CHAPTER 14 SOLUTIONS TO B EXERCISES E141B (15–20 minutes) (a) Longterm liability as amount is due more than 1 year out (b) Valuation account relating to the longterm liability, bonds payable (sometimes referred to as a contra account). The $8,500 would continue to be reported as longterm (c) Current liability, $500,000; longterm liability, $5,500,000 (d) Current liability if current assets are used to satisfy the debt (e) Current liability, due within one year (f) Current liability (g) Current liability (h) Current liability (i) Current liability E142B (15–20 minutes) (a) Debenture bonds—Classify as longterm liability on balance sheet (b) Premium on bonds payable—Classify as adjunct account to Bonds Payable on balance sheet (c) Income bonds payable—Classify as longterm liability on balance sheet Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 141 E142B (Continued) (d) Treasury bonds—Classify as contra account to bonds payable on balance sheet (e) Notes payable—Classify as longterm liability on balance sheet (f) Discount on Bonds Payable—Classify as contra account to bonds payable on balance sheet (g) Unamortized Bond Issue Costs—Classify as “Other assets” on balance sheet (h) Mortgage payable—Classify onethird as current liability and the remainder as longterm liability on balance sheet (i) Gain on repurchase of debt—Classify as part of other gains and losses on the income statement (j) Interest expense (credit balance)—Reclassify to interest payable on balance sheet E143B (15–20 minutes) Delgado Company: (a) 1/1/14 Cash 500,000 Bonds Payable 500,000 (b) 7/1/14 Bond Interest Expense ($500,000 X 8% X 3/12) 10,000 Cash 10,000 (c) 12/31/14 Bond Interest Expense 10,000 Interest Payable 10,000 142 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E143B (Continued) Kumiko Company: (a) 6/1/14 Cash 208,333 Bonds Payable 200,000 Bond Interest Expense ($200,000 X 10% X 5/12) 8,333 (b) 7/1/14 Bond Interest Expense 10,000 Cash ($200,000 X 10% X 6/12) 10,000 (c) 12/31/14 Bond Interest Expense 10,000 Interest Payable 10,000 Note: Some students may credit Interest Payable on 6/1/14. In that case, the entry on 7/1/14 will have a debit to Interest Payable for $8,333 and a debit to Bond Interest Expense for $1,667 E144B (15–20 minutes) (a) 1/1/14 Cash ($400,000 X 102%) 408,000 Bonds Payable 400,000 Premium on Bonds Payable 8,000 (b) 7/1/14 Bond Interest Expense 15,800 Premium on Bonds Payable ($8,000 ÷ 40) 200 Cash ($400,000 X 8% X 6/12) 16,000 (c) 12/31/14 Bond Interest Expense 15,800 Premium on Bonds Payable 200 Interest Payable .16,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 143 E145B (15–20 minutes) (a) 1/1/14 Cash 492,460* Bonds Payable 400,000 Premium on Bonds Payable 92,460 *Present value = $400,000 X PV1 (40 periods, 3%) + $16,000 X PVOA (40 periods, 3 %) = $492,460 (b) 7/1/14 Bond Interest Expense ($492,460 X 6% X 1/2) 14,774 Premium on Bonds Payable 1,226 Cash ($400,000 X 8% X 1/2) 16,000 (c) 12/31/14 Bond Interest Expense ($491,234 X 6% X 1/2) 14,737 Premium on Bonds Payable 1,263 Interest Payable .16,000 Carrying amount of bonds at July 1, 2014: Carrying amount of bonds at January 1, 2014 $492,460 Amortization of bond premium ($16,000 – $14,774) (1,226) Carrying amount of bonds at July 1, 2014 $ 491,234 E146B (15–20 minutes) Schedule of Premium Amortization StraightLine Method Year Jan. 1, 2014 Dec. 31, 2014 Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 Cash Paid $400,000 400,000 400,000 400,000 400,000 Interest Expense $315,753 315,753 315,753 315,753 315,752 *$84,247 = ($5,000,000 – $5,421,236) ÷ 