Solution Manual For Intermediate Accounting, Volume 2, 12th Edition by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Irene M. Wiecek, Bruce J. McConomy – Digital Download File

Instant Download with all chapters and Answers

Sample Chapters

 

*you will get test bank in PDF in best viewable format after buy*

 

CHAPTER 14

 

LONG-TERM FINANCIAL LIABILITIES

 

Learning Objectives

1.      Understand the nature of long-term debt financing arrangements.

2.      Understand how long-term debt is measured and accounted for.

3.      Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings.

4.      Explain how long-term debt is presented, disclosed, and analyzed.

5.      Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future.

 

 

 

Summary of Questions by Learning Objectives and Bloom’s Taxonomy

 

Item	LO	BT	Item	LO	BT	Item	LO	BT		Item	LO	BT		Item	LO	BT
Brief Exercises
1.	1	C	6.	2	AP	11.	2		AP	16.	2		AP	21.	3	AP
2.	1	C	7.	2	AP	12.	2		AP	17.	2		AP	22.	3	AN
3.	2	AP	8.	2	AP	13.	2		AP	18.	2		AP	23.	4	K
4.	2	AP	9.	2	AP	14.	2		AP	19.	3		AP	24.	4	AP
5.	2	AP	10.	2	AP	15.	2		AP	20.	3		C	25.	4	AN
Exercises
1.	1	K	8.	2	AP	15.	2		AP	22.	3		AP	29.	4	K
2.	1,2	AP	9.	2	AP	16.	2,4		AP	23.	3		AP	30.	4	K
3.	2	AP	10.	2	AP	17.	3		AP	24.	3,5		AP	31.	4	AP
4.	2	AP	11.	2	AP	18.	2,4		AP	25.	3		AP
5.	2	AP	12.	2	AP	19.	3		AP	26.	3		AP
6.	2	AP	13.	2	AP	20.	3		AP	27.	3		AP
7.	2	AP	14.	2	AP	21.	3		AP	28.	3		AP
Problems
1.	1,2	AP	5.	2,3	AP	9.	2,4		AP	13.	2,3		AP	17.	2,3	AP
2.	1,2,4	AP	6.	2,3,5	AP	10.	2,4		AP	14.	2,3		AP	18.	2,3	AP
3.	2	AP	7.	2,4	AP	11.	2,3		AP	15.	2,3		AP	19.	2,3	AP
4.	2,3	AP	8.	2	AP	12.	2,3		AP	16.	2,3		AP	20.	2,3	C
Cases
1.	1,4	AN	2.			3.
Integrated Cases
1.	1,4	AN	2.	1,3	AN
Research and Analysis
1.	1,4	AP	3.	4	AN	4.	1,4		AP	5.				6.
2.	1,4	AP

 

 

 

Summary of Legend: The following abbreviations will appear throughout the solutions manual file.
LO	Learning objective
BT	Bloom’s Taxonomy
	K	Knowledge
	C	Comprehension
	AP	Application
	AN	Analysis
	S	Synthesis
	E	Evaluation
Difficulty:	Level of difficulty
	S	Simple
	M	Moderate
	C	Complex
Time:	Estimated time to complete in minutes
AACSB	Association to Advance Collegiate Schools of Business
	Communication		Communication
	Ethics		Ethics
	Analytic		Analytic
	Tech.		Technology
	Diversity		Diversity
	Reflec. Thinking		Reflective Thinking
CPA CM	CPA Canada Competency Map
	Ethics		Professional and Ethical Behaviour
	PS and DM		Problem-Solving and Decision-Making
	Comm.		Communication
	Self-Mgt.		Self-Management
	Team & Lead		Teamwork and Leadership
	Reporting		Financial Reporting
	Stat. & Gov.		Strategy and Governance
	Mgt. Accounting		Management Accounting
	Audit		Audit and Assurance
	Finance		Finance
	Tax		Taxation

 

 

ASSIGNMENT CLASSIFICATION TABLE

 

Topics		Brief Exercises	Exercises	Problems
1.	Understand the nature of long-term debt.	1, 2	1, 2	1, 2
2.	Understand how long-term debt is measured and accounted for.	3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18	3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18	1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 13
3.	Recognition and derecognition of debt and debt restructurings.	19, 20, 21	17, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28	6, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20
4.	Presentation of long-term debt.	24	16, 18, 29, 30	2, 8, 10
5.	Disclosure requirements.		31	9, 10
6.	Long-term debt analysis.	25		7
7.	Differences between IFRS and ASPE.

 

NOTE:  If your students are solving the end-of-chapter material using a financial calculator or Excel functions as opposed to the PV tables, please note that there will be a difference in amounts. Excel and financial calculators yield a more precise result as opposed to PV tables. The amounts used for the preparation of journal entries in solutions have been prepared from the results of calculations arrived at using the PV tables unless otherwise indicated in the question.

