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Ch14 Long Term Liabilities

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    CHAPTER 14

    LONG-TERM LIABILITIES

    TRUE-FALSE—Conceptual

    An!e" No# $ec"%pt%onT 1. Bond interest payments.F 2. Debenture bonds.T 3. Definition of serial bonds.F 4. Market rate vs. coupon rate.F 5. Definition of stated interest rate.T . !tated rate and coupon rate.F ". #morti$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*.

    MULTIPLE CHOICE—Conceptual

    An!e" No# $ec"%pt%ona 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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    MULTIPLE CHOICE—Conceptual cont#.

    An!e" No# $ec"%pt%onb 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.

    MULTIPLE CHOICE—Co(putat%onal

    An!e" No# $ec"%pt%ona ). 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.c "". 6alculate *ain on retirement of bonds.b "%. 6alculate *ain on retirement of bonds.

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    ,on*-Term ,iabilities

    MULTIPLE CHOICE—Co(putat%onal cont#.

    An!e" No# $ec"%pt%onb "'. 6alculate loss on retirement of bonds.b %). Bond retirement 7it/ call premium.b %1. 6alculate loss on retirement of bonds.b %2. arly e(tin*uis/ment of debt.b %3. arly e(tin*uis/ment of debt.a %4. &nterest on noninterest-bearin* note.c %5. &nterest on installment note payable.b %. Determine balance of discount on notes payable.d %". 6alculate times interest earned ratio.b 0%%. Transfer of e9uipment in debt settlement.d 0%'. +eco*ni$in* *ain on debt restructure.a 0'). &nterest and troubled debt restructurin*.

    MULTIPLE CHOICE—CPA A)apte)An!e" No# $ec"%pt%on

    a '1. Determine proceeds from bond issue.b '2. Determine unamorti$ed bond premium.a '3. Determine unamorti$ed bond discount.c '4. 6alculate bond interest e(pense.a '5. 6alculate loss on retirement of bonds.d '. 6alculate loss on retirement of bonds.d '". 6alculate *ain on retirement of bonds.c '%. Determine carryin* value of bonds to be retired.c ''. 6arryin* value of bonds 7it/ call provision.a 1)). 6lassification of *ain from debt refundin*.d 01)1. 6lassification of *ain from troubled debt restructurin*.

    E0ERCISES

    Ite( $ec"%pt%on14-1)2 Terms related to lon*-term debt.14-1)3 Bond issue price and premium amorti$ation.14-1)4 #morti$ation of discount or premium.14-1)5 ntries for bonds payable.14-1) +etirement of bonds.14-1)" arly e(tin*uis/ment of debt.

    014-1)% #ccountin* for a troubled debt settlement.014-1)' #ccountin* for troubled debt restructurin*.014-11) #ccountin* for troubled debt.

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    PROBLEMS

    Ite( $ec"%pt%on14-111 Bond discount amorti$ation.14-112 Bond interest and discount amorti$ation.14-113 ntries for bonds payable.14-114 ntries for bonds payable.

    014-115 #ccountin* for a troubled debt settlement.

    CHAPTER LEARNING OB2ECTI3ES

    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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    ,on*-Term ,iabilities

    SUMMAR OF LEARNING OB2ECTI3ES B 5UESTIONS

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

    Lea"n%n* O67ect%8e 1

    1. TF 21. M6 22. M6Lea"n%n* O67ect%8e /

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

    Lea"n%n* O67ect%8e

    4. TF !2. M6 2'. M6 1. M6 4. M6 1)2. 5. TF 2". M6 3). M6 2. M6 5. M6 1)3. . TF 2%. M6 ). M6 3. M6 . M6 111.

    Lea"n%n* O67ect%8e 4

    ". TF 32. M6 3". M6 '. M6 "4. M6 '3. M6 1)5. %. TF 33. M6 3%. M6 "). M6 "5. M6 '4. M6 111. '. TF 34. M6 3'. M6 "1. M6 ". M6 1)2. 112.

    1). TF 35. M6 ". M6 "2. M6 '1. M6 1)3. 113. 31. M6 3. M6 %. M6 "3. M6 '2. M6 1)4. 114.

    Lea"n%n* O67ect%8e 9

    11. TF "". M6 %1. M6 '. M6 1)). M6 1)". 4). M6 "%. M6 %2. M6 '". M6 1)2. 113. 41. M6 "'. M6 %3. M6 '%. M6 1)5.

    42. M6 %). M6 '5. M6 ''. M6 1).

    Lea"n%n* O67ect%8e :

    12. TF 14. TF !44. M6 4. M6 %4. M6 %. M613. TF 43. M6 45. M6 4". M6 %5. M6

    Lea"n%n* O67ect%8e ;15. TF 4%. M6 !4'. M6

    Lea"n%n* O67ect%8e <

    1. TF 1%. TF 51. M6 53. M6 %". M61". TF !5). M6 52. M6 54. M6

    Lea"n%n* O67ect%8e =1>

    1'. TF 5. M6 5'. M6 '). M6 1)'. 2). TF 5". M6 %%. M6 1)1. M6 11). 55. M6 5%. M6 %'. M6 1)%. 115.