5 **Rounded Premium Amortized 84,247* 84,247 84,247 84,247 84,248 Carrying Amount of Bonds $5,421,236 5,336,989 5,252,742 5,168,495 5,084,248 5,000,000** 144 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E147B (15–20 minutes) The effectiveinterest or yield rate is 6%. It is determined through trial and error using Table 62 for the discounted value of the principal ($3,736,291) and Table 64 for the discounted value of the interest ($1,684,945); $3,736,291 plus $1,684,945 equals the proceeds of $5,421,236. (A financial calculator may be used to determine the rate of 6%.) Schedule of Premium Amortization EffectiveInterest Method (12%) Year (1) Jan. 1, 2014 Dec. 31, 2014 Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 Cash Paid (2) $400,000 400,000 400,000 400,000 400,000 Interest Expense (3) $325,274* 320,791 316,038 311,000 305,661** Carrying Amount of Bonds Premium Amortized (4) $74,726 79,209 83,962 89,000 94,339 $5,421,236 5,346,510 5,267,301 5,183,339 5,094,339 5,000,000 *$325,274 = $5,421,236 X 0.6 **Rounded E148B (15–20 minutes) (a) Printing and engraving costs of bonds Legal fees Commissions paid to underwriter Amount to be reported as Unamortized Bond Issue Costs $ 40,000 120,000 320,000 $480,000 The Unamortized Bond Issue Costs, $480,000, should be reported as a deferred charge in the “Other assets” section on the balance sheet Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 145 E148B (Continued) (b) (c) Interest paid for the period from January 1 (July 1) to June 30 (December 31), 2014; $5,000,000 X 6% X 6/12 Less: Premium amortization for the period from January 1 (July 1) to June 30 (December 31), 2014 [($5,000,000 X 1.04) – $5,000,000] ÷ 10 X 6/12 Interest expense to be recorded on July 1 (December 31), 2014 Carrying amount of bonds on June 30, 2014 Effective interest rate for the period from June 30 to October 31, 2014 (.12 X 4/12) Interest expense to be recorded on October 31, 2014 $150,000 10,000 $140,000 $885,296 X .04 $ 35,412 E149B (20–30 minutes) (a) July 1, 2014 Cash 1,770,602.00 Discount on Bonds Payable 229,398.00 Bonds Payable 2,000,000.00 December 31, 2014 Interest Expense ($1,770,602.00 X 12% X 6/12) Discount on Bonds Payable Cash ($2,000,000 X 10% X 6/12) 106,236.12 6,236.12 100,000.00 June 30, 2015 Interest Expense [($1,770,602.00 + $6,236.12) X 12% X 6/12] Discount on Bonds Payable Cash 106,610.29 6,610.29 100,000.00 146 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E149B (Continued) (b) December 31, 2015 Interest Expense [($1,770,602.00 + $6,236.12 + $6,610.29) X 12% X 6/12] 107,006.90 Discount on Bonds Payable 7,006.90 Cash 100,000.00 Longterm Liabilities: Bonds payable, 10% (due on June 30, 2024) Discount on Bonds Payable* Book value of bonds payable $2,000,000.00 209,544.69 $1,790,455.31 *($229,398) – ($6,236.12 + $6,610.29 + $7,006.90) = $209,544.69 (c) Interest expense for the period from January 1 to June 30, 2015 from (a) 3 $106,610.69 Interest expense for the period from July 1 to December 31, 2015 from (a) 4 107,006.90 Amount of bond interest expense reported for 2015 $213,617.59 The amount of bond interest expense reported in 2015 will be less than the amount that would be reported if the straightline method of amortization were used. Under the straightline method, the amor tization of bond discount is $22,940 ($229,398/10). Bond interest expense for 2015 is the sum of the amortized discount, $22,940, and the actual interest paid, $200,000 ($2,000,000 X 10%). Thus, the amount of bond interest expense is $222,940, which is greater than the bond interest