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CHAPTER 2

NON-CURRENT LIABILITIES
PROBLEMS

2-1. (Ruby Corporation)


At 8% At 11%
Bond issue price 1,081,145 962,280
Nominal interest for 2007 50,000 50,000
Interest expense for 2007 43,246 52,925
Premium/discount amortization in 6,754 2,925
2007
Bond carrying value at December 31, 1,074,391 965,205
2007
Nominal interest for 2008 100,000 100,000
Interest expense for 2008 85,671 106,342
Premium/discount amortization in 14,059 6,342
2008
Bond carrying value at December 31, 1,060,332 971,547
2008

Computations:
At 8%
Issue price = (1,000,000 x 0.6756) + (50,000 x 8.1109)
= 675,600 + 405,545 = 1,081,145

A B C D
Interest Interest Premium Bond
Date Paid Expense Amortization Carrying
Value
06/30/07 1,081,145
12/31/07 50,000 43,246 6,754 1,074,391
06/30/08 50,000 42,976 7,024 1,067,367
12/31/08 50,000 42,695 7,035 1,060,332
A = Face value x 5%
B = Carrying value, beg of year x 4%

At 11%
Issue price = (1,000,000 x 0.5854) + (50,000 x 7.5376)
= 585,430 + 376,880 = 962,280

A B C D
Interest Interest Discount Bond
Date Paid Expense Amortization Carrying
Value
06/30/07 962,280
12/31/07 50,000 52,925 2,925 965,205
06/30/08 50,000 53,086 3,086 968,291
12/31/08 50,000 53,256 3,256 971,547

2-2. (Fire Company)


(a) Issue price
Present value of face value (4,000,000 P2,033, 600
x 0.5084)
Chapter 2 - Non-Current Liabilities

Present value of interest payments (320,000 x 2,247,552


7.0236)
Issue price P4,281,152

(b) Amortization Table


Interes Interest Premium Bond Carrying
Date t Paid Expense Amortization Value
3/01/07 - - - 4,281,152
8/31/07 320,00 299,681 20,319 4,260,833
0
2/28/08 320,00 298,258 21,742 4,239,091
0
8/31/08 320,00 296,736 23,264 4,215,827
0
2/28/09 320,00 295,108 24,892 4,190,935
0

(c)
03/01/07 Cash 4,281,15
2
Bonds Payable 4,000,00
0
Premium on Bonds Payable 281,152

08/31/07 Interest Expense 299,681


Premium on Bonds Payable 20,319
Cash 320,000

12/31/07 Interest Expense (298,258 x 4/6) 198,839


Premium on Bonds Payable 14,494
Interest Payable (320,000 x 4/6) 213,333

12/28/08 Interest Expense 99,419


Premium on Bonds Payable 7,248
Interest Payable 213,333
Cash 320,000

2-3. (Metal Corporation)


Market value of bonds 5,000,000 x .98 4,900,000
Market value of warrants 5,000 x 70 350,000
Total issue price 5,250,000

(a) Cash 5,250,00


0
Discount on Bonds Payable 100,000
Bonds Payable 5,000,00
0
Share Warrants Outstanding 350,000

(b) Cash (5,000 x 20 x 20) 2,000,00


0
Share Warrants Outstanding 350,000
Ordinary Shares (5,000 x 20 x 15) 1,500,00
0

10
Chapter 2 - Non-Current Liabilities

Share Premium 850,000

2-4. (Onyx)
(a) Issue price of bonds with warrants (1,000,000 x 1,030,00
1.03) 0
Bond price without warrants
1,000,000 x 0.3220 322,000
100,000 x 5.6502 565,020 887,020
Value of share warrants 142,980

(b) Interest Expense for 2007 (887,020 x 12% x 88,702


10/12

(c) Bond carrying value, March 1, 2007 887,020


Amortization through December 31,
2007
887,020 x 12% x 10/12 88,702
1,000,000 x 12% x 10/12 83,333 5,369
Bond carrying value, December 31, 892,389
2007

(d) Cash (1,000 x 30 x 50) 1,500,00


0
Share Warrants Outstanding 142,980
Ordinary Share (30,000 x 25) 750,000
Share Premium 892,980

2-5. (Celeron Company)