 

ASSIGNMENT CHARACTERISTICS TABLE

Item		Description	Level of Difficulty	Time (minutes)
E14.1		Features of long-term debt	Simple	10-15
E14.2		Information related to various bond issues	Simple	35-45
E14.3		Entries for bond transactions	Simple	15-20
E14.4		Entries for bond transactions—effective interest	Simple	15-20
E14.5		Entries for bond transactions—straight-line	Simple	15-20
E14.6		Entries for non–interest-bearing debt	Simple	15-20
E14.7		Imputation of interest	Simple	15-20
E14.8		Purchase of land with instalment note	Moderate	15-20
E14.9		Purchase of equipment with non–interest-bearing debt	Moderate	15-20
E14.10		Purchase of computer with non–interest-bearing debt	Moderate	15-20
E14.11		Entries for bond transactions	Moderate	15-20
E14.12		Amortization schedule—straight-line	Simple	10-15
E14.13		Amortization schedule—effective interest	Simple	15-20
E14.14		Determination of proper amounts in account balances	Moderate	15-20
E14.15		Interest-free government loan	Moderate	15-20
E14.16		Entries and questions for bond transactions	Moderate	20-30
E14.17		Entries for retirement and issuance of bonds	Simple	10-15
E14.18		Entries for retirement and issuance of bonds – straight line	Simple	15-20
E14.19		Entries for retirement and issuance of bonds – effective interest	Complex	30-35
E14.20		Entry for retirement of bond; costs for bond issuance	Moderate	20-25
E14.21		Entries for retirement and issuance of bonds	Simple	10-15
E14.22		Impairments	Moderate	15-25
E14.23		Settlement of debt	Moderate	15-20
E14.24		Term modification–debtor’s entries	Complex	45-50
E14.25		Term modification–creditor’s entries	Moderate	25-30
E14.26		Settlement–debtor’s entries	Moderate	25-30
E14.27		Settlement–creditor’s entries	Moderate	20-30
E14.28		Debtor entries for settlement  of troubled debt	Moderate	20-25

 

 

ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED)

 

Item		Description	Level of Difficulty	Time (minutes)
E14.29		Classification of liabilities	Simple	15-20
E14.30		Classification.	Simple	15-20
E14.31		Long-term debt disclosure.	Simple	10-15
P14.1		Entries for noninterest-bearing debt; payable in instalments	Moderate	30-35
P14.2		Contrasting note terms	Complex	50-60
P14.3		Analysis of amortization schedule and interest entries	Simple	15-20
P14.4		Issuance and retirement of bonds	Moderate	25-30
P14.5		Comprehensive bond problem	Complex	50-65
P14.6		Issuance of bonds between interest dates, straight-line, retirement	Complex	30-35
P14.7   P14.8		Entries for noninterest-bearing debt Classification of accounts used in bond issuance	Simple Moderate	15-25 55-65
P14.9		Issuance and retirement of bonds; income statement presentation	Simple	15-20
P14.10		Comprehensive problem; issuance, classification, reporting	Moderate	20-25
P14.11		Issuance of bonds, straight-line interest, retirement	Moderate	20-25
P14.12		Issuance of bonds effective interest, retirement	Moderate	30-35
P14.13		Bonds at discount and premium including partial redemption	Complex	45-50
P14.14		Loan impairment entries	Moderate	30-40
P14.15		Debtor/creditor entries for continuation of troubled debt	Moderate	15-25
P14.16		Restructure of note under different circumstances	Complex	50-60
P14.17		Debtor/creditor entries for continuation of troubled debt	Complex	40-50
P14.18		Entries for troubled debt restructuring	Moderate	30-35
P14.19     P14.20		Debtor/creditor entries for continuation of troubled debt with new effective interest Legal versus in-substance defeasance	Moderate     Moderate	30-35     15-20

 

SOLUTIONS TO BRIEF EXERCISES

 

BRIEF EXERCISE 14.1

 

• A bond’s credit rating is a reflection of credit quality. The BBB credit rating of the bond at the time of issuance reflected an assessment of the company’s ability to pay the amounts that will be due on that specific bond. With four consecutive quarters of increasing losses and deteriorating financial position in 2020, and new competition in the industry, credit analysts may downgrade the bond’s credit rating to below investment grade.

 

• The market closely monitors a bond’s credit rating when determining the required yield and pricing of bonds at issuance and in periods after issuance. If the bond’s credit rating is downgraded, the yield required by investors will likely increase, and the price of the bonds will likely decrease, to compensate the bondholder for the additional risk associated with that specific bond.

 

 

LO 1  BT: C Difficulty: M  Time: 10 min.  AACSB: Analytic  CPA: cpa-t001 cpa-t005

CM: Reporting and Finance

 

BRIEF EXERCISE 14.2

 

• Financing is generally obtained through three sources: borrowing, issuing shares, and/or using internally generated funds. Leverage (or using borrowed money to increase returns to shareholders) can maximize returns to shareholders, and the related interest paid is tax deductible. However, borrowed funds must be repaid and can increase liquidity and solvency risk. Issuing shares does not increase liquidity and solvency risk; however, it may result in dilution of ownership. Using internally generated funds may be appropriate if the company’s business model is generating excess funds.

