of annuity for 8 periods at 8% ................................ 5.747
Present value
value of annuity for 16 periods at
at 3%.............................. 12.561
Present value
value of annuity for 16 periods at
at 4%.............................. 11.652
69. Downing Company issues $5,000,000, 6%, 5-year bonds dated January 1, 2015 on January
1, 2015. The bonds pay interest semiannually on June 30 and December 31. The bonds
are issued to yield 5%. What are the proceeds from the bond issue?
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009
a. $5,000,000
b. $5,216,494
c. $5,218,809
d. $5,217,308
Non-Current Liabilities 14 - 11
71. Everhart Company issues $10,000,000, 6%, 6%, 5-year bonds dated January 1, 2015 on
January 1, 2015. The bonds pays interest semiannually on June 30 and December 31. The
bonds are issued to yield 5%. What are the proceeds from the bond issue?
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009
a. $10,000,000
b. $10,432,988
c. $10,437,618
d. $10,434,616
77. On January 1, 2015, Huber Co. sold 12% bonds with with a face value of $600,000. The bonds
mature in five years, and interest is paid semiannually on June 30 and December 31. The
bonds were sold for $646,200 to yield 10%. Using the effective-interest method of
amortization, interest expense for 2015 is
a. $60,000.
b. $64,436.
c. $64,620.
d. $72,000.
78. On January 2, 2015, a calendar-year corporation sold 8% bonds with a face value of of
$600,000. These bonds mature in five years, and interest is paid semiannually on June 30
and December 31. The bonds were sold for $553,600 to yield 10%. Using the effective-
interest method of computing interest, how much should be charged to interest expense in 2015?
a. $48,000.
b. $55,360.
c. $55,544.
d. $60,000.
The following information applies to both questions 79 and 80.
On October 1, 2015 Macklin Corporation issued 5%, 10-year bonds with a face value of $1,000,000
at 108 (a 4% yield). Interest is paid on October 1 and April 1, with any premiums or discounts
amortized on an effective-interest basis.
79. The entry
entry to
to record
record the
the issuance
issuance of
of the bonds would include a credit of
a. $25,000 to Interest Payable.
b. $80,000 to Bonds Payable.
c. $1,000,000 to Bonds Payable.
d. $1,080,000 to Bonds Payable.
80. Bond interest expense reported on the December
December 31,
31, 2015 income statement of Macklin
Corporation would be
a. $10,800
b. $12,500
c. $13,500
d. $21,600
Non-Current Liabilities 14 - 13
81. The entry to record the issuance of the bonds would include a
a. credit of $12,500 to Interest Payable.
b. credit of $540,000 to Bonds Payable.
c. credit of $500,000 to Bonds Payable.
d. debit of $40,000 to Bonds Payable.
83. At the beginning of 2015, Wallace Corporation issued 10% bonds with a face value of of
$900,000. These bonds mature in the five years, and interest is paid semiannually on June
30 and December 31. The bonds were sold for $833,760 to yield 12%. Wallace uses a
calendar-year reporting period. Using the effective-interest method of amortization, what
amount of interest expense should be reported for 2015? (Round your answer to the nearest
dollar.)
a. $103,248
b. $100,353
c. $100,050
d. $99,750
86. At the beginning of 2015, Winston Corporation issued 10% bonds with with a face value
value of
$600,000. These bonds mature in five years, and interest is paid semiannually on June 30
and December 31. The bonds were sold for $555,840 to yield 12%. Winston uses a
calendar-year reporting period. Using the effective-interest method of amortization, what
amount of interest expense should be reported
r eported for 2015? (Round your answer to the nearest
dollar.)
a. $66,500
b. $66,700
c. $66,901
d. $68,832
87. Franzia Company issues €10,000,000, 7.8%, 20-year bonds to yield 8% on July 1, 2015.
Interest is paid on July 1 and January 1. The proceeds from the bonds are €9,802,073.
What amount of interest expense will be reported on the 2016 income statement?
a. €392,083
b. €780,000
c. €784,249
d. €784,419
88. Franzia Company issues €10,000,000, 7.8%, 20-year bonds to yield 8% on July 1, 2015.
Interest is paid on July 1 and January 1. The proceeds from the bonds are $9,802,073. The
balance reported in the bonds payable account on the December 31, 2015 statement of
financial position?
a. €9,802,073
b. €9,804,156
c. €9,806,322
d. €10,000,000
89. Bangalor Company issues Rs10,000,000, 8%, 10-year bonds at 96.5 on July 1, 2015.
Interest is paid on July 1 and January 1. The journal entry to record the issuance will include
a. a debit to cash for Rs10,000,000
b. a credit to cash for Rs9,650,000
Rs9,650,000
c. a debit to discount on bonds
bonds payable for Rs350,000
d. a credit to bonds payable
payable for Rs9,650,000
Rs9,650,000
90. On January 1, 2015, Chang Company sold HK$10,000,000 of of its 10%, bonds for
HK$8,852,960, a yield of 12%. Interest is payable semiannually on January 1 and July1.