expense under the effectiveinterest method Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 147 E149B (Continued) Total interest to be paid for the bond ($2,000,000 X 10% X 10) $2,000,000 Plus: Discount 229,398 Total cost of borrowing over the life of the bond $2,229,398 They will be the same E1410B (15–20 minutes) (a) January 1, 2014 Cash 1,075,814.74 Premium on Bonds Payable 75,814.74 Bonds Payable 1,000,000.00 (b) Schedule of Interest Expense and Bond Premium Amortization EffectiveInterest Method 12% Bonds Sold to Yield 10% Date 1/1/14 12/31/14 12/31/15 12/31/16 (c) (d) Credit Cash — $120,000.00 120,000.00 120,000.00 Debit Interest Expense — $107,581.47 106,339.62 104,973.58 Debit Bond Premium — $12,418.53 13,660.38 15,026.42 December 31, 2014 Bond Interest Expense Premium on Bonds Payable Cash December 31, 2016 Bond Interest Expense Premium on Bonds Payable Cash Carrying Value of Bonds $1,075,814.74 1,063,396.21 1,049,735.83 1,034,709.41 107,581.47 12,418.53 104,973.58 15,026.42 120,000.00 120,000.00 148 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E1411B (20–30 minutes) Secured Bonds Maturity value Number of interest periods Stated rate per period Effective rate per period Payment amount per period Present value (a) ZeroCoupon Bonds Mortgage Bonds $5,000,000 $8,000,000 $10,000,000 20 20 40 8% 10% / 2 = 5% 10% 12% 8% / 2 = 4% $400,000(a) $500,000(b) $4,148,600(c) $829,360(d) $11,979,285(e) $5,000,000 X 8% = $400,000 (b) $10,000,000 X 5% = $500,000 (c) Present value of an annuity of $400,000 discounted at 10% per period for 20 periods ($400,000 X 8.5135) = Present value of $5,000,000 discounted at 10% per period for 20 periods ($5,000,000 X 0.14864) = (d) Present value of $8,000,000 discounted at 12% for 20 periods ($8,000,000 X 0.10367) = $ 3,405,400 743,200 $ 4,148,600 $ 829,360 (e) Present value of an annuity of $500,000 discounted at 4% for 40 periods ($500,000 X 19.79277) = Present value of $10,000,000 discounted at 4% for 40 periods ($10,000,000 X 0.20829) $ 9,896,385 2,082,900 $11,979,285 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 149 E1412B (15–20 minutes) Reacquisition price ($2,500,000 X 105%) Less: Net carrying amount of bonds redeemed: Par value Unamortized premium Unamortized bond issue costs Loss on redemption Calculation of unamortized premium— Original amount of premium: $2,500,000 X 2% = $50,000 $50,000/10 = $5,000 amortization per year Amount of discount unamortized: $5,000 X 8 = $40,000 Calculation of unamortized issue costs— Original amount of costs: $81,000 X $2,500,000/$5,000,000 = $40,500 $40,500/10 = $4,050 amortization per year Amount of costs unamortized: $4,050 X 8 = $32,400 January 2, 2014 Bonds Payable Loss on Redemption of Bonds Premium on Bonds Payable Unamortized Bond Issue Costs Cash $2,625,000 $2,500,000 40,000 (32,400) 2,500,000 117,400 40,000 2,507,600 $ 117,400 32,400 2,625,000 1410 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E1413B (15–20 minutes) Cash 11,760,000 Discount on Bonds Payable (.02 X $12,000,000) 240,000 Bonds Payable (To record issuance of 10% bonds) Bonds Payable 8,000,000 Loss on Redemption of Bonds 690,000 Cash ($8,000,000 X 1.06) Discount on Bonds Payable Unamortized Bond Issue Costs (To record retirement of 12% bonds) 12,000,000 8,480,000 150,000 60,000 Reacquisition price $8,480,000 Less: Net carrying amount of bonds redeemed: Par value $8,000,000 Unamortized bond discount (150,000) Unamortized bond issue costs (60,000) 7,790,000 Loss on redemption $ 690,000 E1414B (12–16 minutes) (a) June 30, 2015 Bonds Payable 1,000,000 