Ch14-180205115701 - answers for the practice questions. PDF

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Intermediate Accounting IFRS Edition-2nd Questions & Solutions Chapter 14 Non-Current Liabilities Donald E. Kieso Jerry J. Weygandt Terry D. Warfield BRIEF EXERCISES (All calculations are to be rounded to nearest whole currency unit, unless otherwise stated.) 3 BE14-1 Whiteside Corpo...

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Intermediate Accounting IFRS Edition-2nd Questions & Solutions Chapter 14

Non-Current Liabilities

Donald E. Kieso Jerry J. Weygandt Terry D. Warfield

BRIEF EXERCISES (All calculations are to be rounded to nearest whole currency unit, unless otherwise stated.) 3

BE14-1 Whiteside Corporation issues ¥500,000 of 9% bonds, due in 10 years, with interest payable semiannually. At the time of issue, the market rate for such bonds is 10%. Compute the issue price of the bonds.

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BE14-2 The Colson Company issued € 300,000 of 10% bonds on January 1, 2015. The bonds are due January 1, 2020, with interest payable each July 1 and January 1. The bonds are issued at face value. Prepare Colson’s journal entries for (a) the January issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.

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BE14-3 Assume the bonds in BE14-2 were issued at 108.11 to yield 8%. Prepare the journal entries for (a)January 1, (b) July 1, and (c) December 31.

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BE14-4 Assume the bonds in BE14-2 were issued at 92.6393 to yield 12%. Prepare the journal entries for (a)January 1, (b) July 1, and (c) December 31.

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BE14-5 Devers Corporation issued £400,000 of 6% bonds on May 1, 2015. The bonds were dated January 1, 2015, and mature January 1, 2017, with interest payable July 1 and January 1. The bonds were issued at face value plus accrued interest. Prepare Devers’ journal entries for (a) the May 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.

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BE14-6 On January 1, 2015, JWS Corporation issued $600,000 of 7% bonds, due in 10 years. The bonds were issued for $559,224, and pay interest each July 1 and January 1. Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. Assume an effective-interest rate of 8%.

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BE14-7 Assume the bonds in BE14-6 were issued for $644,636 with the effective-interest rate of 6%. Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.

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BE14-8 Tan Corporation issued HK$600,000,000 of 7% bonds on November 1, 2015, for HK$644,636,000. The bonds were dated November 1, 2015, and mature in 10 years, with interest payable each May 1 and November 1. The effective-interest rate is 6%. Prepare Tan’s December 31, 2015, adjusting entry.

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BE14-9 Coldwell, Inc. issued a €100,000, 4-year, 10% note at face value to Flint Hills Bank on January 1, 2015, and received €100,000 cash. The note requires annual interest payments each December 31. Prepare Coldwell’s journal entries to record (a) the issuance of the note and (b) the December 31 interest payment.

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BE14-10 Samson Corporation issued a 4-year, £75,000, zero-interest-bearing note to Brown Company on January 1, 2015, and received cash of £47,664. The implicit interest rate is 12%. Prepare Samson’s journal entries for (a) the January 1 issuance and (b) the December 31 recognition of interest.

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BE14-11 McCormick Corporation issued a 4-year, $40,000, 5% note to Greenbush Company on January 1, 2015, and received a computer that normally sells for $31,495. The note requires annual interest payments each December 31. The market rate of interest for a note of similar risk is 12%. Prepare McCormick’s journal entries for (a) the January 1 issuance and (b) the December 31 interest.

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BE14-12 Shlee Corporation issued a 4-year, €60,000, zero-interest-bearing note to Garcia Company on January 1, 2015, and received cash of €60,000. In addition, Shlee agreed to sell merchandise to Garcia at an amount less than regular selling price over the 4-year period. The market rate of interest for similar notes is 12%. Prepare Shlee Corporation’s January 1 journal entry.

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BE14-13 On January 1, 2015, Henderson Corporation retired $500,000 of bonds at 99. At the time of retirement, the unamortized premium was $15,000. Prepare Henderson’s journal entry to record the reacquisition of the bonds.

Exercises 687 6

BE14-14 Refer to the note issued by Coldwell, Inc. in BE14-9. During 2015, Coldwell experiences financial difficulties. On January 1, 2016, Coldwell negotiates a settlement of the note by issuing to Flint Hills Bank 20,000 €1 par Coldwell ordinary shares. The ordinary shares have a market price of €4.75 per share on the date of the settlement. Prepare Coldwell’s entries to settle this note.