 

• Based on the information provided, borrowing is the most suitable source of financing for Jensen & Jensen. With a debt to total assets ratio of 55%, Jensen & Jensen is underleveraged compared to similar size competitors operating in the same industry. This means that Jensen & Jensen may not be maximizing returns to shareholders, and that the company may be able to finance the expansion by borrowing and still maintain an acceptable level of liquidity and solvency risk. As a telecommunications equipment manufacturer, Jensen & Jensen operates in a capital-intensive industry, and a lender may be able to structure the lending agreement in such a way as to secure the loan with the company’s underlying tangible assets. Further, issuing shares is not ideal given the owners’ desire to keep the company closely held.

 

LO 1  BT: C Difficulty: M  Time: 10 min.  AACSB: Analytic  CPA: cpa-t001 cpa-t005

CM: Reporting and Finance

 

 

BRIEF EXERCISE 14.3

 

1. Using tables:

 

Present value of the principal
$500,000 X .37689	$188,445
Present value of the interest payments
$27,500 X 12.46221	342,711
Issue price	$531,156

 

2. Using a financial calculator:
PV	?	Yields $ 531,155.53
I	5%
N	20
PMT	$ (27,500)
FV	$ (500,000)
Type	0

 

3. Using Excel: = PV(rate,nper,pmt,fv,type)

Result:  $531,155.53 rounded to $531,156

 

LO 2 BT: AP Difficulty: M Time: 10 min.  AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 14.4

 

(a)	Cash …………………………………………………………………….	300,000
	Notes Payable……………………………………………..		300,000
(b)	Interest Expense ($300,000 X 8%)……………………….	24,000
	Cash…………………………………………………………….		24,000

 

LO 2 BT: AP Difficulty: S Time: 5 min.  AACSB: None CPA: cpa-t001 CM: Reporting

 

BRIEF EXERCISE 14.5

 

(a)  1. Using tables:

Present value of the principal
$200,000 X .74409	$148,818
Present value of the interest payments
$8,000 X 8.53020	68,242
Issue price	$217,060

2. Using a financial calculator:

 

PV	?	Yields $ 217,060.41
I	3%
N	10
PMT	$ (8,000)
FV	$ (200,000)
Type	0

 

 

 

BRIEF EXERCISE 14.5

 

(a)  (continued)

 

3. Using Excel: =PV(rate,nper,pmt,fv,type)

Result:  $217,060.41 rounded to $217,060

 

(b)	Cash …………………………………………………………………….	217,060
	Bonds Payable…………………………………………….		217,060
(c)	Interest Expense ($217,060 X 6% X 6/12)…………….	6,512
	Bonds Payable ($8,000 – $6,512)…………………………	1,488
	Cash ($200,000 X 8% X 6/12)……………………….		8,000
	Interest Expense   [($217,060 – $1,488) X 6% X 6/12]……………………….	6,467
	Bonds Payable ($8,000 – $6,467)…………………………	1,533
	Cash ($200,000 X 8% X 6/12)……………………….		8,000

 

 

LO 2 BT: AP Difficulty: M Time: 15 min.  AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 14.6

 

• Using a financial calculator:

PV	$52,000
I	?	Yields 15.09%
N	5
PMT	$    0
FV	$ (105,000)
Type	0
2. Using Excel: =RATE(nper,pmt,pv, fv,type)

Result: 15.0898943 Rounded to two decimal places 15.09 %

 

(b)	Cash …………………………………………………………………….	52,000.00
	Notes Payable……………………………………………..		52,000.00
(c)	Interest Expense ($52,000 X 15.09%)…………………..	7,846.80
	Notes Payable……………………………………………..		7,846.80

 

 

 

BRIEF EXERCISE 14.6

 

(d) Schedule of Discount Amortization
Effective Interest Method (15.09%)
			15.09%
			Effective	Discount	Carrying
Date			Interest	Amort.	Value
Jan. 1	2020				$52,000.00
Dec. 31	2020		$7,846.80	$7,846.80	59,846.80
Dec. 31	2021		9,030.88	9,030.88	68,877.68
Dec. 31	2022		10,393.64	10,393.64	79,271.32
Dec. 31	2023		11,962.04	11,962.04	91,233.36
Dec. 31	2024		13,767.641	13,766.64	105,000.00
			$53,000.00	$53,000.00

¹ rounded

 

LO 2 BT: AP Difficulty: M Time: 20 min.  AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 14.7

(a)
		1. Using a financial calculator:
		PV	$ 38,912
		I	?	Yields 11.00% (rounded to 2 decimal places)
		N	5
		PMT	$(2,500)
		FV	$ (50,000)
		Type	0
2. Using Excel: =RATE(nper,pmt,pv, fv,type)

Result:  11% rounded

 