Loss on Redemption of Bonds 33,000 Discount on Bonds Payable Cash Reacquisition price ($1,000,000 X 102%) Net carrying amount of bonds redeemed: Par value $1,000,000 Unamortized discount (13,000) (0.02 X $1,000,000 X 13/20) Loss on redemption Cash ($1,100,000 X 101%) 1,111,000 Premium on Bonds Payable Bonds Payable 13,000 1,020,000 $1,020,000 (987,000) $ 33,000 11,000 1,100,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 1411 E1414B (Continued) (b) December 31, 2015 Interest Expense Premium on Bonds Payable Cash 32,725 275* 33,000** *(1/40 X $11,000 = $275) **(0.03 X $1,100,000 = $33,000) E1415B (10–15 minutes) Reacquisition price ($1,500,000 X 103%) Less: Net carrying amount of bonds redeemed: Par value Unamortized premium Loss on redemption Bonds Payable Loss on Redemption of Bonds Premium on Bonds Payable Cash (To record redemption of bonds payable) $1,545,000 $1,500,000 21,000 1,500,000 24,000 21,000 Cash 1,738,000 Unamortized Bond Issue Costs 26,000 Discount on Bonds Payable 36,000 Bonds Payable (To record issuance of new bonds) 1,521,000 $ 24,000 1,545,000 1,800,000 1412 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E1416B (15–20 minutes) (a) January 1, 2014 Land 800,000.00 Discount on Notes Payable 375,464.00 Notes Payable 1,175,464.00 (The $800,000 capitalized land cost represents the present value of the note discounted for 5 years at 8%) Equipment 269,547.46 Discount on Notes Payable 80,452.54* Notes Payable 350,000.00 *Computation of the discount on notes payable: Maturity value $350,000.00 Present value of $350,000 due in 8 years at 8%—$350,000 X .54027 $189,094.50 Present value of $14,000 payable annually for 8 years at 8% annually—$14,000 X 5.74664 80,452.96 Present value of the note (269,547.46) Discount $ 80,452.54 (b) Interest Expense 64,000.00 Discount on Notes Payable ($800,000 X .08) Interest Expense 21,563.80 ($269,547.46 X .08) Discount on Notes Payable Cash ($350,000 X .04) 64,000.00 7,563.80 14,000.00 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 1413 E1417B (15–20 minutes) (a) (b) Face value of the zerointerestbearing note Discounting factor (15% for 5 periods) Amount to be recorded for the land at January 1, 2015 $500,000 X 0.49718 $248,590 Carrying value of the note at January 1, 2015 Applicable interest rate (12%) Interest expense to be reported in 2015 $248,590 X 0.15 $ 37,289 January 1, 2015 Cash 1,000,000 Discount on Notes Payable 288,220 Notes Payable Unearned Revenue 1,000,000 288,220* *$1,000,000 – ($1,000,000 X 0.71178) = $288,220 Carrying value of the note at January 1, 2015 Applicable interest rate (12%) Interest expense to be reported for 2015 $711,780** X 0.12 $ 85,414 **$1,000,000 – $288,220 = $711,780 E1418B (15–20 minutes) (a) Cash 200,000 Discount on Notes Payable 41,234 Notes Payable Unearned Revenue ($200,000 – $158,766) Face value Present value of 1 at 8% for 3 years Present value 200,000 41,234 $200,000 X .79383 $158,766 1414 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E1418B (Continued) (b) Interest Expense ($158,766 X 8%) 12,701 Discount on Notes Payable 12,701 Unearned Revenue ($41,234 ÷ 3) 13,745 Sales 13,745 E1419B (10–15 minutes) Year Ending 2014 2015 2016 (a) Carrying Value $50,000 40,000 61,000 Fair Value $54,000 38,000 62,500 Unrealized Holding Gain (Loss) $ (4,000) 2,000 (1,500) Change in Unrealized Holding Gain (Loss) $ (4,000) 6,000 (3,500) 2014 Unrealized Holding Gain or Loss—Income 4,000 Notes Payable 4,000 2015 Notes Payable 6,000 Unrealized Holding Gain or Loss— Income 6,000 2016 Unrealized Holding Gain or Loss—Income 3,500 