ch14_Longterm Liability

8/11/2019 ch14_Longterm Liability

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CHAPTER 14

LONG-TERM LIABILITIES

IFRS questions are avaia!e at t"e en# o$ t"is %"a&ter'

TR(E-FALSE)Con%e&tua

Ans*er No' +es%ri&tionT 1. Bond interest payments.F 2. Debenture bonds.T 3. Definition of serial bonds.F 4. Market rate vs. coupon rate.F 5. Definition of stated interest rate.T . !tated rate and coupon rate.F ". #morti$ation of premium and discount.

F %. &ssuance of bonds.F '. &nterest paid vs. interest e(pense.T 1). #ccountin* for bond issue costs.T 11. +efundin* of bond issue.F 12. ,on*-term notes payable.T 13. &mplicit interest rate.T 14. &mputation and imputed interest rate.T 15. ff-balance-s/eet financin*.T 1. Debt to total assets ratio.F 1". +efinancin* lon*-term debt.F 1%. Times interest earned ratio.F 01'. ,oss reco*ni$ed on impaired loan.

F 02). ainloss in troubled debt restructurin*.

M(LTIPLE CHOICE)Con%e&tuaAns*er No' +es%ri&tion

a 21. ,iability identification.a 22. Bond terms.b 23. Definition of debenture bonds.a 24. Definition of bearer bonds.d !25. Definition of income bonds.a !2. ffective-interest vs. strai*/t-line met/od.d !2". &nterest rate of t/e bond indenture.d 2%. +ate of interest earned by t/e bond/olders.

d 2'. 6alculatin* t/e issue price of bonds.d 3). 6alculatin* t/e issue price of bonds.b 31. remium and interest rates.a 32. &nterest and discount amorti$ation.d 33. ffective-interest amorti$ation met/od.d 34. &mpact of effective-interest met/od.c 35. +ecordin* bonds issued bet7een interest dates.d 3. Bonds issued at ot/er t/an an interest date.d 3". 6lassification of bond issuance costs.c 3%. Bond issuance costs.


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Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition

M(LTIPLE CHOICE)Con%e&tua 0%ont'

Ans*er No' +es%ri&tionb 3'. 6lassification of treasury bonds.d 4). arly e(tin*uis/ment of bonds payable.d 41. ain or loss on e(tin*uis/ment of debt.c 42. &n-substance defeasance.c 43. +eportin* lon*-term debt.a !44. Debt instrument e(c/an*ed for property.d 45. 8aluation of note issued in noncas/ transaction.d 4. !tated interest rate of note.c 4". #ccountin* for discount on notes payable.d 4%. ff-balance-s/eet financin*.c !4'. ff-balance-s/eet financin*.d !5). ,on*-term debt maturin* 7it/in one year.d 51. +e9uired bond disclosures.d 52. ,on*-term debt disclosures.c 53. Times interest earned ratio.c. 54. Debt to total assets ratio.c 055. Modification of terms in debt restructure.d 05. ainloss on troubled debt restructurin*.b 05". ainloss on troubled debt restructurin*.b 05%. &nterest and troubled debt restructurin*.c 05'. 6reditor:s calculations for modification of terms.

T/ese 9uestions also appear in t/e roblem-!olvin* !urvival uide.!T/ese 9uestions also appear in t/e !tudy uide.0 T/is topic is dealt 7it/ in an #ppendi( to t/e c/apter.

M(LTIPLE CHOICE)Co&utationa

Ans*er No' +es%ri&tiona ). 6alculate t/e present value of bond principal.b 1. 6alculate t/e present value of bond interest.a 2. Determine t/e issue price of bonds.c 3. roceeds from bond issuance.c 4. Bonds issued bet7een interest dates.c 5. roceeds from bond issuance.c . Bonds issued bet7een interest dates.c ". ffective-interest met/od interest e(pense.a %. ffective-interest met/od carryin* value.

d '. !trai*/t-line met/od carryin* value.d "). !trai*/t-line amorti$ationinterest e(pense.c "1. ffective-interest met/od interest e(pense.a "2. ffective-interest met/od carryin* value.d "3. !trai*/t-line met/od carryin* value.d "4. !trai*/t-line met/od amorti$ationinterest e(pense.b "5. &nterest e(pense usin* effective-interest met/od.c ". &nterest e(pense usin* effective-interest met/od.d "". ntry to record issuance of bonds.a "%. 6alculate bond interest e(pense.

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,on*-Term ,iabilities

M(LTIPLE CHOICE)Co&utationa 0%ont'

Ans*er No' +es%ri&tionb "'. ntry to record issuance of bonds.c %). 6alculate bond interest e(pense.b %1. 6alculate interest e(pense for t7o periods.b %2. 6alculate unamorti$ed bond discount balance.b %3. 6alculate unamorti$ed bond premium balance.c %4. 6alculate interest e(pense for t7o periods.b %5. ntry to record bond redemption.b %. ntry to record bond redemption.b %". 6alculate loss on bond redemption.c %%. 6alculate loss on bond redemption.c %'. 6alculate *ain on retirement of bonds.b '). 6alculate *ain on retirement of bonds.b '1. 6alculate loss on retirement of bonds.b '2. Bond retirement 7it/ call premium.b '3. 6alculate loss on retirement of bonds.b '4. arly e(tin*uis/ment of debt.b '5. arly e(tin*uis/ment of debt.a '. &nterest on noninterest-bearin* note.c '". &nterest on installment note payable.b '%. Determine balance of discount on notes payable.d ''. 6alculate times interest earned ratio.a 1)). 6alculate times interest earned ratio.c 1)1. 6alculate income before ta(es 7it/ times interest earned ratio.d 1)2. Determine total lon*-term liabilities.b 01)3. Transfer of e9uipment in debt settlement.d 01)4. +eco*ni$in* *ain on debt restructure.a 01)5. &nterest and troubled debt restructurin*.

M(LTIPLE CHOICE)CPA A#a&te#

Ans*er No' +es%ri&tiona 1). Determine proceeds from bond issue.b 1)". Determine unamorti$ed bond premium.a 1)%. Determine unamorti$ed bond discount.c 1)'. 6alculate bond interest e(pense.a 11). 6alculate loss on retirement of bonds.d 111. 6alculate loss on retirement of bonds.d 112. 6alculate *ain on retirement of bonds.

c 113. Determine carryin* value of bonds to be retired.c 114. 6arryin* value of bonds 7it/ call provision.c 115. 6lassification of *ain from debt refundin*.d 011. 6lassification of *ain from troubled debt restructurin*.

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EERCISES

Ite +es%ri&tion14-11" Terms related to lon*-term debt.14-11% Bond issue price and premium amorti$ation.14-11' #morti$ation of discount or premium.14-12) ntries for bonds payable.14-121 +etirement of bonds.14-122 arly e(tin*uis/ment of debt.

014-123 #ccountin* for a troubled debt settlement.014-124 #ccountin* for troubled debt restructurin*.014-125 #ccountin* for troubled debt.

PROBLEMS

Ite +es%ri&tion14-12 Bond discount amorti$ation.14-12" Bond interest and discount amorti$ation.14-12% ntries for bonds payable.14-12' ntries for bonds payable.

014-13) #ccountin* for a troubled debt settlement.

CHAPTER LEARNING OB5ECTI6ES

1. Describe t/e formal procedures associated 7it/ issuin* lon*-term debt.

2. &dentify various types of bond issues.

3. Describe t/e accountin* valuation for bonds at date of issuance.

4. #pply t/e met/ods of bond discount and premium amorti$ation.

5. Describe t/e accountin* for t/e e(tin*uis/ment of debt.

. (plain t/e accountin* for lon*-term notes payable.

". (plain t/e reportin* of off-balance-s/eet financin* arran*ements.

%. &ndicate /o7 to present and analy$e lon*-term debt.

0'. Describe t/e accountin* for a loan impairment.

01). Describe t/e accountin* for debt restructurin*.

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S(MMAR7 OF LEARNING OB5ECTI6ES B7 8(ESTIONS

Item Type Item Type Item Type Item Type Item Type Item Type Item Type

Learnin. O!9e%tive 1

1. TF 21. M6 22. M6Learnin. O!9e%tive 2

2. TF 3. TF 23. M6 24. M6 !25. M6


4. TF 2". M6 3). M6 2. M6 11". 5. TF 2%. M6 ). M6 3. M6 11%. . TF 2'. M6 1. M6 5. M6 12.


". TF 34. M6 ". M6 "5. M6 %3. M6 11'. %. TF 35. M6 %. M6 ". M6 %4. M6 12). '. TF 3. M6 '. M6 "". M6 1). M6 12.

1).2.

TFM6

3".3%.

M6M6

")."1.

M6M6

"%."'.

M6M6

1)".1)%.

M6M6

12".12%.

31. M6 3'. M6 "2. M6 %). M6 1)'. M6 12'. 32. M6 4. M6 "3. M6 %1. M6 11". 33. M6 . M6 "4. M6 %2. M6 11%.

Learnin. O!9e%tive :

11. TF %5. M6 %'. M6 '3. M6 111. M6 115. M6 122. 4). M6 %. M6 '). M6 '4. M6 112. M6 11". 12%. 41. M6 %". M6 '1. M6 '5. M6 113. M6 12).

42. M6 %%. M6 '2. M6 11). M6 114. M6 121.

Learnin. O!9e%tive ;

12. TF 14. TF !44. M6 4. M6 '. M6 '%. M613. TF 43. M6 45. M6 4". M6 '". M6

Learnin. O!9e%tive t/at rate s/ould be considered to bet/e effective rate.

13. T/e implicit interest rate is t/e rate t/at e9uates t/e cas/ received 7it/ t/e amountsreceived in t/e future.

14. T/e process of interest-rate appro(imation is called imputation> and t/e resultin* interestrate is called an imputed interest rate.

15. ff-balance-s/eet financin* is an attempt to borro7 monies in suc/ a 7ay to minimi$e t/ereportin* of debt on t/e balance s/eet.

1. T/e debt to total assets ratio 7ill *o up if an e9ual amount of assets and liabilities areadded to t/e balance s/eet.

1". &f a company plans to retire lon*-term debt from a bond retirement fund> it s/ould reportt/e debt as current.

1%. T/e times interest earned ratio is computed by dividin* income before interest e(pense byinterest e(pense.

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01'. T/e loss to be reco*ni$ed by a creditor on an impaired loan is t/e difference bet7een t/einvestment in t/e loan and t/e e(pected undiscounted future cas/ flo7s from t/e loan.

02). &n a troubled debt restructurin*> t/e loss reco*ni$ed by t/e creditor 7ill e9ual t/e *ainreco*ni$ed by t/e debtor.

True Fase Ans*ers)Con%e&tua

M(LTIPLECHOICE)

Con%e&tua

21. #n e(ample of an item 7/ic/ is not a liability isa' #ivi#en#s &a@a!e in sto%,'b. advances from customers on contracts.c. accrued estimated 7arranty costs.d. t/e portion of lon*-term debt due 7it/in one year.