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BE14-15 Refer to the note issued by Coldwell, Inc. in BE14-9. During 2015, Coldwell experiences financial difficulties. On January 1, 2016, Coldwell negotiates a modification of the terms of the note. Under the modification, Flint Hills Bank agrees to reduce the face value of the note to €90,000 and to extend the maturity date to January 1, 2020. Annual interest payments on December 31 will be made at a rate of 8%. Coldwell’s market interest rate at the time of the modification is 12%. Prepare Coldwell’s entries for (a)the modification on January 1, 2016, and (b) the first interest payment date on December 31, 2016.

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BE14-16 Shonen Knife Corporation has elected to use the fair value option for one of its notes payable. Thenote was issued at an effective rate of 11% and has a carrying value of HK$16,000. At year-end, Shonen Knife’s borrowing rate has declined; the fair value of the note payable is now HK$17,500. (a) Determine the unrealized gain or loss on the note. (b) Prepare the entry to record any unrealized gain or loss, assuming that the change in value was due to general market conditions.

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BE14-17 At December 31, 2015, Hyasaki Corporation has the following account balances: Bonds payable, due January 1, 2023 Interest payable

$1,912,000 80,000

Show how the above accounts should be presented on the December 31, 2015, statement of financial position, including the proper classifications.

EXERCISES (All calculations are to be rounded to nearest whole currency unit, unless otherwise stated.) 2

E14-1 (Classification of Liabilities) Presented below are various account balances. (a) Bank loans payable of a winery, due March 10, 2018. (The product requires aging for 5 years before sale.) (b) Serial bonds payable, €1,000,000, of which €250,000 are due each July 31. (c) Amounts withheld from employees’ wages for income taxes. (d) Notes payable due January 15, 2017. (e) Credit balances in customers’ accounts arising from returns and allowances after collection in full of account. (f) Bonds payable of €2,000,000 maturing June 30, 2016. (g) Overdraft of €1,000 in a bank account. (No other balances are carried at this bank.) (h) Deposits made by customers who have ordered goods. Instructions Indicate whether each of the items above should be classified on December 31, 2015, as a current liability, a non-current liability, or under some other classification. Consider each one independently from all others; that is, do not assume that all of them relate to one particular business. If the classification of some of the items is doubtful, explain why in each case.

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E14-2 (Classification) The following items are found in the financial statements. (a) (b) (c) (d) (e) (f) (g)

Interest expense (credit balance). Bond issue costs. Gain on repurchase of debt. Mortgage payable (payable in equal amounts over next 3 years). Debenture bonds payable (maturing in 5 years). Notes payable (due in 4 years). Income bonds payable (due in 3 years).

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

688 Chapter 14 Non-Current Liabilities 3

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E14-3 (Entries for Bond Transactions) Presented below are two independent situations. 1. On January 1, 2015, Divac Company issued €300,000 of 9%, 10-year bonds at par. Interest is payable quarterly on April 1, July 1, October 1, and January 1. 2. On June 1, 2015, Verbitsky Company issued €200,000 of 12%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semiannually on July 1 and January 1. Instructions For each of these two independent situations, prepare journal entries to record the following. (a) The issuance of the bonds. (b) The payment of interest on July 1. (c) The accrual of interest on December 31.

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E14-4 (Entries for Bond Transactions) Foreman Company issued €800,000 of 10%, 20-year bonds on January 1, 2015, at 119.792 to yield 8%. Interest is payable semiannually on July 1 and January 1. Instructions Prepare the journal entries to record the following. (a) The issuance of the bonds. (b) The payment of interest and the related amortization on July 1, 2015. (c) The accrual of interest and the related amortization on December 31, 2015.

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E14-5 (Entries for Bond Transactions) Assume the same information as in E14-4, except that the bonds were issued at 84.95 to yield 12%. Instructions Prepare the journal entries to record the following. (Round to the nearest euro.) (a) The issuance of the bonds. (b) The payment of interest and related amortization on July 1, 2015. (c) The accrual of interest and the related amortization on December 31, 2015.