The July 1, 2015 entry to record the first interest payment will include
a. a debit to Interest Expense for HK$531,178.
b. a credit to Bonds Payable for
for HK$1,062,355.
c. a debit to Cash for HK$600,000.
d. a credit to Interest Expense for HK$442,648.
92. On January 1, 2015, Lorry Manufacturing Company purchased equipment from Wales Inc.
There was no established market price for the equipment which has an 8 year life and no
salvage value. Lorry gave Wales a £105,000 zero-interest-bearing note p ayable in 3 equal
annual installments of £35,000, with the first payment due December 31, 2015. The
prevailing rate of interest for a note of this type is 8%. The present value of the note at 8%
was £90,199. Assuming that Lorry uses the straight-line method of depreciation, what
amounts will be reported in the company’s 2015 income statement for interest expense and
depreciation expense for the note and equipment?
a. £7,216; £11,275
b. £7,216; £30,066
c. £8,400; £13,125
d. £1,750; £8,750
93. On January 1, 2015, Jantzen Company sold sold land to Dansko Company. There was no
established market price for the land. Dansko gave Jantzen a CHF2,400,000 Zero-interest-
bearing note payable in three equal annual installments of CHF800,000 with the first
payment due December 31, 2015. The note has no ready market. The prevailing rate of
interest for a note of this type is 10%. The present value of a CHF2,400,000 note payable
in three equal annual installments of CHF800,000 at a 10% rate of interest is
CHF1,989,600. The note will be reported on Dansko’s 2015 statement of financial position
at a carrying value of
a. CHF1,989,600
b. CHF2,126,400
c. CHF2,188,560
d. CHF2,400,000
94. On January 1, 2015, Li Company purchased equipment from Keiko Distributors. There was
no established market price for the equipment which has a 10 year life and no salvage value
Li gave Keiko a HK$200,000 zero-interest-bearing note payable in 5 equal annual
installments of HK$40,000, with the first payment due December 31, 2015. The prevailing
rate of interest for a note of this type is 9%. The present value of the note at 9% was
HK$144,200. Assuming that Li uses the straight-line method of depreciation, what amounts
will be reported on the company’s 2015 income statement for interest expense and
depreciation expense for the note and equipment?
a. HK$0; HK$20,000
b. HK$18,000; HK$20,000
c. HK$12,978; HK$14,420
d. HK$14,420; HK$28,840
95. On January
January 1, 2015, Ann
Ann Price loaned $45,078 to
to Joe Kiger. A zero-interest-bearing
zero-interest-bearing note
(face amount, $60,000) was exchanged solely for cash; no other rights or privileges were
exchanged. The note is to be repaid on December 31, 2017. The prevailing rate of interest
for a loan of this type is 10%. The present value of $60,000 at 10% for three years is
$45,078. What amount of interest income should Ms. Price recognize in 2015?
a. $4,508.
b. $6,000.
c. $18,000.
d. $13,524.
14 - 16 Test Bank for Intermediate Accounting:
Accounting: IFRS Edition, 2e
96. On January 1, 2015, Jacobs Company sold property to Dains Company which originally
cost Jacobs $760,000. There was no established exchange price for this property. Dains
gave Jacobs a $1,200,000 zero-interest-bearing note payable in three equal annual
installments of $400,000 with the first payment due December 31, 2015. The note has no
ready market. The prevailing rate of interest for a note of this type is 10%. The present value
of a $1,200,000 note payable in three equal annual installments of $400,000 at a 10% rate
of interest is $994,800. What is the amount of interest income that should be recognized by
Jacobs in 2015, using the effective-interest method?
a. $0.
b. $40,000.
c. $99,480.
d. $120,000.