22. T/e covenants and ot/er terms of t/e a*reement bet7een t/e issuer of bonds and t/elender are set fort/ in t/ea' !on# in#enture'b. bond debenture.c. re*istered bond.d. bond coupon.

23. T/e term used for bonds t/at are unsecured as to principal isa. ?unk bonds.!' #e!enture !on#s'c. indebenture bonds.d. callable bonds.

24. Bonds for 7/ic/ t/e o7ners: names are notre*istered 7it/ t/e issuin* corporation arecalleda' !earer !on#s'b. term bonds.c. debenture bonds.d. secured bonds.

!25. Bonds t/at pay no interest unless t/e issuin* company is profitable are calleda. collateral trust bonds.b. debenture bonds.c. revenue bonds.#' in%oe !on#s'

!2. &f bonds are issued initially at a premium and t/e effective-interest met/od of amorti$ationis used> interest e(pense in t/e earlier years 7ill be

Ite Ans' Ite Ans' Ite Ans' Ite Ans'

1. T . T 11. T 1. T2. F ". F 12. F 1". F3. T %. F 13. T 1%. F4. F '. F 14. T 1'. F5. F 1). T 15. T 2). F

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a' .reater t"an i$ t"e strai."t-ine et"o# *ere use#'b. *reater t/an t/e amount of t/e interest payments.c t/e same as if t/e strai*/t-line met/od 7ere used.d. less t/an if t/e strai*/t-line met/od 7ere used.

2". T/e interest rate 7ritten in t/e terms of t/e bond indenture is kno7n as t/ea. coupon rate.b. nominal rate.c. stated rate.#' %ou&on rate/ noina rate/ or state# rate'

2%. T/e rate of interest actually earned by bond/olders is called t/ea. stated rate.b. yield rate.c. effective rate.#' e$$e%tive/ @ie#/ or ar,et rate'

@se t/e follo7in* information for 9uestions 2' and 3)))) of ten-year> 1) bonds t/at pay interest semiannually. T/e bonds aresold to yield %.

2'. ne step in calculatin* t/e issue price of t/e bonds is to multiply t/e principal by t/e tablevalue fora. 1) periods and 1) from t/e present value of 1 table.b. 2) periods and 5 from t/e present value of 1 table.c. 1) periods and % from t/e present value of 1 table.#' 2 &erio#s an# 4 $ro t"e &resent vaue o$ 1 ta!e'

3). #not/er step in calculatin* t/e issue price of t/e bonds is to

a. multiply A1)>))) by t/e table value for 1) periods and 1) from t/e present value ofan annuity table.b. multiply A1)>))) by t/e table value for 2) periods and 5 from t/e present value of an

annuity table.c. multiply A1)>))) by t/e table value for 2) periods and 4 from t/e present value of an

annuity table.#' none o$ t"ese'

31. +eic/> &nc. issued bonds 7it/ a maturity amount of A2))>))) and a maturity ten yearsfrom date of issue. &f t/e bonds 7ere issued at a premium> t/is indicates t/ata. t/e effective yield or market rate of interest e(ceeded t/e stated Cnominal rate.!' t"e noina rate o$ interest e%ee#e# t"e ar,et rate'c. t/e market and nominal rates coincided.d. no necessary relations/ip e(ists bet7een t/e t7o rates.

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32. &f bonds are initially sold at a discount and t/e strai*/t-line met/od of amorti$ation is used>interest e(pense in t/e earlier years 7illa' e%ee# *"at it *ou# "ave !een "a# t"e e$$e%tive-interest et"o# o$

aortiDation !een use#'b. be less t/an 7/at it 7ould /ave been /ad t/e effective-interest met/od of amorti$ation

been used.c. be t/e same as 7/at it 7ould /ave been /ad t/e effective-interest met/od of amorti$a-

tion been used.d. be less t/an t/e stated Cnominal rate of interest.

33. @nder t/e effective-interest met/od of bond discount or premium amorti$ation> t/eperiodic interest e(pense is e9ual toa. t/e stated Cnominal rate of interest multiplied by t/e face value of t/e bonds.b. t/e market rate of interest multiplied by t/e face value of t/e bonds.c. t/e stated rate multiplied by t/e be*innin*-of-period carryin* amount of t/e bonds.#' t"e ar,et rate uti&ie# !@ t"e !e.innin.-o$-&erio# %arr@in. aount o$ t"e

!on#s'

34. E/en t/e effective-interest met/od is used to amorti$e bond premium or discount> t/eperiodic amorti$ation 7illa. increase if t/e bonds 7ere issued at a discount.b. decrease if t/e bonds 7ere issued at a premium.c. increase if t/e bonds 7ere issued at a premium.#' in%rease i$ t"e !on#s *ere issue# at eit"er a #is%ount or a &reiu'

35. &f bonds are issued bet7een interest dates> t/e entry on t/e books of t/e issuin*corporation could include aa. debit to &nterest ayable.b. credit to &nterest +eceivable.%' %re#it to Interest E&ense'

d. credit to @nearned &nterest.

3. E/en t/e interest payment dates of a bond are May 1 and ;ovember 1> and a bond issueis sold on une 1> t/e amount of cas/ received by t/e issuer 7ill bea. decreased by accrued interest from une 1 to ;ovember 1.b. decreased by accrued interest from May 1 to une 1.c. increased by accrued interest from une 1 to ;ovember 1.#' in%rease# !@ a%%rue# interest $ro Ma@ 1 to 5une 1'

3". T/eoretically> t/e costs of issuin* bonds could bea. e(pensed 7/en incurred.b. reported as a reduction of t/e bond liability.

c. debited to a deferred c/ar*e account and amorti$ed over t/e life of t/e bonds.#' an@ o$ t"ese'

3%. T/e printin* costs and le*al fees associated 7it/ t/e issuance of bonds s/oulda. be e(pensed 7/en incurred.b. be reported as a deduction from t/e face amount of bonds payable.%' !e a%%uuate# in a #e$erre# %"ar.e a%%ount an# aortiDe# over t"e i$e o$ t"e

!on#s'd. not be reported as an e(pense until t/e period t/e bonds mature or are retired.

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3'. Treasury bonds s/ould be s/o7n on t/e balance s/eet asa. an asset.!' a #e#u%tion $ro !on#s &a@a!e issue# to arrive at net !on#s &a@a!e an#

outstan#in.'c. a reduction of stock/olders: e9uity.d. bot/ an asset and a liability.

4). #n early e(tin*uis/ment of bonds payable> 7/ic/ 7ere ori*inally issued at a premium> ismade by purc/ase of t/e bonds bet7een interest dates. #t t/e time of reac9uisitiona. any costs of issuin* t/e bonds must be amorti$ed up to t/e purc/ase date.b. t/e premium must be amorti$ed up to t/e purc/ase date.c. interest must be accrued from t/e last interest date to t/e purc/ase date.#' a o$ t"ese'

41. T/e *enerally accepted met/od of accountin* for *ains or losses from t/e earlye(tin*uis/ment of debt treats any *ain or loss asa. an ad?ustment to t/e cost basis of t/e asset obtained by t/e debt issue.b. an amount t/at s/ould be considered a cas/ ad?ustment to t/e cost of any ot/er debt

issued over t/e remainin* life of t/e old debt instrument.c. an amount received or paid to obtain a ne7 debt instrument and> as suc/> s/ould be

amorti$ed over t/e life of t/e ne7 debt.#' a #i$$eren%e !et*een t"e rea%quisition &ri%e an# t"e net %arr@in. aount o$ t"e

#e!t *"i%" s"ou# !e re%o.niDe# in t"e &erio# o$ re#e&tion'

42. &n-substance defeasance is a term used to refer to an arran*ement 7/erebya. a company *ets anot/er company to cover its payments due on lon*-term debt.b. a *overnmental unit issues debt instruments to corporations.%' a %o&an@ &rovi#es $or t"e $uture re&a@ent o$ a on.-ter #e!t !@ &a%in.

&ur%"ase# se%urities in an irrevo%a!e trust'd. a company le*ally e(tin*uis/es debt before its due date.

43. # corporation borro7ed money from a bank to build a buildin*. T/e lon*-term note si*nedby t/e corporation is secured by a mort*a*e t/at pled*es title to t/e buildin* as securityfor t/e loan. T/e corporation is to pay t/e bank A%)>))) eac/ year for 1) years to repayt/e loan. E/ic/ of t/e follo7in* relations/ips can you e(pect to apply to t/e situationGa. T/e balance of mort*a*e payable at a *iven balance s/eet date 7ill be reported as a

lon*-term liability.b. T/e balance of mort*a*e payable 7ill remain a constant amount over t/e 1)-year

period.%' T"e aount o$ interest e&ense *i #e%rease ea%" &erio# t"e oan is outstan#in./

*"ie t"e &ortion o$ t"e annua &a@ent a&&ie# to t"e oan &rin%i&a *i in%reaseea%" &erio#'

d. T/e amount of interest e(pense 7ill remain constant over t/e 1)-year period.

!44. # debt instrument 7it/ no ready market is e(c/an*ed for property 7/ose fair market valueis currently indeterminable. E/en suc/ a transaction takes placea' t"e &resent vaue o$ t"e #e!t instruent ust !e a&&roiate# usin. an

i&ute# interest rate'b. it s/ould not be recorded on t/e books of eit/er party until t/e fair market value of t/e

property becomes evident.c. t/e board of directors of t/e entity receivin* t/e property s/ould estimate a value for

t/e property t/at 7ill serve as a basis for t/e transaction.

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d. t/e directors of bot/ entities involved in t/e transaction s/ould ne*otiate a value to beassi*ned to t/e property.

45. E/en a note payable is issued for property> *oods> or services> t/e present value of t/enote is measured bya. t/e fair value of t/e property> *oods> or services.b. t/e market value of t/e note.c. usin* an imputed interest rate to discount all future payments on t/e note.#' an@ o$ t"ese'

4. E/en a note payable is e(c/an*ed for property> *oods> or services> t/e stated interestrate is presumed to be fair unlessa. no interest rate is stated.b. t/e stated interest rate is unreasonable.c. t/e stated face amount of t/e note is materially different from t/e current cas/ sales

price for similar items or from current market value of t/e note.#' an@ o$ t"ese'

4". Discount on ;otes ayable is c/ar*ed to interest e(pensea. e9ually over t/e life of t/e note.b. only in t/e year t/e note is issued.%' usin. t"e e$$e%tive-interest et"o#'d. only in t/e year t/e note matures.

4%. E/ic/ of t/e follo7in* is an e(ample of off-balance-s/eet financin*G

1. ;on-consolidated subsidiary.2. !pecial purpose entity.3. peratin* leases.

a. 1b. 2c. 3#' A o$ t"ese are ea&es o$ o$$-!aan%e-s"eet $inan%in.'

!4'. E/en a business enterprise enters into 7/at is referred to as off-balance-s/eet financin*>t/e companya. is attemptin* to conceal t/e debt from s/are/olders by /avin* no information about

t/e debt included in t/e balance s/eet.b. 7is/es to confine all information related to t/e debt to t/e income statement and t/e

statement of cas/ flo7.%' %an en"an%e t"e quait@ o$ its $inan%ia &osition an# &er"a&s &erit %re#it to !e

o!taine# ore rea#i@ an# at ess %ost'd. is in violation of *enerally accepted accountin* principles.