Notes Payable 3,500 (b) The fair value of $38,000 (c) Unrealized holding loss of $3,500 (d) Emily’s creditworthiness has improved during 2016 because bond investors are receiving a lower rate relative to investors in similarrisk investments Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 1415 E1420B (10–15 minutes) At December 31, 2014, disclosures would be as follows: Maturities and sinking fund requirements on longterm debt are as follows: 2015 2016 2017 2018 2019 $ 0 10,500,000 16,500,000 ($6,000,000 + $10,500,000) 28,500,000 ($18,000,000 + $10,500,000) 10,500,000 *E1421B (15–20 minutes) (a) Transfer of property on December 31, 2014: Nixim Company (Debtor): Note Payable 800,000 Interest Payable 121,000 Loss on Disposition of Land 520,000a Land 1,200,000 Gain on Debt Restructuring 241,000b a $680,000 – $1,200,000 = $520,000 ($800,000 + $121,000) – $680,000 = $241,000 b 2nd State Bank (Creditor): Land 680,000 Allowance for Doubtful Accounts 241,000 Note Receivable Interest Receivable 800,000 121,000 1416 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) *E1421B (Continued) (b) “Loss on Land” and the “Gain on Debt Restructuring” should be reported as an ordinary item on the income statement (c) Granting of equity interest on December 31, 2014: Nixim Company (Debtor): Note Payable 800,000 Interest Payable 121,000 Common Stock Additional Paidin Capital Gain on Debt Restructuring 200,000 480,000 241,000 2nd State Bank (Creditor): Investment (Trading) 680,000 Allowance for Doubtful Accounts 241,000 Note Receivable Interest Receivable 800,000 121,000 *E1422B (20–30 minutes) (a) No. The gain recorded by Larkin is not equal to the loss recorded by Zettlein Bank under the debt restructuring agreement. (You will see why this happens in the following four exercises.) In response to this “accounting unsymmetry” treatment, FASB stated that GAAP does not address debtor accounting because the FASB was concerned that expansion of the scope of the statement would delay its issuance (b) No. There is no gain under the modified terms because the total future cash flows after restructuring exceed the total prerestructuring carrying amount of the note (principal): Total future cash flows after restructuring are: Principal Interest ($8,000,000 X 10% X 3) Total prerestructuring carrying amount of note (principal): $ 8,000,000 2,400,000 $10,400,000 $10,000,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 1417 *E1422B (Continued) (c) The interest payment schedule is prepared as follows: LARKIN COMPANY Interest Payment Schedule After Debt Restructuring EffectiveInterest Rate 1.4276% Date 12/31/14 12/31/15 12/31/16 12/31/17 Total Cash Interest (10%) $ 800,000 800,000 800,000 $2,400,000 Effective Interest (1.4276%) a b $142,760 133,377 123,863d $400,000 Reduction of Carrying Amount c $ 657,240 666,623 676,137 $2,000,000 Carrying Amount of Note $10,000,000 9,342,760 8,676,137 8,000,000 a $8,000,000 X 10% = $800,000 $10,000,000 X 1.4276% = $142,760 c $800,000 – $142,760 = $657,240 d Adjusted $2 due to rounding b (d) Interest payment entry for Larkin Company is: December 31, 2016 666,623 Note Payable 133,377 Interest Expense Cash (e) 800,000 The payment entry at maturity is: January 1, 2018 Note Payable 8,000,000 Cash 8,000,000 1418 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) *E1423B (25–30 minutes) (a) Zettlein Bank should use the historical interest rate of 12% to calculate the loss (b) The loss is computed as follows: Prerestructuring carrying amount of note Less: Present value of restructured future cash flows: Present value of principal $8,000,000 due in 3 years at 12% Present value of interest $800,000 paid annually for 3 years at 12% Loss on debt restructuring 1,921,464b $10,000,000 $5,694,240a 7,615,704 $ 2,384,296 a $8,000,000 X .71178 = $5,694,240 $800,000 X 2.40183 = $1,921,464 b December 31, 2014 Bad Debt Expense 2,384,296 Allowance for Doubtful Accounts 2,384,296 (c) The interest receipt schedule is prepared as follows: Date 12/31/14 12/31/15 12/31/16 12/31/17 Total ZETTLEIN BANK Interest Receipt Schedule After Debt Restructuring EffectiveInterest Rate 12% Cash Effective Increase Carrying Interest Interest in Carrying Amount of (10%) (12%) Amount Note $7,615,704 a b c $ 800,000 $ 913,884 $113,884 7,729,588 800,000 927,551 127,551 7,857,139 d 800,000 942,861 142,861 8,000,000 $2,400,000 $2,784,296 $384,296 a $8,000,000 X 10% = $800,000 $7,615,704 X 12% = $913,884 c $913,884 – $800,000 = $113,884 d Adjusted $4 due to rounding b Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 1419 *E1423B (Continued) (d) Interest receipt entry for Zettlein Bank is: December 31, 2016 Cash 800,000 Allowance for Doubtful Accounts 127,551 Interest Revenue (e) 927,551 The receipt entry at maturity is: January 1, 2018 Cash 8,000,000 Allowance for Doubtful Accounts 2,000,000 Note Receivable 10,000,000 *E1424B (25–30 minutes) (a) Yes Larkin Company can record a gain under this term modification The gain is calculated as follows: Total future cash flows after restructuring are: Principal Interest ($6,500,000 X 10% X 3) Total prerestructuring carrying amount of note (principal): $ 6,500,000 1,950,000 $ 8,450,000 $10,000,000 Therefore, the gain = $10,000,000 – $8,450,000 = $1,550,000 (b) The entry to record the gain on December 31, 2014: Note Payable 1,550,000 Gain on Debt Restructuring 1,550,000 1420 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) *E1424B (Continued) (c) Because the new carrying value of the note ($10,000,000 – $1,550,000 = $8,450,000) equals the sum of the undiscounted future cash flows ($6,500,000 principal + $1,950,000 interest = $8,450,000), the imputed interest rate is 0%. Consequently, all the future cash flows reduce the principal balance and no interest expense is recognized (d) The interest payment schedule is prepared as follows: LARKIN COMPANY Interest Payment Schedule After Debt Restructuring EffectiveInterest Rate 0% Date 12/31/14 12/31/15 12/31/16 12/31/17 Total Cash Interest (10%) $ 650,000 650,000 650,000 $1,950,000 Effective Interest (0%) a $0 0 0 $0 Reduction of Carrying Amount $ 650,000 650,000 650,000 $1,950,000 Carrying Amount of Note $8,450,000 7,800,000b 7,150,000 6,500,000 a $6,500,000 X 10% = $650,000 b $8,450,000 – $650,000 = $7,800,000 (e) Cash interest payment entries for Larkin Company are: December 31, 2015, 2016, and 2017 Note Payable 650,000 Cash (f) 650,000 The payment entry at maturity is: January 1, 2018 Note Payable 6,500,000 Cash 6,500,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 1421 *E1425B (20–30 minutes) (a) The loss can be calculated as follows: Prerestructuring carrying amount of note Less: Present value of restructured future Cash flows: Present value of principal $6,500,000 due in 3 years at 12% Present value of interest $650,000 paid annually for 3 years at 12% Loss on debt restructuring $10,000,000 $4,626,570a 1,561,190b 6,187,760 $ 3,812,240 a $6,500,000 X .71178 = $4,626,570 $650,000 X 2.40183 = $1,561,190 b December 31, 2014 Bad Debt Expense Allowance for Doubtful Accounts (b) 3,812,240 3,812,240 The interest receipt schedule is prepared as follows: Date 