97. On January 1, 2015, Crown Company sold sold property to Leary Company. There was no
established exchange price for the property, and Leary gave Crown a $2,000,000 zero-
interest-bearing note payable in 5 equal annual installments of $400,000, with the first
payment due December 31, 2015. The prevailing rate of interest for a note of this type is
9%. The present value of the note at 9% was $1,442,000 at January 1, 2015. What should
be the balance of the Notes Payable account on the books of Leary at December 31, 2015
after adjusting entries are made, assuming that the effective-interest method is used?
a. $2,000,000
b. $1,171,780
c. $1,553,600
d. $1,442,000
102. The 10% bonds payable of NixonNixon Company had a net carrying
carrying amount of $570,000 on
December 31, 2014. The bonds, which had a face value of $600,000, were issued at a
discount to yield 12%. The amortization of the bond discount was recorded under the
effective-interest method. Interest was paid on January 1 and July 1 of each year. On
July 2, 2015, several years before their maturity, Nixon retired the bonds at 102. The interest
payment on July 1, 2015 was made as scheduled. What is the loss that Nixon should record
on the early retirement of the bonds on July 2, 2015? Ignore taxes.
a. $12,000.
b. $37,800. 600000 x 10%= 60000
c. $33,600. 570000 x 12% = 68400
d. $42,000. 600000 x 1.02 - [570000+(68400-60000)]
103. The 12% bonds payable of Nyman Nyman Co. had a carrying amount of $832,000 on
December 31, 2014. The bonds, which had a face value of $800,000, were issued at a
premium to yield 10%. Nyman uses the effective-interest method of amortization. Interest is
paid on June 30 and December 31. On June 30, 2015, several years before their maturity,
Nyman retired the bonds at 104 plus accrued interest.
in terest. The loss on retirement, ignoring taxes,
is
a. $0.
b. $6,400.
c. $9,920.
d. $32,000.
104. Cadbury Company’s 10 year, 8% £10,000,000 face value of bonds have a carrying value of
£9,672,300 on December 31, 2015. The bonds pay interest semiannually at 8% on June 30
and December 31. On January 1, 2016, the bonds are called at 102. What loss would be
reported for the called bonds on the company ’s 2016 income statement?
a. £102,000 loss.
b. £200,000 loss.
c. £327,700 loss.
d. £527,700 loss.
105. The December 31, 2015, statement of financial position of Bordeaux Corporation includes
the following items:
14 - 18 Test Bank for Intermediate Accounting:
Accounting: IFRS Edition, 2e
106. At December
December 31,
31, 2015 the following balances were reported on the statement of financial
position of Yang Corporation:
Bonds Payable ¥1,472,000,000
Interest Payable 33,750,000
The bonds have a face amount of ¥1,500,000,000. If the bonds are retired on January 1,
2016 at 101, what amount of gain or loss will Yang report on the redemption?
a. ¥15,000,000
b. ¥28,000,000
c. ¥43,000,000
d. ¥61,759,000
Use the following information for questions 107 and 108:
On December 31, 2015, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is
a $600,000 note with $60,000 accrued interest payable to Piper, Inc. Piper agrees to accept from
Nolte a building that has a fair value of $590,000, an original cost of $530,000, and accumulated
depreciation of $130,000.
107. Nolte should recognize
recognize a gain or loss
loss on the disposal of the building of
of
a. $0.
b. $190,000 gain.
c. $60,000 gain.
d. $70,000 loss.
108. Nolte should recognize a gain on the settlement of the debt of
a. $0.
b. $10,000.
c. $60,000.
d. $70,000.
109. Putnam Company’s 2015 financial statements contain the following
fo llowing selected data:
Income taxes $40,000
Interest expense 20,000
Net income 60,000
Putnam’s times interest earned for 2015 is
a. 3 times
b. 4 times.
c. 5 times.
d. 6 times.
Non-Current Liabilities 14 - 19
The total non-current liabilities reported on the statement of financial position are
a. $1,865,000.
b. $1,850,000.
c. $1,965,000.
d. $1,950,000.
114. On January 1, 2015, Solis Co.Co. issued its 10% bonds in the face amount of
of $3,000,000,
which mature on January 1, 2020. The bonds were issued for $3,405,000 to yield 8%,
resulting in bond premium of $405,000. Solis uses the effective-interest method of
amortizing bond premium. Interest is payable annually on December 31. At December 31,
2015, the carrying value of the bonds should be
a. $3,405,000.
3000000 x 10% = 300000
b. $3,377,400.
c. $3,364,500. 3405000 x 8% = 272400
d. $3,304,500. 3405000 - (300000-272400)
115. On July 1, 2013, Noble, Inc. issued 9% bonds in the face amount of $5,000,000, which
mature on July 1, 2019. The bonds were issued for $4,695,000 to yield 10%, resulting in a
bond discount of $305,000. Noble uses the effective-interest method of amortizing bond
discount. Interest is payable annually on June 30. At June 30, 2015, the carrying value of
the bonds should be
a. $4,735,950. 2016: 4695000+[4695000x10%-5000000x9%]=4714500
b. $4,745,000.
