CH 14

CHAPTER 14
LONG-TERM LIABILITIES
IFRS questions are avaia!e at t"e en# o$ t"is %"a&ter'
TR(E-FALSE)Con%e&tua
Ans*er No' +es%ri&tion
T 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). 1ain2loss in troubled debt restructurin*.
M(LTIPLE CHOICE)Con%e&tua
a 21. ,iability identification.
a 22. Bond terms.
b 23. Definition of 3debenture bonds.3
a
4
24. Definition of bearer bonds.
d
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25. Definition of income bonds.
a
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2. 5ffective-interest vs. strai*/t-line met/od.
d
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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. 4remium and interest rates.
a 32. &nterest and discount amorti$ation.
d 33. 5ffective-interest amorti$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.
Test Ban, $or Inter-e#iate A%%ountin./ T"irteent" E#ition
c 3%. Bond issuance costs.
M(LTIPLE CHOICE)Con%e&tua 0%ont'1
b 3'. 6lassification of treasury bonds.
d 4). 5arly e(tin*uis/ment of bonds payable.
d 41. 1ain or loss on e(tin*uis/ment of debt.
c
4
42. &n-substance defeasance.
c
4
43. +eportin* lon*-term debt.
a
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44. Debt instrument e(c/an*ed for property.
d 45. 8aluation of note issued in noncas/ transaction.
d 4. !tated interest rate of note.
c 4". #ccountin* for discount on notes payable.
d 4%. .ff-balance-s/eet financin*.
c
!
4'. .ff-balance-s/eet financin*.
d
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5). ,on*-term debt maturin* 7it/in one year.
d 51. +e9uired bond disclosures.
d 52. ,on*-term debt disclosures.
c 53. Times interest earned ratio.
c. 54. Debt to total assets ratio.
c 055. Modification of terms in debt restructure.
d 05. 1ain2loss on troubled debt restructurin*.
b 05". 1ain2loss on troubled debt restructurin*.
b 05%. &nterest and troubled debt restructurin*.
c 05'. 6reditor:s calculations for modification of terms.
4
T/ese 9uestions also appear in t/e 4roblem-!olvin* !urvival 1uide.
!
T/ese 9uestions also appear in t/e !tudy 1uide.
0 T/is topic is dealt 7it/ in an #ppendi( to t/e c/apter.
M(LTIPLE CHOICE)Co-&utationa
a ). 6alculate t/e present value of bond principal.
b 1. 6alculate t/e present value of bond interest.
a 2. Determine t/e issue price of bonds.
c 3. 4roceeds from bond issuance.
c 4. Bonds issued bet7een interest dates.
c 5. 4roceeds from bond issuance.
c . Bonds issued bet7een interest dates.
c ". 5ffective-interest met/od interest e(pense.
a %. 5ffective-interest met/od carryin* value.
d '. !trai*/t-line met/od carryin* value.
d "). !trai*/t-line amorti$ation2interest e(pense.
c "1. 5ffective-interest met/od interest e(pense.
a "2. 5ffective-interest met/od carryin* value.
d "3. !trai*/t-line met/od carryin* value.
d "4. !trai*/t-line met/od amorti$ation2interest e(pense.
b "5. &nterest e(pense usin* effective-interest met/od.
c ". &nterest e(pense usin* effective-interest met/od.
d "". 5ntry to record issuance of bonds.
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,on*-Term ,iabilities
a "%. 6alculate bond interest e(pense.
M(LTIPLE CHOICE)Co-&utationa 0%ont'1
b "'. 5ntry to record issuance of bonds.
c %). 6alculate bond interest e(pense.
b %1. 6alculate interest e(pense for t7o periods.
b %2. 6alculate unamorti$ed bond discount balance.
b %3. 6alculate unamorti$ed bond premium balance.
c %4. 6alculate interest e(pense for t7o periods.
b %5. 5ntry to record bond redemption.
b %. 5ntry to record bond redemption.
b %". 6alculate loss on bond redemption.
c %%. 6alculate loss on bond redemption.
c %'. 6alculate *ain on retirement of bonds.
b '). 6alculate *ain on retirement of bonds.
b '1. 6alculate loss on retirement of bonds.
b '2. Bond retirement 7it/ call premium.
b '3. 6alculate loss on retirement of bonds.
b '4. 5arly e(tin*uis/ment of debt.
b '5. 5arly e(tin*uis/ment of debt.
a '. &nterest on noninterest-bearin* note.
c '". &nterest on installment note payable.
b '%. Determine balance of discount on notes payable.
d ''. 6alculate times interest earned ratio.
a 1)). 6alculate times interest earned ratio.
c 1)1. 6alculate income before ta(es 7it/ times interest earned ratio.
d 1)2. Determine total lon*-term liabilities.
b 01)3. Transfer of e9uipment in debt settlement.
d 01)4. +eco*ni$in* *ain on debt restructure.
a 01)5. &nterest and troubled debt restructurin*.
M(LTIPLE CHOICE)CPA A#a&te#
a 1). Determine proceeds from bond issue.
b 1)". Determine unamorti$ed bond premium.
a 1)%. Determine unamorti$ed bond discount.
c 1)'. 6alculate bond interest e(pense.
a 11). 6alculate loss on retirement of bonds.
d 111. 6alculate loss on retirement of bonds.
d 112. 6alculate *ain on retirement of bonds.
c 113. Determine carryin* value of bonds to be retired.
c 114. 6arryin* value of bonds 7it/ call provision.
c 115. 6lassification of *ain from debt refundin*.
d 011. 6lassification of *ain from troubled debt restructurin*.
14 - 3
E4ERCISES
Ite- +es%ri&tion
514-11" Terms related to lon*-term debt.
514-11% Bond issue price and premium amorti$ation.
514-11' #morti$ation of discount or premium.
514-12) 5ntries for bonds payable.
514-121 +etirement of bonds.
514-122 5arly e(tin*uis/ment of debt.
0514-123 #ccountin* for a troubled debt settlement.
0514-124 #ccountin* for troubled debt restructurin*.
0514-125 #ccountin* for troubled debt.
PROBLEMS
Ite- +es%ri&tion
414-12 Bond discount amorti$ation.
414-12" Bond interest and discount amorti$ation.
414-12% 5ntries for bonds payable.
414-12' 5ntries for bonds payable.
0414-13) #ccountin* for a troubled debt settlement.
CHAPTER LEARNING OB5ECTI6ES
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$ation.
5. Describe t/e accountin* for t/e e(tin*uis/ment of debt.
. 5(plain t/e accountin* for lon*-term notes payable.
". 5(plain t/e reportin* of off-balance-s/eet financin* arran*ements.
%. &ndicate /o7 to present and analy$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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S(MMAR7 OF LEARNING OB5ECTI6ES B7 8(ESTIONS
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Learnin. O!9e%tive 1
1. TF 21. M6 22. M6
2. TF 3. TF 23. M6
4
24. M6
!
25. M6
4. TF 2". M6 3). M6 2. M6 11". 5
5. TF 2%. M6 ). M6 3. M6 11%. 5
. TF 2'. M6 1. M6 5. M6 12. 4
". TF 34. M6 ". M6 "5. M6 %3. M6 11'. 5
%. TF 35. M6 %. M6 ". M6 %4. M6 12). 5
'. TF 3. M6 '. M6 "". M6 1). M6 12. 4
1).
2.
TF
M6
3".
3%.
M6
M6
").
"1.
M6
M6
"%.
"'.
M6
M6
1)".
1)%.
M6
M6
12".
12%.
4
4
31. M6 3'. M6 "2. M6 %). M6 1)'. M6 12'. 4
32. M6 4. M6 "3. M6 %1. M6 11". 5
33. M6 . M6 "4. M6 %2. M6 11%. 5
Learnin. O!9e%tive :
11. TF %5. M6 %'. M6 '3. M6 111. M6 115. M6 122. 5
4). M6 %. M6 '). M6 '4. M6 112. M6 11". 5 12%. 4
41. M6 %". M6 '1. M6 '5. M6 113. M6 12). 5
4
42. M6 %%. M6 '2. M6 11). M6 114. M6 121. 5
Learnin. O!9e%tive ;
12. TF 14. TF
!
44. M6 4. M6 '. M6 '%. M6
13. TF
4
43. M6 45. M6 4". M6 '". M6
Learnin. O!9e%tive <
15. TF 4%. M6
!
4'. M6
Learnin. O!9e%tive =
1. TF 1%. TF 51. M6 53. M6 ''. M6 1)1. M6
1". TF
!
5). M6 52. M6 54. M6 1)). M6 1)2. M6
Learnin. O!9e%tive >?
1'. TF 5. M6 5'. M6 1)5. M6 124. 5
2). TF 5". M6 1)3. M6 1). M6 125. 5
55. M6 5%. M6 1)4. M6 123. 5 13). 4
;ote< TF = True-False 5 = 5(ercise
M6 = Multiple 6/oice 4 = 4roblem
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TR(E FALSE)Con%e&tua
1. 6ompanies usually make bond interest payments semiannually> alt/ou*/ t/e interest rate
is *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$ed to e(pense over t/e
life of t/e bond issue.
11. T/e replacement of an e(istin* bond issue 7it/ a ne7 one is called refundin*.
12. &f a lon*-term note payable /as a stated interest rate> t/at rate s/ould be considered to be
t/e effective rate.
13. T/e implicit interest rate is t/e rate t/at e9uates t/e cas/ received 7it/ t/e amounts
received in t/e future.
14. T/e process of interest-rate appro(imation is called imputation> and t/e resultin* interest
rate is called an imputed interest rate.
15. .ff-balance-s/eet financin* is an attempt to borro7 monies in suc/ a 7ay to minimi$e t/e
reportin* 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 are
added to t/e balance s/eet.
1". &f a company plans to retire lon*-term debt from a bond retirement fund> it s/ould report
t/e debt as current.
1%. T/e times interest earned ratio is computed by dividin* income before interest e(pense by
interest e(pense.
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01'. T/e loss to be reco*ni$ed by a creditor on an impaired loan is t/e difference bet7een t/e
investment in t/e loan and t/e e(pected undiscounted future cas/ flo7s from t/e loan.
02). &n a troubled debt restructurin*> t/e loss reco*ni$ed by t/e creditor 7ill e9ual t/e *ain
reco*ni$ed by t/e debtor.
True Fase Ans*ers)Con%e&tua
Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans'
1. T . T 11. T 1. T
2. F ". F 12. F 1". F
3. T %. F 13. T 1%. F
4. F '. F 14. T 1'. F
5. F 1). T 15. T 2). F
M(LTIPLE CHOICE)Con%e&tua
21. #n e(ample of an item 7/ic/ is not a liability is
a. dividends payable in stock.
b. advances from customers on contracts.
c. accrued estimated 7arranty costs.
d. t/e portion of lon*-term debt due 7it/in one year.
22. T/e covenants and ot/er terms of t/e a*reement bet7een t/e issuer of bonds and t/e
lender are set fort/ in t/e
a. bond indenture.
b. bond debenture.
c. re*istered bond.
d. bond coupon.