!5). ,on*-term debt t/at matures 7it/in one year and is to be converted into stock s/ould bereporteda. as a current liability.b. in a special section bet7een liabilities and stock/oldersH e9uity.c. as noncurrent.#' as non%urrent an# a%%o&anie# *it" a note e&ainin. t"e et"o# to !e use# in

its iqui#ation'

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51. E/ic/ of t/e follo7in* must be disclosed relative to lon*-term debt maturities and sinkin*fund re9uirementsGa. T/e present value of future payments for sinkin* fund re9uirements and lon*-term

debt maturities durin* eac/ of t/e ne(t five years.b. T/e present value of sc/eduled interest payments on lon*-term debt durin* eac/ of

t/e ne(t five years.c. T/e amount of sc/eduled interest payments on lon*-term debt durin* eac/ of t/e ne(t

five years.#' T"e aount o$ $uture &a@ents $or sin,in. $un# requireents an# on.-ter

#e!t aturities #urin. ea%" o$ t"e net $ive @ears'

52. ;ote disclosures for lon*-term debt *enerally include all of t/e follo7in* excepta. assets pled*ed as security.b. call provisions and conversion privile*es.c. restrictions imposed by t/e creditor.#' naes o$ s&e%i$i% %re#itors'

53. T/e times interest earned ratio is computed by dividin*a. net income by interest e(pense.b. income before ta(es by interest e(pense.%' in%oe !e$ore in%oe taes an# interest e&ense !@ interest e&ense'd. net income and interest e(pense by interest e(pense.

54. T/e debt to total assets ratio is computed by dividin*a. current liabilities by total assets.b. lon*-term liabilities by total assets.%' tota ia!iities !@ tota assets'd. total assets by total liabilities.

055. &n a troubled debt restructurin* in 7/ic/ t/e debt is continued 7it/ modified terms and t/e

carryin* amount of t/e debt is less t/an t/e total future cas/ flo7s>a. a loss s/ould be reco*ni$ed by t/e debtor.b. a *ain s/ould be reco*ni$ed by t/e debtor.%' a ne* e$$e%tive-interest rate ust !e %o&ute#'d. no interest e(pense or revenue s/ould be reco*ni$ed in t/e future.

05. # troubled debt restructurin* 7ill *enerally result in aa. loss by t/e debtor and a *ain by t/e creditor.b. loss by bot/ t/e debtor and t/e creditor.c. *ain by bot/ t/e debtor and t/e creditor.#' .ain !@ t"e #e!tor an# a oss !@ t"e %re#itor'

05". &n a troubled debt restructurin* in 7/ic/ t/e debt is settled by a transfer of assets 7it/ afair market value less t/an t/e carryin* amount of t/e debt> t/e debtor 7ould reco*ni$ea. no *ain or loss on t/e settlement.b. a *ain on t/e settlement.c. a loss on t/e settlement.d. none of t/ese.

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05%. &n a troubled debt restructurin* in 7/ic/ t/e debt is continued 7it/ modified terms> a *ains/ould be reco*ni$ed at t/e date of restructure> but no interest e(pense s/ould bereco*ni$ed over t/e remainin* life of t/e debt> 7/enever t/ea. carryin* amount of t/e pre-restructure debt is less t/an t/e total future cas/ flo7s.b. carryin* amount of t/e pre-restructure debt is *reater t/an t/e total future cas/ flo7s.c. present value of t/e pre-restructure debt is less t/an t/e present value of t/e future

cas/ flo7s.d. present value of t/e pre-restructure debt is *reater t/an t/e present value of t/e future

cas/ flo7s.

05'. &n a troubled debt restructurin* in 7/ic/ t/e debt is continued 7it/ modified terms and t/ecarryin* amount of t/e debt is less t/an t/e total future cas/ flo7s> t/e creditor s/oulda. compute a ne7 effective-interest rate.b. not reco*ni$e a loss.c. calculate its loss usin* t/e /istorical effective rate of t/e loan.d. calculate its loss usin* t/e current effective rate of t/e loan.

Muti&e C"oi%e Ans*ers)Con%e&tua

Ite Ans' Ite Ans' Ite Ans' Ite Ans' Ite Ans' Ite Ans' Ite Ans'

21. a 2". d 33. d 3'. b 45. d 51. d 05". b22. a 2%. d 34. d 4). d 4. d 52. d 05%. b

23. b 2'. d 35. c 41. d 4". c 53. c 05'. c

24. a 3). d 3. d 42. c 4%. d 54. c

25. d 31. b 3". d 43. c 4'. c 055. c

2. a 32. a 3%. c 44. a 5). d 05. d

!olutions to t/ose Multiple 6/oice 9uestions for 7/ic/ t/e ans7er is Inone of t/ese.J3). multiply A5>))) by t/e table value for 2) periods and 4 from t/e present value of an

annuity table.

M(LTIPLE CHOICE)Co&utationa

@se t/e follo7in* information for 9uestions ) t/rou*/ 2 2)1)> llison 6o. issued ei*/t-year bonds 7it/ a face value of A1>)))>))) and astated interest rate of > payable semiannually on une 3) and December 31. T/e bonds 7eresold to yield %. Table values are))).

1. T/e present value of t/e interest isa. A344>%2).b. A34'>5).c. A3"2>)).d. A3">%3).

2. T/e issue price of t/e bonds isa. A%%3>5).b. A%%4>%2).c. A%%'>5).d. A'''>)).

3. Do7nin* 6ompany issues A5>)))>)))> > 5-year bonds dated anuary 1> 2)1) onanuary 1> 2)1). T/e bonds pay interest semiannually on une 3) and December 31. T/ebonds are issued to yield 5. E/at are t/e proceeds from t/e bond issueG

2.5 3.) 5.) .)resent value of a sin*le sum for 5 periods .%%3%5 .%21 ."%353 ."4"2resent value of a sin*le sum for 1) periods ."%12) ."44)' .13'1 .55%3'resent value of an annuity for 5 periods 4.45%3 4.5"'"1 4.32'4% 4.2123resent value of an annuity for 1) periods %."52) %.53)2) "."21"3 ".3))'

a. A5>)))>)))b. A5>21>4'4c. A5>21%>%)'d. A5>21">3)%

4. Feller 6ompany issues A2)>)))>))) of 1)-year> ' bonds on Marc/ 1> 2)1) at '" plusaccrued interest. T/e bonds are dated anuary 1> 2)1)> and pay interest on une 3) andDecember 31. E/at is t/e total cas/ received on t/e issue dateGa. A1'>4))>)))b. A2)>45)>)))c. A1'>"))>)))d. A1'>1))>)))

14 - 14


15/43


5. ver/art 6ompany issues A1)>)))>)))> > 5-year bonds dated anuary 1> 2)1) onanuary 1> 2)1). T/e bonds pays interest semiannually on une 3) and December 31.T/e bonds are issued to yield 5. E/at are t/e proceeds from t/e bond issueG

2.5 3.) 5.) .)resent value of a sin*le sum for 5 periods .%%3%5 .%21 ."%353 ."4"2

resent value of a sin*le sum for 1) periods ."%12) ."44)' .13'1 .55%3'resent value of an annuity for 5 periods 4.45%3 4.5"'"1 4.32'4% 4.2123resent value of an annuity for 1) periods %."52) %.53)2) "."21"3 ".3))'

a. A1)>)))>)))b. A1)>432>'%%c. A1)>43">1%d. A1)>434>1

. Farmer 6ompany issues A1)>)))>))) of 1)-year> ' bonds on Marc/ 1> 2)1) at '" plusaccrued interest. T/e bonds are dated anuary 1> 2)1)> and pay interest on une 3) and

December 31. E/at is t/e total cas/ received on t/e issue dateGa. A'>"))>)))b. A1)>225>)))c. A'>%5)>)))d. A'>55)>)))

". # company issues A2)>)))>)))> ".%> 2)-year bonds to yield % on anuary 1> 2)1).&nterest is paid on une 3) and December 31. T/e proceeds from t/e bonds areA1'>)4>145. @sin* effective-interest amorti$ation> /o7 muc/ interest e(pense 7ill bereco*ni$ed in 2)1)Ga. A"%)>)))b. A1>5)>)))

c. A1>5%>4'%d. A1>5%>332

%. # company issues A2)>)))>)))> ".%> 2)-year bonds to yield % on anuary 1> 2)1).&nterest is paid on une 3) and December 31. T/e proceeds from t/e bonds areA1'>)4>145. @sin* effective-interest amorti$ation> 7/at 7ill t/e carryin* value of t/ebonds be on t/e December 31> 2)1) balance s/eetGa. A1'>12>43b. A2)>)))>)))c. A1'>25>125d. A1'>)%>31)

'. # company issues A2)>)))>)))> ".%> 2)-year bonds to yield % on anuary 1> 2))'.&nterest is paid on une 3) and December 31. T/e proceeds from t/e bonds areA1'>)4>145. @sin* strai*/t-line amorti$ation> 7/at is t/e carryin* value of t/e bonds onDecember 31> 2)11Ga. A1'>")>231b. A1'>'4)>22c. A1'>33>%34d. A1'>3>523

14 - 1:


16/43


"). # company issues A2)>)))>)))> ".%> 2)-year bonds to yield % on anuary 1> 2)1).&nterest is paid on une 3) and December 31. T/e proceeds from t/e bonds areA1'>)4>145. E/at is interest e(pense for 2)11> usin* strai*/t-line amorti$ationGa. A1>54)>2)"b. A1>5)>)))c. A1>5'>1'2d. A1>5"'>"'3

"1. # company issues A5>)))>)))> ".%> 2)-year bonds to yield % on anuary 1> 2)1).&nterest is paid on une 3) and December 31. T/e proceeds from t/e bonds areA4>')1>)3. @sin* effective-interest amorti$ation> /o7 muc/ interest e(pense 7ill bereco*ni$ed in 2)1)Ga. A1'5>)))b. A3')>)))c. A3'2>124d. A3'2>)%3

"2. # company issues A5>)))>)))> ".%> 2)-year bonds to yield % on anuary 1> 2)1).

