Question & Answer

Using the same information as in E14-22 and

, answer the following questions related to American Bank (creditor).

Instructions

(a) Compute the loss American Bank will suffer under this new term modification. Prepare the journal entry to record the loss on American’s books.

(b) Prepare the interest receipt schedule for American Bank after the debt restructuring.

(c) Prepare the interest receipt entry for American Bank on December 31, 2015, 2016, and 2017.

(d) What entry should American Bank make on January 1, 2018?

Use the same information as in E14-22 above except that American Bank reduced the principal to $1,900,000 rather than $2,400,000. On January 1, 2018,

Barkley pays $1,900,000 in cash to American Bank for the principal.

Instructions

(a) Can Barkley Company record a gain under this term modification? If yes, compute the gain for

Barkley Company.

(b) Prepare the journal entries to record the gain on Barkley’s books.

(c) What interest rate should Barkley use to compute its interest expense in future periods? Will your answer be the same as in E14-22 above? Why or why not?

(d) Prepare the interest payment schedule of the note for Barkley Company after the debt restructuring.

(e) Prepare the interest payment entries for Barkley Company on December 31, of 2015, 2016, and 2017.

(f) What entry should Barkley make on January 1, 2018?

Using the same information as in E14-22, answer the following questions related to American Bank (creditor).

Instructions

(a) What interest rate should American Bank use to calculate the loss on the debt restructuring?

(b) Compute the loss that American Bank will suffer from the debt restructuring. Prepare the journal entry to record the loss.

(c) Prepare the interest receipt schedule for American Bank after the debt restructuring.

(d) Prepare the interest receipt entry for American Bank on December 31, 2016.

(e) What entry should American Bank make on January 1, 2018?

On December 31, 2014, the American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $3,000,000 note receivable by the following modifications:

1. Reducing the principal obligation from $3,000,000 to $2,400,000.

2. Extending the maturity date from December 31, 2014, to January 1, 2018.

3. Reducing the interest rate from 12% to 10%.

Barkley pays interest at the end of each year. On January 1, 2018, Barkley Company pays $2,400,000 in cash to Firstar Bank.

Instructions

(a) Will the gain recorded by Barkley be equal to the loss recorded by American Bank under the debt restructuring?

(b) Can Barkley Company record a gain under the term modification mentioned above? Explain.

(c) Assuming that the interest rate Barkley should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note for Barkley Company after the debt restructuring.

(d) Prepare the interest payment entry for Barkley Company on December 31, 2016.

(e) What entry should Barkley make on January 1, 2018?

Strickland Company owes $200,000 plus $18,000 of accrued interest to Moran State Bank. The debt is a 10-year, 10% note. During 2014, Strickland’s business deteriorated due to a faltering regional economy. On December 31, 2014, Moran State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of $390,000, accumulated depreciation of $221,000, and a fair value of $180,000.

Instructions

(a) Prepare journal entries for Strickland Company and Moran State Bank to record this debt settlement.

(b) How should Strickland report the gain or loss on the disposition of machine and on restructuring of debt in its 2014 income statement?

(c) Assume that, instead of transferring the machine, Strickland decides to grant 15,000 shares of its common stock ($10 par) which has a fair value of $180,000 in full settlement of the loan obligation.

If Moran State Bank treats Strickland’s stock as a trading investment, prepare the entries to record the transaction for both parties.

At December 31, 2014, Redmond Company has outstanding three long-term debt issues. The first is a $2,000,000 note payable which matures June 30, 2017. The second is a$6,000,000 bond issue which matures September 30, 2018. The third is a $12,500,000 sinking fund debenture with annual sinking fund payments of $2,500,000 in each of the years 2016 through 2020.

Instructions

Prepare the required note disclosure for the long-term debt at December 31, 2014.

Fallen Company commonly issues long-term notes payable to its various lenders. Fallen has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Fallen has elected to use the fair value option for the long-term notes issued to Barclay’s Bank and has the following data related to the carrying and fair value for these notes.

Carrying Value Fair Value

December 31, 2014 $54,000 $54,000

December 31, 2015 44,000 42,500

December 31, 2016 36,000 38,000

Instructions

(a) Prepare the journal entry at December 31 (Fallen’s year-end) for 2014, 2015, and 2016, to record the fair value option for these notes.

(b) At what amount will the note be reported on Fallen’s 2015 balance sheet?

(c) What is the effect of recording the fair value option on these notes on Fallen’s 2016 income?

(d) Assuming that general market interest rates have been stable over the period, does the fair value data for the notes indicate that Fallen’s creditworthiness has improved or declined in 2016? Explain.

On January 1, 2014, Margaret Avery Co. borrowed and received $400,000 from a major customer evidenced by a zero-interest-bearing note due in 3 years. As consideration for the zero-interest-bearing feature, Avery agrees to supply the customer’s inventory needs for the loan period at lower than the market price. The appropriate rate at which to impute interest is 8%.

Instructions

(a) Prepare the journal entry to record the initial transaction on January 1, 2014. (Round all computations to the nearest dollar.)