23. T/e term used for bonds t/at are unsecured as to principal is
a. ?unk bonds.
b. debenture bonds.
c. indebenture bonds.
d. callable bonds.
4
24. Bonds for 7/ic/ t/e o7ners: names are not re*istered 7it/ t/e issuin* corporation are
called
a. bearer bonds.
b. term bonds.
c. debenture bonds.
d. secured bonds.
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25. Bonds t/at pay no interest unless t/e issuin* company is profitable are called
a. collateral trust bonds.
b. debenture bonds.
c. revenue bonds.
d. income bonds.
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2. &f bonds are issued initially at a premium and t/e effective-interest met/od of amorti$ation
is used> interest e(pense in t/e earlier years 7ill be
a. *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/e
a. 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/e
a. stated rate.
b. yield rate.
c. effective rate.
d. effective> yield> or market rate.
@se t/e follo7in* information for 9uestions 2' and 3)<
Fo( 6o. issued A1))>))) of ten-year> 1)B bonds t/at pay interest semiannually. T/e bonds are
sold to yield %B.
2'. .ne step in calculatin* t/e issue price of t/e bonds is to multiply t/e principal by t/e table
value for
a. 1) periods and 1)B from t/e present value of 1 table.
b. 2) periods and 5B from t/e present value of 1 table.
c. 1) periods and %B from t/e present value of 1 table.
d. 2) periods and 4B from t/e present value of 1 table.
3). #not/er step in calculatin* t/e issue price of t/e bonds is to
a. multiply A1)>))) by t/e table value for 1) periods and 1)B from t/e present value of
an annuity table.
b. multiply A1)>))) by t/e table value for 2) periods and 5B from t/e present value of an
annuity table.
c. multiply A1)>))) by t/e table value for 2) periods and 4B from t/e present value of an
annuity table.
d. none of t/ese.
31. +eic/> &nc. issued bonds 7it/ a maturity amount of A2))>))) and a maturity ten years
from date of issue. &f t/e bonds 7ere issued at a premium> t/is indicates t/at
a. t/e effective yield or market rate of interest e(ceeded t/e stated CnominalD 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.
14 - =
32. &f bonds are initially sold at a discount and t/e strai*/t-line met/od of amorti$ation is used>
interest e(pense in t/e earlier years 7ill
a. e(ceed 7/at it 7ould /ave been /ad t/e effective-interest met/od of amorti$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 CnominalD rate of interest.
33. @nder t/e effective-interest met/od of bond discount or premium amorti$ation> t/e
periodic interest e(pense is e9ual to
a. t/e stated CnominalD rate of interest multiplied by t/e face value of t/e bonds.
b. t/e market rate of interest multiplied by t/e face value of t/e bonds.
c. t/e stated rate multiplied by t/e be*innin*-of-period carryin* amount of t/e bonds.
d. t/e market rate multiplied by t/e be*innin*-of-period carryin* amount of t/e bonds.
34. E/en t/e effective-interest met/od is used to amorti$e bond premium or discount> t/e
periodic amorti$ation 7ill
a. increase if t/e bonds 7ere issued at a discount.
b. decrease if t/e bonds 7ere issued at a premium.
c. increase if t/e bonds 7ere issued at a premium.
d. increase if t/e bonds 7ere issued at eit/er a discount or a premium.
35. &f bonds are issued bet7een interest dates> t/e entry on t/e books of t/e issuin*
corporation could include a
a. debit to &nterest 4ayable.
b. credit to &nterest +eceivable.
c. credit to &nterest 5(pense.
d. credit to @nearned &nterest.
3. E/en t/e interest payment dates of a bond are May 1 and ;ovember 1> and a bond issue
is sold on Fune 1> t/e amount of cas/ received by t/e issuer 7ill be
a. decreased by accrued interest from Fune 1 to ;ovember 1.
b. decreased by accrued interest from May 1 to Fune 1.
c. increased by accrued interest from Fune 1 to ;ovember 1.
d. increased by accrued interest from May 1 to Fune 1.
3". T/eoretically> t/e costs of issuin* bonds could be
a. e(pensed 7/en incurred.
b. reported as a reduction of t/e bond liability.
c. debited to a deferred c/ar*e account and amorti$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/ould
a. 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$ed over t/e life of t/e bonds.
d. not be reported as an e(pense until t/e period t/e bonds mature or are retired.
14 - ?
3'. Treasury bonds s/ould be s/o7n on t/e balance s/eet as
a. an asset.
b. a deduction from bonds payable issued to arrive at net bonds payable and outstandin*.
c. a reduction of stock/olders: e9uity.
d. bot/ an asset and a liability.
4). #n early e(tin*uis/ment of bonds payable> 7/ic/ 7ere ori*inally issued at a premium> is
made by purc/ase of t/e bonds bet7een interest dates. #t t/e time of reac9uisition
a. any costs of issuin* t/e bonds must be amorti$ed up to t/e purc/ase date.
b. t/e premium must be amorti$ed up to t/e purc/ase date.
c. interest must be accrued from t/e last interest date to t/e purc/ase date.
d. all of t/ese.
41. T/e *enerally accepted met/od of accountin* for *ains or losses from t/e early
e(tin*uis/ment of debt treats any *ain or loss as
a. an ad?ustment to t/e cost basis of t/e asset obtained by t/e debt issue.
b. an amount t/at s/ould be considered a cas/ ad?ustment to t/e cost of any ot/er debt
issued over t/e remainin* life of t/e old debt instrument.
c. an amount received or paid to obtain a ne7 debt instrument and> as suc/> s/ould be
amorti$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.
4
42. 3&n-substance defeasance3 is a term used to refer to an arran*ement 7/ereby
a. 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.
4
43. # corporation borro7ed money from a bank to build a buildin*. T/e lon*-term note si*ned
by t/e corporation is secured by a mort*a*e t/at pled*es title to t/e buildin* as security
for t/e loan. T/e corporation is to pay t/e bank A%)>))) eac/ year for 1) years to repay
t/e loan. E/ic/ of t/e follo7in* relations/ips can you e(pect to apply to t/e situationG
a. 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.
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44. # debt instrument 7it/ no ready market is e(c/an*ed for property 7/ose fair market value
is currently indeterminable. E/en suc/ a transaction takes place
a. 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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45. E/en a note payable is issued for property> *oods> or services> t/e present value of t/e
note is measured by
a. 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 interest
rate is presumed to be fair unless
a. 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 4ayable is c/ar*ed to interest e(pense
a. 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 3off-balance-s/eet financin*3G
1. ;on-consolidated subsidiary.
2. !pecial purpose entity.
3. .peratin* leases.
a. 1
b. 2
c. 3
d. #ll of t/ese are e(amples of 3off-balance-s/eet financin*.3
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4'. E/en a business enterprise enters into 7/at is referred to as off-balance-s/eet financin*>
t/e company
a. 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.
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5). ,on*-term debt t/at matures 7it/in one year and is to be converted into stock s/ould be
reported
a. 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.
14 - 11
51. E/ic/ of t/e follo7in* must be disclosed relative to lon*-term debt maturities and sinkin*
fund re9uirementsG
a. 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 a
a. 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/ a
fair market value less t/an t/e carryin* amount of t/e debt> t/e debtor 7ould reco*ni$e
a. no *ain or loss on t/e settlement.
b. a *ain on t/e settlement.
c. a loss on t/e settlement.
d. none of t/ese.
14 - 12
05%. &n a troubled debt restructurin* in 7/ic/ t/e debt is continued 7it/ modified terms> a *ain
s/ould be reco*ni$ed at t/e date of restructure> but no interest e(pense s/ould be
reco*ni$ed over t/e remainin* life of t/e debt> 7/enever t/e
a. carryin* amount of t/e pre-restructure debt is less t/an t/e total future cas/ flo7s.
b. carryin* amount of t/e pre-restructure debt is *reater t/an t/e total future cas/ flo7s.
c. present value of t/e pre-restructure debt is less t/an t/e present value of t/e future
cas/ flo7s.
d. present value of t/e pre-restructure debt is *reater t/an t/e present value of t/e future
cas/ flo7s.
05'. &n a troubled debt restructurin* in 7/ic/ t/e debt is continued 7it/ modified terms and t/e
carryin* amount of t/e debt is less t/an t/e total future cas/ flo7s> t/e creditor s/ould
a. compute a ne7 effective-interest rate.
b. not reco*ni$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.
Muti&e C"oi%e Ans*ers)Con%e&tua
Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans'
21. a 2". d 33. d 3'. b 45. d 51. d 05". b
22. a 2%. d 34. d 4). d 4. d 52. d 05%. b
23. b 2'. d 35. c 41. d 4". c 53. c 05'. c
24. a 3). d 3. d 42. c 4%. d 54. c
25. d 31. b 3". d 43. c 4'. c 055. c
2. 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.J
3). multiply A5>))) by t/e table value for 2) periods and 4B from t/e present value of an
annuity table.
M(LTIPLE CHOICE)Co-&utationa
@se t/e follo7in* information for 9uestions ) t/rou*/ 2<
.n Fanuary 1> 2)1)> 5llison 6o. issued ei*/t-year bonds 7it/ a face value of A1>)))>))) and a
stated interest rate of B> payable semiannually on Fune 3) and December 31. T/e bonds 7ere
sold to yield %B. Table values are<
4resent value of 1 for % periods at B.......................................... .2"
4resent value of 1 for % periods at %B.......................................... .54)
4resent value of 1 for 1 periods at 3B........................................ .23
4resent value of 1 for 1 periods at 4B........................................ .534
4resent value of annuity for % periods at B................................ .21)
4resent value of annuity for % periods at %B................................ 5."4"
4resent value of annuity for 1 periods at 3B.............................. 12.51
4resent value of annuity for 1 periods at 4B.............................. 11.52
14 - 13
). T/e present value of t/e principal is
a. A534>))).
b. A54)>))).
c. A23>))).
d. A2">))).
1. T/e present value of t/e interest is
a. A344>%2).
b. A34'>5).
c. A3"2>)).
d. A3">%3).
2. T/e issue price of t/e bonds is
a. A%%3>5).
b. A%%4>%2).
c. A%%'>5).
d. A'''>)).
3. Do7nin* 6ompany issues A5>)))>)))> B> 5-year bonds dated Fanuary 1> 2)1) on
Fanuary 1> 2)1). T/e bonds pay interest semiannually on Fune 3) and December 31. T/e
bonds are issued to yield 5B. E/at are t/e proceeds from t/e bond issueG
2.5B 3.)B 5.)B .)B
4resent value of a sin*le sum for 5 periods .%%3%5 .%21 ."%353 ."4"2
4resent value of a sin*le sum for 1) periods ."%12) ."44)' .13'1 .55%3'
4resent value of an annuity for 5 periods 4.45%3 4.5"'"1 4.32'4% 4.2123
4resent value of an annuity for 1) periods %."52) %.53)2) "."21"3 ".3))'
a. A5>)))>)))
b. A5>21>4'4
c. A5>21%>%)'
d. A5>21">3)%
4. Feller 6ompany issues A2)>)))>))) of 1)-year> 'B bonds on Marc/ 1> 2)1) at '" plus
accrued interest. T/e bonds are dated Fanuary 1> 2)1)> and pay interest on Fune 3) and
December 31. E/at is t/e total cas/ received on t/e issue dateG
a. A1'>4))>)))
b. A2)>45)>)))
c. A1'>"))>)))
d. A1'>1))>)))
14 - 14
5. 5ver/art 6ompany issues A1)>)))>)))> B> 5-year bonds dated Fanuary 1> 2)1) on
Fanuary 1> 2)1). T/e bonds pays interest semiannually on Fune 3) and December 31.