&nterest is paid on une 3) and December 31. T/e proceeds from t/e bonds areA4>')1>)3. @sin* effective-interest amorti$ation> 7/at 7ill t/e carryin* value of t/e bondsbe on t/e December 31> 2)1) balance s/eetGa. A4>')3>1)b. A5>)))>)))c. A4>')>2%1d. A4>')2>)""

"3. # company issues A5>)))>)))> ".%> 2)-year bonds to yield % on anuary 1> 2))'.&nterest is paid on une 3) and December 31. T/e proceeds from t/e bonds areA4>')1>)3. @sin* strai*/t-line amorti$ation> 7/at is t/e carryin* value of t/e bonds onDecember 31> 2)11G

a. A4>'1">55%b. A4>'%5>15c. A4>')%>45%d. A4>'15>%%1

"4. # company issues A5>)))>)))> ".%> 2)-year bonds to yield % on anuary 1> 2)1).&nterest is paid on une 3) and December 31. T/e proceeds from t/e bonds areA4>')1>)3. E/at is interest e(pense for 2)11> usin* strai*/t-line amorti$ationGa. A3%5>)52b. A3')>)))c. A3'2>2'%d. A3'4>'4%

"5. n anuary 1> 2)1)> Kuber 6o. sold 12 bonds 7it/ a face value of A))>))). T/e bondsmature in five years> and interest is paid semiannually on une 3) and December 31. T/ebonds 7ere sold for A4>2)) to yield 1). @sin* t/e effective-interest met/od ofamorti$ation> interest e(pense for 2)1) isa. A)>))).b. A4>43.c. A4>2).d. A"2>))).

14 - 1;


17/43


". n anuary 2> 2)1)> a calendar-year corporation sold % bonds 7it/ a face value ofA))>))). T/ese bonds mature in five years> and interest is paid semiannually on une 3)and December 31. T/e bonds 7ere sold for A553>)) to yield 1). @sin* t/e effective-interest met/od of computin* interest> /o7 muc/ s/ould be c/ar*ed to interest e(pense in 2)1)Ga. A4%>))).b. A55>3).c. A55>544.d. A)>))).

T"e $oo*in. in$oration a&&ies to !ot" questions ))) to Bonds ayable.d. A4)>))) to remium on Bonds ayable.

"%. Bond interest e(pense reported on t/e December 31> 2)1) income statement of Macklin6orporation 7ould bea. A11>5))b. A12>5))c. A13>5))d. A23>)))

T"e $oo*in. in$oration a&&ies to !ot" questions


18/43


%2. n anuary 1> atterson &nc. issued A5>)))>)))> ' bonds for A4>'5>))). T/e marketrate of interest for t/ese bonds is 1). &nterest is payable annually on December 31.atterson uses t/e effective-interest met/od of amorti$in* bond discount. #t t/e end of t/efirst year> atterson s/ould report unamorti$ed bond discount ofa. A2"4>5)).b. A2%5>5)).c. A25%>)5).d. A255>))).

%3. n anuary 1> Martine$ &nc. issued A3>)))>)))> 11 bonds for A3>1'5>))). T/e marketrate of interest for t/ese bonds is 1). &nterest is payable annually on December 31.Martine$ uses t/e effective-interest met/od of amorti$in* bond premium. #t t/e end of t/efirst year> Martine$ s/ould report unamorti$ed bond premium of13)b. A1%4>5))c. A1"3>55)d. A15>)))

%4. #t t/e be*innin* of 2)1)> Einston 6orporation issued 1) bonds 7it/ a face value ofA))>))). T/ese bonds mature in five years> and interest is paid semiannually on une 3)and December 31. T/e bonds 7ere sold for 555>%4) to yield 12. Einston uses acalendar-year reportin* period. @sin* t/e effective-interest met/od of amorti$ation> 7/atamount of interest e(pense s/ould be reported for 2)1)G C+ound your ans7er to t/enearest dollar.a. A>5))b. A>"))c. A>')1d. A%>%32

%5. Lant 6orporation retires its A1))>))) face value bonds at 1)2 on anuary 1> follo7in* t/epayment of interest. T/e carryin* value of t/e bonds at t/e redemption date is A'>25).T/e entry to record t/e redemption 7ill include aa. credit of A3>"5) to ,oss on Bond +edemption.b. credit of A3>"5) to Discount on Bonds ayable.c. debit of A5>"5) to ain on Bond +edemption.d. debit of A2>))) to remium on Bonds ayable.

%. 6arr 6orporation retires its A1))>))) face value bonds at 1)5 on anuary 1> follo7in* t/epayment of interest. T/e carryin* value of t/e bonds at t/e redemption date is A1)3>"45.T/e entry to record t/e redemption 7ill include aa. credit of A3>"45 to ,oss on Bond +edemption.

b. debit of A3>"45 to remium on Bonds ayable.c. credit of A1>255 to ain on Bond +edemption.d. debit of A5>))) to remium on Bonds ayable.

%". #t December 31> 2)1) t/e follo7in* balances e(isted on t/e books of Fo(7ort/6orporation)))>)))Discount on Bonds ayable 1)>)))&nterest ayable 5)>)))@namorti$ed Bond &ssue 6osts 12)>)))

14 - 1=


19/43


&f t/e bonds are retired on anuary 1> 2)11> at 1)2> 7/at 7ill Fo(7ort/ report as a loss onredemptionGa. A3")>)))b. A32)>)))c. A2")>)))d. A2))>)))

%%. #t December 31> 2)1) t/e follo7in* balances e(isted on t/e books of +entro 6orporation5))>)))Discount on Bonds ayable 12)>)))&nterest ayable 3">)))@namorti$ed Bond &ssue 6osts ')>)))

&f t/e bonds are retired on anuary 1> 2)11> at 1)2> 7/at 7ill +entro report as a loss onredemptionGa. A15)>)))b. A2)2>5))c. A24)>)))d. A2"">5))

%'. T/e December 31> 2)1)> balance s/eet of Kess 6orporation includes t/e follo7in* items)))>)))@namorti$ed premium on bonds payable 2">)))

T/e bonds 7ere issued on December 31> 2))'> at 1)3> 7it/ interest payable on uly 1and December 31 of eac/ year. Kess uses strai*/t-line amorti$ation. n Marc/ 1> 2)11>Kess retired A4))>))) of t/ese bonds at '% plus accrued interest. E/at s/ould Kessrecord as a *ain on retirement of t/ese bondsG &*nore ta(es.a. A1%>%)).

b. A1)>%)).c. A1%>)).d. A2)>))).

'). n anuary 1> 2))4> Kernande$ 6orporation issued A4>5))>))) of 1) ten-year bonds at1)3. T/e bonds are callable at t/e option of Kernande$ at 1)5. Kernande$ /as recordedamorti$ation of t/e bond premium on t/e strai*/t-line met/od C7/ic/ 7as not materiallydifferent from t/e effective-interest met/od.

n December 31> 2)1)> 7/en t/e fair market value of t/e bonds 7as '> Kernande$repurc/ased A1>)))>))) of t/e bonds in t/e open market at '. Kernande$ /as recordedinterest and amorti$ation for 2)1). &*norin* income ta(es and assumin* t/at t/e *ain is

material> Kernande$ s/ould report t/is reac9uisition asa. a loss of A4'>))).b. a *ain of A4'>))).c. a loss of A1>))).d. a *ain of A1>))).

14 - 1?


20/43


'1. T/e 1) bonds payable of ;i(on 6ompany /ad a net carryin* amount of A5")>))) onDecember 31> 2)1). T/e bonds> 7/ic/ /ad a face value of A))>)))> 7ere issued at adiscount to yield 12. T/e amorti$ation of t/e bond discount 7as recorded under t/eeffective-interest met/od. &nterest 7as paid on anuary 1 and uly 1 of eac/ year. nuly 2> 2)11> several years before t/eir maturity> ;i(on retired t/e bonds at 1)2. T/einterest payment on uly 1> 2)11 7as made as sc/eduled. E/at is t/e loss t/at ;i(ons/ould record on t/e early retirement of t/e bonds on uly 2> 2)11G &*nore ta(es.a. A12>))).b. A3">%)).c. A33>)).d. A42>))).

'2. # corporation called an outstandin* bond obli*ation four years before maturity. #t t/at timet/ere 7as an unamorti$ed discount of A3))>))). To e(tin*uis/ t/is debt> t/e company /adto pay a call premium of A1))>))). Ignoring income tax considerations> /o7 s/ould t/eseamounts be treated for accountin* purposesGa. #morti$e A4))>))) over four years.b. 6/ar*e A4))>))) to a loss in t/e year of e(tin*uis/ment.c. 6/ar*e A1))>))) to a loss in t/e year of e(tin*uis/ment and amorti$e A3))>))) over

four years.d. it/er amorti$e A4))>))) over four years or c/ar*e A4))>))) to a loss immediately>

7/ic/ever mana*ement selects.

'3. T/e 12 bonds payable of ;yman 6o. /ad a carryin* amount of A%32>))) onDecember 31> 2)1). T/e bonds> 7/ic/ /ad a face value of A%))>)))> 7ere issued at apremium to yield 1). ;yman uses t/e effective-interest met/od of amorti$ation. &nterest ispaid on une 3) and December 31. n une 3)> 2)11> several years before t/eir maturity>;yman retired t/e bonds at 1)4 plus accrued interest. T/e loss on retirement> i*norin*ta(es> isa. A).

b. A>4)).c. A'>'2).d. A32>))).

'4. Didde 6ompany issues A1)>)))>))) face value of bonds at ' on anuary 1> 2))'. T/ebonds are dated anuary 1> 2))'> pay interest semiannually at % on une 3) andDecember 31> and mature in 1) years. !trai*/t-line amorti$ation is used for discounts andpremiums. n !eptember 1> 2)12> A>)))>))) of t/e bonds are called at 1)2 plusaccrued interest. E/at *ain or loss 7ould be reco*ni$ed on t/e called bonds on!eptember 1> 2)12Ga. A))>))) lossb. A2"2>))) loss

c. A3)>))) lossd. A453>333 loss

14 - 2


21/43


'5. 6orte$ 6ompany issues A5>)))>))) face value of bonds at ' on anuary 1> 2))'. T/ebonds are dated anuary 1> 2))'> pay interest semiannually at % on une 3) andDecember 31> and mature in 1) years. !trai*/t-line amorti$ation is used for discounts andpremiums. n !eptember 1> 2)12> A3>)))>))) of t/e bonds are called at 1)2 plusaccrued interest. E/at *ain or loss 7ould be reco*ni$ed on t/e called bonds on!eptember 1> 2)12Ga. A3))>))) lossb. A13>))) lossc. A1%)>))) lossd. A22>" loss

'. n anuary 1> 2)1)> #nn rice loaned A45>)"% to oe Li*er. # $ero-interest-bearin* noteCface amount> A)>))) 7as e(c/an*ed solely for cas/ no ot/er ri*/ts or privile*es 7eree(c/an*ed. T/e note is to be repaid on December 31> 2)12. T/e prevailin* rate of interestfor a loan of t/is type is 1). T/e present value of A)>))) at 1) for t/ree years isA45>)"%. E/at amount of interest income s/ould Ms. rice reco*ni$e in 2)1)Ga. A4>5)%.b. A>))).c. A1%>))).d. A13>524.

'". n anuary 1> 2)1)> acobs 6ompany sold property to Dains 6ompany 7/ic/ ori*inallycost acobs A")>))). T/ere 7as noestablis/ed e(c/an*e price for t/is property. Danis*ave acobs a A1>2))>))) $ero-interest-bearin* note payable in t/ree e9ual annualinstallments of A4))>))) 7it/ t/e first payment due December 31> 2)1). T/e note /as noready market. T/e prevailin* rate of interest for a note of t/is type is 1). T/e presentvalue of a A1>2))>))) note payable in t/ree e9ual annual installments of A4))>))) at a1) rate of interest is A''4>%)). E/at is t/e amount of interest income t/at s/ould bereco*ni$ed by acobs in 2)1)> usin* t/e effective-interest met/odGa. A).

b. A4)>))).c. A''>4%).d. A12)>))).