    ;ote< TF = True-False = (erciseM6 = Multiple 6/oice = roblem

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    TRUE FALSE—Conceptual

    1. 6ompanies usually make bond interest payments semiannually> alt/ou*/ t/e interest rateis *enerally e(pressed as an annual rate.

    2. # mort*a*e bond is referred to as a debenture bond.

    3. Bond issues t/at mature in installments are called serial bonds.

    4. &f t/e market rate is *reater t/an t/e coupon rate> bonds 7ill be sold at a premium.

    5. T/e interest rate 7ritten in t/e terms of t/e bond indenture is called t/e effective yield or market rate.

    . T/e stated rate is t/e same as t/e coupon rate.

    ". #morti$ation of a premium increases bond interest e(pense> 7/ile amorti$ation of a

    discount decreases bond interest e(pense.

    %. # bond may only be issued on an interest payment date.

    '. T/e cas/ paid for interest 7ill al7ays be *reater t/an interest e(pense 7/en usin*effective-interest amorti$ation for a bond.

    1). Bond issue costs are capitali$ed as a deferred c/ar*e and amorti$ed to e(pense over t/elife of t/e bond issue.

    11. T/e replacement of an e(istin* bond issue 7it/ a ne7 one is called refundin*.

    12. &f a lon*-term note payable /as a stated interest rate> 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 refinance lon*-term debt or retire it from a bond retirement fund> its/ould report t/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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    ,on*-Term ,iabilities

    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.

    T"ue Fale An!e"—ConceptualIte( An# Ite( An# Ite( An# Ite( An#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

    MULTIPLE CHOICE—Conceptual

    21. #n e(ample of an item 7/ic/ is not a liability isa. dividends payable in stock.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. bond indenture.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.b. debenture bonds.c. indebenture bonds.d. callable bonds.

    24. Bonds for 7/ic/ t/e o7ners: names are not  re*istered 7it/ t/e issuin* corporation arecalleda. bearer bonds.

    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.d. income bonds.

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    Tet Ban& 'o" Inte"(e)%ate Account%n*+ T!el't, E)%t%on

    !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 bea. *reater t/an if t/e strai*/t-line met/od 7ere used.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.d. coupon rate> nominal rate> or stated rate.

    2%. T/e rate of interest actually earned by bond/olders is called t/ea. stated rate.b. yield rate.c. effective rate.d. effective> yield> or market rate.

    @se t/e follo7in* information for 9uestions 2' and 3)<

    6o( 6o. issued A1))>))) 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 for a. 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.d. 2) periods and 4 from t/e present value of 1 table.

    3). #not/er step in calculatin* t/e issue price of t/e bonds is toa. multiply A1)>))) by t/e table value for 1) periods and 1) from t/e present value of 

    an 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.d. none of t/ese.

    31. !tone> &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.b. t/e nominal rate of interest e(ceeded t/e market 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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    ,on*-Term ,iabilities

    32. &f bonds are initially sold at a discount and t/e strai*/t-line met/od of amorti$ation is used>interest e(pense in t/e earlier years 7illa. e(ceed 7/at it 7ould /ave been /ad t/e effective-interest met/od of amorti$ation

    been used.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.d. t/e market rate multiplied by t/e be*innin*-of-period carryin* amount of t/e bonds.

    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.d. increase if t/e bonds 7ere issued at eit/er a discount or a premium.

    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.c. credit to &nterest (pense.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.d. increased by accrued interest from May 1 to une 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.

    d. any of 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.c. be accumulated in a deferred c/ar*e account and amorti$ed over t/e life of t/e bonds.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.b. a deduction from bonds payable issued to arrive at net bonds payable and outstandin*.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.d. all of 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.d. a difference bet7een t/e reac9uisition price and t/e net carryin* amount of t/e debt

    7/ic/ s/ould be reco*ni$ed in t/e period of redemption.

    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.c. a company provides for t/e future repayment of a lon*-term debt by placin*

    purc/ased securities in an irrevocable 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.c. T/e amount of interest e(pense 7ill decrease eac/ period t/e loan is outstandin*> 7/ile

    t/e portion of t/e annual payment applied to t/e loan principal 7ill increase eac/ period.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 present value of t/e debt instrument must be appro(imated usin* an imputed

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

    assi*ned to t/e property.

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    ,on*-Term ,iabilities

    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.d. any of 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.d. any of 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.c. usin* t/e effective-interest met/od.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*G1. ;on-consolidated subsidiary.2. !pecial purpose entity.3. peratin* leases.

    a. 1b. 2c. 3d. #ll of t/ese are e(amples of off-balance-s/eet financin*.

    !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.c. can en/ance t/e 9uality of its financial position and per/aps permit credit to be

    obtained more readily and at less cost.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.d. as noncurrent and accompanied 7it/ a note e(plainin* t/e met/od to be used in its

    li9uidation.

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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.d. T/e amount of future payments for sinkin* fund re9uirements and lon*-term debt

    maturities durin* eac/ of t/e ne(t five years.

