Week 02 – Ch.

14 Non- Current Liabilities

Ch.14 Current Liabilities

Exercise 14.01 True or False

1. Companies usually make bond interest payments semiannually, although the interest
rate is generally expressed as an annual rate.
2. A mortgage bond is referred to as a debenture bond.
3. Bond issues that mature in installments are called serial bonds.
4. If the market rate is greater than the stated rate, bonds will be sold at a premium.
5. The interest rate written in the terms of the bond indenture is called the effective yield
or market rate.
6. The stated rate is the same as the coupon rate.
7. The proceeds of a bond with a face amount of ¥100,000,000 which sells at 102 will be
¥100,200,000.
8. The proceeds of a bond with a face amount of ¥100,000,000 which sells at 98 will be
¥98,000,000.
9. When bonds are issued at a discount, the bonds payable account is credited for the
proceeds from the issue.
10. When bonds are issued at a premium, the bonds payable account is credited for the
face amount.
11. At any point during the term of the bond, the balance in the bonds payable account
should be the carrying value of the bond.
12. The semi-annual interest payment on a 6.5% HK$10,000,000 bond is HK$650,000.
13. The journal entry to record amortization of bond discount includes a debit to the bonds
payable account.
14. Amortization of bond premium reduces the balance in bonds payable.
15. Amortization of a premium increases bond interest expense, while amortization of a
discount decreases bond interest expense.
16. A bond may only be issued on an interest payment date.
17. The cash paid for interest will always be greater than interest expense when using
effective-interest amortization for a bond.
18. If a long-term note payable has a stated interest rate, that rate should be considered to
be the effective rate.
19. The process of interest-rate approximation is called imputation, and the resulting
interest rate is called an imputed interest rate.
20. When a zero-interest bearing note is issued, the note payable account will be credited
for the present value of the maturity value.
21. Amortization of the discount on a zero-interest bearing note decreases the balance in
notes payable
22. The replacement of an existing bond issue with a new one is called refunding.
23. The IASB’s position is that fair value measurement for financial liabilities is more
relevant and understandable than amortized cost.
24. Under IFRS, subsidiaries in which the parent company holds a less than 50 percent
interest do not have to be included in consolidated financial statements.
25. Off-balance-sheet financing is an attempt to borrow monies in such a way to minimize
the reporting of debt on the balance sheet.
26. The debt to assets ratio will go up if an equal amount of assets and liabilities are added
to the balance sheet.

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27. If a company plans to retire long-term debt from a bond retirement fund, it should
report the debt as current.
28. The times interest earned is computed by dividing income before interest expense by
interest expense.
29. Debt issuance costs are recorded as an asset and amortized to expense over the life of
the bond.
30. IFRS recognition criteria for environment liabilities are more stringent than that of US
GAAP.

Exercise 14.02 Terms related to long-term debt..

Place the letter of the best matching phrase before each word.

___ 1. Indenture ___ 6. Times Interest Earned

___ 2. Serial Bonds ___ 7. Mortgage
___ 3. Bonds Issued at Par ___ 8. Premium on Bonds
___ 4. Carrying Value ___ 9. Reacquisition Price
___ 5. Nominal Rate ___ 10. Market Rate

a. Bonds issued in the name of the owner.

b. Rate set by party issuing the bonds which appears on the bond instrument.
c. The interest paid each period is the effective interest at date of issuance.
d. Rate of interest actually earned by the bondholders.
e. Results when bonds are sold below par.
f. Results when bonds are sold above par.
g. Bond issues that mature in installments.
h. Price paid by issuing corporation for its own bonds.
i. Book value of bonds at any given date.
j. Ratio of current assets to current liabilities.
k. The bond contract or agreement.
l. Indicates the company’s ability to meet interest payments as they come due.
m. Ratio of debt to equity.
n. Exclusive right to manufacture a product.
o. A document that pledges title to property as security for a loan.

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Exercise 14.03 —Bond issue price and premium amortization.

On January 1, 2019, Piper Co. issued ten-year bonds with a face value of €1,000,000 and a stated
interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to
yield 12%. Table values are:
Present value of 1 for 10 periods at 10% ................................. .386
Present value of 1 for 10 periods at 12% ................................. .322
Present value of 1 for 20 periods at 5% ................................... .377
Present value of 1 for 20 periods at 6% ................................... .312
Present value of annuity for 10 periods at 10% ........................ 6.145
Present value of annuity for 10 periods at 12% ........................ 5.650
Present value of annuity for 20 periods at 5% ......................... 12.462
Present value of annuity for 20 periods at 6% ......................... 11.470

Instructions
(a) Calculate the issue price of the bonds.
(b) Without prejudice to your solution in part (a), assume that the issue price was €884,000. Prepare
the amortization table for 2019, assuming that amortization is recorded on interest payment
dates.