'%. n anuary 1> 2)1)> 6ro7n 6ompany sold property to ,eary 6ompany. T/ere 7as noestablis/ed e(c/an*e price for t/e property> and ,eary *ave 6ro7n a A2>)))>))) $ero-interest-bearin* note payable in 5 e9ual annual installments of A4))>)))> 7it/ t/e firstpayment due December 31> 2)1). T/e prevailin* rate of interest for a note of t/is type is'. T/e present value of t/e note at ' 7as A1>442>))) at anuary 1> 2)1). E/at s/ouldbe t/e balance of t/e Discount on ;otes ayable account on t/e books of ,eary atDecember 31> 2)1) after ad?ustin* entries are made> assumin* t/at t/e effective-interestmet/od is usedG

a. A)b. A42%>22)c. A44>4))d. A55%>)))

14 - 21


22/43


''. utnam 6ompanyHs 2)1) financial statements contain t/e follo7in* selected data)))&nterest e(pense 2)>)));et income )>)))

utnamHs times interest earned for 2)1) isa. 3 timesb. 4 times.c. 5 times.d. times.

1)). &n t/e recent year Kill 6orporation /ad net income of A14)>)))> interest e(pense ofA4)>)))> and ta( e(pense of A2)>))). E/at 7as Kill 6orporation:s times interest earnedratio for t/e yearGa. 5.)b. 4.)c. 3.5d. 3.)

1)1. &n recent year 6ey 6orporation /ad net income of A25)>)))> interest e(pense of A5)>)))>and a times interest earned ratio of '. E/at 7as 6ey 6orporation:s income before ta(esfor t/e yearGa. A5))>)))b. A45)>)))c. A4))>)))d. ;one of t/e above.

1)2. T/e ad?usted trial balance for ,ifesaver 6orp. at t/e end of t/e current year> 2)1)>contained t/e follo7in* accounts.

5-year Bonds ayable % A1>5))>)))

Bond &nterest ayable 5)>)))remium on Bonds ayable 1))>)));otes ayable C3 mo. 4)>)));otes ayable C5 yr. 15>)))Mort*a*e ayable CA15>))) due currently 2))>)))!alaries ayable 1%>)))Ta(es ayable Cdue 315 of 2)11 25>)))

T/e total lon*-term liabilities reported on t/e balance s/eet area. A1>%5>))).b. A1>%5)>))).c. A1>'5>))).

d. A1>'5)>))).

@se t/e follo7in* information for 9uestions 01)3 t/rou*/ 01)5 2))%> ;olte 6o. is in financial difficulty and cannot pay a note due t/at day. &t isa A))>))) note 7it/ A)>))) accrued interest payable to iper> &nc. iper a*rees to accept from;olte e9uipment t/at /as a fair value of A2')>)))> an ori*inal cost of A4%)>)))> and accumulateddepreciation of A23)>))). iper also for*ives t/e accrued interest> e(tends t/e maturity date toDecember 31> 2)11> reduces t/e face amount of t/e note to A25)>)))> and reduces t/e interestrate to > 7it/ interest payable at t/e end of eac/ year.

14 - 22


23/43


01)3. ;olte s/ould reco*ni$e a *ain or loss on t/e transfer of t/e e9uipment ofa. A).b. A4)>))) *ain.c. A)>))) *ain.d. A1')>))) loss.

01)4. ;olte s/ould reco*ni$e a *ain on t/e partial settlement and restructure of t/e debt ofa. A).b. A15>))).c. A55>))).d. A"5>))).

01)5. ;olte s/ould record interest e(pense for 2)11 ofa. A).b. A15>))).c. A3)>))).d. A45>))).

Muti&e C"oi%e Ans*ers)Co&utationa

Ite Ans' Ite Ans' Ite Ans' Ite Ans' Ite Ans' Ite Ans' Ite Ans'

). a ". c "4. d %1. b %%. c '5. b 1)2. d1. b %. a "5. b %2. b %'. c '. a 01)3. b

2. a '. d ". c %3. b '). b '". c 01)4. d

3. c "). d "". d %4. c '1. b '%. b 01)5. a

4. c "1. c "%. a %5. b '2. b ''. d

5. c "2. a "'. b %. b '3. b 1)). a

. c "3. d %). c %". b '4. b 1)1. c

M(LTIPLE CHOICE)CPA A#a&te#

1). n uly 1> 2)1)> !pear 6o. issued 1>))) of its 1)> A1>))) bonds at '' plus accruedinterest. T/e bonds are dated #pril 1> 2)1) and mature on #pril 1> 2)2). &nterest ispayable semiannually on #pril 1 and ctober 1. E/at amount did !pear receive from t/ebond issuanceGa. A1>)15>)))b. A1>)))>)))c. A'')>)))d. A'5>)))

14 - 23


24/43


1)". n anuary 1> 2)1)> !olis 6o. issued its 1) bonds in t/e face amount of A3>)))>)))>7/ic/ mature on anuary 1> 2)2). T/e bonds 7ere issued for A3>4)5>))) to yield %>resultin* in bond premium of A4)5>))). !olis uses t/e effective-interest met/od ofamorti$in* bond premium. &nterest is payable annually on December 31. #t December 31>2)1)> !olis:s ad?usted unamorti$ed bond premium s/ould bea. A4)5>))).b. A3"">4)).c. A34>5)).d. A3)4>5)).

1)%. n uly 1> 2))'> ;oble> &nc. issued ' bonds in t/e face amount of A5>)))>)))> 7/ic/mature on uly 1> 2)15. T/e bonds 7ere issued for A4>'5>))) to yield 1)> resultin* in abond discount of A3)5>))). ;oble uses t/e effective-interest met/od of amorti$in* bonddiscount. &nterest is payable annually on une 3). #t une 3)> 2)11> ;oble:s unamorti$edbond discount s/ould bea. A24>)5).b. A255>))).c. A244>))).d. A215>))).

1)'. n anuary 1> 2)1)> Kuff 6o. sold A1>)))>))) of its 1) bonds for A%%5>2' to yield12. &nterest is payable semiannually on anuary 1 and uly 1. E/at amount s/ould Kuffreport as interest e(pense for t/e si( mont/s ended une 3)> 2)1)Ga. A44>2b. A5)>)))c. A53>11%d. A)>)))

11). n anuary 1> 2)11> Doty 6o. redeemed its 15-year bonds of A2>5))>))) par value for1)2. T/ey 7ere ori*inally issued on anuary 1> 1''' at '% 7it/ a maturity date of

anuary 1> 2)14. T/e bond issue costs relatin* to t/is transaction 7ere A15)>))). Dotyamorti$es discounts> premiums> and bond issue costs usin* t/e strai*/t-line met/od.E/at amount of loss s/ould Doty reco*ni$e on t/e redemption of t/ese bonds Ci*noreta(esGa. A')>)))b. A)>)))c. A5)>)))d. A)

111. n its December 31> 2)1) balance s/eet> mi* 6orp. reported bonds payable ofA>)))>))) and related unamorti$ed bond issue costs of A32)>))). T/e bonds /ad beenissued at par. n anuary 2> 2)11> mi* retired A3>)))>))) of t/e outstandin* bonds at

par plus a call premium of A")>))). E/at amount s/ould mi* report in its 2)11 incomestatement as loss on e(tin*uis/ment of debt Ci*nore ta(esGa. A)b. A")>)))c. A1)>)))d. A23)>)))

14 - 24


25/43


112. n anuary 1> 2))> oll 6orp. issued 1>))) of its 1)> A1>))) bonds for A1>)4)>))).T/ese bonds 7ere to mature on anuary 1> 2)1 but 7ere callable at 1)1 any time afterDecember 31> 2))'. &nterest 7as payable semiannually on uly 1 and anuary 1. nuly 1> 2)11> oll called all of t/e bonds and retired t/em. Bond premium 7as amorti$edon a strai*/t-line basis. Before income ta(es> oll:s *ain or loss in 2)11 on t/is earlye(tin*uis/ment of debt 7asa. A3)>))) *ain.b. A12>))) *ain.c. A1)>))) loss.d. A%>))) *ain.

113. n une 3)> 2)11> mara 6o. /ad outstandin* %> A3>)))>))) face amount> 15-yearbonds maturin* on une 3)> 2)21. &nterest is payable on une 3) and December 31. T/eunamorti$ed balances in t/e bond discount and deferred bond issue costs accounts onune 3)> 2)11 7ere A1)5>))) and A3)>)))> respectively. n une 3)> 2)11> maraac9uired all of t/ese bonds at '4 and retired t/em. E/at net carryin* amount s/ould beused in computin* *ain or loss on t/is early e(tin*uis/ment of debtGa. A2>'")>))).

b. A2>%'5>))).c. A2>%5>))).d. A2>%2)>))).

114. # ten-year bond 7as issued in 2))' at a discount 7it/ a call provision to retire t/e bonds.E/en t/e bond issuer e(ercised t/e call provision on an interest date in 2)11> t/e carryin*amount of t/e bond 7as less t/an t/e call price. T/e amount of bond liability removedfrom t/e accounts in 2)11 s/ould /ave e9ualed t/ea. call price.b. call price less unamorti$ed discount.c. face amount less unamorti$ed discount.d. face amount plus unamorti$ed discount.

115. ai*e 6o. took advanta*e of market conditions to refund debt. T/is 7as t/e fourt/refundin* operation carried out by ai*e 7it/in t/e last t/ree years. T/e e(cess of t/ecarryin* amount of t/e old debt over t/e amount paid to e(tin*uis/ it s/ould be reportedas aa. *ain> net of income ta(es.b. loss> net of income ta(es.c. part of continuin* operations.d. deferred credit to be amorti$ed over t/e life of t/e ne7 debt.

011. ddy 6o. is indebted to 6ole under a A4))>)))> 12> t/ree-year note datedDecember 31> 2))'. Because of ddy:s financial difficulties developin* in 2)11> ddy

o7ed accrued interest of A4%>))) on t/e note at December 31> 2)11. @nder a troubleddebt restructurin*> on December 31> 2)11> 6ole a*reed to settle t/e note and accruedinterest for a tract of land /avin* a fair value of A3)>))). ddy:s ac9uisition cost of t/eland is A2')>))). &*norin* income ta(es> on its 2)11 income statement ddy s/ould reportas a result of t/e troubled debt restructurin*

ain on Disposal +estructurin* aina. A15%>))) A)b. A11)>))) A)c. A")>))) A4)>)))d. A")>))) A%%>)))

14 - 2:


26/43


Muti&e C"oi%e Ans*ers)CPA A#a&te#

Ite Ans' Ite Ans' Ite Ans' Ite Ans' Ite Ans' Ite Ans'

1). a 1)%. a 11). a 112. d 114. c 011. d1)". b 1)'. c 111. d 113. c 115. c

+ERI6ATIONS) Co&utationa

No' Ans*er +erivation

). a A1>)))>))) N .534 = A534>))).