T/e bonds are issued to yield 5B. E/at are t/e proceeds from t/e bond issueG
2.5B 3.)B 5.)B .)B
4resent value of a sin*le sum for 5 periods .%%3%5 .%21 ."%353 ."4"2
4resent value of a sin*le sum for 1) periods ."%12) ."44)' .13'1 .55%3'
4resent value of an annuity for 5 periods 4.45%3 4.5"'"1 4.32'4% 4.2123
4resent value of an annuity for 1) periods %."52) %.53)2) "."21"3 ".3))'
a. A1)>)))>)))
b. A1)>432>'%%
c. A1)>43">1%
d. A1)>434>1
. Farmer 6ompany issues A1)>)))>))) of 1)-year> 'B bonds on Marc/ 1> 2)1) at '" plus
accrued interest. T/e bonds are dated Fanuary 1> 2)1)> and pay interest on Fune 3) and
December 31. E/at is t/e total cas/ received on t/e issue dateG
a. A'>"))>)))
b. A1)>225>)))
c. A'>%5)>)))
d. A'>55)>)))
". # company issues A2)>)))>)))> ".%B> 2)-year bonds to yield %B on Fanuary 1> 2)1).
&nterest is paid on Fune 3) and December 31. T/e proceeds from t/e bonds are
A1'>)4>145. @sin* effective-interest amorti$ation> /o7 muc/ interest e(pense 7ill be
reco*ni$ed in 2)1)G
a. A"%)>)))
b. A1>5)>)))
c. A1>5%>4'%
d. A1>5%>332
%. # company issues A2)>)))>)))> ".%B> 2)-year bonds to yield %B on Fanuary 1> 2)1).
A1'>)4>145. @sin* effective-interest amorti$ation> 7/at 7ill t/e carryin* value of t/e
bonds be on t/e December 31> 2)1) balance s/eetG
a. A1'>12>43
b. A2)>)))>)))
c. A1'>25>125
d. A1'>)%>31)
'. # company issues A2)>)))>)))> ".%B> 2)-year bonds to yield %B on Fanuary 1> 2))'.
A1'>)4>145. @sin* strai*/t-line amorti$ation> 7/at is t/e carryin* value of t/e bonds on
December 31> 2)11G
a. A1'>")>231
b. A1'>'4)>22
c. A1'>33>%34
d. A1'>3>523
14 - 1:
"). # company issues A2)>)))>)))> ".%B> 2)-year bonds to yield %B on Fanuary 1> 2)1).
A1'>)4>145. E/at is interest e(pense for 2)11> usin* strai*/t-line amorti$ationG
a. A1>54)>2)"
b. A1>5)>)))
c. A1>5'>1'2
d. A1>5"'>"'3
"1. # company issues A5>)))>)))> ".%B> 2)-year bonds to yield %B on Fanuary 1> 2)1).
A4>')1>)3. @sin* effective-interest amorti$ation> /o7 muc/ interest e(pense 7ill be
reco*ni$ed in 2)1)G
a. A1'5>)))
b. A3')>)))
c. A3'2>124
d. A3'2>)%3
A4>')1>)3. @sin* effective-interest amorti$ation> 7/at 7ill t/e carryin* value of t/e bonds
be on t/e December 31> 2)1) balance s/eetG
a. A4>')3>1)
b. A5>)))>)))
c. A4>')>2%1
d. A4>')2>)""
"3. # company issues A5>)))>)))> ".%B> 2)-year bonds to yield %B on Fanuary 1> 2))'.
A4>')1>)3. @sin* strai*/t-line amorti$ation> 7/at is t/e carryin* value of t/e bonds on
December 31> 2)11G
a. A4>'1">55%
b. A4>'%5>15
c. A4>')%>45%
d. A4>'15>%%1
A4>')1>)3. E/at is interest e(pense for 2)11> usin* strai*/t-line amorti$ationG
a. A3%5>)52
b. A3')>)))
c. A3'2>2'%
d. A3'4>'4%
"5. .n Fanuary 1> 2)1)> Kuber 6o. sold 12B bonds 7it/ a face value of A))>))). T/e bonds
mature in five years> and interest is paid semiannually on Fune 3) and December 31. T/e
bonds 7ere sold for A4>2)) to yield 1)B. @sin* t/e effective-interest met/od of
amorti$ation> interest e(pense for 2)1) is
a. A)>))).
b. A4>43.
c. A4>2).
d. A"2>))).
14 - 1;
". .n Fanuary 2> 2)1)> a calendar-year corporation sold %B bonds 7it/ a face value of
A))>))). T/ese bonds mature in five years> and interest is paid semiannually on Fune 3)
and December 31. T/e bonds 7ere sold for A553>)) to yield 1)B. @sin* t/e effective-
interest met/od of computin* interest> /o7 muc/ s/ould be c/ar*ed to interest e(pense in 2)1)G
a. A4%>))).
b. A55>3).
c. A55>544.
d. A)>))).
T"e $oo*in. in$or-ation a&&ies to !ot" questions << an# <=' .n .ctober 1> 2)1) Macklin
6orporation issued 5B> 1)-year bonds 7it/ a face value of A1>)))>))) at 1)4. &nterest is paid on
.ctober 1 and #pril 1> 7it/ any premiums or discounts amorti$ed on a strai*/t-line basis.
"". T/e entry to record t/e issuance of t/e bonds 7ould include a credit of
a. A25>))) to interest 4ayable.
b. A4)>))) to Discount on Bonds 4ayable.
c. A')>))) to Bonds 4ayable.
d. A4)>))) to 4remium on Bonds 4ayable.
"%. Bond interest e(pense reported on t/e December 31> 2)1) income statement of Macklin
6orporation 7ould be
a. A11>5))
b. A12>5))
c. A13>5))
d. A23>)))
T"e $oo*in. in$or-ation a&&ies to !ot" questions <? an# =@' .n .ctober 1> 2)1) Bartley
6orporation issued 5B> 1)-year bonds 7it/ a face value of A5))>))) at 1)4. &nterest is paid on
.ctober 1 and #pril 1> 7it/ any premiums or discounts amorti$ed on a strai*/t-line basis.
"'. T/e entry to record t/e issuance of t/e bonds 7ould include a
a. credit of A12>5)) to interest 4ayable.
b. credit of A2)>))) to 4remium on Bonds 4ayable.
c. credit of A4%)>))) to Bonds 4ayable.
d. debit of A2)>))) to Discount on Bonds 4ayable.
%). Bond interest e(pense reported on t/e December 31> 2)1) income statement of Bartley
6orporation 7ould be
a. A>"5)
b. A11>5))
c. A5>"5)
d. A>25)
%1. #t t/e be*innin* of 2)1)> Eallace 6orporation issued 1)B bonds 7it/ a face value of
A'))>))). T/ese bonds mature in t/e five years> and interest is paid semiannually on
Fune 3) and December 31. T/e bonds 7ere sold for %33>") to yield 12B. Eallace uses
a calendar-year reportin* period. @sin* t/e effective-interest met/od of amorti$ation> 7/at
amount of interest e(pense s/ould be reported for 2)1)G C+ound your ans7er to t/e
nearest dollar.D
a. A1)3>24%
b. A1))>353
c. A1))>)5)
d. A''>"5)
14 - 1<
%2. .n Fanuary 1> 4atterson &nc. issued A5>)))>)))> 'B bonds for A4>'5>))). T/e market
rate of interest for t/ese bonds is 1)B. &nterest is payable annually on December 31.
4atterson uses t/e effective-interest met/od of amorti$in* bond discount. #t t/e end of
t/e first year> 4atterson s/ould report unamorti$ed bond discount of
a. A2"4>5)).
b. A2%5>5)).
c. A25%>)5).
d. A255>))).
%3. .n Fanuary 1> Martine$ &nc. issued A3>)))>)))> 11B bonds for A3>1'5>))). T/e market
rate of interest for t/ese bonds is 1)B. &nterest is payable annually on December 31.
Martine$ uses t/e effective-interest met/od of amorti$in* bond premium. #t t/e end of t/e
first year> Martine$ s/ould report unamorti$ed bond premium of<
a. A1%5>13)
b. A1%4>5))
c. A1"3>55)
d. A15>)))
%4. #t t/e be*innin* of 2)1)> Einston 6orporation issued 1)B bonds 7it/ a face value of
A))>))). T/ese bonds mature in five years> and interest is paid semiannually on Fune 3)
and December 31. T/e bonds 7ere sold for 555>%4) to yield 12B. Einston uses a
calendar-year reportin* period. @sin* t/e effective-interest met/od of amorti$ation> 7/at
amount of interest e(pense s/ould be reported for 2)1)G C+ound your ans7er to t/e
nearest dollar.D
a. A>5))
b. A>"))
c. A>')1
d. A%>%32
%5. Lant 6orporation retires its A1))>))) face value bonds at 1)2 on Fanuary 1> follo7in* t/e
payment of interest. T/e carryin* value of t/e bonds at t/e redemption date is A'>25).
T/e entry to record t/e redemption 7ill include a
a. credit of A3>"5) to ,oss on Bond +edemption.
b. credit of A3>"5) to Discount on Bonds 4ayable.
c. debit of A5>"5) to 1ain on Bond +edemption.
d. debit of A2>))) to 4remium on Bonds 4ayable.
%. 6arr 6orporation retires its A1))>))) face value bonds at 1)5 on Fanuary 1> follo7in* t/e
payment of interest. T/e carryin* value of t/e bonds at t/e redemption date is A1)3>"45.
T/e entry to record t/e redemption 7ill include a
a. credit of A3>"45 to ,oss on Bond +edemption.
b. debit of A3>"45 to 4remium on Bonds 4ayable.
c. credit of A1>255 to 1ain on Bond +edemption.
d. debit of A5>))) to 4remium on Bonds 4ayable.