(b) Prepare the journal entry to record any adjusting entries needed at December 31, 2014. Assume that the sales of Avery’s product to this customer occur evenly over the 3-year period.

Presented below are two independent situations.

(a) On January 1, 2014, Robin Wright Inc. purchased land that had an assessed value of $350,000 at the time of purchase. A $550,000, zero-interest-bearing note due January 1, 2017, was given in exchange.

There was no established exchange price for the land, nor a ready fair value for the note. The interest rate charged on a note of this type is 12%. Determine at what amount the land should be recorded at January 1, 2014, and the interest expense to be reported in 2014 related to this transaction.

(b) On January 1, 2014, Field Furniture Co. borrowed $5,000,000 (face value) from Gary Sinise Co., a major customer, through a zero-interest-bearing note due in 4 years. Because the note was zerointerest- bearing, Field Furniture agreed to sell furniture to this customer at lower than market price.

A 10% rate of interest is normally charged on this type of loan. Prepare the journal entry to record this transaction and determine the amount of interest expense to report for 2014.

On January 1, 2014, Ellen Greene Company makes the two following acquisitions.

1. Purchases land having a fair value of $200,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $337,012.

2. Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $250,000 (interest payable annually).

The company has to pay 11% interest for funds from its bank.

Instructions

(Round answers to the nearest cent.)

(a) Record the two journal entries that should be recorded by Ellen Greene Company for the two purchases on January 1, 2014.

(b) Record the interest at the end of the first year on both notes using the effective-interest method.

Linda Day George Company had bonds outstanding with a maturity value of $300,000. On April 30, 2014, when these bonds had an unamortized discount of $10,000, they were called in at 104. To pay for these bonds, George had issued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 103 (face value $300,000). Issue costs related to the new bonds were $3,000.

Instructions

Ignoring interest, compute the gain or loss and record this refunding transaction.

On June 30, 2006, County Company issued 12% bonds with a par value of $800,000 due in 20 years. They were issued at 98 and were callable at 104 at any date after June 30, 2014. Because of lower interest rates and a significant change in the company’s credit rating, it was decided to call the entire issue on June 30, 2015, and to issue new bonds. New 10% bonds were sold in the amount of $1,000,000 at 102; they mature in 20 years. County Company uses straight-line amortization. Interest payment dates are December 31 and June 30.

Instructions

(a) Prepare journal entries to record the redemption of the old issue and the sale of the new issue on June 30, 2015.

(b) Prepare the entry required on December 31, 2015, to record the payment of the first 6 months’ interest and the amortization of premium on the bonds.

Matt Perry, Inc. had outstanding $6,000,000 of 11% bonds (interest payable July 31 and January 31) due in 10 years. On July 1, it issued $9,000,000 of 10%, 15-year bonds (interest payable July 1 and January 1) at 98. A portion of the proceeds was used to call the 11% bonds at 102 on August 1. Unamortized bond discount and issue cost applicable to the 11% bonds were $120,000 and $30,000, respectively.

Instructions

Prepare the journal entries necessary to record issue of the new bonds and the refunding of the bonds.

On January 2, 2009, Banno Corporation issued $1,500,000 of 10% bonds at 97 due December 31, 2018. Legal and other costs of $24,000 were incurred in connection with the issue. Interest on the bonds is payable annually each December 31. The $24,000 issue costs are being deferred and amortized on a straight-line basis over the 10-year term of the bonds. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable “interest method.”)

The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2014, Banno called

$900,000 face amount of the bonds and redeemed them.

Instructions

Ignoring income taxes, compute the amount of loss, if any, to be recognized by Banno as a result of retiring the $900,000 of bonds in 2014 and prepare the journal entry to record the redemption.

Karen Austin Inc. has issued three types of debt on January 1, 2014, the start of the company’s fiscal year.

(a) $10 million, 10-year, 15% unsecured bonds, interest payable quarterly. Bonds were priced to yield 12%.

 (b) $25 million par of 10-year, zero-coupon bonds at a price to yield 12% per year.

(c) $20 million, 10-year, 10% mortgage bonds, interest payable annually to yield 12%.

Instructions

Prepare a schedule that identifies the following items for each bond: (1) maturity value, (2) number of interest periods over life of bond, (3) stated rate per each interest period, (4) effective-interest rate per each interest period, (5) payment amount per period, and (6) present value of bonds at date of issue.

On January 1, 2014, Aumont Company sold 12% bonds having a maturity value of $500,000 for $537,907.37, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2014, and mature January 1, 2019, with interest payable December 31 of each year. Aumont Company allocates interest and unamortized discount or premium on the effective-interest basis.

Instructions

(Round answers to the nearest cent.)

(a) Prepare the journal entry at the date of the bond issuance.

(b) Prepare a schedule of interest expense and bond amortization for 2014–2016.

(c) Prepare the journal entry to record the interest payment and the amortization for 2014.

(d) Prepare the journal entry to record the interest payment and the amortization for 2016.

On June 30, 2014, Mischa Auer Company issued $4,000,000 face value of 13%, 20-year bonds at $4,300,920, a yield of 12%. Auer uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31.