(a) Issue price of convertible bonds 2,000,00
0
Issue price of bonds without conversion privilege
2,000,000 x 0.5674 1,134,800
200,000 x 3.6048 720,960 1,855,76
0
Allocation to equity 144,240

(b) Amortization Table


Interest Interest Premium Bond
Date Paid Expense Amortization Carrying
Value
07/01/06 - - - 1,855,760
06/30/07 200,000 222,691 22,691 1,878,451
06/30/08 200,000 225,414 25,414 1,903,865
06/30/08 (1,142,319)
06/30/08 761,546
06/30/09 80,000 91,386 11,386 772,932
06/30/10 80,000 92,572 12,752 785,684
06/30/11 80,000 94,316* 14,316 800,000
*Adjusted; difference is due to rounding off.

(c)
07/01/06 Cash 2,000,00
0
Discount on Bonds Payable 144,240

11
Chapter 2 - Non-Current Liabilities

Bonds Payable 2,000,00


0
PIC Arising from Bond Conversion Privilege 144,240

06/30/07 Interest Expense 222,691


Discount on Bonds Payable 22,691
Cash 200,000

06/30/08 Interest Expense 225,414


Discount on Bonds Payable 25,414
Cash 200,000

06/30/08 Bonds Payable 1,200,00


0
PIC Arising from Conversion 86,544
Privilege
Discount on Bonds Payable 57,681
Ordinary Share 960,000
Share Premium 268,863

Carrying value,bonds converted (1,903,865 x 1,142,31


120/200 9
Face value of bonds converted 1,200,00
0
Discount on bonds payable cancelled 57,681
Value of equity converted (144,240 x 86,544
120/200)

Par value of ordinary shares issued (120 x 80 x 960,000


100)

06/30/09 Interest Expense 91,386


Discount on Bonds Payable 11,386
Cash 80,000

06/30/10 Interest Expense 92,752


Discount on Bonds Payable 12,752
Cash 80,000

06/30/11 Interest Expense 94,316


Discount on Bonds Payable 14,316
Cash 80,000

06/30/11 Bonds Payable 800,000


PIC Arising from Bond Conversion Privilege 57,69
6
Cash 800,000
PIC from Unexercised Bond Conversion Privilege 57,696
(144,240 – 86,544)

2-6 (Iron Company)


Bonds Payable 2,000,00
0
Premium on Bonds Payable (450,000 x 2/20) 45,000
PIC Arising from Bond Conversion Privilege(320,000 x 32,000

12
Chapter 2 - Non-Current Liabilities

2/20)
Ordinary Shares (1,000 x 60 x 20) 1,200,00
0
Share Premium 877,000

2-7 (Lim Corporation)

(a) Cash 5,500,00


0
Bonds Payable 5,000,00
0
Premium on Bonds Payable 200,000
PIC Arising from Bond Conversion 300,000
Privilege

(b) Bonds Payable 1,000,00


0
Premium on Bonds Payable (5,000 x 10,000
1/5)
PIC Arising from Bond Conversion 60,000
Privilege
Ordinary Share (200 x 40 x 100) 800,000
Share Premium 270,000
300,000 x 1/5 = 60,000

(c) Bonds Payable 2,000,00


0
Premium on Bonds Payable (5,000 x 20,000
2/5)
PIC Arising from Bond Conversion 120,000
Privilege
Cash (2,000,000 x 1.04) 2,080,00
0
Gain on Retirement of Bonds 10,000
PIC from Unexercised Bond Conversion 50,000
Privilege

Retirement price 2,080,00


0
Retirement price on account of
liability
2,000,000 x 1.005 2,010,00
0
Retirement price on account of 70,000
equity

Carrying value of bonds retired


Face value 2,000,00
0
Unamortized premium (50,000 x ___20,000
2/5)
2,020,00
0
Retirement price of bonds (2M x 2,010,00

13
Chapter 2 - Non-Current Liabilities

1.005) 0
Gain on retirement of bonds 10,000

Carrying value of equity 120,000


cancelled
Retirement price on account of 70,000
equity
Gain on cancellation taken to 50,000
equity

2-8. (Emerald Corporation)