1. b CA1>)))>))) N .)3 N 11.52 = A34'>5).

2. a A534>))) O A34'>5) = A%%3>5).

3. c CA5>)))>))) N ."%12) O CA15)>))) N %."52) = A5>21%>%)'.

4. c CA2)>)))>))) N .'" O CA1>%))>))) N 212 = A1'>"))>))).

5. c CA1)>)))>))) N ."%12) O CA3))>))) N %."52) = A1)>43">1%.

. c CA1)>)))>))) N .'" O CA'))>))) N 212 = A'>%5)>))).

". c CA1'>)4>145 N .)4 O CA1'>)%>31) N .)4 = A1>5%>4'%.

%. a A1'>)4>145 O PCA1'>)4>145 N .)4 Q A"%)>)))RO PA1'>)%>31) N .)4 Q A"%)>)))R = A1'>12>43.

'. d A1'>)4>145 O CA3'5>%55 N 32) = A1'>3>523.

"). d CA2)>)))>))) N .)"% O CA3'5>%55 S 2) = A1>5"'>"'3.

"1. c CA4>')1>)3 N .)4 O CA4>')2>)"" N .)4 = A3'2>124.

"2. a A4>')1>)3 O PCA4>')1>)3 N .)4 Q A1'5>)))R O PCA4>')2>)"" N .)4 Q A1'5>)))R= A4>')3>1).

"3. d A4>')1>)3 O CA'%>'4 N 32) = A4>'15>%%1.

"4. d CA5>)))>))) N .)"% O CA'%>'4 S 2) = A3'4>'4%.

"5. b A4>2)) N .)5 = A32>31)PA4>2)) Q CA3>))) Q A32>31)R N .)5 = 32>12

A4>43

". c A553>)) N .)5 = A2">%)PA553>)) O CA2">%) Q A24>)))R N .)5 = 2">%4

A55>544

14 - 2;


27/43


+ERI6ATIONS) Co&utationa 0%ont'

No' Ans*er +erivation"". d CA1>)))>))) N 1.)4 Q A1>)))>))) = A4)>))) premium.

"%. a PCA1>)))>))) N .)5 N 312R Q PCA4)>))) S 1) N 312R = A11>5)).

"'. b CA5))>))) N 1.)4 Q A5))>))) = A2)>))) premium.

%). c PCA5))>))) N .)5 N 312R Q PCA2)>))) S 1) N 312R = A5>"5).

%1. b CA%33>") N .) = A5)>)2 PA5)>)2 Q CA'))>))) N .)5R = A5>)2CA%33>") O A5>)2 N .) = A5)>32"A5)>)2 O A5)>32" = A1))>353.

%2. b CA4>'5>))) N .1) Q CA5>)))>))) N .)' = A1'>5))CA5>)))>))) Q A4>'5>))) Q A1'>5)) = A2%5>5)).

%3. b CA3>)))>))) N .11 Q CA3>1'5>))) N .1) = A1)>5))CA3>1'5>))) Q A3>)))>))) Q A1)>5)) = A1%4>5)).

%4. c CA555>%4) N .) = A33>35) PA33>35) Q CA))>))) N .)5R = A3>35)CA555>%4) O A3>35) N .) = A33>551A33>35) O A33>551 = A>')1.

%5. b A1))>))) Q A'>25) = A3>"5) discount.

%. b A1)3>"45 Q A1))>))) = A3>"45 premium.

%". b CA2>)))>))) N 1.)2 Q CA2>)))>))) Q A1)>))) Q A12)>))) = A32)>))).

%%. c CA1>5))>))) N 1.)2 Q CA1>5))>))) Q A12)>))) Q A')>))) = A24)>))).

%'. c 27 000 2

1 027 000 418 6

A >A > > .

= A41)>)) C68 of retired bonds

A41)>)) Q CA4))>))) N .'% = A1%>)).

'). b 4 500 000A135>)))

A > > (1.)3 " 2'1)

= A1>))'>))) C68 of retired bonds

A1>))'>))) Q CA1>)))>))) .' = A4'>))).

'1. b A5")>))) O PCA5")>))) N .) Q CA))>))) N .)5R = A5"4>2)) C68 of bondsA5"4>2)) Q CA))>))) N 1.)2 = A3">%)).

'2. b A3))>))) O A1))>))) = A4))>))).

'3. b A%32>))) Q PCA%))>))) N .) Q CA%32>))) N .)5R = A%25>)) C68 of bondsCA%))>))) N 1.)4 Q A%25>)) = A>4)).

14 - 2


28/43

Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition14 - 2=


29/43


+ERI6ATIONS) Co&utationa 0%ont'

No' Ans*er +erivation'4. b A'>))>))) O PA4))>))) N C3 23 S 1)RU N .) = A5>%4%>)))

A>12)>))) Q A5>%4%>))) = A2"2>))).

'5. b A4>%))>))) O PA2))>))) N C3 23 S 1)RU N .) = A2>'24>)))A3>))>))) Q A2>'24>))) = A13>))).

'. a A45>)"% N .1) = A4>5)%.

'". c A''4>%)) N .1) = A''>4%).

'%. b A2>)))>))) Q A1>442>))) Q CA1>442>))) N .)' = A42%>22).

A)>))) O A4)>))) O A2)>)))''. d VVVVVVVVVVVVV = times.

A2)>)))

1)). a CA14)>))) O A4)>))) O A2)>))) S A4)>))) = 5.).

1)1. c CA25)>))) O A5)>))) O W S A5)>))) = 'CA3))>))) O W = ' N A5)>)))W = A15)>))) &BT = A4))>))) CA25)>))) O A15)>))).

1)2. d A1>5))>))) O A1))>))) O A15>))) O CA2))>))) Q A15>))) = A1>'5)>))).

01)3. b A2')>))) Q CA4%)>))) Q A23)>))) = A4)>))).

01)4. d CA))>))) O A)>))) Q PA2')>))) O A25)>))) O CA25)>))) N .) N 3R= A"5>))).

01)5. a ). T/e effective-interest rate is ).

+ERI6ATIONS) CPA A#a&te#

No' Ans*er +erivation

1). a CA1>)))>))) N .'' O CA1>)))>))) N .1) N 312 = A1>)15>))).

1)". b A4)5>))) Q PCA3>)))>))) N .1) Q CA3>4)5>))) N .)%R = A3"">4)).

1)%. a 2))'Q2)1)'5>))) O PCA4>'5>))) N .1 Q CA5>)))>))) N .)'R

= A4>"14>5)).2)1)Q2)11"14>5)) O CA4"1>45) Q A45)>))) = A4>"35>'5)A5>)))>))) Q A4>"35>'5) = A24>)5).

1)'. c A%%5>2' N .) = A53>11%.

11). a CA2>5))>))) N 1.)2 Q 200 000

2 300 000 1215

A >A > >

+ = A')>))).

14 - 2?


30/43


+ERI6ATIONS) CPA A#a&te# 0%ont'

No' Ans*er +erivation111. d CA3>)))>))) O A")>))) Q PCA>)))>))) Q A32)>))) N 12R = A23)>))).

112. d 40 000

1 040 000 1120

A >A > > Q CA1>)))>))) N 1.)1 = A%>))).

113. c A3>)))>))) Q CA1)5>))) O A3)>))) = A2>%5>))).

114. c 6onceptual.

115. c 6onceptual.

011. d A3)>))) Q A2')>))) = A")>)))CA4))>))) O A4%>))) Q A3)>))) = A%%>))).

EERCISES

E' 14-11


31/43


E' 14-11 assume t/at t/e issue price 7as A%%4>))).

repare t/e amorti$ation table for 2)11> assumin* t/at amorti$ation is recorded on interestpayment dates.

Soution 14-11=

Ca .312 N A1>)))>))) = A312>)))11.4") N A5)>))) = 5"3>5))

A%%5>5))

Cb Date 6as/ (pense #morti$ation 6arryin* #mount

1111 A%%4>)))3)11 A5)>))) A53>)4) 3>)4) %%">)4)123111 5)>))) 53>222 3>222 %')>22

14 - 31


32/43


E' 14-11?V#morti$ation of discount or premium.

rider &ndustries> &nc. issued A>)))>))) of % debentures on May 1> 2)1) and received cas/totalin* A5>323>5"". T/e bonds pay interest semiannually on May 1 and ;ovember 1. T/e maturitydate on t/ese bonds is ;ovember 1> 2)1%. T/e firm uses t/e effective-interest met/od of amorti$in*discounts and premiums. T/e bonds 7ere sold to yield an effective-interest rate of 1).

Instru%tions6alculate t/e total dollar amount of discount or premium amorti$ation durin* t/e first year C511)t/rou*/ 43)11 t/ese bonds 7ere outstandin*. C!/o7 computations and round to t/e nearestdollar.

Soution 14-11?

&nterest 6as/ Discount 6arryin* Date (pense &nterest #morti$ed 8alue of Bonds511) A5>323>5""1111) A2>1"' A24)>))) A2>1"' 5>34'>"5

5111 2">4%% 24)>))) 2">4%% 5>3"">244Total A53>"E' 14-12Vntries for Bonds ayable.

repare ?ournal entries to record t/e follo7in* transactions related to lon*-term bonds of Yuirk 6o.

Ca n #pril 1> 2))'> Yuirk issued A5))>)))> ' bonds for A53">%% includin* accrued interest.&nterest is payable annually on anuary 1> and t/e bonds mature on anuary 1> 2)1'.

Cb n uly 1> 2)11 Yuirk retired A15)>))) of t/e bonds at 1)2 plus accrued interest. Yuirk usesstrai*/t-line amorti$ation.

Soution 14-12

Ca 6as/.............................................................................................. 53">%%Bonds ayable..................................................................... 5))>)))&nterest (pense CA5))>))) N ' N 312............................ 11>25)remium on Bonds ayable................................................ 2>1%

Cb &nterest (pense............................................................................ >34)remium on Bonds ayable CA2>1% N .3 N 11"....................... 41)

6as/ CA15)>))) N ' N 12.............................................. >"5)

Bonds ayable............................................................................... 15)>)))remium on Bonds ayable CA2>1% N .3 N ')11"..................... >142

6as/.................................................................................... 153>)))ain on +edemption of Bonds............................................. 3>142

14 - 32


33/43


E' 14-121V+etirement of bonds.

repare ?ournal entries to record t/e follo7in* retirement. C!/o7 computations and round to t/enearest dollar.

T/e December 31> 2)1) balance s/eet of Eolfe 6o. included t/e follo7in* items5))

Discount on Bonds ayable CA4%>))) N 15 N 1% N 312.... 3))

Bonds ayable................................................................................ 24)>))),oss on +edemption of Bonds........................................................ 11>"))

Discount on Bonds ayable PC15 N A4%>))) Q A3))R.......... '>3))6as/.................................................................................... 242>4))

E' 14-122Varly e(tin*uis/ment of debt.