%". #t December 31> 2)1) t/e follo7in* balances e(isted on t/e books of Fo(7ort/
6orporation<
Bonds 4ayable A2>)))>)))
Discount on Bonds 4ayable 1)>)))
&nterest 4ayable 5)>)))
@namorti$ed Bond &ssue 6osts 12)>)))
14 - 1=
&f t/e bonds are retired on Fanuary 1> 2)11> at 1)2> 7/at 7ill Fo(7ort/ report as a loss on
redemptionG
a. A3")>)))
b. A32)>)))
c. A2")>)))
d. A2))>)))
%%. #t December 31> 2)1) t/e follo7in* balances e(isted on t/e books of +entro 6orporation<
Bonds 4ayable A1>5))>)))
Discount on Bonds 4ayable 12)>)))
&nterest 4ayable 3">)))
@namorti$ed Bond &ssue 6osts ')>)))
&f t/e bonds are retired on Fanuary 1> 2)11> at 1)2> 7/at 7ill +entro report as a loss on
redemptionG
a. A15)>)))
b. A2)2>5))
c. A24)>)))
d. A2"">5))
%'. T/e December 31> 2)1)> balance s/eet of Kess 6orporation includes t/e follo7in* items<
'B bonds payable due December 31> 2)1' A1>)))>)))
@namorti$ed premium on bonds payable 2">)))
T/e bonds 7ere issued on December 31> 2))'> at 1)3> 7it/ interest payable on Fuly 1
and December 31 of eac/ year. Kess uses strai*/t-line amorti$ation. .n Marc/ 1> 2)11>
Kess retired A4))>))) of t/ese bonds at '% plus accrued interest. E/at s/ould Kess
record as a *ain on retirement of t/ese bondsG &*nore ta(es.
a. A1%>%)).
b. A1)>%)).
c. A1%>)).
d. A2)>))).
'). .n Fanuary 1> 2))4> Kernande$ 6orporation issued A4>5))>))) of 1)B ten-year bonds at
1)3. T/e bonds are callable at t/e option of Kernande$ at 1)5. Kernande$ /as recorded
amorti$ation of t/e bond premium on t/e strai*/t-line met/od C7/ic/ 7as not materially
different from t/e effective-interest met/odD.
.n December 31> 2)1)> 7/en t/e fair market value of t/e bonds 7as '> Kernande$
repurc/ased A1>)))>))) of t/e bonds in t/e open market at '. Kernande$ /as recorded
interest and amorti$ation for 2)1). &*norin* income ta(es and assumin* t/at t/e *ain is
material> Kernande$ s/ould report t/is reac9uisition as
a. a loss of A4'>))).
b. a *ain of A4'>))).
c. a loss of A1>))).
d. a *ain of A1>))).
14 - 1?
'1. T/e 1)B bonds payable of ;i(on 6ompany /ad a net carryin* amount of A5")>))) on
December 31> 2)1). T/e bonds> 7/ic/ /ad a face value of A))>)))> 7ere issued at a
discount to yield 12B. T/e amorti$ation of t/e bond discount 7as recorded under t/e
effective-interest met/od. &nterest 7as paid on Fanuary 1 and Fuly 1 of eac/ year. .n
Fuly 2> 2)11> several years before t/eir maturity> ;i(on retired t/e bonds at 1)2. T/e
interest payment on Fuly 1> 2)11 7as made as sc/eduled. E/at is t/e loss t/at ;i(on
s/ould record on t/e early retirement of t/e bonds on Fuly 2> 2)11G &*nore ta(es.
a. A12>))).
b. A3">%)).
c. A33>)).
d. A42>))).
'2. # corporation called an outstandin* bond obli*ation four years before maturity. #t t/at
time t/ere 7as an unamorti$ed discount of A3))>))). To e(tin*uis/ t/is debt> t/e
company /ad to pay a call premium of A1))>))). Ignoring income tax considerations> /o7
s/ould t/ese amounts be treated for accountin* purposesG
a. #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. 5it/er amorti$e A4))>))) over four years or c/ar*e A4))>))) to a loss immediately>
7/ic/ever mana*ement selects.
'3. T/e 12B bonds payable of ;yman 6o. /ad a carryin* amount of A%32>))) on
December 31> 2)1). T/e bonds> 7/ic/ /ad a face value of A%))>)))> 7ere issued at a
premium to yield 1)B. ;yman uses t/e effective-interest met/od of amorti$ation. &nterest is
paid on Fune 3) and December 31. .n Fune 3)> 2)11> several years before t/eir maturity>
;yman retired t/e bonds at 1)4 plus accrued interest. T/e loss on retirement> i*norin*
ta(es> is
a. A).
b. A>4)).
c. A'>'2).
d. A32>))).
'4. Didde 6ompany issues A1)>)))>))) face value of bonds at ' on Fanuary 1> 2))'. T/e
bonds are dated Fanuary 1> 2))'> pay interest semiannually at %B on Fune 3) and
December 31> and mature in 1) years. !trai*/t-line amorti$ation is used for discounts and
premiums. .n !eptember 1> 2)12> A>)))>))) of t/e bonds are called at 1)2 plus
accrued interest. E/at *ain or loss 7ould be reco*ni$ed on t/e called bonds on
!eptember 1> 2)12G
a. A))>))) loss
b. A2"2>))) loss
c. A3)>))) loss
d. A453>333 loss
14 - 2@
'5. 6orte$ 6ompany issues A5>)))>))) face value of bonds at ' on Fanuary 1> 2))'. T/e
bonds are dated Fanuary 1> 2))'> pay interest semiannually at %B on Fune 3) and
December 31> and mature in 1) years. !trai*/t-line amorti$ation is used for discounts and
premiums. .n !eptember 1> 2)12> A3>)))>))) of t/e bonds are called at 1)2 plus
accrued interest. E/at *ain or loss 7ould be reco*ni$ed on t/e called bonds on
!eptember 1> 2)12G
a. A3))>))) loss
b. A13>))) loss
c. A1%)>))) loss
d. A22>" loss
'. .n Fanuary 1> 2)1)> #nn 4rice loaned A45>)"% to Foe Li*er. # $ero-interest-bearin* note
Cface amount> A)>)))D 7as e(c/an*ed solely for cas/M no ot/er ri*/ts or privile*es 7ere
e(c/an*ed. T/e note is to be repaid on December 31> 2)12. T/e prevailin* rate of interest
for a loan of t/is type is 1)B. T/e present value of A)>))) at 1)B for t/ree years is
A45>)"%. E/at amount of interest income s/ould Ms. 4rice reco*ni$e in 2)1)G
a. A4>5)%.
b. A>))).
c. A1%>))).
d. A13>524.
'". .n Fanuary 1> 2)1)> Facobs 6ompany sold property to Dains 6ompany 7/ic/ ori*inally
cost Facobs A")>))). T/ere 7as no establis/ed e(c/an*e price for t/is property. Danis
*ave Facobs a A1>2))>))) $ero-interest-bearin* note payable in t/ree e9ual annual
installments of A4))>))) 7it/ t/e first payment due December 31> 2)1). T/e note /as no
ready market. T/e prevailin* rate of interest for a note of t/is type is 1)B. T/e present
value of a A1>2))>))) note payable in t/ree e9ual annual installments of A4))>))) at a
1)B rate of interest is A''4>%)). E/at is t/e amount of interest income t/at s/ould be
reco*ni$ed by Facobs in 2)1)> usin* t/e effective-interest met/odG
a. A).
b. A4)>))).
c. A''>4%).
d. A12)>))).
'%. .n Fanuary 1> 2)1)> 6ro7n 6ompany sold property to ,eary 6ompany. T/ere 7as no
establis/ed e(c/an*e price for t/e property> and ,eary *ave 6ro7n a A2>)))>))) $ero-
interest-bearin* note payable in 5 e9ual annual installments of A4))>)))> 7it/ t/e first
payment due December 31> 2)1). T/e prevailin* rate of interest for a note of t/is type is
'B. T/e present value of t/e note at 'B 7as A1>442>))) at Fanuary 1> 2)1). E/at s/ould
be t/e balance of t/e Discount on ;otes 4ayable account on t/e books of ,eary at
December 31> 2)1) after ad?ustin* entries are made> assumin* t/at t/e effective-interest
met/od is usedG
a. A)
b. A42%>22)
c. A44>4))
d. A55%>)))
14 - 21
''. 4utnam 6ompanyHs 2)1) financial statements contain t/e follo7in* selected data<
&ncome ta(es A4)>)))
&nterest e(pense 2)>)))
;et income )>)))
4utnamHs times interest earned for 2)1) is
a. 3 times
b. 4 times.
c. 5 times.
d. times.
1)). &n t/e recent year Kill 6orporation /ad net income of A14)>)))> interest e(pense of
A4)>)))> and ta( e(pense of A2)>))). E/at 7as Kill 6orporation:s times interest earned
ratio for t/e yearG
a. 5.)
b. 4.)
c. 3.5
d. 3.)
1)1. &n recent year 6ey 6orporation /ad net income of A25)>)))> interest e(pense of A5)>)))>
and a times interest earned ratio of '. E/at 7as 6ey 6orporation:s income before ta(es
for t/e yearG
a. A5))>)))
b. A45)>)))
c. A4))>)))
d. ;one of t/e above.
1)2. T/e ad?usted trial balance for ,ifesaver 6orp. at t/e end of t/e current year> 2)1)>
contained t/e follo7in* accounts.
5-year Bonds 4ayable %B A1>5))>)))
Bond &nterest 4ayable 5)>)))
4remium on Bonds 4ayable 1))>)))
;otes 4ayable C3 mo.D 4)>)))
;otes 4ayable C5 yr.D 15>)))
Mort*a*e 4ayable CA15>))) due currentlyD 2))>)))
!alaries 4ayable 1%>)))
Ta(es 4ayable Cdue 3215 of 2)11D 25>)))
T/e total lon*-term liabilities reported on t/e balance s/eet are
a. A1>%5>))).
b. A1>%5)>))).
c. A1>'5>))).
d. A1>'5)>))).
@se t/e follo7in* information for 9uestions 01)3 t/rou*/ 01)5<
.n December 31> 2))%> ;olte 6o. is in financial difficulty and cannot pay a note due t/at day. &t is
a A))>))) note 7it/ A)>))) accrued interest payable to 4iper> &nc. 4iper a*rees to accept from
;olte e9uipment t/at /as a fair value of A2')>)))> an ori*inal cost of A4%)>)))> and accumulated
depreciation of A23)>))). 4iper also for*ives t/e accrued interest> e(tends t/e maturity date to
December 31> 2)11> reduces t/e face amount of t/e note to A25)>)))> and reduces t/e interest
rate to B> 7it/ interest payable at t/e end of eac/ year.
14 - 22
01)3. ;olte 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.
01)4. ;olte s/ould reco*ni$e a *ain on t/e partial settlement and restructure of t/e debt of
a. A).
b. A15>))).
c. A55>))).
d. A"5>))).
01)5. ;olte s/ould record interest e(pense for 2)11 of
a. A).
b. A15>))).
c. A3)>))).
d. A45>))).