The following table may facilitate the computations required in this
problem.
Interes Interest Premium Bond
Date t Paid Expense Amortization Carrying Value
12/01/05 - - - 5,386,072
06/01/06 300,00 269,304 30,696 5,355,376
0
12/01/06 300,00 267,769 32,231 5,323,145
0
06/01/07 300,00 266,157 33,843 5,289,302
0
12/01/07 300,00 264,465 35,535 5,253,767
0
06/01/08 300,00 262,688 37,312 5,216,455
0
12/01/08 180,00 156,494 23,506 3,106,367
0
06/01/09 180,00 155,318 24,682 3,081,685
0
12/01/09 180,00 154,084 25,916 3,055,769
0
06/01/10 180,00 152,788 27,212 3,028,557
0
12/01/10 180,00 151,443* 28,557 3,000,000
0
*Adjusted; difference is due to rounding off.

(a) Carrying value, December 1, 2006 (see, 5,323,14


table) 5
Amortization for one month (33,843 x ____5,640
1/6)
Carrying value, December 31, 2006 5,317,50
5

(b) Interest Expense for year 2006


January 1-June 1, 2006 (269,304 x 5/6) 224,420
June 1-December 1, 2006 267,769
December 1-31, 2006 (266,157 x 1/6) _44,360
Total 536,549

(c) Carrying value of bonds retired on December 1,


2007
5,253,767 x 2/5 2,101,50
7
Amortization through April 1, 2008 (37,312 x 4/6 x ____9,950

14
Chapter 2 - Non-Current Liabilities

2/5)
Carrying value of bonds retired on April 1, 2,091,55
2008 7

(d) Carrying value of bonds retired 2,091,55


7
Redemption price (2,000,000 x 1.04) 2,080,00
0
Gain on redemption of bonds 11,557

(e) Carrying value of remaining bonds, December 1, 3,106,367


2007
Amortization through December 31, 2007 (24,682 x 4,114
1/6)
Carrying value of remaining bonds, December 31, 3,102,253
2007

(f) On bonds redeemed: 2008 2009


January 1-April 1, 2008 (262,688 x 2/5 x 52,538
3/6)
On remaining bonds
January 1-June 1, 2008 (262,688 x 3/5 x 131,34
5/6) 4
June 1-December 1, 2008 156,494
December 1-31, 2008 (155,318 x 25,886
1/6)
January 1-June 1, 2009 (155,318 x 129,432
5/6)
June 1-December 1, 2009 154,084
December 1-31, 2009 (152,788 x ______ 25,465
1/6)
Interest Expense 366,262 308,981

2-9. (Ohio Company) Partial Amortization Table


Interest Interest Premium Bond Carrying
Date Paid Expense Amortization Value
01/01/06 - - - 12,684,120
12/31/06 1,200,00 1,014,73 185,270 12,498,850
0 0
12/31/07 1,200,00 999,90 200,092 12,298,758
0 8
12/31/07 1,200,00 983,90 216,099 12,082,659
0 1
12/31/09 1,200,00 966,61 233,387 11,849,272
0 3
12/31/10 600,00 473,97 126,029 5,798,607
0 1
12/31/11 600,00 463,88 136,111 5,662,496
0 9

(a) Effective interest (12,734,120 – 50,000) x 8% 1,014,730


Nominal interest (10,000,000 x 12% 1,200,000
Amortization of premium for 2006 185,270

(b) Carrying value of bonds on December 31, 2009 (see 11,849,27


table) 2

15
Chapter 2 - Non-Current Liabilities

(c) Carrying value of bonds called (11,849,272 x 5,924,636


5/10)
Call price/retirement price (5,000,000 x 110%) 5,050,000
Gain on retirement of bonds 874,636

(d) Interest Expense for year 2011 (see table) 463,889

(e) Unamortized premium on bonds payable, Dec. 31,


2011
5,662,496 – 5,000,000 662,496

2-10. (Sim Company)