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E14-6 (Amortization Schedule) Spencer Company sells 10% bonds having a maturity value of £3,000,000 for £2,783,724. The bonds are dated January 1, 2015, and mature January 1, 2020. Interest is payable annually on January 1. Instructions Set up a schedule of interest expense and discount amortization. (Hint: The effective-interest rate must be computed.)

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E14-7 (Determine Proper Amounts in Account Balances) Presented below are three independent situations. Instructions (a) McEntire Co. sold $2,500,000 of 11%, 10-year bonds at 106.231 to yield 10% on January 1, 2015. The bonds were dated January 1, 2015, and pay interest on July 1 and January 1. Determine the amount of interest expense to be reported on July 1, 2015, and December 31, 2015. (b) Cheriel Inc. issued $600,000 of 9%, 10-year bonds on June 30, 2015, for $562,500. This price provided a yield of 10% on the bonds. Interest is payable semiannually on December 31 and June 30. Determine the amount of interest expense to record if financial statements are issued on October 31, 2015. (c) On October 1, 2015, Chinook Company sold 12% bonds having a maturity value of $800,000 for $853,382 plus accrued interest, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2015, and mature January 1, 2020, with interest payable December 31 of each year. Prepare the journal entries at the date of the bond issuance and for the first interest payment.

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E14-8 (Entries and Questions for Bond Transactions) On June 30, 2014, Macias Company issued R$5,000,000 face value of 13%, 20-year bonds at R$5,376,150 to yield 12%. The bonds pay semiannual interest on June 30 and December 31. Instructions (a) Prepare the journal entries to record the following transactions. (1) The issuance of the bonds on June 30, 2014. (2) The payment of interest and the amortization of the premium on December 31, 2014. (3) The payment of interest and the amortization of the premium on June 30, 2015. (4) The payment of interest and the amortization of the premium on December 31, 2015.

Exercises 689 (b) Show the proper statement of financial position presentation for the liability for bonds payable on the December 31, 2015, statement of financial position. (c) Provide the answers to the following questions. (1) What amount of interest expense is reported for 2015? (2) Determine the total cost of borrowing over the life of the bond. 3

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E14-9 (Entries for Bond Transactions) On January 1, 2015, Osborn Company sold 12% bonds having a maturity value of £800,000 for £860,651.79, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2015, and mature January 1, 2020, with interest payable December 31 of each year. Instructions (a) Prepare the journal entry at the date of the bond issuance. (b) Prepare a schedule of interest expense and bond amortization for 2015–2017. (c) Prepare the journal entry to record the interest payment and the amortization for 2015. (d) Prepare the journal entry to record the interest payment and the amortization for 2017.

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E14-10 (Information Related to Various Bond Issues) Pawnee Inc. has issued three types of debt on January 1, 2015, the start of the company’s fiscal year. (a) $10 million, 10-year, 13% unsecured bonds, interest payable quarterly. Bonds were priced to yield12%. (b) $25 million par of 10-year, zero-coupon bonds at a price to yield 12% per year. (c) $15 million, 10-year, 10% mortgage bonds, interest payable annually to yield 12%. Instructions Prepare a schedule that identifies the following items for each bond: (1) maturity value, (2) number of interest periods over life of bond, (3) stated rate per each interest period, (4) effective-interest rate per each interest period, (5) payment amount per period, and (6) present value of bonds at date of issue.

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E14-11 (Entries for Zero-Interest-Bearing Notes) On January 1, 2015, McLean Company makes the two following acquisitions. 1. Purchases land having a fair value of €300,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of €505,518. 2. Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of €400,000 (interest payable annually). The company has to pay 11% interest for funds from its bank. Instructions (a) Record the two journal entries that should be recorded by McLean Company for the two purchases on January 1, 2015. (b) Record the interest at the end of the first year on both notes.

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E14-12 (Imputation of Interest) Presented below are two independent situations. Instructions (a) On January 1, 2015, Spartan Inc. purchased land that had an assessed value of $390,000 at the time of purchase. A $600,000, zero-interest-bearing note due January 1, 2018, was given in exchange. There was no established exchange price for the land, nor a ready market price for the note. The interest rate charged on a note of this type is 12%. Determine at what amount the land shouldbe recorded at January 1, 2015, and the interest expense to be reported in 2015 related to this transaction. (b) On January 1, 2015, Geimer Furniture Co. borrowed $4,000,000 (face value) from Aurora Co., a major customer, through a zero-interest-bearing note due in 4 years. Because the note was zerointerest-bearing, Geimer Furniture agreed to sell furniture to this customer at lower than market price. A 10% rate of interest is normally charged on this type of loan. Prepare the journal entry to record this transaction and determine the amount of interest expense to report for 2015.