Exercise 14.04 —Amortization of discount or premium.

Grider Industries, Inc. issued €6,000,000 of 8% debentures on May 1, 2018 and received cash totaling
€5,323,577. The bonds pay interest semiannually on May 1 and November 1. The maturity date on
these bonds is November 1, 2022. The firm uses the effective-interest method of amortizing discounts
and premiums. The bonds were sold to yield an effective-interest rate of 10%.
Instructions
Calculate the total dollar amount of discount or premium amortization during the first year (5/1/18
through 4/30/19) these bonds were outstanding. (Show computations and round to the nearest
dollar.)

Exercise 14.05 —Entries for Retirement and Issuance of Bonds

On April 30, 2010, Winsor Company issued 8% bonds with a par value of £900,000 due in 20 years.
They were issued at 82.8 to yield 10% and were callable at 102 at any date after April 30, 2018.
Because of lower interest rates and a significant change in the company’s credit rating, it was decided
to call the entries issue on April 30, 2019, and to issue new bonds. New 6% bonds were sold in the
amount of £1,200,000 at 112.5 to yield 5%; they mature in 20 years. Interest payment dates are
October 31 and April 30 for both and new bonds.
Instructions
(a) Prepare journal entries to record the retirement of the old issue and the sale of the new issue
on April 30, 2019. Unamortized discount is £118,470.
(b) Prepare the entry required on October 31, 2019, to record the payment of the first
6 months’ interest and the amortization of premium on the bonds.

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Exercise 14.06 —Entries for settlement of Debt

Consider the following independent situations.
(a) Gregory Co. owes €333,000 to Merando Inc. The debt is a 10-year, 11% note. Because
Gregory Co. is in financial trouble, Merando Inc. agrees to accept some property and cancel
the entire debt. The property has a book value of €150,000 and a fair value of €230,000.
Prepare the journal entry on Gregory’s books for debt settlement.
(b) Kifer Corp. owes €450,000 to First Trust. The debt is a 10-year, 12% note due December
31, 2017. Because Kifer Corp. is in financial trouble, First Trust agrees to extend the maturity
date to December 31, 2019, reduce the principal to €370,000, and reduce the interest rate
of 5%, payable annually on December 31. Kifer’s, market rate of interest is 8%. Prepare the
journal entries on Kifer’s books on December 31, 2017, 2018, and 2019.

Exercise 14.07—Settlement of debt.

Mann, Inc., which owes Doran Co. €600,000 in notes payable with accrued interest of €54,000, is in
financial difficulty. To settle the debt, Doran agrees to accept from Mann equipment with a fair value
of €570,000, an original cost of €840,000, and accumulated depreciation of €195,000.

Instructions
(a) Compute the gain or loss to Mann on the settlement of the debt.
(b) Compute the gain or loss to Mann on the transfer of the equipment.
(c) Prepare the journal entry on Mann ‘s books to record the settlement of this debt.
(d) Prepare the journal entry on Doran’s books to record the settlement of the receivable.

Exercise 14.08 —Accounting for extinguishment/settlement of debt.

(a) What are the general rules for measuring and recognizing a gain or loss by the debtor on a
settlement of debt which includes the transfer of noncash assets?

(b) What are the general rules for measuring and recognizing gain or loss by a debt extinguishment
with modification?

Exercise 14.09—Bond discount amortization.

On June 1, 2017, Everly Bottle Company sold €400,000 in long-term bonds for €351,040. The bonds
will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The bonds pay
interest annually on May 31 of each year. The bonds are to be accounted for under the effective-
interest method.

Instructions
(a) Construct a bond amortization table for this problem to indicate the amount of interest expense
and discount amortization at each May 31. Include only the first four years. Make sure all
columns and rows are properly labeled. (Round to the nearest dollar.)
(b) The sales price of €351,040 was determined from present value tables. Specifically explain how
one would determine the price using present value tables.
(c) Assuming that interest and discount amortization are recorded each May 31, prepare the
adjusting entry to be made on December 31, 2019. (Round to the nearest dollar.)

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Exercise 14.10—Bond interest and discount amortization.

Grove Corporation issued £800,000 of 8% bonds on October 1, 2018, due on October 1, 2019. The
interest is to be paid twice a year on April 1 and October 1. The bonds were sold to yield 10%
effective annual interest. Grove Corporation closes its books annually on December 31.

Instructions
(a) Complete the following amortization schedule for the dates indicated. (Round all answers to
the nearest dollar.) Use the effective-interest method.
Cash Interest Discount Carrying Amount
Paid Expense Amortized of Bonds
October 1, 2018 £738,224
April 1, 2019
October 1, 2019

(b) Prepare the adjusting entry for December 31, 2019. Use the effective-interest method.

(c) Compute the interest expense to be reported in the income statement for the year ended
December 31, 2019.

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