Partial Amortization Table
Nominal Effective Premium Bond
Date Interest Interest Amortization Carrying value
03/01/06 P1,963,000
09/01/06 85,000 88,335 3,335 1,966,335
03/01/07 85,000 88,485 3,485 1,969,820
09/01/07 85,000 88,642 3,642 1,973,462
03/01/08 85,000 88,806 3,806 1,977,268
09/01/08 85,000 88,977 3,977 1,981,245
03/01/09 85,000 89,156 4,156 1,985,401
09/01/09 85,000 89,343 4,343 1,989,744
(a) Interest expense recorded on September 1, 88,335
2006
Discount amortization recorded on September 3,335
1, 2006
(b) Carrying amount of the bonds, September 1, 1,966,335
2006
Amortization through December 31, 2006 (3,485 x 2,323
4/6)
Carrying amount of the bonds, December 31, 1,968,658
2006

(c) Retirement price (at face value) 2,000,000


Accrued interest (2,000,000 x 8.5% x 4/12) 56,667
Amount of cash paid on June 30, 2009 2,056,667

(d) Carrying value, March 1, 2009 (see table) 1,985,401


Amortization through June 30, 2009 (4,343 x 2,895
4/6)
Carrying value, June 30, 2009 1,988,296
Retirement price (at face value) 2,000,000
Loss on retirement of bonds 11,704

2-11. (Lim Company)


(a) Issue price of the bonds
Principal Interest Amount PV Present
Due Date Due Due Due Factor Value
12/31/08 2,000,00 800,000 2,800,000 0.8929 2,500,120
0
12/31/09 2,000,00 640,000 2,640,000 0.7972 2,104,608
0

16
Chapter 2 - Non-Current Liabilities

12/31/10 2,000,00 480,000 2,480,000 0.7118 1,765,264


0
12/31/11 2,000,00 320,000 2,320,000 0.6355 1,474,360
0
12/31/12 2,000,00 160,000 2,160,000 0.5674 1,225,584
0
Selling price of bonds P9,069,93
6

(b) Amortization Table


Principal Interest Effective Discount Carrying
Due Date Due Due Interest Amortizatio Value, end
n
12/31/07 P9,069,9
36
12/31/08 2,000,00 800,000 1,088,392 288,392 7,358,328
0
12/31/09 2,000,00 640,000 882,999 242,999 5,601,327
0
12/31/10 2,000,00 480,000 672,159 192,159 3,793,486
0
12/31/11 2,000,00 320,000 455,218 135,218 1,928,704
0
12/31/12 2,000,00 160,000 231,296 71,296* -0-
0
*Adjusted; difference is due to rounding off.

(c)
12/31/07 Cash 9,069,93
6
Discount on Bonds Payable 930,064
Bonds Payable 10,000,00
0

12/31/08 Interest Expense 1,088,39


2
Discount on Bonds Payable 288,392
Cash 800,000

Bonds Payable 2,000,00


0
Cash 2,000,000

12/31/09 Interest Expense 882,999


Discount on Bonds Payable 242,999
Cash 640,000

Bonds Payable 2,000,00


0
Cash 2,000,000

2-12. (Blue Sapphire Corporation)


(a) Issue price of the bonds
Principal Interest Amount Present
Due Date Due Due Due PV Value
Factor
12/31/07 2,000,00 960,000 2,960,000 0.9259 2,740,664
0

17
Chapter 2 - Non-Current Liabilities

12/31/08 2,000,00 720,000 2,720,000 0.8573 2,331,856


0
12/31/09 2,000,00 480,000 2,480,000 0.7938 1,968,624
0
12/31/10 2,000,00 240,000 2,240,000 0.7355 1,646,400
0
Selling price of bonds P8,687,54
4

(b) Amortization Table


Principal Interest Effectiv Discount Carrying
Due Date Due Due e Amortizatio Value, end
Interest n
01/01/07 8,687,544
12/31/07 2,000,00 960,000 695,004 264,996 6,422,548
0
12/31/08 2,000,00 720,000 513,804 206,196 4,216,352
0
12/31/09 2,000,00 480,000 337,308 142,692 2,073,660
0
12/31/10 2,000,00 240,000 166,340 73,660 -0-
0 *
*Adjusted; difference is due to rounding off.

