EXERCISE 14-8 (15-20 minutes)

(a) The purchase price of the land should be recorded at

the present value of the future cash flows of the
instalment note at the imputed interest rate of 9%. This
is the fairest measure of the value of the asset obtained
as it represents the present value of an agreed series of
future cash flows. The listing price represents a
tentative amount asked for the property and could be
above or below the eventual agreed value.

(b) Land will be recorded at $110,000 based on the
calculations below:

*PV of $43,456 ordinary annuity @ 9% for 3

years: ($43,456 X 2.53130) = $110,000

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

Using a financial calculator:
PV ? Yields $ 110,000
I 9%
N 3
PMT $ (43,456)
FV $ 0
Type 0

(c)
Effective Interest Amortization Table
Effective Interest Method 9%


Year
Note
Payment
9%
Interest
Reduction
of Principal
Carrying
Amount
1/1/14 $110,000
12/31/14 $43,456 $9,900 $ 33,556 76,444
12/31/15 43,456 6,880 36,576 39,868
12/31/16 43,456 3,588 39,868 0

EXERCISE 14-8 (Continued)

(d) Land ................................................................................. 110,000
Notes Payable ......................................................... 110,000

(e) Interest Expense ............................................................. 9,900
Notes Payable ................................................................. 33,556
Cash ........................................................................ 43,456
(a)
(f) From the perspective of Safayeni Ltd., an instalment note
provides for a reduced risk of collection when compared to
a regular interest-bearing note. In the case of the interest-
bearing note, the principal amount is due at the maturity of
the note. Further, the instalment note provides a regular
reduction of the principal balance in every payment
received annually and therefore reduces Safayenis
investment in the receivable, freeing up the cash for other
purposes. This is demonstrated in the effective interest
amortization table provided above for the instalment note.

EXERCISE 14-17 (10-15 minutes)

Reacquisition price ($500,000 X 104%) .......................... $520,000
Less: Net carrying amount of bonds
redeemed:
Face value ............................................................ $500,000
Unamortized discount ......................................... (10,000) 490,000
Loss on redemption ........................................................ $ 30,000


Bonds Payable ................................................................ 490,000
Loss on Redemption of Bonds ....................................... 30,000
Cash ........................................................................ 520,000
(To record redemption of bonds payable)


Cash ................................................................................. 512,000
Bonds Payable
($500,000 + $15,000 $3,000) ...............................

512,000
(To record issuance of new bonds)


Note: When a note or bond is issued, it should be recognized at
the fair value adjusted by any directly attributable issue costs.
These costs would affect the amount of bond premium or
discount amortization recorded and effectively increase the
interest expense over the term of the bond through the
allocation of the issuance cost to periods. However, note that
where the liabilities will subsequently be measured at fair value
(e.g., under the fair value option or because they are
derivatives), the transaction costs should not be included in the
initial measurement (i.e., the costs should be expensed at the
time of issuance) [CICA Handbook, Part II, Section 3856.07 and
IAS 39.43].

Issuance costs increases the effective interest rate because the
proceeds are now lower (512k instead of 515k). The new
effective interest rate will have to be recalculated based on the
PV of 512k, the periodic interest payments and the face value of
the bond.