Instructions

(Round answers to the nearest cent.)

(a) Prepare the journal entries to record the following transactions.

(1) The issuance of the bonds on June 30, 2014.

(2) The payment of interest and the amortization of the premium on December 31, 2014.

(3) The payment of interest and the amortization of the premium on June 30, 2015.

(4) The payment of interest and the amortization of the premium on December 31, 2015.

(b) Show the proper balance sheet presentation for the liability for bonds payable on the December

31, 2015, balance sheet.

(c) Provide the answers to the following questions.

(1) What amount of interest expense is reported for 2015?

(2) Will the bond interest expense reported in 2015 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used?

(3) Determine the total cost of borrowing over the life of the bond.

(4) Will the total bond interest expense for the life of the bond be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used?

Presented below are three independent situations.

(a) CeCe Winans Corporation incurred the following costs in connection with the issuance of bonds:

(1) printing and engraving costs, $12,000; (2) legal fees, $49,000; and (3) commissions paid to underwriter, $60,000. What amount should be reported as Unamortized Bond Issue Costs, and where should this amount be reported on the balance sheet?

(b) George Gershwin Co. sold $2,000,000 of 10%, 10-year bonds at 104 on January 1, 2014. The bonds were dated January 1, 2014, and pay interest on July 1 and January 1. If Gershwin uses the straightline method to amortize bond premium or discount, determine the amount of interest expense to be reported on July 1, 2014, and December 31, 2014.

(c) Ron Kenoly Inc. issued $600,000 of 9%, 10-year bonds on June 30, 2014, for $562,500. This price provided a yield of 10% on the bonds. Interest is payable semiannually on December 31 and

June 30. If Kenoly uses the effective-interest method, determine the amount of interest expense to record if financial statements are issued on October 31, 2014.

Assume the same information as E14-6.

Instructions

Set up a schedule of interest expense and discount amortization under the effective-interest method.

(Hint: The effective-interest rate must be computed.)

Devon Harris Company sells 10% bonds having a maturity value of $2,000,000 for $1,855,816. The bonds are dated January 1, 2014, and mature January 1, 2019. Interest is payable annually on January 1.

Instructions

Set up a schedule of interest expense and discount amortization under the straight-line method. (Round answers to the nearest cent.)

Assume the same information as in E14-4, except that Celine Dion Company uses the effective-interest method of amortization for bond premium or discount. Assume an effective yield of 9.7705%.

Instructions

Prepare the journal entries to record the following. (Round to the nearest dollar.)

(a) The issuance of the bonds.

(b) The payment of interest and related amortization on July 1, 2014.

(c) The accrual of interest and the related amortization on December 31, 2014.

Celine Dion Company issued $600,000 of 10%, 20-year bonds on January 1, 2014, at 102. Interest is payable semiannually on July 1 and January 1. Dion Company uses the straight-line method of amortization for bond premium or discount.

Instructions

Prepare the journal entries to record the following.

(a) The issuance of the bonds.

(b) The payment of interest and the related amortization on July 1, 2014.

(c) The accrual of interest and the related amortization on December 31, 2014.

Presented below are two independent situations.

1. On January 1, 2014, Simon Company issued $200,000 of 9%, 10-year bonds at par. Interest is payable quarterly on April 1, July 1, October 1, and January 1.

2. On June 1, 2014, Garfunkel Company issued $100,000 of 12%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semiannually on July 1 and January 1.

Instructions

For each of these two independent situations, prepare journal entries to record the following.

(a) The issuance of the bonds.

(b) The payment of interest on July 1.

(c) The accrual of interest on December 31.

The following items are found in the financial statements.

(a) Discount on bonds payable.

(b) Interest expense (credit balance).

(c) Unamortized bond issue costs.

(d) Gain on repurchase of debt.

(e) Mortgage payable (payable in equal amounts over next 3 years).

(f) Debenture bonds payable (maturing in 5 years).

(g) Notes payable (due in 4 years).

(h) Premium on bonds payable.

(i) Treasury bonds.

(j) Bonds payable (due in 3 years).

Instructions

Indicate how each of these items should be classified in the financial statements.

Presented below are various account balances of K.D. Lang Inc.

(a) Unamortized premium on bonds payable, of which $3,000 will be amortized during the next year.

(b) Bank loans payable of a winery, due March 10, 2018. (The product requires aging for 5 years before sale.)

(c) Serial bonds payable, $1,000,000, of which $200,000 are due each July 31.

(d) Amounts withheld from employees’ wages for income taxes.

(e) Notes payable due January 15, 2017.

(f) Credit balances in customers’ accounts arising from returns and allowances after collection in full of account.

(g) Bonds payable of $2,000,000 maturing June 30, 2016.

(h) Overdraft of $1,000 in a bank account. (No other balances are carried at this bank.)

(i) Deposits made by customers who have ordered goods.

Instructions

Indicate whether each of the items above should be classified on December 31, 2014, as a current liability, a long-term liability, or under some other classification. Consider each one independently from all others; that is, do not assume that all of them relate to one particular business. If the classification of some of the items is doubtful, explain why in each case.