Corporate Accounting II AC4301 Week 2- CH14 Practice Questions with Solution PDF

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Ex. 14-122 —Bond issue price and premium amortization.On January 1, 2019, Piper Co. issued ten-year bonds with a face value of €1,000,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Table values are:Present value of 1 for 10 p...

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Ex. 14-122—Bond issue price and premium amortization. On January 1, 2019, Piper Co. issued ten-year bonds with a face value of €1,000,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Table values are: Present value of 1 for 10 periods at 10% .................................. .386 Present value of 1 for 10 periods at 12% .................................. .322 Present value of 1 for 20 periods at 5% .................................... .377 Present value of 1 for 20 periods at 6% .................................... .312 Present value of annuity for 10 periods at 10% ........................ 6.145 Present value of annuity for 10 periods at 12% ........................ 5.650 Present value of annuity for 20 periods at 5% .......................... 12.462 Present value of annuity for 20 periods at 6% .......................... 11.470 Instructions (a) Calculate the issue price of the bonds. (b) Without prejudice to your solution in part (a), assume that the issue price was €884,000. Prepare the amortization table for 2019, assuming that amortization is recorded on interest payment dates.

Solution 14-122 (a) .312 × €1,000,000 = 11.470 × €50,000 =

(b) Date 1/1/19 6/30/19 12/31/19

€312,000 573,500 €885,500

Cash Paid

Interest Expense

Discount Amortized

€50,000 50,000

€53,040 53,222

€3,040 3,222

Carrying Amount €884,000 887,040 890,262

Ex. 14-123—Amortization of discount or premium. Grider Industries, Inc. issued €6,000,000 of 8% debentures on May 1, 2018 and received cash totaling €5,323,577. The bonds pay interest semiannually on May 1 and November 1. The maturity date on these bonds is November 1, 2022. The firm uses the effective-interest method of amortizing discounts and premiums. The bonds were sold to yield an effective-interest rate of 10%. Instructions Calculate the total dollar amount of discount or premium amortization during the first year (5/1/18 through 4/30/19) these bonds were outstanding. (Show computations and round to the nearest dollar.) Solution 14-123 Date 5/1/18 11/1/18 5/1/19

Interest Expense

Cash Paid

Discount Amortized

€266,179 267,488

€240,000 240,000

€26,179 27,488 €53,667

Total

Carrying Value of Bonds €5,323,577 5,349,756 5,377,244

Ex. 14-125—Entries for settlement of Debt Consider the following independent situations. (a) Gregory Co. owes €333,000 to Merando Inc. The debt is a 10-year, 11% note. Because Gregory Co. is in financial trouble, Merando Inc. agrees to accept some property and cancel the entire debt. The property has a book value of €150,000 and a fair value of €230,000. Prepare the journal entry on Gregory’s books for debt settlement. (b) Kifer Corp. owes €450,000 to First Trust. The debt is a 10-year, 12% note due December 31, 2017. Because Kifer Corp. is in financial trouble, First Trust agrees to extend the maturity date to December 31, 2019, reduce the principal to €370,000, and reduce the interest rate of 5%, payable annually on December 31. Kifer’s, market rate of interest is 8%. Prepare the journal entries on Kifer’s books on December 31, 2017, 2018, and 2019. Solution 14-125 (a) Gregory Co.’s entry: Notes Payable................................................................................. Property............................................................................... Gain on Disposition of Property........................................... (€230,000 – €150,000)......................................................... Gain on Extinguishment of Debt..........................................

333,000 150,000 80,000 103,000*

*€333,000 – €230,000. (b) Present value of restructured cash flows: Present value of €370,000 due in 2 years................................. at 8%, interest payable annually.............................................. (Table 6-2); (€370,000 × .85734)......................................... Present value of €11,000 interest payable annually for 2 years at 8% (Table 6-4); (€18,500 × 1.78326)................................................................. Fair value of note...........................................................................

€317,216

32,990 €350,206

Kifer Corp.’s entries: 2017 Notes payable (Old)................................................................ Gain on Extinguishment of Debt.......................................... Notes payable (New)...........................................................

450,000

2018 Interest Expense ($350,206 × 8%)......................................... Notes payable ..................................................................... Cash (5% × $370,000).........................................................

28,016

2019 Interest Expense .................................................................... [(€350,206 + €9,516) × .08]................................................. Notes payable ....................................................................... Cash [€370,000 + (5% × €370,000)]....................................

99,794 350,206

9,516 18,500

28,778 359,722 388,500

Ex. 14-126—Settlement of debt. Mann, Inc., which owes Doran Co. €600,000 in notes payable with accrued interest of €54,000, is in financial difficulty. To settle the debt, Doran agrees to accept from Mann equipment with a fair value of €570,000, an original cost of €840,000, and accumulated depreciation of €195,000. Instructions (a) Compute the gain or loss to Mann on the settlement of the debt. (b) Compute the gain or loss to Mann on the transfer of the equipment. (c) Prepare the journal entry on Mann ‘s books to record the settlement of this debt. (d) Prepare the journal entry on Doran’s books to record the settlement of the receivable.