Kurst> &ncorporated sold its % bonds 7it/ a maturity value of A3>)))>))) on #u*ust 1> 2))' forA2>'4>))). #t t/e time of t/e sale t/e bonds /ad 5 years until t/ey reac/ed maturity. &nterest ont/e bonds is payable semiannually on #u*ust 1 and February 1. T/e bonds are callable at 1)4 at

any time after #u*ust 1> 2)11. By ctober 1> 2)11> t/e market rate of interest /as declined andt/e market price of Kurst:s bonds /as risen to a price of 1)1. T/e firm decides to refund t/ebonds by sellin* a ne7 bond issue to mature in 5 years. Kurst be*ins to reac9uire its %bonds in t/e market and is able to purc/ase A5))>))) 7ort/ at 1)1. T/e remainder of t/eoutstandin* bonds is reac9uired by e(ercisin* t/e bonds: call feature. &n t/e final analysis> /o7muc/ 7as t/e *ain or loss e(perienced by Kurst in reac9uirin* its % bondsG C#ssume t/e firmused strai*/t-line amorti$ation. !/o7 calculations.

Soution 14-122

+eac9uisition price))) N 1.)1 = A 5)5>)))

A2>5))>))) N 1.)4 = 2>))>))) A3>1)5>))),ess net carryin* amount'4>))) O CA54>))) N 2) = 2>''>4)),oss on early e(tin*uis/ment A 135>))

14 - 33


34/43


>E' 14-123V#ccountin* for a troubled debt settlement.

Mann> &nc.> 7/ic/ o7es Doran 6o. A))>))) in notes payable 7it/ accrued interest of A54>)))> isin financial difficulty. To settle t/e debt> Doran a*rees to accept from Mann e9uipment 7it/ a fairvalue of A5")>)))> an ori*inal cost of A%4)>)))> and accumulated depreciation of A1'5>))).

Instru%tionsCa 6ompute t/e *ain or loss to Mann on t/e settlement of t/e debt.

Cb 6ompute t/e *ain or loss to Mann on t/e transfer of t/e e9uipment.

Cc repare t/e ?ournal entry on Mann :s books to record t/e settlement of t/is debt.

Cd repare t/e ?ournal entry on Doran:s books to record t/e settlement of t/e receivable.

>Soution 14-123

Ca ;ote payable A))>)))

&nterest payable 54>)))6arryin* amount of debt 54>)))Fair value of e9uipment 5")>)))ain on settlement of debt A %4>)))

Cb 6ost A%4)>)))#ccumulated depreciation 1'5>)))Book value 45>)))Fair value of plant assets 5")>))),oss on disposal of e9uipment A "5>)))

Cc ;otes ayable............................................................................... ))>)))

&nterest ayable............................................................................. 54>)))#ccumulated Depreciation............................................................. 1'5>))),oss on Disposal of 9uipment...................................................... "5>)))

9uipment.......................................................................... %4)>)))ain on !ettlement of Debt................................................ %4>)))

Cd 9uipment...................................................................................... 5")>)))#llo7ance for Doubtful #ccounts.................................................... %4>)))

;otes +eceivable............................................................... ))>)))&nterest +eceivable............................................................. 54>)))

>E' 14-124V#ccountin* for a troubled debt restructurin*.

n December 31> 2))'> !/ort 6o. is in financial difficulty and cannot pay a note due t/at day. &t isa A5))>))) note 7it/ A5)>))) accrued interest payable to Bryan> &nc. Bryan a*rees to for*ive t/eaccrued interest> e(tend t/e maturity date to December 31> 2)11> and reduce t/e interest rate to4. T/e present value of t/e restructured cas/ flo7s is A42%>))).

14 - 34


35/43


Instru%tionsrepare entries for t/e follo7in* 2)1).

Cc T/e restructure on BryanHs books.

>Soution 14-124

Ca &nterest ayable............................................................................. 5)>)));otes ayable CA5))>))) N 4 N 2................................... 4)>)))ain on +estructurin*........................................................ 1)>)))

Cb ;otes ayable............................................................................... 2)>)))6as/................................................................................... 2)>)))

Cc #llo7ance for Doubtful #ccounts.................................................... 122>)));otes +eceivable............................................................... "2>)))&nterest +eceivable............................................................. 5)>)))

>E' 14-12:V#ccountin* for troubled debt.

Ca E/at are t/e *eneral rules for measurin* and reco*ni$in* a *ain or loss by t/e debtor on asettlement of troubled debt 7/ic/ includes t/e transfer of noncas/ assetsG

Cb E/at are t/e *eneral rules for measurin* and reco*ni$in* a *ain and for recordin* futurepayments by t/e debtor in a troubled debt restructurin*G

>Soution 14-12:

Ca &f t/e settlement of debt includes t/e transfer of noncas/ assets> a *ain is measured by t/edebtor as t/e difference bet7een t/e fair value of t/e assets transferred and t/e carryin*amount of t/e debt> includin* accrued interest. T/e debtor also reco*ni$es a *ain or loss ont/e disposal of assets as t/e difference bet7een t/e fair value of t/e assets transferred andt/eir book value.

Cb &f t/e carryin* amount of t/e payable is *reater t/an t/e undiscounted total future cas/ flo7s>t/e *ain is measured by t/e debtor as t/e difference bet7een t/e carryin* amount and t/efuture cas/ flo7s. Future payments reduce t/e principal no interest e(pense is recorded by

t/e debtor.&f t/e carryin* amount of t/e payable is less t/an t/e future cas/ flo7s> no restructurin* *ainis reco*ni$ed by t/e debtor. # ne7 effective-interest rate is calculated t/at e9uates t/epresent value of t/e future cas/ flo7s 7it/ t/e carryin* amount of t/e debt. # part of t/efuture cas/ flo7s is recorded as interest e(pense by t/e debtor.

14 - 3:


36/43


PROBLEMS

Pr' 14-12;VBond discount amorti$ation.

n une 1> 2))'> verly Bottle 6ompany sold A4))>))) in lon*-term bonds for A351>)4). T/ebonds 7ill mature in 1) years and /ave a stated interest rate of % and a yield rate of 1). T/ebonds pay interest annually on May 31 of eac/ year. T/e bonds are to be accounted for under t/eeffective-interest met/od.

Instru%tionsCa 6onstruct a bond amorti$ation table for t/is problem to indicate t/e amount of interest

e(pense and discount amorti$ation at eac/ May 31. &nclude only t/e first four years. Makesure all columns and ro7s are properly labeled. C+ound to t/e nearest dollar.

Cb T/e sales price of A351>)4) 7as determined from present value tables. !pecifically e(plain/o7 one 7ould determine t/e price usin* present value tables.

Cc #ssumin* t/at interest and discount amorti$ation are recorded eac/ May 31> prepare t/ead?ustin* entry to be made on December 31> 2)11. C+ound to t/e nearest dollar.

Soution 14-12;

Ca Debit 6redit 6arryin* #mountDate 6redit 6as/ &nterest (pense Bond Discount of Bonds1)' A351>)4)5311) A32>))) A35>1)4 A3>1)4 354>14453111 32>))) 35>414 3>414 35">55%53112 32>))) 35>"5 3>"5 31>31453113 32>))) 3>131 4>131 35>445

Cb C1 Find t/e present value of A4))>))) due in 1) years at 1).C2 Find t/e present value of 1) annual payments of A32>))) at 1).#dd C1 and C2 to obtain t/e present value of t/e principal and t/e interest payments.

Cc &nterest (pense.......................................................................... 2)>%5%0&nterest ayable................................................................ 1%>"00Discount on Bonds ayable.............................................. 2>1'1

0"12 A35>"5 Cfrom Table = A2)>%5%00"12 % A4))>))) = A1%>"

Pr' 14-12))) of % bonds on ctober 1> 2)1)> due on ctober 1> 2)15.T/e interest is to be paid t7ice a year on #pril 1 and ctober 1. T/e bonds 7ere sold to yield 1)effective annual interest. rove 6orporation closes its books annually on December 31.

14 - 3;


37/43


Instru%tionsCa 6omplete t/e follo7in* amorti$ation sc/edule for t/e dates indicated. C+ound all ans7ers to

t/e nearest dollar. @se t/e effective-interest met/od.

Debit 6redit 6arryin* #mount6redit 6as/ &nterest (pense Bond Discount of Bonds

ctober 1> 2)1) A"3%>224#pril 1> 2)11ctober 1> 2)11

Cb repare t/e ad?ustin* entry for December 31> 2)11. @se t/e effective-interest met/od.

Cc 6ompute t/e interest e(pense to be reported in t/e income statement for t/e year endedDecember 31> 2)11.

Soution 14-12 2)1) A"3%>224

#pril 1> 2)11 A32>))) A3>'11 A4>'11 "43>135ctober 1> 2)11 32>))) 3">15" 5>15" "4%>2'2

Cb &nterest (pense CA"4%>2'2 N 1) N 312..................................... 1%>")"&nterest ayable C12 N A32>))) ......................................... 1>)))Discount on Bonds ayable CA1%>")" Q A1>))) ............... 2>")"

Cc A1%>45 C12 of A3>'113">15"

1%>")"

A"4>32)

Pr' 14-12=Vntries for bonds payable.

repare t/e necessary ?ournal entries to record t/e follo7in* transactions relatin* to t/e lon*-termissuance of bonds of itts 6o.))) face value itts 6o. second mort*a*e> % bonds for A%"2>1)> includin*accrued interest. &nterest is payable semiannually on December 1 and une 1 7it/ t/e bonds

maturin* 1) years from t/is past December 1. T/e bonds are callable at 1)2.

une 1aid semiannual interest on itts 6o. bonds. C@se strai*/t-line amorti$ation of any premium ordiscount.

December 1aid semiannual interest on itts 6o. bonds and purc/ased A4))>))) face value bonds at t/e callprice in accordance 7it/ t/e provisions of t/e bond indenture.

14 - 3


38/43


Soution 14-12=

Marc/ 1< 6as/.................................................................................... %"2>1)Bonds ayable......................................................... %))>)))remium on Bonds ayable..................................... 5>1)&nterest (pense CA%))>))) N % N 312................ 1>)))

une 1< &nterest (pense.................................................................. 3)>5)remium on Bonds ayable CA5>1) N 311".................... 1>44)

6as/......................................................................... 32>)))

Dec. 1< &nterest (pense.................................................................. 2'>12)remium on Bonds ayable CA5>1) N 11".................... 2>%%)

6as/......................................................................... 32>)))

Bonds ayable..................................................................... 4))>)))remium on Bonds ayable0............................................... 25>'2)

ain on +edemption of Bonds................................. 1">'2)

6as/......................................................................... 4)%>)))

012 N CA5>1) Q A1>44) Q A2>%%) = A25>'2).

Pr' 14-12?Vntries for bonds payable.

repare ?ournal entries to record t/e follo7in* transactions relatin* to lon*-term bonds of Lirby>&nc. C!/o7 computations.