(c)
01/01/07 Cash 8,687,54
4
Bonds Payable 8,000,00
0
Premium on Bonds Payable 687,544

12/31/07 Interest Expense 695,004


Premium on Bonds Payable 264,996
Cash 960,000

Bonds Payable 2,000,00


0
Cash 2,000,00
0

12/31/08 Interest Expense 513,804


Premium on Bonds Payable 206,196
Cash 720,000

Bonds Payable 2,000,00


0
Cash 2,000,00
0

2-13. (KFC Delivery Service)


(a) 6,949,800/9,000,000 = 0.7722 This present value factor for
three periods is under the rate of 9% (Table II, Present Value of
a Single Payment). Hence, effective yield for this transaction is
9%.

(b) Date Amortization Carrying Value of


Note
09/01/07 6,949,800

18
Chapter 2 - Non-Current Liabilities

08/31/08 9% x 6,949,800 = 625,482 7,575,282


08/31/09 9% x 7,575,282 = 681,775 8,257,057
08/31/10 9% x 8,257,057 = 742,943* 9,000,000
*Adjusted; difference is due to rounding off.

(c) Interest expense for 2007 (625,482 x 4/12) 208,494

Carrying value, September 1, 2007 6,949,80


0
Amortization through December 31, 2007 280,494
Carrying value, December 31, 2007 7,158,29
4

(d)
09/01/07 Land 6,949,80
0
Discount on Notes Payable 2,050,20
0
Notes Payable 9,000,00
0

12/31/07 Interest Expense 208,494


Discount on Notes Payable 208,494

09/01/08 Interest Expense (625,482 -208,494) 416,988


Discount on Notes Payable 416,988

12/31/08 Interest Expense (681,775 x 4/12) 227,258


Discount on Notes Payable 227,258

09/01/09 Interest Expense (681,775 – 454,517


227,258)
Discount on Notes Payable 454,517

12/31/09 Interest Expense (742,943 x 4/12) 247,648


Discount on Notes Payable 247,648

09/01/10 Interest Expense (742,943 – 495,295


247,648)
Discount on Notes Payable 495,295

2-14. (JFC)
(a) 2007 2008 2009
6,949,800 x 9%= 625,482
625,482 x 4/12 208,494
625,482 x 8/12 416,988
6,949,800 x 1.09 =
7,575,282
7,575,282 x 9%= 681,775
681,775 x 4/12 227,258
681,775 x 8/12 454,517
7,575,282 x 1.09 =
8,253,057
8,253,057 x 9%= 743,135
743,135 x 4/12 _______ _______ 247,712
Totals 208,494 644,246 702,229

(b) Notes Payable 6,949,800

19
Chapter 2 - Non-Current Liabilities

Accrued interest 208,494


Total, December 31, 2007 7,158,294

(c) Notes Payable 6,949,800


Accrued interest (208,494 + 644,246) 852,740
Total, December 31, 2008 7,802,540

Notes Payable 6,949,800


Accrued interest (208,494+644,246+702,229) 1,554,969
Total, December 31, 2009 8,504,769

(d)
09/01/07 Land 6,949,80
0
Notes Payable 6,949,80
0

12/31/07 Interest Expense 208,494


Interest Payable 208,494

12/31/08 Interest Expense 644,246


Interest Payable 644,246
12/31/09 Interest Expense 702,229
Interest Payable 702,229

12/31/10 Interest Expense (adjusted) 495,231


Interest Payable 1,554,96
9
Notes Payable 6,949,80
0
Cash 9,000,00
0

2-15. (Wendy’s Catering Service)


(a) Present value of note (800,000 x 3.2397)
2,591,760

(b) Date Principal Due Amortization


Carrying Value of Note
4/01/06 2,591,760
3/31/07 800,000 233,258 2,025,018
3/31/08 800,000 182,252 1,407,270
3/31/09 800,000 126,654 733,924
3/31/10 800,000 66,076* -0-

*Adjusted; difference is due to rounding off.