2017: 4714500+[4714500x10%-5000000x9%]=4735950
c. $4,756,000.
d. $4,785,000.
116. On January 1, 2015, Huff Co. sold $1,000,000 of its 10% bonds for $885,296 to yield 12%.
Interest is payable semiannually on January 1 and July 1. What amount should Huff report
as interest expense for the six months ended June 30, 2015?
a. $44,266
b. $50,000
885296x12%/2
c. $53,118
d. $60,000
120. Eddy Co. is indebted to Cole under a $400,000, 12%, 12%, three-year note dated
December 31, 2013. Because of Eddy’s financial difficulties developing in 2015, Eddy owed
accrued interest of $48,000 on the note at December 31, 2015. Under a debt settlement,
on December 31, 2015, Cole agreed to settle the note and accrued interest for a tract of
land having a fair value of $360,000. Eddy’s acquisition cost of the land is $290,000.
Ignoring income taxes, on its 2015 income statement Eddy should report as a result of the
debt settlement
Gain on Disposal Extinguishment Gain
a. $158,000 $0
b. $110,000 $0
c. $70,000 $40,000
d. $70,000 $88,000
DERIVATIONS — Computational
No. Answer Derivation
66. a $1,000,000 × .534 = $534,000.
119. c Conceptual.
EXERCISES
Ex. 14-121—Terms related to long-term debt.
Place the letter of the best matching phrase before each word.
Solution 14-121
1. k 3. c 5. b 7. o 9. h
2. g 4. i 6. l 8. f 10. d
Non-Current Liabilities 14 - 27
Instructions
(a) Calculate the issue
issue price of the bonds.
(b) Without prejudice to your
your solution in part (a), assume that the issue price was
was $884,000.
Prepare the amortization table for 2015, assuming that amortization is recorded on interest
payment dates.
Solution 14-122
(a) .312 × $1,000,000 = $312,000
11.470 × $50,000 = 573,500
$885,500
Solution 14-123
Interest Cash Discount Carrying
Date Expense Paid Amortized Value of Bonds
5/1/14 $5,323,577
11/1/14 $266,179 $240,000 $26,179 5,349,756
5/1/15 267,488 240,000 27,488 5,377,244
Total $53,667
Solution 14-124
(a) April 30, 2015
Bonds Payable ($900,000 – $118,470)........................................... 781,530
Loss on Extinguishment of Bonds................................................... 136,470
Cash ................................................................................... 918,000
2016 Interest
Interest Expense
Expense ..................................................................
[($350,206 + $9,516) × .08] ................................................ 28,778
Notes payable ...................................................................... 359,722
Cash [$370,000 + (5% × $370,000)] ................................... 388,500
14 - 30 Test Bank for Intermediate Accounting:
Accounting: IFRS Edition, 2e
Instructions
(a) Compute the gain or loss to Mann on the settlement of the debt.
(b) Compute the gain or loss to Mann on the transfer of the equipment.
equipment.
(c) Prepare the journal entry on Mann ‘s books to record the settlement of this debt.
(d) Prepare the journal entry on Doran’s books to record the settlement of the receivable.
Solution 14-126
(a) Note payable $600,000
Interest payable 54,000
Carrying amount of debt 654,000
Fair value of equipment 570,000
Gain on settlement of debt $ 84,000
(b) What are the general rules for measuring and recognizing gain or loss by a debt
extinguishment with modification?
Solution 14-127
(a) If the settlement
settlement of debt includes
includes the transfer of noncash assets,
assets, a gain is measured by the
debtor as the difference between the fair value of the assets transferred and the carrying
amount of the debt, including accrued interest. The debtor also recognizes a gain or loss on
the disposal of assets as the difference between
b etween the fair value of the assets transferred and
their book value.
PROBLEMS
Pr. 14-128 —Bond discount amortization.
On June 1, 2013, Everly Bottle Company sold $400,000 in long-term bonds for $351,040. The
bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The
bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under the
effective-interest method.
Instructions
(a) Construct a bond amortization table for this problem to indicate
indicate the amount of interest expense
expense
and discount amortization at each May 31. Include only the first four years. Make sure all
columns and rows are properly labeled. (Round to the nearest dollar.)
(b) The sales price
price of $351,040 was determined from
from present value tables. Specifically explain
how one would determine the price using present value tables.
(c) Assuming that interest and discount amortization are recorded each May 31, prepare the
adjusting entry to be made on December 31, 2015. (Round to the nearest dollar.)