    52. ;ote disclosures for lon*-term debt *enerally include all of t/e follo7in* except a. assets pled*ed as security.b. call provisions and conversion privile*es.c. restrictions imposed by t/e creditor.d. names of specific creditors.

    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.c. income before income ta(es and interest e(pense by interest e(pense.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.c. total liabilities by total 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.c. a ne7 effective-interest rate must be computed.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.d. *ain by t/e debtor and a loss by t/e creditor.

    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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    ,on*-Term ,iabilities

    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.

    Mult%ple C,o%ce An!e"—Conceptual

    Ite( An# Ite( An# Ite( An# Ite( An# Ite( An# Ite( An# Ite( An#

    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%. b23. b 2'. d 35. c 41. d 4". c 53. c 05'. c24. a 3). d 3. d 42. c 4%. d 54. c25. d 31. b 3". d 43. c 4'. c 055. c2. 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.

    MULTIPLE CHOICE—Co(putat%onal

    @se t/e follo7in* information for 9uestions ) t/rou*/ 2<

    n anuary 1> 2))"> Bleeker 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<

    resent value of 1 for % periods at .......................................... .2"resent value of 1 for % periods at %.......................................... .54)resent value of 1 for 1 periods at 3........................................ .23resent value of 1 for 1 periods at 4........................................ .534resent value of annuity for % periods at ................................ .21)resent value of annuity for % periods at %................................ 5."4"resent value of annuity for 1 periods at 3.............................. 12.51resent value of annuity for 1 periods at 4.............................. 11.52

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    Tet Ban& 'o" Inte"(e)%ate Account%n*+ T!el't, E)%t%on

    ). T/e present value of t/e principal isa. A534>))).b. A54)>))).c. A23>))).d. A2">))).

    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. ,ime7ay 6ompany issues A5>)))>)))> > 5-year bonds dated anuary 1> 2))" onanuary 1> 2))". 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. #mstop 6ompany issues A2)>)))>))) of 1)-year> ' bonds on Marc/ 1> 2))" at '" plusaccrued interest. T/e bonds are dated anuary 1> 2))"> 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))>)))

    5. Kou*/ton 6ompany issues A1)>)))>)))> > 5-year bonds dated anuary 1> 2))" onanuary 1> 2))". 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"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))'

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    ,on*-Term ,iabilities

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

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

    a. A"%)>)))b. A1>5)>)))c. A1>5%>4'%d. A1>5%>332

    %. # 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* effective-interest amorti$ation> 7/at 7ill t/e carryin* value of t/ebonds be on t/e December 31> 2))" balance s/eetGa. A1'>12>43b. A2)>)))>)))c. A1'>25>125

    d. 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))%Ga. A1'>")>231b. A1'>'4)>22c. A1'>33>%34d. A1'>3>523

    "). # 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. E/at is interest e(pense for 2))"> usin* strai*/t-line amorti$ationGa. A1>54)>2)"b. A1>5)>)))c. A1>5'>1'2d. A1>5"'>"'3

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    Tet Ban& 'o" Inte"(e)%ate Account%n*+ T!el't, E)%t%on

    "1. # 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* effective-interest amorti$ation> /o7 muc/ interest e(pense 7ill bereco*ni$ed in 2))"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))".&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))" 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))%Ga. 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)).&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))"> usin* strai*/t-line amorti$ationG

    a. A3%5>)52b. A3')>)))c. A3'2>2'%d. A3'4>'4%

    "5. n anuary 1> 2))"> Foley 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 of amorti$ation> interest e(pense for 2))" isa. A)>))).b. A4>43.c. A4>2).d. A"2>))).

    ". n anuary 2> 2))"> a calendar-year corporation sold % bonds 7it/ a face value of A))>))). 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 in2))"Ga. A4%>))).b. A55>3).c. A55>544.d. A)>))).

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    ,on*-Term ,iabilities

    "". T/e December 31> 2))> balance s/eet of ddy 6orporation includes t/e follo7in* items<

    ' bonds payable due December 31> 2)15 A1>)))>)))@namorti$ed premium on bonds payable 2">)))

    T/e bonds 7ere issued on December 31> 2))5> at 1)3> 7it/ interest payable on uly 1and December 31 of eac/ year. ddy uses strai*/t-line amorti$ation. n Marc/ 1> 2))">ddy retired A4))>))) of t/ese bonds at '% plus accrued interest. E/at s/ould ddyrecord as a *ain on retirement of t/ese bondsG &*nore ta(es.a. A1%>%)).b. A1)>%)).c. A1%>)).d. A2)>))).

    "%. n anuary 1> 2))1> on$ale$ 6orporation issued A4>5))>))) of 1) ten-year bonds at1)3. T/e bonds are callable at t/e option of on$ale$ at 1)5. on$ale$ /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))"> 7/en t/e fair market value of t/e bonds 7as '> on$ale$repurc/ased A1>)))>))) of t/e bonds in t/e open market at '. on$ale$ /as recordedinterest and amorti$ation for 2))". &*norin* income ta(es and assumin* t/at t/e *ain ismaterial> on$ale$ 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>))).