(b)	Equipment……………………………………………………	38,912
	Notes Payable…………………………………….		38,912

 

 

 

BRIEF EXERCISE 14.7 (Continued)

 

(c) Interest Expense1……………………………………..	4,280
Cash2…………………………………………………		2,500
Notes Payable……………………………………		1,780
1($38,912 X 11.00% = $4,280)
2($50,000 X 5% = $2,500)

 

 

LO 2 BT: AP Difficulty: M Time: 15 min.  AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 14.8

 

Cash …………………………………………………………………….	200,000
Notes Payable……………………………………………..		176,448
Unearned Revenue……………………………………..		23,552

 

The difference between the present value (using an 8% discount rate) and proceeds is recorded as unearned revenue, since Big Country agreed to provide cattle at a reduced price over the term of the note. The amount will be brought into revenue over the term of the note, as the cattle are provided to Little Town.

1. Using a financial calculator:
PV	?	Yields $ 176,447.50
I	8%
N	6
PMT	0
FV	$ (280,000)
Type	0

 

2. Excel formula: =PV(rate,nper,pmt,fv,type)

Result; $176,447.50 rounded to $176,448

 

LO 2 BT: AP Difficulty: C Time: 10 min.  AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 14.9

 

The relevant interest rate to be imputed on the instalment note is the rate Pflug would pay at its bank of 11%

 

1. Using tables:

 

Using ordinary annuity tables for 11% for two periods, the factor of 1.71252 is used and divided into the present value amount of $40,000 to arrive at the amount of the equal instalment payment of $23,357.39.

 

2. Using a financial calculator:

 

PV	$ (40,000)
I	11%
N	2
PMT	?	Yields  $ (23,357.35)
FV	$  0
Type	0

 

3. Using Excel: = PMT(rate,nper,pv,fv,type)

Result: $23,357.35

 

LO 2 BT: AP Difficulty: M Time: 10 min.  AACSB: None CPA: cpa-t001 CM: Reporting

 

BRIEF EXERCISE 14.10

 

(a)	Cash ($500,000 – $25,000)………………………….	475,000
	Bonds Payable…………………………………..		475,000
(b)	Interest Expense ($40,0001 + $2,5002)………..	42,500
	Bonds Payable…………………………………..		2,500
	Cash1…………………………………………………		40,000
	1 $500,000 X 8% = $40,000
	2 $25,000 issue cost X 1/10 = $2,500

 

(c)     When a note or bond is issued, it should be recognized at fair value adjusted by any directly attributable issue costs. However, note that where the liability will subsequently be measured at fair value (e.g., under the fair value option or because it is a derivative), the transaction costs should not be included in the initial measurement (i.e., the costs should be expensed) [CPA Canada Handbook, Part II, Section 3856.07 and IFRS 9.5.1.1].

 

(d)     If the bonds were trading on the market for over their face value, this would imply that the bonds were not actually issued at face value, but rather that the interest rate paid on the bonds exceeds market rate, and thus, the bonds are trading at a premium. This reflects the fair value hierarchy, whereby observable market prices for identical assets and liabilities is first on the hierarchy, and thus, if fair value was being used to record these bonds, their value would be higher than what is currently recorded.

 

LO 2 BT: AP Difficulty: M Time: 15 min.  AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 14.11

 

(a)	Cash …………………………………………………………………….	300,000
	Bonds Payable…………………………………………….		300,000
(b)	Interest Expense………………………………………………….	15,000
	Cash ($300,000 X 10% X 6/12)……………………..		15,000
(c)	Interest Expense………………………………………………….	15,000
	Interest Payable…………………………………………..		15,000

 

LO 2 BT: AP Difficulty: S Time: 10 min.  AACSB: None CPA: cpa-t001 CM: Reporting

 

BRIEF EXERCISE 14.12

         

(a)	Cash ($300,000 X .98)………………………….	294,000
	Bonds Payable……………………………		294,000
(b)	Interest Expense………………………………….	15,600
	Cash ($300,000 X 10% X 6/12)…….		15,000
	Bonds Payable1…………………………..		600
	1($6,000 X 1/5 X .5 = $600)
(c)	Interest Expense………………………………….	15,600
	Interest Payable………………………….		15,000
	Bonds Payable……………………………		600

 

LO 2 BT: AP Difficulty: S Time: 10 min.  AACSB: None CPA: cpa-t001 CM: Reporting

 

BRIEF EXERCISE 14.13

 

(a)	Cash ($300,000 X 1.03 = $309,000)……….	309,000
	Bonds Payable…………………………….		309,000
(b)	Interest Expense…………………………………..	14,100
	Bonds Payable ($9,000 X 1/5 X .5)………..	900
	Cash ($300,000 X 10% X 6/12)……..		15,000
(c)	Interest Expense…………………………………..	14,100
	Bonds Payable……………………………………..	900
	Interest Payable…………………………..		15,000

 