(c)
04/01/07 Equipment 2,591,76
0
Discount on Notes Payable 608,240
Notes Payable 3,200,00
0

12/31/07 Interest Expense (233,258 x 9/12) 174,944


Discount on Notes Payable 174,944

03/31/08 Notes Payable 800,000

20
Chapter 2 - Non-Current Liabilities

Interest Expense 58,314


Cash 800,000
Discount on Notes Payable (233,258- 58,314
174,944)

12/31/08 Interest Expense (182,252 x 9/12) 136,689


Discount on Notes Payable 136,689

03/31/09 Notes Payable 800,000


Interest Expense 45,463
Cash 800,000
Discount on Notes Payable (182,252- 45,563
136,689)

12/31/09 Interest Expense (126,654 x 9/12) 94,991


Discount on Notes Payable 94,991

03/31/10 Notes Payable 800,000


Interest Expense 31,663
Cash 800,000
Discount on Notes Payable (126,654- 31,663
94,991)

12/31/10 Interest Expense (66,076 x 9/12) 49,557


Discount on Notes Payable 49,557

03/31/11 Notes Payable 800,000


Interest Expense 16,519
Cash 800,000
Discount on Notes Payable (66,076- 16,519
49,557)

2-16. (Burgee’s Food Corporation)


(a)
Principal
Date Annual Interest Payment Carrying Value
Payment
04/01/07 2,591,760
03/31/08 800,000 233,258 566,742 2,025,018
03/31/09 800,000 182,252 617,748 1,407,270
03/31/10 800,000 126,654 673,346 733,924
03/31/11 800,000 66,053 733,947* -0-
*Adjusted

(b)
04/01/07 Equipment 2,591,76
0
Notes Payable 2,591,76
0

12/31/07 Interest Expense (233,258 x 9/12) 174,944


Interest Payable 174,944

04/01/08 Interest Payable 174,944


Interest Expense (233,258 – 174,944) 58,314
Notes Payable 566,748
Cash 800,000

12/31/08 Interest Expense (182,252 x 9/12) 136,689

21
Chapter 2 - Non-Current Liabilities

Interest Payable 136,689

04/01/09 Interest Payable 136,689


Interest Expense (182,252 – 136,689) 45,563
Notes Payable 617,748
Cash 800,000

12/31/09 Interest Expense (126,654 x 9/12) 94,991


Interest Payable 94,991

04/01/10 Interest Payable 94,991


Interest Expense (126,654 – 94,991) 31,663
Notes Payable 673,346
Cash 800,000

12/31/10 Interest Expense (66,053 x 9/12) 49,540


Interest Payable 49,540

04/01/11 Interest Payable 49,540


Interest Expense (66,053 – 49,540) 16,513
Notes Payable 733,947
Cash 800,000

(c) Current portion at December 31,


2008
Notes Payable 617,748
Interest Payable 136,689

Noncurrent portion at December 31,


2008
Notes Payable 1,407,27
0

2-17.
(a) (South Company
Notes Payable 900,000
Interest Payable 90,000
Cost of Sales 650,000
Inventory of Machine Parts 650,000
Sales 800,000
Gain on Debt Restructuring 190,000

(b) (Jay Company)


Bonds Payable 10,000,00
0
Interest Payable 900,000
Ordinary Share 7,500,00
0
Share Premium 3,400,00
0

(c) (Capshell Company)


Notes Payable 10,000,00
0
Interest Payable 1,200,000

22
Chapter 2 - Non-Current Liabilities

Restructured Notes Payable 7,459,26


4
Gain on Debt Restructuring 3,740,73
6

Present value of future payments


8,000,000 x 0.7972 = 6,377,600
8,000,000 x 8% x 1.6901 = 1,081,664
Total
7,459,264
Carrying value of liability 11,200,000
Gain on debt restructuring 3,740,736

Alternatively, the entry may be


recorded as:
Notes Payable 10,000,00
0
Interest Payable 1,200,000
Discount on Restructured Notes 540,736
Payable
Restructured Notes Payable 8,000,00
0
Gain on Debt Restructuring 3,740,73
6

(d) (Solid Company)


Notes Payable 3,000,000
Interest Payable 330,000
Restructured Notes Payable 3,111,02
4
Gain on Debt Restructuring 218,976

Present value of future payments


3,000,000 x 0.5935 =
1,780,500
3,000,000 x 12% x 3.6959 = 1,330,524
Total
3,111,024
Carrying value of liability
3,330,000
Gain on debt restructuring
218,976

Alternatively, the entry may be


recorded as:
Notes Payable 3,000,000
Interest Payable 330,000
Premium on Restructured Notes 111,024
Payable
Restructured Notes Payable 3,000,00
0
Gain on Debt Restructuring 218,976

23