    "'. T/e 1) bonds payable of Llein 6ompany /ad a net carryin* amount of A5")>))) onDecember 31> 2)). 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/e

    effective-interest met/od. &nterest 7as paid on anuary 1 and uly 1 of eac/ year. n uly2> 2))"> several years before t/eir maturity> Llein retired t/e bonds at 1)2. T/e interestpayment on uly 1> 2))" 7as made as sc/eduled. E/at is t/e loss t/at Llein s/ouldrecord on t/e early retirement of t/e bonds on uly 2> 2))"G &*nore ta(es.a. A12>))).b. A3">%)).c. A33>)).d. A42>))).

    %). # 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/ese

    amounts 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.

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    ,on*-Term ,iabilities

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

    %. n anuary 1> 2))"> lenn 6ompany sold property to Kenry 6ompany. T/ere 7as noestablis/ed e(c/an*e price for t/e property> and Kenry *ave lenn a A2>)))>))) $ero-interest-bearin* note payable in 5 e9ual annual installments of A4))>)))> 7it/ t/e firstpayment due December 31> 2))". 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))". E/at s/ouldbe t/e balance of t/e Discount on ;otes ayable account on t/e books of Kenry atDecember 31> 2))" after ad?ustin* entries are made> assumin* t/at t/e effective-interestmet/od is usedGa. A)b. A42%>22)c. A44>4))d. A55%>)))

    %". ;yland 6ompanyHs 2))" financial statements contain t/e follo7in* selected data<

    &ncome ta(es A4)>)))&nterest e(pense 2)>)));et income )>)))

    ;ylandHs times interest earned for 2))" isa. 3 timesb. 4 times.c. 5 times.d. times.

    @se t/e follo7in* information for 9uestions 0%% t/rou*/ 0')<

    n December 31> 2))5> +eese 6o. is in financial difficulty and cannot pay a note due t/at day. &tis a A))>))) note 7it/ A)>))) accrued interest payable to Trear> &nc. Trear a*rees to acceptfrom +eese e9uipment t/at /as a fair value of A2')>)))> an ori*inal cost of A4%)>)))> andaccumulated depreciation of A23)>))). Trear also for*ives t/e accrued interest> e(tends t/ematurity date to December 31> 2))%> reduces t/e face amount of t/e note to A25)>)))> andreduces t/e interest rate to > 7it/ interest payable at t/e end of eac/ year.

    0%%. +eese s/ould reco*ni$e a *ain or loss on t/e transfer of t/e e9uipment of a. A).b. A4)>))) *ain.c. A)>))) *ain.

    d. A1')>))) loss.

    0%'. +eese s/ould reco*ni$e a *ain on t/e partial settlement and restructure of t/e debt of a. A).b. A15>))).c. A55>))).d. A"5>))).

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    Tet Ban& 'o" Inte"(e)%ate Account%n*+ T!el't, E)%t%on

    0'). +eese s/ould record interest e(pense for 2))% ofa. A).b. A15>))).c. A3)>))).d. A45>))).

    Mult%ple C,o%ce An!e"—Co(putat%onal

    Ite( An# Ite( An# Ite( An# Ite( An# Ite( An# Ite( An# Ite( An#

    ). a 5. c "). d "5. b %). b %5. c 0'). a1. b . c "1. c ". c %1. b %. b2. a ". c "2. a "". c %2. b %". d3. c %. a "3. d "%. b %3. b 0%%. b4. c '. d "4. d "'. b %4. a 0%'. d

    MULTIPLE CHOICE—CPA A)apte)

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

    '2. n anuary 1> 2))"> ome$ 6o. issued its 1) bonds in t/e face amount of A3>)))>)))>7/ic/ mature on anuary 1> 2)1". T/e bonds 7ere issued for A3>4)5>))) to yield %>resultin* in bond premium of A4)5>))). ome$ uses t/e effective-interest met/od of amorti$in* bond premium. &nterest is payable annually on December 31. #t December 31>2))"> ome$:s ad?usted unamorti$ed bond premium s/ould bea. A4)5>))).b. A3"">4)).c. A34>5)).d. A3)4>5)).

    '3. n uly 1> 2))5> Litel> &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>))). Litel uses t/e effective-interest met/od of amorti$in* bonddiscount. &nterest is payable annually on une 3). #t une 3)> 2))"> Litel:s unamorti$edbond discount s/ould bea. A24>)5).b. A255>))).c. A244>))).d. A215>))).

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    Tet Ban& 'o" Inte"(e)%ate Account%n*+ T!el't, E)%t%on

    ''. # ten-year bond 7as issued in 2))5 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))"> 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))" 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.

    1)). !tarr 6o. took advanta*e of market conditions to refund debt. T/is 7as t/e fourt/refundin* operation carried out by !tarr 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.