LO 2 BT: AP Difficulty: M Time: 10 min.  AACSB: None CPA: cpa-t001 CM: Reporting

 

BRIEF EXERCISE 14.14

 

(a)	Cash …………………………………………………………………….	615,000
	Bonds Payable…………………………………………….		600,000
	Interest Expense1………………………………………..		15,000
	1($600,000 X 6% X 5/12 = $15,000)
(b)	Interest Expense2…………………………………………………	18,000
	Cash ……………………………………………………………		18,000
	2($600,000 X 6% X 6/12 = $18,000)
(c)	Interest Expense………………………………………………….	18,000
	Interest Payable…………………………………………..		18,000

 

LO 2 BT: AP Difficulty: M Time: 10 min.  AACSB: None CPA: cpa-t001 CM: Reporting

 

BRIEF EXERCISE 14.15

 

(a)	Cash …………………………………………………………………….	559,229
	Bonds Payable…………………………………………….		559,229
(b)	Interest Expense………………………………………………….	22,369
	Cash…………………………………………………………….		21,000
	Bonds Payable…………………………………………….		1,369
(c)	Interest Expense………………………………………………….	22,424
	Interest Payable…………………………………………..		21,000
	Bonds Payable…………………………………………….		1,424

 

(d)     1. Using a financial calculator:

FV =	(600,000)		Given
n =	20		10 years X 2
PMT =	(21,000)		Face X 7% X 6/12
i =	4.0%		Calculate
PV =	559,229		Given

 

2. Using Excel: =RATE(nper,pmt,pv, fv,type)

Result:  4%

BRIEF EXERCISE 14.15 (Continued)

 

e. Schedule of Discount Amortization

Effective Interest Method (4%)

 

			3.5%		4.0%
			Cash		Interest	Discount	Carrying
Date			Paid		Expense	Amortized	Amount
Jan. 1	2020						$559,229.00
July 1	2020		$21,000.00		$22,369.16	$1,369.16	560,598.16
Jan. 1	2021		21,000.00		22,423.93	1,423.93	562,022.09
July 1	2021		21,000.00		22,480.88	1,480.88	563,502.97

 

LO 2 BT: AP Difficulty: M Time: 20 min.  AACSB: None CPA: cpa-t001 CM: Reporting

 

BRIEF EXERCISE 14.16

 

(a)	Cash …………………………………………………………………….	644,632
	Bonds Payable…………………………………………….			644,632
(b)	Interest Expense………………………………………………….	19,339
	Bonds Payable……………………………………………………..	1,661
	Cash…………………………………………………………….			21,000
(c)	Interest Expense………………………………………………….	19,289
	Bonds Payable……………………………………………………..	1,711
	Interest Payable…………………………………………..			21,000

(d) 1. Using a financial calculator:

FV =	(600,000)		Given
n =	20		10 years X 2
PMT =	(21,000)		Face X 7% X 6/12
i =	3.0%		Calculate
PV =	644,632		Given

 

 

 

BRIEF EXERCISE 14.16 (Continued)

 

(d) (continued)

 

2. Using Excel: =RATE(nper,pmt,pv, fv,type)

Result: 3 %

(e) Schedule of Premium Amortization

Effective Interest Method (3%)

 

			3.5%		3.0%
			Cash		Interest	Premium	Carrying
Date			Paid		Expense	Amortized	Amount
Jan. 1	2020						$644,632.00
July 1	2020		$21,000.00		$19,338.96	$1,661.04	642,970.96
Jan. 1	2021		21,000.00		19,289.13	1,710.87	641,260.09
July 1	2021		21,000.00		19,237.80	1,762.20	639,497.89

 

LO 2 BT: AP Difficulty: M Time: 20 min.  AACSB: None CPA: cpa-t001 CM: Reporting

 

 

BRIEF EXERCISE 14.17

 

(a)	Cash …………………………………………………………………….	1,058,671
	Bonds Payable…………………………………………….			1,058,671
(b)	Interest Expense1……………………………………………………..		21,173
	Bonds Payable………………………………………………………….		1,327
	Cash2……………………………………………………………….				22,500
	1($1,058,671 x 8% x 3/12 = $21,173) 2($1,000,000 x 9% x 3/12 = $22,500)

 

LO 2 BT: AP Difficulty: S Time: 10 min.  AACSB: None CPA: cpa-t001 CM: Reporting

 

 

BRIEF EXERCISE 14.18

 

(a)	Interest Expense ($1,000,000 X 7%)…………….	70,000
	Cash……………………………………………………		70,000
	To record payment of interest
	Bonds Payable ($1,000,000 – $900,000)……….	100,000
	Unrealized Gain or Loss …………………….		100,000
	To record fair value adjustment
	The unrealized gain or loss is recorded in net income.
(b)	Interest Expense ($1,000,000 X 7%)…………….	70,000
	Cash…………………………………………………… To record payment of interest		70,000
	Bonds Payable ($1,000,000 – $900,000)……….	100,000
	Unrealized Gain or Loss – OCI…………….		100,000
	To record fair value adjustment
	The unrealized gain or loss is recorded in other comprehensive income.