Solution 14-126 (a) Note payable Interest payable Carrying amount of debt Fair value of equipment Gain on settlement of debt

€600,000 54,000 654,000 570,000 € 84,000

(b) Cost Accumulated depreciation Book value Fair value of plant assets Loss on disposal of equipment

€840,000 195,000 645,000 570,000 € 75,000

(c) Notes Payable............................................................................... Interest Payable............................................................................. Accumulated Depreciation............................................................. Loss on Disposal of Equipment...................................................... Equipment.......................................................................... Gain on Extinguishment of Debt.........................................

600,000 54,000 195,000 75,000

(d) Equipment...................................................................................... Allowance for Doubtful Accounts.................................................... Notes Receivable............................................................... Interest Receivable.............................................................

570,000 84,000

840,000 84,000

600,000 54,000

Pr. 14-132—Modification of Note under Different Circumstances. Halvor Corporation is having financial difficulty and therefore has asked Manhattan National Bank to restructure its €3 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value. Instructions Prepare below are three independent situations. Prepare the journal entry that Halvor would make for each of these restructurings. (a) Manhattan National Bank agrees to take an equity interest in Halvor by accepting ordinary shares valued at €2,200,000 in exchange for relinquishing its claim on this note. The ordinary shares have a par value of €1,000,000. (b) Manhattan National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of €1,950,000 and a fair value of €2,400,000. (c) Manhattan National Bank agrees to modify the terms of the note, indicating that Halvor does not have to pay interest on the note over the 3-year period. Solution 14-132 (a)

Notes Payable............................................................ Share Capital––Ordinary............................... Share Premium––Ordinary............................ Gain on Extinguishment of Debt....................

3,000,000 1,000,000 1,200,000 800,000

Carrying amount of debt........... € 3,000,000 Fair value of equity..................... (2,200,000) Gain on Extinguishment of Debt...................................... € 800,000 (b)

Notes Payable................................................................ Land................................................................... Gain on Disposal of Real Estate......................... Gain on Extinguishment of Debt......................... Fair value of land.......................... €2,400,000 Book value of land........................ (1,950,000) Gain on disposal of real estate.................................. € 450,000 Note payable (carrying amount).................................... € 3,000,000 Fair value of land......................... (2,400,000) Gain on extinguishment of debt........................................... € 600,000

3,000,000 1,950,000 450,000 600,000

(c)

Notes Payable (Old)....................................................... Gain on Extinguishment of Debt......................... Note Payable (New)........................................... *Calculation of gain. Pre-restructure carrying amount..................................... Less: Present value of restructuring cash flows: Present value of €3,000,000 due in 3 years at 12% (Table 6-2); (€3,000,000 × .71178)........................................ Debtor’s gain on extinguishment....................................

€3,000,000 864,660* 2,135,340

€ 3,000,000

2,135,340 € 864,660

Wiley Exercise 14.11 $ Problem 14.12

EXERCISE 14.11 (a)

1.

January 1, 2019 Land................................................................................... 300,000 Notes Payable.......................................................... (The €300,000 capitalized land cost represents the present value of the note discounted for five years at 11%.)

2.

Equipment......................................................................... 297,079* Notes Payable.......................................................... *Computation of the present value of the note: Present value of €400,000 due in 8 years at 11%— €400,000 X .43393 (PVF8, 11%)................................ Present value of €24,000 payable annually for 8 years at 11% annually— €24,000 [(€400,000 X .06) X 5.14612 (PVF-OA8, 11%)].......................................... Present value of the note

300,000

297,079

€173,572

123,507 €297,079

December 31, 2019 (b)

1.

2.

Interest Expense............................................................... 33,000 Notes Payable (€300,000 X .11).....................................................

33,000

Interest Expense (€297,079 X .11).............................................................. 32,679 Notes Payable.......................................................... Cash (€400,000 X .06)..............................................

8,679 24,000

PROBLEM 14.12 (a)

Notes Payable................................................................... 5,000,000 Share Capital—Ordinary......................................... Share Premium—Ordinary...................................... Gain on Extinguishment of Debt............................ Carrying amount of debt Fair value of equity Gain on extinguishment of debt

(b)

$5,000,000 (3,700,000) $1,300,000

Notes Payable................................................................... 5,000,000 Land.......................................................................... Gain on Disposition of Land................................... Gain on Extinguishment of Debt............................ Fair value of land Book value of land Gain on disposition of real estate Note payable (carrying amount) Fair value of land Gain on extinguishment of debt

1,700,000 2,000,000 1,300,000

$4,000,000 (3,250,000) $ 750,000

$5,000,000 (4,000,000) $1,000,000

3,250,000 750,000 1,000,000

PROBLEM 14.12 (Continued) (c)

Notes Payable (Old).......................................................... 5,000,000 Gain on Extinguishment of Debt............................ 1,441,100* Notes Payable (New)............................................... 3,558,900 *Calculation of gain. Pre-restructure carrying amount................................... Less: Present value of restructured cash flows: Present value of $5,000,000 due in 3 years at 12% (Table 6-2); ($5,000,000 X .71178)........................................ Debtor’s gain on extinguishment....................................

$ 5,000,000

3,558,900 $ 1,441,100...