    01)1. Brye 6o. is indebted to Dole under a A4))>)))> 12> t/ree-year note dated December 31>2))5. Because of Brye:s financial difficulties developin* in 2))"> Brye o7ed accruedinterest of A4%>))) on t/e note at December 31> 2))". @nder a troubled debtrestructurin*> on December 31> 2))"> Dole a*reed to settle t/e note and accrued interestfor a tract of land /avin* a fair value of A3)>))). Brye:s ac9uisition cost of t/e land isA2')>))). &*norin* income ta(es> on its 2))" income statement Brye s/ould report as aresult of t/e troubled debt restructurin*

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

    Mult%ple C,o%ce An!e"—CPA A)apte)

    Ite( An# Ite( An# Ite( An# Ite( An# Ite( An# Ite( An#

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

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    ,on*-Term ,iabilities

    $ERI3ATIONS — Co(putat%onal

    No# An!e" $e"%8at%on

    ). 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

    A2">))) 2"". c PA1>)2">))) Q C  N R N .4 = A41)>)) C68 of retired bonds

    1%

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

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    Tet Ban& 'o" Inte"(e)%ate Account%n*+ T!el't, E)%t%on

    $ERI3ATIONS — Co(putat%onal cont#.

    No# An!e" $e"%8at%onA135>)))

    "%. b PA4>5))>))) N 1.)3 Q C N "R N 2' = A1>))'>))) C68 of retired bonds1)

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

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

    %). b A3))>))) O A1))>))) = A4))>))).

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

    %2. b UA'>))>))) O PA4))>))) N C3 23 S 1)RV N .) = A5>%4%>)))

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

    %3. UA4>%))>))) O PA2))>))) N C3 23 S 1)RV N .) = A2>'24>)))A3>))>))) Q A2>'24>))) = A13>))).

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

    %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 = times.

    A2)>)))

    0%%. b A2')>))) Q CA4%)>))) Q A23)>))) = A4)>))).

    0%'. d CA))>))) O A)>))) Q PA2')>))) O A25)>))) O CA25)>))) N .) N 3R= A"5>))).

    0'). a ). T/e effective-interest rate is ).

    $ERI3ATIONS — CPA A)apte)

    No# An!e" $e"%8at%on'1. a CA1>)))>))) N .'' O CA1>)))>))) N .1) N 312 = A1>)15>))).

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

    '3. a 2))5-2))< A4>'5>))) O PCA4>'5>))) N .1 Q CA5>)))>))) N .)'R= A4>"14>5)).

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

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    ,on*-Term ,iabilities

    $ERI3ATIONS — CPA A)apte) cont#.

    No# An!e" $e"%8at%on'4. c A%%5>2' N .) = A53>11%.

     A2))>)))'5. a CA2>5))>))) N 1.)2 Q PA2>3))>))) O C N 12R  = A')>))).15'. d CA3>)))>))) O A")>))) Q PCA>)))>))) Q A32)>))) N 12R = A23)>))).

    A4)>)))'". d PA1>)4)>))) Q C  N 11R  Q CA1>)))>))) N 1.)1 = A%>))).

    2)

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

    ''. c 6onceptual.

    1)). a 6onceptual.01)1. d A3)>))) Q A2')>))) = A")>)))

    CA4))>))) O A4%>))) Q A3)>))) = A%%>))).

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    Tet Ban& 'o" Inte"(e)%ate Account%n*+ T!el't, E)%t%on

    E0ERCISES

    E@# 14-1>/Terms related to lon*-term debt.

    lace t/e letter of t/e best matc/in* p/rase before eac/ 7ord.

     WWWWW 1. &ndenture WWWWW . Times &nterest arned +atio

     WWWWW 2. Treasury Bonds WWWWW ". Mort*a*e

     WWWWW 3. Bonds &ssued at ar WWWWW %. remium on Bonds

     WWWWW 4. 6arryin* 8alue WWWWW '. +eac9uisition rice

     WWWWW 5. ;ominal +ate WWWWW1). Market +ate

    a. +e9uires t/at bond discount be reported in t/e balance s/eet as a direct deduction from t/e

    face of t/e bond.b. +ate set by party issuin* t/e bonds 7/ic/ appears on t/e bond instrument.

    c. T/e interest paid eac/ period is t/e effective interest at date of issuance.

    d. +ate of interest actually earned by t/e bond/olders.

    e. +esults 7/en bonds are sold belo7 par.

    f. +esults 7/en bonds are sold above par.

    *. Bonds payable reac9uired by t/e issuin* corporation t/at /ave not been canceled.

    /. rice paid by issuin* corporation for its o7n bonds.

    i. Book value of bonds at any *iven date.

     ?. +atio of current assets to current liabilities.

    k. T/e bond contract or a*reement.

    l. &ndicates t/e companyHs ability to meet interest payments as t/ey come due.

    m. +atio of debt to e9uity.

    n. (clusive ri*/t to manufacture a product.

    o. # document t/at pled*es title to property as security for a loan.