 

LO 2 BT: AP Difficulty: M Time: 10 min.  AACSB: None CPA: cpa-t001 CM: Reporting

 

 

BRIEF EXERCISE 14.19

 

Bonds Payable ($800,000 + $6,500)…………….	806,500
Cash ($800,000 X .97)…………………………		776,000
Gain on Redemption of Bonds…………..		30,500

 

LO 3 BT: AP Difficulty: S Time: 10 min.  AACSB: None CPA: cpa-t001 CM: Reporting

 

 

BRIEF EXERCISE 14.20

 

This is a situation where a currently maturing liability (a current liability) at year end is expected to be refinanced on a long-term basis.

 

Under IFRS, this loan liability is required to be reported as a current liability on the December 31 financial statements because it was not refinanced by the reporting date. The only exception permitted would be if the refinancing that extends the repayment terms was done under an agreement that existed at December 31 and the decision about the refinancing is solely up to the discretion of the entity’s management.

 

The ASPE standard, however, allows more flexibility. The maturing debt is required to be reported as a current liability unless it has been refinanced on a long-term basis or there is a non-cancellable agreement to do so before the financial statements are completed, and there is nothing that prevents completion of the refinancing. Because the entity’s financial statements would not have been completed as soon as two days after the reporting date (December 31) when the new agreement was finalized, ASPE would permit the debt to be included with long-term liabilities.

 

LO 3 BT: C Difficulty: M Time: 15 min.  AACSB: None CPA: cpa-t001 CM: Reporting

 

BRIEF EXERCISE 14.21

 

Since the present value of the future cash flows of the new debt differs by an amount larger than 10% of the present value of the old debt, the renegotiated debt is considered a settlement. A gain/loss is recorded by Lawrence (debtor) and no interest is recorded by the debtor. This is not considered a modification of terms. The old debt is removed from the books of Lawrence with a gain/loss being recognized, and the new debt is recorded.

2020   Notes Payable……………………………………	100,000
Gain on Restructuring of Debt……		27,603
Notes Payable ……………………………		72,397
2021   Interest Expense ($72,397 X .10)……….	7,240
Notes Payable…………………………….		1,240
Cash (8% X $75,000)…………………..		6,000
2022   Interest Expense1………………………………	7,364
Notes Payable…………………………….		1,364
Cash……………………………………………		6,000
1($72,397 + $1,240) X .10 = $7,364 To record payment of interest
2022   Notes Payable……………………………………	75,000
Cash………………………………………….. .		75,000
To record maturity of note

LO 3 BT: AP Difficulty: M Time: 20 min.  AACSB: None CPA: cpa-t001 CM: Reporting

 

 

BRIEF EXERCISE 14.22

 

• Steinem’s liquidity has improved. As a result of this transaction, the company’s SFP will show $1 million more cash, and $1 million less accounts receivable (a less liquid asset than cash).

 

• Steinem’s SFP will not show increased debt or equity as a result of this transaction. The cash was generated by the special purpose entity, which sold shares to its investors.

 

• This transaction is an example of off–balance sheet financing.

 

• From the perspective of an investor, there is a risk that the special purpose entity is being used primarily to make Steinem’s SFP and liquidity position appear better. As a general rule, special purpose entities should be consolidated with the main company when the main company is the primary beneficiary.

 

LO 3  BT: AN Difficulty: M  Time: 15 min.  AACSB: Analytic  CPA: cpa-t001 cpa-t005

CM: Reporting and Finance

 

 

BRIEF EXERCISE 14.23

 

Current liabilities
Bond interest payable…………………………………	$ 25,000
Bonds payable, due September 1, 2021………	$1,200,000

 

LO 4 BT: K Difficulty: S Time: 5 min.  AACSB: None CPA: cpa-t001 CM: Reporting

 

 

BRIEF EXERCISE 14.24

 

(a)

Ambrosia Limited

Partial Statement of Financial Position

As at December 31, 2020

 

Liabilities

 

Accounts payable and accrued liabilities                     $  20,000

Wages payable                                                                       15,000

Bonus payable                                                                       15,000

Bonds payable                                                                     140,000

Total liabilities                                                                    $190,000

 

 

(b)

Ambrosia Limited

Partial Statement of Financial Position

As at December 31, 2020

Liabilities

 

Current

Accounts payable and accrued liabilities            $ 20,000

Wages payable                                                             15,000

Current portion of bonds payable                            30,000

Total current liabilities                                                       65,000

 

Long-term

Bonus payable                                                             15,000

Bonds payable                                                           110,000

Total long-term liabilities                                                 125,000

Total liabilities                                                                  $190,000

 

LO 4 BT: AP Difficulty: S Time: 15 min.  AACSB: None CPA: cpa-t001 CM: Reporting

 

 

BRIEF EXERCISE 14.25

 

Debt-paying ability may be evaluated by calculating the debt to total assets ratio:

 

2020 – $500,000 / $900,000= 56%

2019 – $750,000/$ 700,000 = 107%

 

Sports International’s debt to assets ratio improved significantly from 2019 to 2020, so their debt-paying ability and long-term solvency has improved.