Solution 14-128
(a) Cash Interest Discount Carrying Amount
Date Paid Expense Amortized of Bonds
6/1/13 $351,040
5/31/14 $32,000 $35,104 $3,104 354,144
5/31/15 32,000 35,414 3,414 357,558
5/31/16 32,000 35,756 3,756 361,314
5/31/17 32,000 36,131 4,131 365,445
14 - 32 Test Bank for Intermediate Accounting:
Accounting: IFRS Edition, 2e
(b) (1) Find the present value of $400,000 due in 10 years at 10%.
(2) Find the present
present value
value of
of 10 annual payments
payments of $32,000 at 10%.
Add (1) and (2) to obtain the present value
value of the principal and the interest payments.
Instructions
(a) Complete the following amortization
amortization schedule for the dates indicated. (Round all answers to
the nearest dollar.)
dollar.) Use the effective-interest method.
Cash Interest Discount Carrying Amount
Paid Expense Amortized of Bonds
October 1, 2014 $738,224
April 1, 2015
October 1, 2015
Solution 14-129
(a) Cash Interest Discount Carrying Amount
Paid Expense Amortized of Bonds
October 1, 2014 $738,224
April 1, 2015 $32,000 $36,911 $4,911 743,135
October 1, 2015 32,000 37,157 5,157 748,292
$74,320
14 - 34 Test Bank for Intermediate Accounting:
Accounting: IFRS Edition, 2e
Solution 14-130
3/1/15 Cash......................................................................................... 283,250
Bonds Payable ............................................................... 283,250
9/1/15 Interest Expense ($283,250 × .06)......................
.06)...................................
.....................
........ 16,995
Bonds Payable ............................................................... 1,995
Cash ($300,000 ×.05) .................................................... 15,000
12/31/15 Interest Expense [($283,250 + $1,995) × .06 × 4/6]......... 4/6]......... 11,410
Bonds Payable ............................................................... 1,410
Interest Payable ($15,000 × 4/6) .................................... 10,000
3/1/16 Interest Expense [($283,250 + $1,995) × .06 × 2/6]................. 2/6]................. 5,705
Interest Payable ..................................................................... 10,000
Bonds Payable ............................................................... 705
Cash .............................................................................. 15,000
Instructions
(Round to the nearest dollar.)
Prepare all of the relevant journal entries from the time of sale until the date indicated. Amortize
premium or discount on interest dates and at year-end. (Assume that reversing entries were made.)
Solution 14-131
6/1/15 Cash..................................................................................... 638,780
Bonds Payable ........................................................... 638,780
*$300,000 ÷ $600,000 = .5
*Reacquisition price
$315,000 – ($300,000 × 6% × 4/6).......................
4/6)....................................
.....................
........ 303,000
Net carrying amount of bonds redeemed:
($630,455* × .50) – $1,492........................
$1,492...................................
........................
.........................
..............
.. 313,736
Gain on extinguishment....................
extinguishment.................................
.........................
.........................
.....................
........ $ (10,736)
*$638,780 – $4,061 – $4,264
Solution 14-132
(a) Notes Payable......................
Payable.....................................
...........................
.......................
........... 3,000,000
Share Capital –– ––Ordinary............................... 1,000,000
Share Premium ––Ordinary............................ 1,200,000
Gain on Extinguishment of Debt....................
Debt.................... 800,000
Carrying amount of debt.............
debt............. 3,000,000
Fair value of equity.....................
equity..................... (2,200,000)
Gain on Extinguishment
14 - 36 Test Bank for Intermediate Accounting:
Accounting: IFRS Edition, 2e
of Debt.....................
Debt.................................
.................
..... $ 800,000
Non-Current Liabilities 14 - 37
*Calculation of gain.
Pre-restructure carrying amount .................................... $ 3,000,000
Less: Present value of restructuring cash flows:
Present value of $3,000,000 due in
3 years at 12% (Table 6-2);
($3,000,000 × .65752)........................................ 1,972,560
Debtor ’s gain on extinguishment.................................... $ 1,027,440
Instructions
(a) Compute the amount of gain or loss to Ludwig, Inc. on the transfer (disposition) of the land.
(b) Compute the amount of gain or loss to Ludwig, Inc. on the settlement
settlement of the debt.
(c) Prepare the journal entry on Ludwig ‘s books to record the settlement of this debt.
*Solution 14-133
(a) Fair value of the land $610,000
Cost of the land to Ludwig, Inc. 450,000
Gain on disposal of land $160,000