Muti&e C"oi%e Ans*ers)Co-&utationa
Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans'
). a ". c "4. d %1. b %%. c '5. b 1)2. d
1. b %. a "5. b %2. b %'. c '. a 01)3. b
2. a '. d ". c %3. b '). b '". c 01)4. d
3. c "). d "". d %4. c '1. b '%. b 01)5. a
4. c "1. c "%. a %5. b '2. b ''. d
5. c "2. a "'. b %. b '3. b 1)). a
. c "3. d %). c %". b '4. b 1)1. c
M(LTIPLE CHOICE)CPA A#a&te#
1). .n Fuly 1> 2)1)> !pear 6o. issued 1>))) of its 1)B> A1>))) bonds at '' plus accrued
interest. T/e bonds are dated #pril 1> 2)1) and mature on #pril 1> 2)2). &nterest is
payable semiannually on #pril 1 and .ctober 1. E/at amount did !pear receive from t/e
bond issuanceG
a. A1>)15>)))
b. A1>)))>)))
c. A'')>)))
d. A'5>)))
14 - 23
1)". .n Fanuary 1> 2)1)> !olis 6o. issued its 1)B bonds in t/e face amount of A3>)))>)))>
7/ic/ mature on Fanuary 1> 2)2). T/e bonds 7ere issued for A3>4)5>))) to yield %B>
resultin* in bond premium of A4)5>))). !olis uses t/e effective-interest met/od of
amorti$in* bond premium. &nterest is payable annually on December 31. #t December 31>
2)1)> !olis:s ad?usted unamorti$ed bond premium s/ould be
a. A4)5>))).
b. A3"">4)).
c. A34>5)).
d. A3)4>5)).
1)%. .n Fuly 1> 2))'> ;oble> &nc. issued 'B bonds in t/e face amount of A5>)))>)))> 7/ic/
mature on Fuly 1> 2)15. T/e bonds 7ere issued for A4>'5>))) to yield 1)B> resultin* in a
bond discount of A3)5>))). ;oble uses t/e effective-interest met/od of amorti$in* bond
discount. &nterest is payable annually on Fune 3). #t Fune 3)> 2)11> ;oble:s unamorti$ed
bond discount s/ould be
a. A24>)5).
b. A255>))).
c. A244>))).
d. A215>))).
1)'. .n Fanuary 1> 2)1)> Kuff 6o. sold A1>)))>))) of its 1)B bonds for A%%5>2' to yield
12B. &nterest is payable semiannually on Fanuary 1 and Fuly 1. E/at amount s/ould Kuff
report as interest e(pense for t/e si( mont/s ended Fune 3)> 2)1)G
a. A44>2
b. A5)>)))
c. A53>11%
d. A)>)))
11). .n Fanuary 1> 2)11> Doty 6o. redeemed its 15-year bonds of A2>5))>))) par value for
1)2. T/ey 7ere ori*inally issued on Fanuary 1> 1''' at '% 7it/ a maturity date of
Fanuary 1> 2)14. T/e bond issue costs relatin* to t/is transaction 7ere A15)>))). Doty
amorti$es discounts> premiums> and bond issue costs usin* t/e strai*/t-line met/od.
E/at amount of loss s/ould Doty reco*ni$e on t/e redemption of t/ese bonds Ci*nore
ta(esDG
a. A')>)))
b. A)>)))
c. A5)>)))
d. A)
111. .n its December 31> 2)1) balance s/eet> 5mi* 6orp. reported bonds payable of
A>)))>))) and related unamorti$ed bond issue costs of A32)>))). T/e bonds /ad been
issued at par. .n Fanuary 2> 2)11> 5mi* retired A3>)))>))) of t/e outstandin* bonds at
par plus a call premium of A")>))). E/at amount s/ould 5mi* report in its 2)11 income
statement as loss on e(tin*uis/ment of debt Ci*nore ta(esDG
a. A)
b. A")>)))
c. A1)>)))
d. A23)>)))
14 - 24
112. .n Fanuary 1> 2))> 1oll 6orp. issued 1>))) of its 1)B> A1>))) bonds for A1>)4)>))).
T/ese bonds 7ere to mature on Fanuary 1> 2)1 but 7ere callable at 1)1 any time after
December 31> 2))'. &nterest 7as payable semiannually on Fuly 1 and Fanuary 1. .n
Fuly 1> 2)11> 1oll called all of t/e bonds and retired t/em. Bond premium 7as amorti$ed
on a strai*/t-line basis. Before income ta(es> 1oll:s *ain or loss in 2)11 on t/is early
e(tin*uis/ment of debt 7as
a. A3)>))) *ain.
b. A12>))) *ain.
c. A1)>))) loss.
d. A%>))) *ain.
113. .n Fune 3)> 2)11> .mara 6o. /ad outstandin* %B> A3>)))>))) face amount> 15-year
bonds maturin* on Fune 3)> 2)21. &nterest is payable on Fune 3) and December 31. T/e
unamorti$ed balances in t/e bond discount and deferred bond issue costs accounts on
Fune 3)> 2)11 7ere A1)5>))) and A3)>)))> respectively. .n Fune 3)> 2)11> .mara
ac9uired all of t/ese bonds at '4 and retired t/em. E/at net carryin* amount s/ould be
used in computin* *ain or loss on t/is early e(tin*uis/ment of debtG
a. A2>'")>))).
b. A2>%'5>))).
c. A2>%5>))).
d. A2>%2)>))).
114. # ten-year bond 7as issued in 2))' 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)11> t/e carryin*
amount of t/e bond 7as less t/an t/e call price. T/e amount of bond liability removed
from t/e accounts in 2)11 s/ould /ave e9ualed t/e
a. call price.
b. call price less unamorti$ed discount.
c. face amount less unamorti$ed discount.
d. face amount plus unamorti$ed discount.
115. 4ai*e 6o. took advanta*e of market conditions to refund debt. T/is 7as t/e fourt/
refundin* operation carried out by 4ai*e 7it/in t/e last t/ree years. T/e e(cess of t/e
carryin* amount of t/e old debt over t/e amount paid to e(tin*uis/ it s/ould be reported
as a
a. *ain> net of income ta(es.
b. loss> net of income ta(es.
c. part of continuin* operations.
d. deferred credit to be amorti$ed over t/e life of t/e ne7 debt.
011. 5ddy 6o. is indebted to 6ole under a A4))>)))> 12B> t/ree-year note dated
December 31> 2))'. Because of 5ddy:s financial difficulties developin* in 2)11> 5ddy
o7ed accrued interest of A4%>))) on t/e note at December 31> 2)11. @nder a troubled
debt restructurin*> on December 31> 2)11> 6ole a*reed to settle t/e note and accrued
interest for a tract of land /avin* a fair value of A3)>))). 5ddy:s ac9uisition cost of t/e
land is A2')>))). &*norin* income ta(es> on its 2)11 income statement 5ddy s/ould
report as a result of t/e troubled debt restructurin*
1ain on Disposal +estructurin* 1ain
a. A15%>))) A)
b. A11)>))) A)
c. A")>))) A4)>)))
d. A")>))) A%%>)))
14 - 2:
Muti&e C"oi%e Ans*ers)CPA A#a&te#
Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans' Ite- Ans'
1). a 1)%. a 11). a 112. d 114. c 011. d
1)". b 1)'. c 111. d 113. c 115. c
+ERI6ATIONS ) Co-&utationa
No' Ans*er +erivation
). a A1>)))>))) N .534 = A534>))).
1. b CA1>)))>))) N .)3D N 11.52 = A34'>5).
2. a A534>))) O A34'>5) = A%%3>5).
3. c CA5>)))>))) N ."%12)D O CA15)>))) N %."52)D = A5>21%>%)'.
4. c CA2)>)))>))) N .'"D O CA1>%))>))) N 2212D = A1'>"))>))).
5. c CA1)>)))>))) N ."%12)D O CA3))>))) N %."52)D = A1)>43">1%.
. c CA1)>)))>))) N .'"D O CA'))>))) N 2212D = A'>%5)>))).
". c CA1'>)4>145 N .)4D O CA1'>)%>31) N .)4D = A1>5%>4'%.
%. a A1'>)4>145 O PCA1'>)4>145 N .)4D Q A"%)>)))R
O PA1'>)%>31) N .)4D Q A"%)>)))R = A1'>12>43.
'. d A1'>)4>145 O CA3'5>%55 N 322)D = A1'>3>523.
"). d CA2)>)))>))) N .)"%D O CA3'5>%55 S 2)D = A1>5"'>"'3.
"1. c CA4>')1>)3 N .)4D O CA4>')2>)"" N .)4D = A3'2>124.
"2. a A4>')1>)3 O PCA4>')1>)3 N .)4D Q A1'5>)))R O PCA4>')2>)"" N .)4D Q A1'5>)))R
= A4>')3>1).
"3. d A4>')1>)3 O CA'%>'4 N 322)D = A4>'15>%%1.
"4. d CA5>)))>))) N .)"%D O CA'%>'4 S 2)D = A3'4>'4%.
"5. b A4>2)) N .)5 = A32>31)
PA4>2)) Q CA3>))) Q A32>31)DR N .)5 = 32>12
A4>43
". c A553>)) N .)5 = A2">%)
PA553>)) O CA2">%) Q A24>)))DR N .)5 = 2">%4
A55>544
14 - 2;
+ERI6ATIONS ) Co-&utationa 0%ont'1
"". d CA1>)))>))) N 1.)4D Q A1>)))>))) = A4)>))) premium.
"%. a PCA1>)))>))) N .)5D N 3212R Q PCA4)>))) S 1)D N 3212R = A11>5)).
"'. b CA5))>))) N 1.)4D Q A5))>))) = A2)>))) premium.
%). c PCA5))>))) N .)5D N 3212R Q PCA2)>))) S 1)D N 3212R = A5>"5).
%1. b CA%33>") N .)D = A5)>)2M PA5)>)2 Q CA'))>))) N .)5DR = A5>)2
CA%33>") O A5>)2D N .) = A5)>32"
A5)>)2 O A5)>32" = A1))>353.
%2. b CA4>'5>))) N .1)D Q CA5>)))>))) N .)'D = A1'>5))
CA5>)))>))) Q A4>'5>)))D Q A1'>5)) = A2%5>5)).
%3. b CA3>)))>))) N .11D Q CA3>1'5>))) N .1)D = A1)>5))
CA3>1'5>))) Q A3>)))>)))D Q A1)>5)) = A1%4>5)).
%4. c CA555>%4) N .)D = A33>35)M PA33>35) Q CA))>))) N .)5DR = A3>35)
CA555>%4) O A3>35)D N .) = A33>551
A33>35) O A33>551 = A>')1.
%5. b A1))>))) Q A'>25) = A3>"5) discount.
%. b A1)3>"45 Q A1))>))) = A3>"45 premium.
%". b CA2>)))>))) N 1.)2D Q CA2>)))>))) Q A1)>))) Q A12)>)))D = A32)>))).
%%. c CA1>5))>))) N 1.)2D Q CA1>5))>))) Q A12)>))) Q A')>)))D = A24)>))).
%'. c
27 000 2
1 027 000 4
18 6
A >
A > > .
1 _
1

,
1
]

= A41)>)) C68 of retired bondsD
A41)>)) Q CA4))>))) N .'%D = A1%>)).