    Solut%on 14-1>/

    1. k 3. c 5. b ". o '. /2. * 4. i l % f 1). d

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    ,on*-Term ,iabilities

    E@# 14-1>Bond issue price and premium amorti$ation.

    n anuary 1> 2))"> ,o7ry 6o. issued ten-year bonds 7it/ a face value of A1>)))>))) and astated interest rate of 1)> payable semiannually on une 3) and December 31. T/e bonds 7eresold to yield 12. Table values are<

    resent value of 1 for 1) periods at 1) .................................. .3%

    resent value of 1 for 1) periods at 12 .................................. .322resent value of 1 for 2) periods at 5 .................................... .3""resent value of 1 for 2) periods at .................................... .312resent value of annuity for 1) periods at 1) ........................ .145resent value of annuity for 1) periods at 12 ........................ 5.5)resent value of annuity for 2) periods at 5 .......................... 12.42resent value of annuity for 2) periods at .......................... 11.4")

    Int"uct%onCa 6alculate t/e issue price of t/e bonds.Cb Eit/out pre?udice to your solution in part Ca> assume t/at t/e issue price 7as A%%4>))).

    repare t/e amorti$ation table for 2))"> assumin* t/at amorti$ation is recorded on interest

    payment dates.

    Solut%on 14-1>

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

    A%%5>5))

    Cb Date 6as/ (pense #morti$ation 6arryin* #mount11)" A%%4>)))3))" A5)>))) A53>)4) 3>)4) %%">)4)1231)" 5)>))) 53>222 3>222 %')>22

    E@# 14-1>4#morti$ation of discount or premium.

    Benson &ndustries> &nc. issued A>)))>))) of % debentures on May 1> 2)) 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)14. 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).

    Int"uct%on6alculate t/e total dollar amount of discount or premium amorti$ation durin* t/e first year C51)t/rou*/ 43))" t/ese bonds 7ere outstandin*. C!/o7 computations and round to t/e nearestdollar.

    Solut%on 14-1>4

    &nterest 6as/ Discount 6arryin*  Date (pense &nterest #morti$ed 8alue of Bonds51) A5>323>5""111) A2>1"' A24)>))) A2>1"' 5>34'>"551)" 2">4%% 24)>))) 2">4%% 5>3"">244

    Total A53>"

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    Tet Ban& 'o" Inte"(e)%ate Account%n*+ T!el't, E)%t%on

    E@# 14-1>9ntries for Bonds ayable.

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

    Ca n #pril 1> 2))> !tarr 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))% !tarr retired A15)>))) of t/e bonds at 1)2 plus accrued interest. !tarr usesstrai*/t-line amorti$ation.

    Solut%on 14-1>9

    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

    E@# 14-1>:+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))" balance s/eet of Marin 6o. included t/e follo7in* items<

    ".5 bonds payable due December 31> 2)15 A1>2))>)))@namorti$ed discount on bonds payable 4%>)))

    T/e bonds 7ere issued on December 31> 2))5 at '5> 7it/ interest payable on une 3) andDecember 31. C@se strai*/t-line amorti$ation.

    n #pril 1> 2))%> Marin retired A24)>))) of t/ese bonds at 1)1 plus accrued interest.

    Solut%on 14-1>:

    &nterest (pense............................................................................. 4>%))6as/ CA24)>))) N ".5 N 312........................................... 4>5))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))

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    ,on*-Term ,iabilities

    E@# 14-1>;arly e(tin*uis/ment of debt.

    ratt> &ncorporated sold its % bonds 7it/ a maturity value of A3>)))>))) on #u*ust 1> 2))5 for A2>'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 atany time after #u*ust 1> 2))". By ctober 1> 2))"> t/e market rate of interest /as declined and

    t/e market price of ratt:s bonds /as risen to a price of 1)1. T/e firm decides to refund t/e bondsby sellin* a ne7 bond issue to mature in 5 years. ratt be*ins to reac9uire its % bonds int/e market and is able to purc/ase A5))>))) 7ort/ at 1)1. T/e remainder of t/e outstandin*bonds is reac9uired by e(ercisin* t/e bonds: call feature. &n t/e final analysis> /o7 muc/ 7as t/e*ain or loss e(perienced by ratt in reac9uirin* its % bondsG C#ssume t/e firm used strai*/t-line amorti$ation. !/o7 calculations.

    Solut%on 14-1>;

    +eac9uisition price<A5))>))) N 1.)1 = A 5)5>)))A2>5))>))) N 1.)4 = 2>))>))) A3>1)5>)))

    ,ess net carryin* amount<A2>'4>))) O CA54>))) N 2) = 2>''>4))

    ,oss on early e(tin*uis/ment A 135>))

    =E@# 14-1> &nc.> 7/ic/ o7es Kenry 6o. A))>))) in notes payable 7it/ accrued interest of A54>)))> isin financial difficulty. To settle t/e debt> Kenry a*rees to accept from 6ole e9uipment 7it/ a fair value of A5")>)))> an ori*inal cost of A%4)>)))> and accumulated depreciation of A1'5>))).

    Int"uct%onCa 6ompute t/e *ain or loss to 6ole on t/e settlement of t/e debt.

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

    Cc repare t/e ?ournal entry on 6ole:s books to record t/e settlement of t/is debt.