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E14-13 (Imputation of Interest with Right) On January 1, 2015, Durdil Co. borrowed and received 500,000 from a major customer evidenced by a zero-interest-bearing note due in 3 years. As consideration for the zero-interest-bearing feature, Durdil agrees to supply the customer’s inventory needs for the loan period at lower than the market price. The appropriate rate at which to impute interest is 8%.

690 Chapter 14 Non-Current Liabilities Instructions (a) Prepare the journal entry to record the initial transaction on January 1, 2015. (b) Prepare the journal entry to record any adjusting entries needed at December 31, 2015. Assume that the sales of Durdil’s product to this customer occur evenly over the 3-year period. 3

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E14-14 (Entry for Retirement of Bond; Bond Issue Costs) On January 2, 2012, Prebish Corporation issued $1,500,000 of 10% bonds to yield 11% due December 31, 2021. Interest on the bonds is payable annually each December 31. The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2015, Prebish called $1,000,000 face amount of the bonds and retired them. Instructions (a) Determine the price of the Prebish bonds when issued on January 2, 2012. (b) Prepare an amortization schedule for 2012–2016 for the bonds. (c) Ignoring income taxes, compute the amount of loss, if any, to be recognized by Prebish as a result of retiring the $1,000,000 of bonds in 2015 and prepare the journal entry to record the retirement.

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E14-15 (Entries for Retirement and Issuance of Bonds) On June 30, 2007, Mendenhal Company issued 8% bonds with a par value of £600,000 due in 20 years. They were issued at 82.8414 to yield 10% and were callable at 104 at any date after June 30, 2015. Because of lower interest rates and a significant change in the company’s credit rating, it was decided to call the entire issue on June 30, 2016, and to issue new bonds. New 6% bonds were sold in the amount of £800,000 at 112.5513 to yield 5%; they mature in 20 years. Interest payment dates are December 31 and June 30 for both old and new bonds. Instructions (a) Prepare journal entries to record the retirement of the old issue and the sale of the new issue on June 30, 2016. Unamortized discount is £78,979. (b) Prepare the entry required on December 31, 2016, to record the payment of the first 6 months’ interest and the amortization of premium on the bonds.

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E14-16 (Entries for Retirement and Issuance of Bonds) Kobiachi Company had bonds outstanding with a maturity value of ¥5,000,000. On April 30, 2016, when these bonds had an unamortized discount of ¥100,000, they were called in at 104. To pay for these bonds, Kobiachi had issued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 103 (face value ¥5,000,000). Instructions Ignoring interest, compute the gain or loss and record this refunding transaction.

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E14-17 (Settlement of Debt) Strickland Company owes $200,000 plus $18,000 of accrued interest to Moran State Bank. The debt is a 10-year, 10% note. During 2015, Strickland’s business deteriorated due to a faltering regional economy. On December 31, 2015, Moran State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of $390,000, accumulated depreciation of $221,000, and a fair value of $180,000. Instructions (a) Prepare journal entries for Strickland Company to record this debt settlement. (b) How should Strickland report the gain or loss on the disposition of machine and on restructuring of debt in its 2015 income statement? (c) Assume that, instead of transferring the machine, Strickland decides to grant 15,000 of its ordinary shares ($10 par), which have a fair value of $180,000 in full settlement of the loan obligation. Prepare the entries to record the transaction.

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E14-18 (Loan Modification) On December 31, 2015, Sterling Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, £3,000,000 note receivable by the following modifications: 1. Reducing the principal obligation from £3,000,000 to £2,400,000. 2. Extending the maturity date from December 31, 2015, to January 1, 2019. 3. Reducing the interest rate from 12% to 10%. Barkley’s market rate of interest is 15%. Barkley pays interest at the end of each year. On January 1, 2019, Barkley Company pays £2,400,000 in cash to Sterling Bank.

Problems 691 Instructions (a) Can Barkley Company record a gain under the term modification mentioned above? Explain. (b) Prepare the a...