'). b
4 500 000
A135>)))
A > > (1.)3 " 22'
1)

1 _

1
,
]
= A1>))'>))) C68 of retired bondsD
A1>))'>))) Q CA1>)))>))) .'D = A4'>))).
'1. b A5")>))) O PCA5")>))) N .)D Q CA))>))) N .)5DR = A5"4>2)) C68 of bondsD
A5"4>2)) Q CA))>))) N 1.)2D = A3">%)).
'2. b A3))>))) O A1))>))) = A4))>))).
'3. b A%32>))) Q PCA%))>))) N .)D Q CA%32>))) N .)5DR = A%25>)) C68 of bondsD
CA%))>))) N 1.)4D Q A%25>)) = A>4)).
14 - 2<
Test Ban, $or Inter-e#iate A%%ountin./ T"irteent" E#ition 14 - 2=
+ERI6ATIONS ) Co-&utationa 0%ont'1
'4. b TA'>))>))) O PA4))>))) N C3 223 S 1)DRU N .) = A5>%4%>)))
A>12)>))) Q A5>%4%>))) = A2"2>))).
'5. b TA4>%))>))) O PA2))>))) N C3 223 S 1)DRU N .) = A2>'24>)))
A3>))>))) Q A2>'24>))) = A13>))).
'. a A45>)"% N .1) = A4>5)%.
'". c A''4>%)) N .1) = A''>4%).
'%. b A2>)))>))) Q A1>442>))) Q CA1>442>))) N .)'D = A42%>22).
A)>))) O A4)>))) O A2)>)))
''. d VVVVVVVVVVVVV = times.
A2)>)))
1)). a CA14)>))) O A4)>))) O A2)>)))D S A4)>))) = 5.).
1)1. c CA25)>))) O A5)>))) O WD S A5)>))) = '
CA3))>))) O WD = ' N A5)>)))
W = A15)>)))M &BT = A4))>))) CA25)>))) O A15)>)))D.
1)2. d A1>5))>))) O A1))>))) O A15>))) O CA2))>))) Q A15>)))D = A1>'5)>))).
01)3. b A2')>))) Q CA4%)>))) Q A23)>)))D = A4)>))).
01)4. d CA))>))) O A)>)))D Q PA2')>))) O A25)>))) O CA25)>))) N .) N 3DR
= A"5>))).
01)5. a ). T/e effective-interest rate is )B.
+ERI6ATIONS ) CPA A#a&te#
1). a CA1>)))>))) N .''D O CA1>)))>))) N .1) N 3212D = A1>)15>))).
1)". b A4)5>))) Q PCA3>)))>))) N .1)D Q CA3>4)5>))) N .)%DR = A3"">4)).
1)%. a 2))'Q2)1)<A4>'5>))) O PCA4>'5>))) N .1D Q CA5>)))>))) N .)'DR
= A4>"14>5)).
2)1)Q2)11<A4>"14>5)) O CA4"1>45) Q A45)>)))D = A4>"35>'5)
A5>)))>))) Q A4>"35>'5) = A24>)5).
1)'. c A%%5>2' N .) = A53>11%.
11). a CA2>5))>))) N 1.)2D Q
200 000
2 300 000 12
15
A >
A > >
1 _
1

,
1
]
+
= A')>))).
14 - 2?
+ERI6ATIONS ) CPA A#a&te# 0%ont'1
111. d CA3>)))>))) O A")>)))D Q PCA>)))>))) Q A32)>)))D N 122R = A23)>))).
112. d
40 000
1 040 000 11
20
A >
A > >
1 _
1

,
1
]

Q CA1>)))>))) N 1.)1D = A%>))).
113. c A3>)))>))) Q CA1)5>))) O A3)>)))D = A2>%5>))).
114. c 6onceptual.
115. c 6onceptual.
011. d A3)>))) Q A2')>))) = A")>)))
CA4))>))) O A4%>)))D Q A3)>))) = A%%>))).
E4ERCISES
EA' 14-11<VTerms related to lon*-term debt.
4lace t/e letter of t/e best matc/in* p/rase before eac/ 7ord.
XXXXX 1. &ndenture XXXXX . Times &nterest 5arned +atio
XXXXX 2. Treasury Bonds XXXXX ". Mort*a*e
XXXXX 3. Bonds &ssued at 4ar XXXXX %. 4remium on Bonds
XXXXX 4. 6arryin* 8alue XXXXX '. +eac9uisition 4rice
XXXXX 5. ;ominal +ate XXXXX1). 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.
/. 4rice 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.
14 - 3@
EA' 14-11< C6ont.D
m. +atio of debt to e9uity.
n. 5(clusive ri*/t to manufacture a product.
o. # document t/at pled*es title to property as security for a loan.
Soution 14-11<
1. k 3. c 5. b ". o '. /
2. * 4. i l % f 1). d
EA' 14-11=VBond issue price and premium amorti$ation.
.n Fanuary 1> 2)11> 4iper 6o. issued ten-year bonds 7it/ a face value of A1>)))>))) and a
stated interest rate of 1)B> payable semiannually on Fune 3) and December 31. T/e bonds 7ere
sold to yield 12B. Table values are<
4resent value of 1 for 1) periods at 1)B .................................. .3%
4resent value of 1 for 1) periods at 12B .................................. .322
4resent value of 1 for 2) periods at 5B .................................... .3""
4resent value of 1 for 2) periods at B .................................... .312
4resent value of annuity for 1) periods at 1)B ........................ .145
4resent value of annuity for 1) periods at 12B ........................ 5.5)
4resent value of annuity for 2) periods at 5B .......................... 12.42
4resent value of annuity for 2) periods at B .......................... 11.4")
Instru%tions
CaD 6alculate t/e issue price of t/e bonds.
CbD Eit/out pre?udice to your solution in part CaD> assume t/at t/e issue price 7as A%%4>))).
4repare t/e amorti$ation table for 2)11> assumin* t/at amorti$ation is recorded on interest
payment dates.
Soution 14-11=
CaD .312 N A1>)))>))) = A312>)))
11.4") N A5)>))) = 5"3>5))
A%%5>5))
CbD Date 6as/ 5(pense #morti$ation 6arryin* #mount
121211 A%%4>)))
23)211 A5)>))) A53>)4) 3>)4) %%">)4)
12231211 5)>))) 53>222 3>222 %')>22
14 - 31
EA' 14-11?V#morti$ation of discount or premium.
1rider &ndustries> &nc. issued A>)))>))) of %B debentures on May 1> 2)1) and received cas/
totalin* A5>323>5"". T/e bonds pay interest semiannually on May 1 and ;ovember 1. T/e maturity
date on t/ese bonds is ;ovember 1> 2)1%. T/e firm uses t/e effective-interest met/od of
amorti$in* discounts and premiums. T/e bonds 7ere sold to yield an effective-interest rate of 1)B.
Instru%tions
6alculate t/e total dollar amount of discount or premium amorti$ation durin* t/e first year C52121)
t/rou*/ 423)211D t/ese bonds 7ere outstandin*. C!/o7 computations and round to t/e nearest
dollar.D
Soution 14-11?
&nterest 6as/ Discount 6arryin*
Date 5(pense &nterest #morti$ed 8alue of Bonds
52121) A5>323>5""
112121) A2>1"' A24)>))) A2>1"' 5>34'>"5
521211 2">4%% 24)>))) 2">4%% 5>3"">244
Total A53>"
EA' 14-12@V5ntries for Bonds 4ayable.
4repare ?ournal entries to record t/e follo7in* transactions related to lon*-term bonds of Yuirk 6o.
CaD .n #pril 1> 2))'> Yuirk issued A5))>)))> 'B bonds for A53">%% includin* accrued interest.
&nterest is payable annually on Fanuary 1> and t/e bonds mature on Fanuary 1> 2)1'.
CbD .n Fuly 1> 2)11 Yuirk retired A15)>))) of t/e bonds at 1)2 plus accrued interest. Yuirk uses
strai*/t-line amorti$ation.
Soution 14-12@
CaD 6as/.............................................................................................. 53">%%
Bonds 4ayable..................................................................... 5))>)))
&nterest 5(pense CA5))>))) N 'B N 3212D............................ 11>25)
4remium on Bonds 4ayable................................................ 2>1%
CbD &nterest 5(pense............................................................................ >34)
4remium on Bonds 4ayable CA2>1% N .3 N 211"D...................... 41)
6as/ CA15)>))) N 'B N 212D.............................................. >"5)
Bonds 4ayable............................................................................... 15)>)))
4remium on Bonds 4ayable CA2>1% N .3 N ')211"D.................... >142
6as/.................................................................................... 153>)))
1ain on +edemption of Bonds............................................. 3>142
14 - 32
EA' 14-121V+etirement of bonds.
4repare ?ournal entries to record t/e follo7in* retirement. C!/o7 computations and round to t/e
nearest dollar.D
T/e December 31> 2)1) balance s/eet of Eolfe 6o. included t/e follo7in* items<
".5B bonds payable due December 31> 2)1% A1>2))>)))
@namorti$ed discount on bonds payable 4%>)))
T/e bonds 7ere issued on December 31> 2))% at '5> 7it/ interest payable on Fune 3) and
December 31. C@se strai*/t-line amorti$ation.D
.n #pril 1> 2)11> Eolfe retired A24)>))) of t/ese bonds at 1)1 plus accrued interest.
Soution 14-121
&nterest 5(pense............................................................................. 4>%))
6as/ CA24)>))) N ".5B N 3212D........................................... 4>5))
Discount on Bonds 4ayable CA4%>))) N 125 N 12% N 3212D.... 3))
Bonds 4ayable................................................................................ 24)>)))
,oss on +edemption of Bonds........................................................ 11>"))
Discount on Bonds 4ayable PC125 N A4%>)))D Q A3))R.......... '>3))
6as/.................................................................................... 242>4))
EA' 14-122V5arly e(tin*uis/ment of debt.
Kurst> &ncorporated sold its %B bonds 7it/ a maturity value of A3>)))>))) on #u*ust 1> 2))' for
A2>'4>))). #t t/e time of t/e sale t/e bonds /ad 5 years until t/ey reac/ed maturity. &nterest on
t/e bonds is payable semiannually on #u*ust 1 and February 1. T/e bonds are callable at 1)4 at
any time after #u*ust 1> 2)11. By .ctober 1> 2)11> t/e market rate of interest /as declined and
t/e market price of Kurst:s bonds /as risen to a price of 1)1. T/e firm decides to refund t/e
bonds by sellin* a ne7 B bond issue to mature in 5 years. Kurst be*ins to reac9uire its %B
bonds in t/e market and is able to purc/ase A5))>))) 7ort/ at 1)1. T/e remainder of t/e
outstandin* bonds is reac9uired by e(ercisin* t/e bonds: call feature. &n t/e final analysis> /o7
muc/ 7as t/e *ain or loss e(perienced by Kurst in reac9uirin* its %B bondsG C#ssume t/e firm
used strai*/t-line amorti$ation.D !/o7 calculations.
Soution 14-122
+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 22)D = 2>''>4))
,oss on early e(tin*uis/ment A 135>))
14 - 33
>EA' 14-123V#ccountin* for a troubled debt settlement.