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

    =Solut%on 14-1><

    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>)))

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    Tet Ban& 'o" Inte"(e)%ate Account%n*+ T!el't, E)%t%on

    =Solut%on 14-1>)))&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@# 14-1>?#ccountin* for a troubled debt restructurin*.

    n December 31> 2))> oore 6o. is in financial difficulty and cannot pay a note due t/at day. &tis a A5))>))) note 7it/ A5)>))) accrued interest payable to dsen> &nc. dsen a*rees to for*ivet/e accrued interest> e(tend t/e maturity date to December 31> 2))%> and reduce t/e interest rateto 4. T/e present value of t/e restructured cas/ flo7s is A42%>))).

    Int"uct%onrepare entries for t/e follo7in*<Ca T/e restructure on oore:s books.Cb T/e payment of interest on December 31> 2))".Cc T/e restructure on dsenHs books.

    =Solut%on 14-1>?

    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@# 14-11>#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

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    ,on*-Term ,iabilities

    =Solut%on 14-11>

    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 and

    t/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 byt/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.

    PROBLEMS

    P"# 14-111Bond discount amorti$ation.

    n une 1> 2))> ansonXbottleA6ompany sold A4))>1)Y in lon*-term bo;ls fkr A351>)4)Z[T\eb nds 7ill mature in 1) years and /ave]a s4ated antebest ra4e of % and a yield rape of 1)f T/* bonds pay interest anntadly on MaV 31of]aa] yeav. T/e b*nds are to b accounted for under t?e effdctive-interest m^t/od.

    Int"uct%onCa6onstruct a bond amorti$ation table fo+ _/is proble- to indicite t/e amount of31interest

    e(pense and discoun_ amorti$a9ion at eac/ May 31. Knclude only t/e)firstfour years. Make

    sure al` columns 9l rous ar31properly labeled. C+ound to t/e fea+estAollar.Cb TKe sales price of A351>)4) 7a detrlindd frnm (resent value tabler. !pmciZiclly e(plain

    /k7 one 7ould determine t/e priceusin* pres@nt va/ue tebles.

    Cc #sumin* t/at in4e+est and discou.t amorti$ation are vecorded eaci May 31> prepare t/ead?ustin* eltry to be made31on Decumber 31> 2)%.AC+ound to t/e nearest dollar.

    Solut%on14-11

    Ca Debit 6relit 6crryin* mount D[te 6radit 6as/ &nerest D(pense Bond Discount C of Bonds1) A35)>)4)531)" A32>))) 35>))4 A3>1)4 35g144531)% 32

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    Tet Ban& 'o" Inte"(e)%ate Account%n*+ T!el't, E)%t%on

    2)) 35>414 3>41435">55%531)' 32>))) 35>"5 3>"5 3>3145h3112 32>))) 3>131 4>'31 35>445

    Cb C1 Find t/e /re3end)value of A4))>))) due yn 1) years 9t 12.C2 FindCt/e uresent value of 1) an;ual paymdnts of A32>))) at 14.

     #dd j1O od C2]tn obtain t/e prese.t value of t/e principal end t/e interest payme.ts.SolutIoN :4-11  Ccont.

    Cc&nterest (pense...............................................................2%>%5%0&nterest ayable................................................................ 1%>"00

    Discount on ondU ayab/e............................................................. 2l1'1

    0" 12  × A".5 C*rom bVeO = 2)>%耵 %

    00"12C× g䀠×d耴 ))>)))= A1>2"

    P"# 14-11/Bond interes䁴 and dicount aVorpi䁡 eion.

    ,o*an 6orpnraion i7sueA A%) >))  o % bonds)on ctober1> 2))>䀠 lue o; qtober 1 2)1.T/e intere! is to e aid t7ice聡 yea9 o #tril 1 and[ctober 1. T/e b?d! 7era solfCto yield1) efective annual interest. ,o*9n 6orporation closes itsCbook7 annually on December 35.

    Int"u&T%onCa 6Vplete t/e follo7in* amorti$ateon sc/edule for t/e dates[indicated. C+*und a,l ans7ers tn

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

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    ,on*-Term ,iabilities

    Debit 6redit 6arryin* #Mou;t6redit 6as/ &nterest (pensa Bond Discount [of Bonds

    ctober 1g 2)) A"3%>24 #9rwl 1> 2))"

    ctobr 1> 2))"

    Cbrepare t/e ad?ustin* entryfor Deaemer 31> 2))". @se t/^ enAect&ve-inverest met/od.ᄂ

    Cc 6om)uu t/e interesu e(pen7e to be ruror4ed in t/m i;aome stataMent for tCe year eldedecamber 31> 2))".