 

Debt-paying ability may also be evaluated by calculating the current ratio:

 

2020 – $120,000 / $100,000 = 1.20

2019 – $140,000 / $150,000 = 0.93

 

Based on Sports International’s current ratio, their ability to meet short-term payment requirements in 2020 improved from 2019.

 

LO 4  BT: AN Difficulty: M  Time: 15 min.  AACSB: Analytic  CPA: cpa-t001 cpa-t005

CM: Reporting and Finance

 

SOLUTIONS TO EXERCISES

 

EXERCISE 14.1

 

a.

1. 2
2. 3
3. 2
4. 2
5. 1
6. 2
7. 2
8. 1

 

1. A feature or characteristic that increases the riskiness of the long-term debt will cause investors to require a higher yield on the long-term debt. A higher yield on the long-term debt will give investors an acceptable return that matches the issuer’s risk characteristics.

 

LO 1  BT: K Difficulty: S  Time: 15 min.  AACSB: Analytic  CPA: cpa-t001 cpa-t005

CM: Reporting and Finance

 

EXERCISE 14.2

 

		Unsecured Bonds				Zero-Coupon Bonds			Mortgage Bonds
a.	Maturity value	$10,000,000				$2,500,000			$15,000,000
b.	Number of interest periods	40				10			10
c.	Stated rate per	3.25% (		13%	)	0			10%
	period			4
d.	Effective rate	3% (	12%		)	12%			12%
	per period		4
e.	Payment amount	$325,000 (1)				0			$1,500,000 (2)
	per period
f.	Present value	$10,577,900 (3)				$804,925 (4)			$13,304,880 (5)

 

⁽¹⁾ $10,000,000 X 13% X 1/4 = $325,000

⁽²⁾ $15,000,000 X 10% = $1,500,000

 

1. Using factor tables

 

⁽³⁾ Present value of an annuity of $325,000

          discounted at 3% per period for 40

	periods ($325,000 X 23.11477) =	$ 7,512,300
Present value of $10,000,000 discounted
	at 3% per period for 40 periods
	($10,000,000 X .30656) =	3,065,600
		$10,577,900

 

2. Using a financial calculator:

 

PV	$  ?	Yields  $10,577,869
I	3%
N	40
PMT	$ (325,000)
FV	$ (10,000,000)
Type	0

 

 

EXERCISE 14.2 (CONTINUED)   3. Using Excel:  = PV(rate,nper,pmt,fv,type)

Result: $10,577,869.30 rounded to $10,577,869

 

1. Using factor tables

 

⁽⁴⁾ Present value of $2,500,000 discounted at 12% for 10 periods

	($2,500,000 X .32197) =	$804,925

 

2) Using a financial calculator:
PV	$  ?	Yields $804,933
I	12%
N	10
PMT	0
FV	$  (2,500,000)
Type	0

 

 

 

EXERCISE 14.2 (CONTINUED)

 

3. Using Excel:  = PV(rate,nper,pmt,fv,type)

Result: $804,933.09 rounded to $804,933

 

1. Using factor tables

 

⁽⁵⁾ Present value of an annuity of $1,500,000 discounted

          at 12% for 10 periods

	($1,500,000 X 5.65022) =		$8,475,330
Present value of $15,000,000 discounted
	at 12% for 10 years
	($15,000,000 X .32197)		4,829,550
			$13,304,880
2. Using a financial calculator:

 

PV	$  ?	Yields $13,304,933
I	12%
N	10
PMT	$   (1,500,000)
FV	$ (15,000,000)
Type	0

 

 

 

EXERCISE 14.2 (CONTINUED)   3. Using Excel: = PV(rate,nper,pmt,fv,type)

 

Result: $13,304,933.09 rounded to $13,304,933

 

A more accurate result is obtained using Excel and a financial calculator compared to using factors from tables as there are a limited number of decimal places in the tables.

 

 

 

EXERCISE 14.2 (CONTINUED)

 

1. Similarities and differences among the bond features and their impact on risk are as follows:

 

– bond maturity (duration) – The bonds all have the same maturity date (duration), thus this risk factor is equalized among the bonds.

 

– bond stated rate and effective interest rate – The bonds all have a different stated interest rate (ranging from a deep discount, zero-coupon bond of 0% to 13%).  A discount on bonds payable results when investors demand a rate of interest higher than the rate stated on the bonds. This occurs when the investors are not satisfied with the stated nominal interest rate because they can earn a greater rate on alternative investments of equal risk. They refuse to pay par for the bonds and cannot change the stated nominal rate. However, by lowering the amount paid for the bonds, investors can alter the effective rate of interest. A premium on bonds payable results from the opposite conditions. That is, when investors are satisfied with a rate of interest lower than the rate stated on the bonds, they are willing to pay more than the face value of the bonds in order to acquire them, thus reducing their effective rate of interest below the stated rate.  In this case, all the bonds are set to yield an effective interest rate of 12%, which adjusts the pricing of each individual bond so that they are all equally attractive to investors (purely on interest rates).