12/31/14 12/31/15 12/31/16 12/31/17 Total ZETTLEIN BANK Interest Receipt Schedule After Debt Restructuring EffectiveInterest Rate 12% Cash Effective Increase Carrying Interest Interest in Carrying Amount of (10%) (12%) Amount Note $6,187,760 a b c $ 650,000 $ 742,531 $ 92,531 6,280,291 650,000 753,635 103,635 6,383,926 d 650,000 766,074 116,074 6,500,000 $1,950,000 $2,262,240 $312,240 a $6,500,000 X 10% = $650,000 $6,187,760 X 12% = $742,531 c $742,531 – $650,000 = $92,531 d Adjusts $3 due to rounding b 1422 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) *E1425B (Continued) (c) (d) Interest receipt entries for Zettlein Bank are: December 31, 2015 Cash 650,000 Allowance for Doubtful Accounts 92,531 Interest Revenue 742,531 December 31, 2016 Cash 650,000 Allowance for Doubtful Accounts 103,635 Interest Revenue 753,635 December 31, 2017 Cash 650,000 Allowance for Doubtful Accounts 116,074 Interest Revenue 766,074 The receipt entry at maturity is: January 1, 2018 Cash 6,500,000 Allowance for Doubtful Accounts 3,500,000 Note Receivable 10,000,000 E1426B (15–20 minutes) (a) Weaver Co.’s entry: Notes Payable 1,398,600 Property Gain on Property Disposition (Ordinary) ($840,000 – $560,000) Gain on Restructuring 560,000 280,000 558,600* *$1,398,600 – $840,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 1423 E1426B (Continued) (b) McBride Inc.’s entry: Property 840,000 Allowance for Doubtful Accounts 558,600 (or Bad Debt Expense) Notes Receivable 1,398,600 *E1427B (20–25 minutes) Because the carrying amount of the debt, $600,000 exceeds the total future cash flows $590,000 [$500,000 + ($30,000 X 3)], a gain is recognized and no interest is recorded by the debtor (a) (b) Vista Corp.’s entries: 2014 Note Payable 10,000 Gain on Restructuring 10,000 2015 Note Payable 30,000 Cash (6% X $500,000) 30,000 2016 Note Payable 30,000 Cash (6% X $500,000) 30,000 2017 Note Payable 530,000 Cash [$500,000 + (6% X $500,000)] 530,000 First National’s entry on December 31, 2014: Bad Debt Expense 149,734 Allowance for Doubtful Accounts 149,734 Prerestructure carrying amount $600,000 Present value of restructured cash flows: Present value of $500,000 due in 3 years at 10%, interest payable annually (Table 62); (500,000 X 0.75132) $375,660 Present value of $30,000 interest payable annually for 2 years at 10% (Table 64); ($30,000 X 2.48685) 74,606 450,266 Creditor’s loss on restructure $(149,734) 1424 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) *E1427B (Continued) Date 12/31/14 12/31/15 12/31/16 12/31/17 Cash Interest Effective Interest Increase in Carrying Amount $30,000a 30,000 30,000 $45,027b 46,529 48,178* $15,027c 16,529 18,178 Carrying Amount of Note $450,266 465,293 481,822 500,000 a $30,000 = $500,000 X 6% $45,027 = $450,266 X 10% c $15,027 = $45,027 – $30,000 *Rounded b December 31, 2015 Cash 30,000 Allowance for Doubtful Accounts 15,027 Interest Revenue 45,027 December 31, 2016 Cash 30,000 Allowance for Doubtful Accounts 16,529 Interest Revenue 46,529 December 31, 2017 Cash 30,000 Allowance for Doubtful Accounts 18,178 Interest Revenue 48,178 Cash 500,000 Allowance for Doubtful Accounts 100,000 Note Receivable 600,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 1425 ... 142 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E143B (Continued) Kumiko Company: (a)... Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 143 E145B (15–20 minutes) (a) 1/1/14... 144 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E147B (15–20 minutes) The effectiveinterest or yield rate is 6%. It is determined through trial and