    Solut%on1-11/

    Ca Debit 6redit 6arsyin* #mount6bedit 6as/ &nterest $pense Bond Discount of Bonds

    ctob^r [> 2Y "3224 #prw/ 1> 2%)"A32>)))A3>'11A4>'11"43>135ctober 1> 2)t" )2>))) 3">15" 5>15" " ᄉ %>2'2

    CB &nterest ppenUe Cd"4%>2=2 N 1) N 312..................................... 1%>"2G #nterertCayxble C12 N A3 )) .......................................... 1>))4i3cunt on Bond7)ayable CA1%

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    Tet Ban& 'o" Inte"(e)%ate Account%n*+ T!el't, E)%t%on

    ")" Q A1))) .................................................................................... 2>")"

    Cs A1%>A5 C12 of A>'113">91"

      1%g")"A">32)

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    ,on*-Term ,iabilities

    P"# 14-11nt$ies for bons payable.

    repare tCe necessary ?urnal entries to rec*2d t/e follo7in* tra;saction! relatzn: to)t/e lon*-term issuxnce of bmnes ofTituc 6o.<

    {arc/ [

    &ssuel A%))-))) faceCvxlue Titus 6. secondAmort*a7e> % bonds for |%"2>94> includin*accrued interest. &nterest &! pay9Ble semiannually on December 1 and une 1 7ivl t/ebondsmaturi;* ) years f}om t/is pist December 1. T/e bonds)are c#llable iT 1)2.

    ~u; 1aiD semiannual interest on Tipus 6 . bonds• C@se strai*/t-line amorui$ation of any premiuu or Ais*ount.

    Dece€ber 1-a&d semia.nual interesp on Titus co. boods andApurc/asmd A4))>))4 face v6>uebonds at]t(e call price in acco$lxncm 7it/ t/e provi7ions of t/e bond indnture

    Solut%on14+11

    Mcrc/ 1< 6as/.................................................................................... %"r>1)Bonds +ayable......................................................... %))>)))re€iuM)on Bonds ayable...................................... 5>‚)

    &nterest (penUe CA%))>) ) N[% N 312............................. 1•>)))

    une 1< &terest (pense.................................................................. 3)>5)re€ium k ƒondsCayible CA5>1 N 311"................&>44)

    & 6as/ ................................................................................. 32>p))

    Dec0 1< &nterest (pense.................................................................. 2'>12%remium on Bonds a'able A5>1) „11G................................ 2>%%)

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

    onds ayable ...................................................................4))>)))- reeium onBo…ds ayable0 .......................................................................25>'2ain o? +edemption of Bonds............................................................ 1">'2%

    6as/ ....................................................................4)%>)))012 N CA5">1)]Q A1>44) Q 2>%%) = A25>'2).

    P"# 14.1D4ntries for bonds ]ayable.rep#re ?ournal entr&es to35record t/d fol`o7in* transabtions re,atin* po lon*-term bo.ds of riur> &nc. C!/o7 computatio?s.-0a n u;e 1> 2))> rier>35&nc. i9sued)A))>)))> b nds for   A ᄃ %">4)> 7/ic/ &ncludes

    accr9ed interest. &nper*7t is paya*le]se€ia.nually n]February 1 and #u*ust 1 7it/ t?e bond9maturn* nn Februcry 1> 2)1. T/e bonfs are kamlable at 1Y2.

    P"# 14-114  Ccont.

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    Tet Ban& 'o" Inte"(e)%ate Account%n*+ T!el't, E)%t%on

    Cb n #uust 1> 2))> rier pawd interest)n t(e bonds and recordud amorti$adion. rier u7esstrai*ltline amorti$ation.Ca n Feb2uary 1> 2))%> rier paid inerest and recordedamrti$atio… on all of t/e bonds> and purc/ased A3)>p)) of t/e bonds a_ t/e call)]rice•

     #ssuma t/at a reversin* entry 7as made on anuary 1> 2))%.

    S lut%on 14-14

    ja 6as0............................................................................................... 5g">4)Discount mn Bonds ay#me....................................................... 24>3)

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    ,on*-Term ,iabilities

    Bonls ayable.................................................................... ))> )&?tepest ()ense CA))>))) N N 412.......................... 12

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    Tet Ban& 'o" Inte"(e)%ate Account%n*+ T!el't, E)%t%on

    )))

    Cb &ntere!t (pmnse CA)Y>))) N † 2 O A4 ᄉ1%>42)

    6as/................................................................................... 1%>)))Di3co7nt on Bonds ayable CA24>) N 211................... 42)

     Cc &ntepest (pens^ A1%>))) O A1>2) ................................1'>)")6as/........................................................................................... 1%>)))

    Discount on +onds ay#ble CA2A>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))

    =P"# 14-119#ccountin* for a troubled debt settlement.

    Finney> &nc.> 7/ic/ o7es 6arson 6o. A%))>))) in notes payable> is in financial difficulty. Toeliminate t/e debt> 6arson a*rees to accept from Finney land /avin* a fair market value of A1)>))) and a recorded cost of A45)>))).

    Int"uct%onCa 6ompute t/e amount of *ain or loss to Finney> &nc. on t/e transfer Cdisposition of t/e land.

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

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

    Cd 6ompute t/e *ain or loss to 6arson 6o. from settlement of its receivable from Finney.

    Ce repare t/e ?ournal entry on 6arson:s books to record t/e settlement of t/is receivable.

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    ,on*-Term ,iabilities

    =Solut%on 14-119

    Ca Fair market value of t/e land A1)>)))6ost of t/e land to lton> &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.............................................................. %))>)))

    14 - ?


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