Ca n une 1> 2))'> Lirby> &nc. issued A))>)))> bonds for A5%">4)> 7/ic/ includesaccrued interest. &nterest is payable semiannually on February 1 and #u*ust 1 7it/ t/e

bonds maturin* on February 1> 2)1'. T/e bonds are callable at 1)2.Cb n #u*ust 1> 2))'> Lirby paid interest on t/e bonds and recorded amorti$ation. Lirby uses

strai*/t-line amorti$ation.

Cc n February 1> 2)11> Lirby paid interest and recorded amorti$ation on all of t/e bonds> andpurc/ased A3)>))) of t/e bonds at t/e call price. #ssume t/at a reversin* entry 7as madeon anuary 1> 2)11.

Soution 14-12?

Ca 6as/.............................................................................................. 5%">4)Discount on Bonds ayable........................................................... 24>3)

Bonds ayable................................................................... ))>)))&nterest (pense CA))>))) N N 412.......................... 12>)))

Cb &nterest (pense CA))>))) N N 12 O A42).......................... 1%>42)6as/................................................................................... 1%>)))Discount on Bonds ayable CA24>3) N 211................... 42)

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Soution 14-12? C6ont.

Cc &nterest (pense CA1%>))) O A1>2)............................................. 1'>2)6as/................................................................................... 1%>)))Discount on Bonds ayable CA24>3) N 11.................. 1>2)

Bonds ayable............................................................................... 3)>))),oss on Bond +edemption............................................................. 1'>2'

Discount on Bonds ayable P. N CA24>3) Q A4>2))R ...... 12>)'6as/................................................................................... 3">2))

>Pr' 14-13V#ccountin* for a troubled debt settlement.

,ud7i*> &nc.> 7/ic/ o7es iffin 6o. A%))>))) in notes payable> is in financial difficulty. Toeliminate t/e debt> iffin a*rees to accept from ,ud7i* land /avin* a fair market value ofA1)>))) and a recorded cost of A45)>))).

Instru%tionsCa 6ompute t/e amount of *ain or loss to ,ud7i*> &nc. on t/e transfer Cdisposition of t/e land.

Cb 6ompute t/e amount of *ain or loss to ,ud7i*> &nc. on t/e settlement of t/e debt.

Cc repare t/e ?ournal entry on ,ud7i* :s books to record t/e settlement of t/is debt.

Cd 6ompute t/e *ain or loss to iffin 6o. from settlement of its receivable from ,ud7i*.

Ce repare t/e ?ournal entry on iffin:s books to record t/e settlement of t/is receivable.

>Soution 14-13

Ca Fair market value of t/e land A1)>)))6ost of t/e land to ,ud7i*> &nc. 45)>)))ain on disposition of land A1)>)))

Cb 6arryin* amount of debt A%))>)))Fair market value of t/e land *iven 1)>)))ain on settlement of debt A1')>)))

Cc ;otes ayable.............................................................................. %))>))),and.................................................................................. 45)>)))ain on Disposition of ,and.............................................. 1)>)))ain on !ettlement of Debt............................................... 1')>)))

Cd 6arryin* amount of receivable A%))>))),and received in settlement 1)>))),oss on settled debt A1')>)))

Ce ,and............................................................................................. 1)>)))#llo7ance for Doubtful #ccounts.................................................. 1')>)))

;otes +eceivable.............................................................. %))>)))

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IFRS 8(ESTIONS

TrueFase1. !imilar to @.!. practice> i## re9uires t/at companies present current and noncurrent

liabilities on t/e face of t/e balance s/eet> 7it/ current liabilities *enerally presented in order

of li9uidity.

2. !imilar to @.!. practice> i## re9uires t/at companies present current and noncurrentliabilities on t/e face of t/e balance s/eet> 7it/ current liabilities *enerally presented in orderof ma*nitude.

3. Bot/ i## and @.!. ## pro/ibit t/e reco*nition of liabilities for future losses.

4. i## and @.!. ## are similar in t/e treatment of asset retirement obli*ations.

5. T/e reco*nition criteria for an asset retirement obli*ation C#+ are more strin*ent underi##.

. i## and @.!. ## are dissimilar in t/eir treatment of contin*encies.

". T/e criteria for reco*ni$in* contin*ent assets are more strin*ent under @.!. ##.

%. @nder i##> t/e measurement of a provision related to a contin*ency is based on anavera*e estimate of t/e e(penditure re9uired to settle t/e obli*ation.

'. @.!. ## permits reco*nition of a restructurin* liability> once a company /as committed to arestructurin* plan.

1). T/e reco*nition criteria for an #+ are more strin*ent under @.!. ##< T/e #+ is not

reco*ni$ed unless t/ere is a present le*al obli*ation and t/e fair value of t/e obli*ation canbe reasonably estimated.

Ans*ers to TrueFase1. True2. False3. True4. True5. False. False". False%. False

'. False1). True

Muti&e C"oi%e 8uestions1. T/e primary i## related to reportin* and reco*nition of liabilities is found in

a. ! 1) and ! 3'.b. ! 1" and ! 23.c. ! 1 and ! 3".d. ! 2" and ! 32.

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2. !imilar to @.!. practice> i## re9uires t/at companies present current and noncurrentliabilities on t/e face of t/e balance s/eet 7it/ current liabilitiesa. *enerally presented in order of ma*nitude.b. presented in alp/abetic order.c. presented in order of li9uidity.d. presented in t/e order in 7/ic/ t/ey 7ere incurred.

3. @nder i##> t/e measurement of a provision related to a contin*ency is based ona. t/e best estimate of t/e e(penditure re9uired to settle t/e obli*ation.b. t/e minimum amount from amon* a number of alternative estimates.c. an avera*e from amon* a number of alternative estimates.d. 7/atever mana*ement feels t/at s/are/olders 7ould be 7illin* to accept because of t/e

impact on current earnin*s.

4. Bot/ @.!. ## and i## pro/ibita. t/e reco*nition of a restructurin* liability> once a company /as committed to a

restructurin* plan.b. t/e reco*nition of liabilities for future losses.c. communicatin* information on a restructurin* plan to employees> before a liability can be

establis/ed.d. all of t/e above.

5. i## and @.!. ## area. similar in t/e treatment of asset retirement obli*ations C#+s.b. si*nificantly different 7/en it comes to t/e treatment of asset retirement obli*ations

C#+s.c. continuin* to evolve in t/e area of asset retirement obli*ations C#+s.d. in conflict 7it/ respect to t/e accountin* for and presentation of asset retirement

obli*ations C#+s.

. Bot/ i## and @.!. ## permit valuation of lon*-term debt and ot/er liabilities ata. present value discounted at t/e firm:s cost of capital.b. current market values of t/e obli*ations> based on c/an*es in t/e discount rate 7it/

unreali$ed *ains and losses reflected in a separate account in stock/olders: e9uity.c. fair value 7it/ *ains and losses on c/an*es in fair value recorded in income in certain

situations.d. /istoric costs 7it/out reflectin* c/an*es in valuation as obli*ations 7ill be retired at t/eir

maturity date.

". #s t/ere is no comparable institution to t/e !6 in international securities markets> manyinternational companies Ct/ose not re*istered 7it/ t/e !6a. voluntarily ad/ere to !6 criteria in providin* information related to contractual

obli*ations.b. are not re9uired to provide disclosures suc/ as t/ose related to contractual obli*ations.c. follo7 t/e re9uirements establis/ed for contractual obli*ations put fort/ by t/e !B.d. follo7 t/e re9uirements establis/ed for contractual obli*ations put fort/ by t/e F#!B.

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%. @nder @.!. ##> contin*ent assets for insurance recoveries are reco*ni$ed if XXXXXXXXXXi## re9uires t/e recovery be XXXXXXXXXXX before reco*nition of an asset is permitted.

a. probable and virtually certain b. possible and very likely c. possible and definite d. certain and probable

'. i## rules for establis/in* restructurin* liabilities could be used as an earnin*smana*ement tool because i## rules are

a. more-strin*ent t/at @.!. ##. b. less-strin*ent t/at @.!. ##. c. virtually t/e same as @.!. ##. d. totally different t/an @.!. ##.

1). # concern 7it/ i## is t/at its less-strin*ent rules for establis/in* restructurin* liabilitiescould be used as

a. a more appropriate met/od t/an t/at employed under @.!. ##. b. an appropriate met/od> but comple( and difficult to e(plain to s/are/olders. c. a met/od readily employed to make t/e understandin* of financial information morecompre/ensible to s/are/olders.

d. an earinin*s mana*ement tool.

Ans*ers to uti&e %"oi%e1. c2. c3. a4. b5. a. c

". b%. a'. b1). d

IFRS S"ort Ans*er

1. Briefly describe some of t/e similarities and differences bet7een @.!. ## and i## 7it/respect to t/e accountin* for liabilities.

1. #mon* t/e similarities are< C1 i## re9uires t/at companies present current and non-

current liabilities on t/e face of t/e balance s/eet> 7it/ current liabilities *enerally presentedin order of li9uidity> C2 Bot/ ##s pro/ibit t/e reco*nition of liabilities for future losses C3i## and @.!. ## are similar in t/e treatment of asset retirement obli*ations C#+s>and C4 i## and @.!. ## are similar in t/eir treatment of contin*encies.

#lt/ou*/ t/e t7o ##s are similar 7it/ respect to t/e above topics> t/ere are differences>includin*< C1 @nder i##> t/e measurement of a provision related to a contin*ency is basedon t/e best estimate of t/e e(penditure re9uired to settle t/e obli*ation. &f a ran*e ofestimates is predicted and no amount in t/e ran*e is more likely t/an any ot/er amount in t/eran*e> t/e Zmid-pointH of t/e ran*e is used to measure t/e liability. &n @.!. ##> t/e minimum

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amount in a ran*e is used C2 i## permits reco*nition of a restructurin* liability> once acompany /as committed to a restructurin* plan. @.!. ## /as additional criteria Ci.e.>related to communicatin* t/e plan to employees> before a restructurin* liability can beestablis/ed C3 t/e reco*nition criteria for an asset retirement obli*ation are more strin*entunder @.!. ##Vt/e #+ is not reco*ni$ed unless t/ere is a present le*al obli*ation andt/e fair value of t/e obli*ation can be reasonably estimated and C4 t/e criteria forreco*ni$in* contin*ent assets for insurance recoveries are reco*ni$ed if probable i##re9uires t/e recovery be Ivirtually certain>J before reco*nition of an asset is permited.

2. Briefly discuss /o7 accountin* conver*ence efforts addressin* liabilities is related to t/e!BF#!B conceptual frame7ork pro?ect.

2. T/e !B and F#!B are 7orkin* on a conceptual frame7ork pro?ect> part of 7/ic/ 7ille(amine t/e definition of a liability. &n addition> t/is pro?ect 7ill address t/e difference inmeasurements used bet7een i## and @.!. ## for contin*ent liabilities. #lso> in itspro?ect on business combinations> t/e !B is considerin* c/an*in* its definition of acontin*ent asset to conver*e 7it/ @.!. ##.

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ch14_Longterm Liability

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