Mann> &nc.> 7/ic/ o7es Doran 6o. A))>))) in notes payable 7it/ accrued interest of A54>)))> is
in financial difficulty. To settle t/e debt> Doran a*rees to accept from Mann e9uipment 7it/ a fair
value of A5")>)))> an ori*inal cost of A%4)>)))> and accumulated depreciation of A1'5>))).
Instru%tions
CaD 6ompute t/e *ain or loss to Mann on t/e settlement of t/e debt.
CbD 6ompute t/e *ain or loss to Mann on t/e transfer of t/e e9uipment.
CcD 4repare t/e ?ournal entry on Mann :s books to record t/e settlement of t/is debt.
CdD 4repare t/e ?ournal entry on Doran:s books to record t/e settlement of t/e receivable.
>Soution 14-123
CaD ;ote payable A))>)))
&nterest payable 54>)))
6arryin* amount of debt 54>)))
Fair value of e9uipment 5")>)))
1ain on settlement of debt A %4>)))
CbD 6ost A%4)>)))
#ccumulated depreciation 1'5>)))
Book value 45>)))
Fair value of plant assets 5")>)))
,oss on disposal of e9uipment A "5>)))
CcD ;otes 4ayable............................................................................... ))>)))
&nterest 4ayable............................................................................. 54>)))
#ccumulated Depreciation............................................................. 1'5>)))
,oss on Disposal of 59uipment...................................................... "5>)))
59uipment.......................................................................... %4)>)))
1ain on !ettlement of Debt................................................ %4>)))
CdD 59uipment...................................................................................... 5")>)))
#llo7ance for Doubtful #ccounts................................................... %4>)))
;otes +eceivable............................................................... ))>)))
&nterest +eceivable............................................................. 54>)))
>EA' 14-124V#ccountin* for a troubled debt restructurin*.
.n December 31> 2))'> !/ort 6o. is in financial difficulty and cannot pay a note due t/at day. &t is
a A5))>))) note 7it/ A5)>))) accrued interest payable to Bryan> &nc. Bryan a*rees to for*ive t/e
accrued interest> e(tend t/e maturity date to December 31> 2)11> and reduce t/e interest rate to
4B. T/e present value of t/e restructured cas/ flo7s is A42%>))).
14 - 34
Instru%tions
4repare entries for t/e follo7in*<
CaD T/e restructure on !/ortHs books.
CbD T/e payment of interest on December 31> 2)1).
CcD T/e restructure on BryanHs books.
>Soution 14-124
CaD &nterest 4ayable............................................................................. 5)>)))
;otes 4ayable CA5))>))) N 4B N 2D................................... 4)>)))
1ain on +estructurin*........................................................ 1)>)))
CbD ;otes 4ayable............................................................................... 2)>)))
6as/................................................................................... 2)>)))
CcD #llo7ance for Doubtful #ccounts................................................... 122>)))
;otes +eceivable............................................................... "2>)))
&nterest +eceivable............................................................. 5)>)))
>EA' 14-12:V#ccountin* for troubled debt.
CaD E/at are t/e *eneral rules for measurin* and reco*ni$in* a *ain or loss by t/e debtor on a
settlement of troubled debt 7/ic/ includes t/e transfer of noncas/ assetsG
CbD E/at are t/e *eneral rules for measurin* and reco*ni$in* a *ain and for recordin* future
payments by t/e debtor in a troubled debt restructurin*G
>Soution 14-12:
CaD &f t/e settlement of debt includes t/e transfer of noncas/ assets> a *ain is measured by t/e
debtor 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$es a *ain or loss on
t/e disposal of assets as t/e difference bet7een t/e fair value of t/e assets transferred and
t/eir book value.
CbD &f t/e carryin* amount of t/e payable is *reater t/an t/e undiscounted total future cas/ flo7s>
t/e *ain is measured by t/e debtor as t/e difference bet7een t/e carryin* amount and t/e
future cas/ flo7s. Future payments reduce t/e principalM no interest e(pense is recorded by
t/e debtor.
&f t/e carryin* amount of t/e payable is less t/an t/e future cas/ flo7s> no restructurin* *ain
is reco*ni$ed by t/e debtor. # ne7 effective-interest rate is calculated t/at e9uates t/e
present value of t/e future cas/ flo7s 7it/ t/e carryin* amount of t/e debt. # part of t/e
future cas/ flo7s is recorded as interest e(pense by t/e debtor.
14 - 3:
PROBLEMS
Pr' 14-12;VBond discount amorti$ation.
.n Fune 1> 2))'> 5verly Bottle 6ompany sold A4))>))) in lon*-term bonds for A351>)4). T/e
bonds 7ill mature in 1) years and /ave a stated interest rate of %B and a yield rate of 1)B. T/e
bonds pay interest annually on May 31 of eac/ year. T/e bonds are to be accounted for under
t/e effective-interest met/od.
Instru%tions
CaD 6onstruct a bond amorti$ation table for t/is problem to indicate t/e amount of interest
e(pense and discount amorti$ation at eac/ May 31. &nclude only t/e first four years. Make
sure all columns and ro7s are properly labeled. C+ound to t/e nearest dollar.D
CbD T/e sales price of A351>)4) 7as determined from present value tables. !pecifically e(plain
/o7 one 7ould determine t/e price usin* present value tables.
CcD #ssumin* t/at interest and discount amorti$ation are recorded eac/ May 31> prepare t/e
ad?ustin* entry to be made on December 31> 2)11. C+ound to t/e nearest dollar.D
Soution 14-12;
CaD Debit 6redit 6arryin* #mount
Date 6redit 6as/ &nterest 5(pense Bond Discount of Bonds
212)' A351>)4)
523121) A32>))) A35>1)4 A3>1)4 354>144
5231211 32>))) 35>414 3>414 35">55%
5231212 32>))) 35>"5 3>"5 31>314
5231213 32>))) 3>131 4>131 35>445
CbD C1D Find t/e present value of A4))>))) due in 1) years at 1)B.
C2D Find t/e present value of 1) annual payments of A32>))) at 1)B.
#dd C1D and C2D to obtain t/e present value of t/e principal and t/e interest payments.
CcD &nterest 5(pense.......................................................................... 2)>%5%0
&nterest 4ayable................................................................ 1%>"00
Discount on Bonds 4ayable.............................................. 2>1'1
0"212 A35>"5 Cfrom TableD = A2)>%5%
00"212 %B A4))>))) = A1%>"
Pr' 14-12<VBond interest and discount amorti$ation.
1rove 6orporation issued A%))>))) of %B bonds on .ctober 1> 2)1)> due on .ctober 1> 2)15.
T/e interest is to be paid t7ice a year on #pril 1 and .ctober 1. T/e bonds 7ere sold to yield
1)B effective annual interest. 1rove 6orporation closes its books annually on December 31.
14 - 3;
Instru%tions
CaD 6omplete t/e follo7in* amorti$ation sc/edule for t/e dates indicated. C+ound all ans7ers to
t/e nearest dollar.D @se t/e effective-interest met/od.
Debit 6redit 6arryin* #mount
6redit 6as/ &nterest 5(pense Bond Discount of Bonds
.ctober 1> 2)1) A"3%>224
#pril 1> 2)11
.ctober 1> 2)11
CbD 4repare t/e ad?ustin* entry for December 31> 2)11. @se t/e effective-interest met/od.
CcD 6ompute t/e interest e(pense to be reported in t/e income statement for t/e year ended
December 31> 2)11.
Soution 14-12<
CaD Debit 6redit 6arryin* #mount
6redit 6as/ &nterest 5(pense Bond Discount of Bonds
.ctober 1> 2)1) A"3%>224
#pril 1> 2)11 A32>))) A3>'11 A4>'11 "43>135
.ctober 1> 2)11 32>))) 3">15" 5>15" "4%>2'2
CbD &nterest 5(pense CA"4%>2'2 N 1)B N 3212D..................................... 1%>")"
&nterest 4ayable C122 N A32>)))D ......................................... 1>)))
Discount on Bonds 4ayable CA1%>")" Q A1>)))D ............... 2>")"
CcD A1%>45 C122 of A3>'11D
3">15"
1%>")"
A"4>32)
Pr' 14-12=V5ntries for bonds payable.
4repare t/e necessary ?ournal entries to record t/e follo7in* transactions relatin* to t/e lon*-term
issuance of bonds of 4itts 6o.<
Marc/ 1
&ssued A%))>))) face value 4itts 6o. second mort*a*e> %B bonds for A%"2>1)> includin*
accrued interest. &nterest is payable semiannually on December 1 and Fune 1 7it/ t/e bonds
maturin* 1) years from t/is past December 1. T/e bonds are callable at 1)2.
Fune 1
4aid semiannual interest on 4itts 6o. bonds. C@se strai*/t-line amorti$ation of any premium or
discount.D
December 1
4aid semiannual interest on 4itts 6o. bonds and purc/ased A4))>))) face value bonds at t/e call
price in accordance 7it/ t/e provisions of t/e bond indenture.
14 - 3<
Soution 14-12=
Marc/ 1< 6as/.................................................................................... %"2>1)
Bonds 4ayable......................................................... %))>)))
4remium on Bonds 4ayable..................................... 5>1)
&nterest 5(pense CA%))>))) N %B N 3212D................ 1>)))
Fune 1< &nterest 5(pense.................................................................. 3)>5)
4remium on Bonds 4ayable CA5>1) N 3211"D................... 1>44)
6as/......................................................................... 32>)))
Dec. 1< &nterest 5(pense.................................................................. 2'>12)
4remium on Bonds 4ayable CA5>1) N 211"D................... 2>%%)
6as/......................................................................... 32>)))
Bonds 4ayable..................................................................... 4))>)))
4remium on Bonds 4ayable0............................................... 25>'2)
1ain on +edemption of Bonds................................. 1">'2)
6as/......................................................................... 4)%>)))
0122 N CA5>1) Q A1>44) Q A2>%%)D = A25>'2).
Pr' 14-12?V5ntries for bonds payable.
4repare ?ournal entries to record t/e follo7in* transactions relatin* to lon*-term bonds of Lirby>
&nc. C!/o7 computations.D
CaD .n Fune 1> 2))'> Lirby> &nc. issued A))>)))> B bonds for A5%">4)> 7/ic/ includes
accrued interest. &nterest is payable semiannually on February 1 and #u*ust 1 7it/ t/e
bonds maturin* on February 1> 2)1'. T/e bonds are callable at 1)2.
CbD .n #u*ust 1> 2))'> Lirby paid interest on t/e bonds and recorded amorti$ation. Lirby uses
strai*/t-line amorti$ation.
CcD .n February 1> 2)11> Lirby paid interest and recorded amorti$ation on all of t/e bonds> and
purc/ased A3)>))) of t/e bonds at t/e call price. #ssume t/at a reversin* entry 7as made
on Fanuary 1> 2)11.
Soution 14-12?