 

– timing of cash flows – The bonds all have differing timing of cash flow to the investors.  This can affect their risk, as cash flows further in the future have a higher risk factor than cash flows in the present.

 

– bond security – Bonds security affects the risk of the bond.  In the event of default, a secured bond will rank higher than an unsecured bond.  Thus, unsecured bonds are generally riskier than secured bonds. Presumably the mortgage bonds have security.

 

EXERCISE 14.2 (CONTINUED)

 

1. (continued)

 

All the above factors have to be assessed together to determine the riskiness of each bond. The zero-coupon bonds have no cash flows over the entire 10-year term, making them riskier in that the company may not be able to pay back the $2.5 million at that time. On the other hand, the zero-coupon bonds may have more security underlying them than the 13% bonds that are listed as unsecured. The mortgage bonds are the least risky with the interest cash flows spread over the life of the bonds, and with physical property pledged as collateral in the case of inability of Anaconda to pay the principal or interest. Further information is required, however, about the fair value of the underlying collateral.

 

LO 1,2  BT: AP Difficulty: M  Time: 45 min.  AACSB: Analytic  CPA: cpa-t001 cpa-t005

CM: Reporting and Finance

 

EXERCISE 14.3

 

1.	Divac Limited:
a.		1/1/20	Cash …………………………………………………………………….	300,000
			Bonds Payable…………………………………………….		300,000
b.		7/1/20	Interest Expense1…………………………………………………	6,750
			Cash…………………………………………………………….		6,750
			1($300,000 X 9% X 3/12)
c.		12/31/20	Interest Expense………………………………………………….	6,750
			Interest Payable…………………………………………..		6,750

 

2.	Verbitsky Inc.:
a.		6/1/20	Cash …………………………………………………………………….	210,000
			Bonds Payable…………………………………………….		200,000
			Interest Expense2………………………………………..		10,000
			2($200,000 X 12% X 5/12)
b.		7/1/20	Interest Expense3…………………………………………………	12,000
			Cash…………………………………………………………….		12,000
			3($200,000 X 12% X 6/12)
c.		12/31/20	Interest Expense………………………………………………….	12,000
			Interest Payable…………………………………………..		12,000

Note to instructor: Some students may credit Interest Payable on 6/1/20. If they do so, the entry on 7/1/20 will have a debit to Interest Payable for $10,000 and a debit to Interest Expense for $2,000.

 

LO 2 BT: AP Difficulty: S Time: 20 min.  AACSB: None CPA: cpa-t001 CM: Reporting

 

 

EXERCISE 14.4

 

a.

1/1/20	Cash ($800,000 X 102%)………………….	816,000
	Bonds Payable…………………………..		816,000

 

b.

7/1/20	Interest Expense1…………………………………………..	39,780
	Bonds Payable……………………………………………….	220
	Cash2………………………………………………………..		40,000
	1($816,000 X 9.75% X 1/2)
	2($800,000 X 10% X 6/12)

 

c.

12/31/20	Interest Expense3………………………………….	39,769
	Bonds Payable……………………………………..	231
	Interest Payable………………………………		40,000
	3($815,7804 X 9.75% X 1/2)

 

	4Carrying amount of bonds at July 1, 2020:
	Carrying amount of bonds at January 1, 2020	$816,000
	Amortization of bond premium
	($40,000 – $39,780)	(220)
	Carrying amount of bonds at July 1, 2020	$815,780

 

LO 2 BT: AP Difficulty: S Time: 20 min.  AACSB: None CPA: cpa-t001 CM: Reporting

 

 

EXERCISE 14.5

 

a.

(1)	1/1/20	Cash ($800,000 X 102%)…………………………………	816,000
		Bonds Payable………………………………………….		816,000
(2)	7/1/20	Interest Expense……………………………………………	39,600
		Bonds Payable1………………………………………………	400
		Cash2………………………………………………………..		40,000
		1($16,000 ¸ 40)
		2($800,000 X 10% X 6/12)
(3)	12/31/20	Interest Expense……………………………………………	39,600
		Bonds Payable……………………………………………….	400
		Interest Payable………………………………………..		40,000

 

 

9. Although the effective interest method is required under IFRS per IFRS 9.5.4.1, accounting standards for private enterprises do not specify that this method must be used and therefore, the straight-line method is also an option. The straight-line method is valued for its simplicity and might be used by companies whose financial statements are not constrained by this specific element of GAAP.

 

LO 2 BT: AP Difficulty: M Time: 20 min.  AACSB: None CPA: cpa-t001 CM: Reporting

 

Purchase For continue…..