CaD 6as/.............................................................................................. 5%">4)
Discount on Bonds 4ayable........................................................... 24>3)
Bonds 4ayable................................................................... ))>)))
&nterest 5(pense CA))>))) N B N 4212D.......................... 12>)))
CbD &nterest 5(pense CA))>))) N B N 212D O A42).......................... 1%>42)
6as/................................................................................... 1%>)))
Discount on Bonds 4ayable CA24>3) N 2211D.................. 42)
14 - 3=
Soution 14-12? C6ont.D
CcD &nterest 5(pense CA1%>))) O A1>2)D............................................. 1'>2)
6as/................................................................................... 1%>)))
Discount on Bonds 4ayable CA24>3) N 211D................. 1>2)
Bonds 4ayable............................................................................... 3)>)))
,oss on Bond +edemption............................................................. 1'>2'
Discount on Bonds 4ayable P. N CA24>3) Q A4>2))DR ...... 12>)'
6as/................................................................................... 3">2))
>Pr' 14-13@V#ccountin* for a troubled debt settlement.
,ud7i*> &nc.> 7/ic/ o7es 1iffin 6o. A%))>))) in notes payable> is in financial difficulty. To
eliminate t/e debt> 1iffin a*rees to accept from ,ud7i* land /avin* a fair market value of
A1)>))) and a recorded cost of A45)>))).
Instru%tions
CaD 6ompute t/e amount of *ain or loss to ,ud7i*> &nc. on t/e transfer CdispositionD of t/e land.
CbD 6ompute t/e amount of *ain or loss to ,ud7i*> &nc. on t/e settlement of t/e debt.
CcD 4repare t/e ?ournal entry on ,ud7i* :s books to record t/e settlement of t/is debt.
CdD 6ompute t/e *ain or loss to 1iffin 6o. from settlement of its receivable from ,ud7i*.
CeD 4repare t/e ?ournal entry on 1iffin:s books to record t/e settlement of t/is receivable.
>Soution 14-13@
CaD Fair market value of t/e land A1)>)))
6ost of t/e land to ,ud7i*> &nc. 45)>)))
1ain on disposition of land A1)>)))
CbD 6arryin* amount of debt A%))>)))
Fair market value of t/e land *iven 1)>)))
1ain on settlement of debt A1')>)))
CcD ;otes 4ayable.............................................................................. %))>)))
,and.................................................................................. 45)>)))
1ain on Disposition of ,and.............................................. 1)>)))
1ain on !ettlement of Debt............................................... 1')>)))
CdD 6arryin* amount of receivable A%))>)))
,and received in settlement 1)>)))
,oss on settled debt A1')>)))
CeD ,and............................................................................................. 1)>)))
#llo7ance for Doubtful #ccounts.................................................. 1')>)))
;otes +eceivable.............................................................. %))>)))
14 - 3?
IFRS 8(ESTIONS
TrueBFase
1. !imilar to @.!. practice> i1##4 re9uires t/at companies present current and noncurrent
liabilities on t/e face of t/e balance s/eet> 7it/ current liabilities *enerally presented in order
of li9uidity.
liabilities on t/e face of t/e balance s/eet> 7it/ current liabilities *enerally presented in order
of ma*nitude.
3. Bot/ i1##4 and @.!. 1##4 pro/ibit t/e reco*nition of liabilities for future losses.
4. i1##4 and @.!. 1##4 are similar in t/e treatment of asset retirement obli*ations.
5. T/e reco*nition criteria for an asset retirement obli*ation C#+.D are more strin*ent under
i1##4.
. i1##4 and @.!. 1##4 are dissimilar in t/eir treatment of contin*encies.
". T/e criteria for reco*ni$in* contin*ent assets are more strin*ent under @.!. 1##4.
%. @nder i1##4> t/e measurement of a provision related to a contin*ency is based on an
avera*e estimate of t/e e(penditure re9uired to settle t/e obli*ation.
'. @.!. 1##4 permits reco*nition of a restructurin* liability> once a company /as committed to a
restructurin* plan.
1). T/e reco*nition criteria for an #+. are more strin*ent under @.!. 1##4< T/e #+. is not
reco*ni$ed unless t/ere is a present le*al obli*ation and t/e fair value of t/e obli*ation can
be reasonably estimated.
Ans*ers to TrueBFaseC
1. True
2. False
3. True
4. True
5. False
. False
". False
%. False
'. False
1). True
Muti&e C"oi%e 8uestions
1. T/e primary i1##4 related to reportin* and reco*nition of liabilities is found in
a. &#! 1) and &#! 3'.
b. &#! 1" and &#! 23.
c. &#! 1 and &#! 3".
d. &#! 2" and &#! 32.
14 - 4@
liabilities on t/e face of t/e balance s/eet 7it/ current liabilities
a. *enerally presented in order of ma*nitude.
b. presented in alp/abetic order.
c. presented in order of li9uidity.
d. presented in t/e order in 7/ic/ t/ey 7ere incurred.
3. @nder i1##4> t/e measurement of a provision related to a contin*ency is based on
a. t/e best estimate of t/e e(penditure re9uired to settle t/e obli*ation.
b. t/e minimum amount from amon* a number of alternative estimates.
c. an avera*e from amon* a number of alternative estimates.
d. 7/atever mana*ement feels t/at s/are/olders 7ould be 7illin* to accept because of t/e
impact on current earnin*s.
4. Bot/ @.!. 1##4 and i1##4 pro/ibit
a. t/e reco*nition of a restructurin* liability> once a company /as committed to a
restructurin* plan.
b. t/e reco*nition of liabilities for future losses.
c. communicatin* information on a restructurin* plan to employees> before a liability can be
establis/ed.
d. all of t/e above.
5. i1##4 and @.!. 1##4 are
a. similar in t/e treatment of asset retirement obli*ations C#+.sD.
b. si*nificantly different 7/en it comes to t/e treatment of asset retirement obli*ations
C#+.sD.
c. continuin* to evolve in t/e area of asset retirement obli*ations C#+.sD.
d. in conflict 7it/ respect to t/e accountin* for and presentation of asset retirement
obli*ations C#+.sD.
. Bot/ i1##4 and @.!. 1##4 permit valuation of lon*-term debt and ot/er liabilities at
a. present value discounted at t/e firm:s cost of capital.
b. current market values of t/e obli*ations> based on c/an*es in t/e discount rate 7it/
unreali$ed *ains and losses reflected in a separate account in stock/olders: e9uity.
c. fair value 7it/ *ains and losses on c/an*es in fair value recorded in income in certain
situations.
d. /istoric costs 7it/out reflectin* c/an*es in valuation as obli*ations 7ill be retired at t/eir
maturity date.
". #s t/ere is no comparable institution to t/e !56 in international securities markets> many
international companies Ct/ose not re*istered 7it/ t/e !56D
a. voluntarily ad/ere to !56 criteria in providin* information related to contractual
obli*ations.
b. are not re9uired to provide disclosures suc/ as t/ose related to contractual obli*ations.
c. follo7 t/e re9uirements establis/ed for contractual obli*ations put fort/ by t/e &#!B.
d. follo7 t/e re9uirements establis/ed for contractual obli*ations put fort/ by t/e F#!B.
14 - 41
%. @nder @.!. 1##4> contin*ent assets for insurance recoveries are reco*ni$ed if XXXXXXXXXXM
i1##4 re9uires t/e recovery be 3XXXXXXXXXXX3 before reco*nition of an asset is permitted.
a. probable and virtually certain
b. possible and very likely
c. possible and definite
d. certain and probable
'. i1##4 rules for establis/in* restructurin* liabilities could be used as an earnin*s
mana*ement tool because i1##4 rules are
a. more-strin*ent t/at @.!. 1##4.
b. less-strin*ent t/at @.!. 1##4.
c. virtually t/e same as @.!. 1##4.
d. totally different t/an @.!. 1##4.
1). # concern 7it/ i1##4 is t/at its less-strin*ent rules for establis/in* restructurin* liabilities
could be used as
a. a more appropriate met/od t/an t/at employed under @.!. 1##4.
b. an appropriate met/od> but comple( and difficult to e(plain to s/are/olders.
c. a met/od readily employed to make t/e understandin* of financial information more
compre/ensible to s/are/olders.
d. an earinin*s mana*ement tool.
Ans*ers to -uti&e %"oi%eC
1. c
2. c
3. a
4. b
5. a
. c
". b
%. a
'. b
1). d
IFRS S"ort Ans*erC
1. Briefly describe some of t/e similarities and differences bet7een @.!. 1##4 and i1##4 7it/
respect to t/e accountin* for liabilities.
1. #mon* t/e similarities are< C1D i1##4 re9uires t/at companies present current and non-
current liabilities on t/e face of t/e balance s/eet> 7it/ current liabilities *enerally presented
in order of li9uidity> C2D Bot/ 1##4s pro/ibit t/e reco*nition of liabilities for future lossesM C3D
i1##4 and @.!. 1##4 are similar in t/e treatment of asset retirement obli*ations C#+.sD>
and C4D i1##4 and @.!. 1##4 are similar in t/eir treatment of contin*encies.
#lt/ou*/ t/e t7o 1##4s are similar 7it/ respect to t/e above topics> t/ere are differences>
includin*< C1D @nder i1##4> t/e measurement of a provision related to a contin*ency is based
on t/e best estimate of t/e e(penditure re9uired to settle t/e obli*ation. &f a ran*e of
estimates is predicted and no amount in t/e ran*e is more likely t/an any ot/er amount in t/e
ran*e> t/e Zmid-pointH of t/e ran*e is used to measure t/e liability. &n @.!. 1##4> t/e
14 - 42
minimum amount in a ran*e is usedM C2D i1##4 permits reco*nition of a restructurin* liability>
once a company /as committed to a restructurin* plan. @.!. 1##4 /as additional criteria
Ci.e.> related to communicatin* t/e plan to employeesD> before a restructurin* liability can be
establis/edM C3D t/e reco*nition criteria for an asset retirement obli*ation are more strin*ent
under @.!. 1##4Vt/e #+. is not reco*ni$ed unless t/ere is a present le*al obli*ation and
t/e fair value of t/e obli*ation can be reasonably estimatedM and C4D t/e criteria for
reco*ni$in* contin*ent assets for insurance recoveries are reco*ni$ed if probableM i1##4
re9uires t/e recovery be Ivirtually certain>J before reco*nition of an asset is permited.
2. Briefly discuss /o7 accountin* conver*ence efforts addressin* liabilities is related to t/e
&#!B2F#!B conceptual frame7ork pro?ect.
2. T/e &#!B and F#!B are 7orkin* on a conceptual frame7ork pro?ect> part of 7/ic/ 7ill
e(amine t/e definition of a liability. &n addition> t/is pro?ect 7ill address t/e difference in
measurements used bet7een i1##4 and @.!. 1##4 for contin*ent liabilities. #lso> in its
pro?ect on business combinations> t/e &#!B is considerin* c/an*in* its definition of a
contin*ent asset to conver*e 7it/ @.!. 1##4.
14 - 43

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CHAPTER 14

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