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Exercises • 753

[*6J BE14-15 Refer to the note issued by Coldwell, Inc. in BE14-9. During 2011, Coldwell experiences financial
difficulties. On January 1, 2012, Coldwell negotiates a modification of the terms of the note. Under the
modification, Flint Hills Bank agrees to reduce the face value of the note to $90,000 and to extend the maturity
date to January 1, 2016. Annual interest payments on December 31 will be made at a rate of 8%. Coldwell's
market interest rate at the time of the modification is 12%. Prepare Coldwell's entries for (a) the modification
on January 1, 2012, and (b) the first interest payment date on December 31, 2012.
|*7| BE14-16 Shonen Knife Corporation has elected to use the fair value option for one of its notes payable. The
note was issued at an effective rate of 11% and has a carrying value of $16,000. At year-end, Shonen Knife's
borrowing rate has declined; the fair value of the note payable is now $17,500. (a) Determine the unrealized
gain or loss on the note, (b) Prepare the entry to record any unrealized gain or loss.
|^9J BE14-17 At December 31, 2011, Hyasaki Corporation has the following account balances:
Bonds payable, due January 1,2019 $1,912,000
Bond interest payable 80,000
Show how the above accounts should be presented on the December 31, 2011, statement of financial
position, including the proper classifications.

f WILEY ©
EXERCISES PLUS
[*2J E14-1 (Classification of Liabilities) Presented below are various account balances.
(a) Bank loans payable of a winery, due March 10, 2014. (The product requires aging for 5 years before
sale.)
(b) Serial bonds payable, $1,000,000, of which $250,000 are due each July 31.
(c) Amounts withheld from employees' wages for income taxes.
(d) Notes payable due January 15, 2013.
(e) Credit balances in customers' accounts arising from returns and allowances after collection in full of
account.
(f) Bonds payable of $2,000,000 maturing June 30, 2012.
(g) Overdraft of $1,000 in a bank account. (No other balances are carried at this bank.)
(h) Deposits made by customers who have ordered goods.

Instructions
Indicate whether each of the items above should be classified on December 31, 2011, as a current liability, a non-
current liability, or under some other classification. Consider each one independently from all others; that is, do
not assume that all of them relate to one particular business. If the classification of some of the items is doubtful,
explain why in each case. f*2J E14-2 (Classification) The following items are found in the financial
statements.
(a) Interest expense (credit balance).
(b) Bond issue costs.
(c) Gain on repurchase of debt.
(d) Mortgage payable (payable in equal amounts over next 3 years).
(e) Debenture bonds payable (maturing in 5 years).
(f) Notes payable (due in 4 years).
(g) Income bonds payable (due in 3 years).

Instructions
Indicate how each of these items should be classified in the financial statements. |»3|«4| E14-3
(Entries for Bond Transactions) Presented below are two independent situations.
1. On January 1, 2010, Divac Company issued €300,000 of 9%, 10-year bonds at par. Interest is payable
quarterly on April 1, July 1, October 1, and January 1.
2. On June 1, 2010, Verbitsky Company issued €200,000 of 12%, 10-year bonds dated January 1 at par
plus accrued interest. Interest is payable semiannually on July 1 and January 1.
754 • Chapter 14 Non-Current Liabilities

Instructions
For each of these two independent situations, prepare journal entries to record the following.
(a) The issuance of the bonds.
(b) The payment of interest on July 1.
(c) The accrual of interest on December 31.

|»3|«4| E14-4 (Entries for Bond Transactions) Foreman Company issued $800,000 of 10%, 20-year bonds on January 1, 2011,
at 119.792 to yield 8%. Interest is payable semiannually on July 1 and January 1.

Instructions
Prepare the journal entries to record the following.
(a) The issuance of the bonds.
(b) The payment of interest and the related amortization on July 1, 2011.
(c) The accrual of interest and the related amortization on December 31, 2011.

|»3|»4| E14-5 (Entries for Bond Transactions) Assume the same information as in E14-4, except that the bonds were issued at
84.95 to yield 12%.

Instructions
Prepare the journal entries to record the following. (Round to the nearest dollar.)
(a) The issuance of the bonds.
(b) The payment of interest and related amortization on July 1, 2011.
(c) The accrual of interest and the related amortization on December 31, 2011.

|»3|«4| E14-6 (Amortization Schedule) Spencer Company sells 10% bonds having a maturity value of £3,000,000 for £2,783,724.
The bonds are dated January 1, 2010, and mature January 1, 2015. Interest is payable annually on January 1.

Instructions
Set up a schedule of interest expense and discount amortization. (Hint: The effective-interest rate must be
computed.)

E14-7 (Determine Proper Amounts in Account Balances) Presented below are three independent situations.
(a) McEntire Co. sold $2,500,000 of 11%, 10-year bonds at 106.231 to yield 10% on January 1, 2010. The bonds
were dated January 1, 2010, and pay interest on July 1 and January 1. Determine the amount of interest expense
to be reported on July 1, 2010, and December 31, 2010.
(b) Cheriel Inc. issued $600,000 of 9%, 10-year bonds on June 30, 2010, for $562,500. This price provided a yield
of 10% on the bonds. Interest is payable semiannually on December 31 and June 30. Determine the amount of
interest expense to record if financial statements are issued on October 31, 2010.
(c) On October 1, 2010, Chinook Company sold 12% bonds having a maturity value of $800,000 for $853,382
plus accrued interest, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2010,
and mature January 1, 2015, with interest payable December 31 of each year. Prepare the journal entries at the
date of the bond issuance and for the first interest payment.

E14-8 (Entries and Questions for Bond Transactions) On June 30, 2010, Mackes Company issued $5,000,000 face

w value of 13%, 20-year bonds at $5,376,150 to yield 12%. The bonds pay semiannual interest on June 30 and December
31.

Instructions
(a) Prepare the journal entries to record the following transactions.
(1) The issuance of the bonds on June 30, 2010.
(2) The payment of interest and the amortization of the premium on December 31, 2010.
(3) The payment of interest and the amortization of the premium on June 30, 2011.
(4) The payment of interest and the amortization of the premium on December 31, 2011.
(b) Show the proper statement of financial position presentation for the liability for bonds payable on the
December 31, 2011, statement of financial position.
(c) Provide the answers to the following questions.
(1) What amount of interest expense is reported for 2011?
(2) Determine the total cost of borrowing over the life of the bond.
Exercises

|*3|»4| E14-9 (Entries for Bond Transactions) On January 1, 2010, Osborn Company sold 12% bonds having a maturity value
of £800,000 for £860,651.79, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2010,
and mature January 1, 2015, with interest payable December 31 of each year.
Instructions
(a) Prepare the journal entry at the date of the bond issuance.
(b) Prepare a schedule of interest expense and bond amortization for 2010-2012.
(c) Prepare the journal entry to record the interest payment and the amortization for 2010.
(d) Prepare the journal entry to record the interest payment and the amortization for 2012.

|»3|»4| E14-10 (Information Related to Various Bond Issues) Pawnee Inc. has issued three types of debt on January 1, 2010, the
start of the company's fiscal year.
(a) $10 million, 10-year, 13% unsecured bonds, interest payable quarterly. Bonds were priced to yield 12%.
(b) $25 million par of 10-year, zero-coupon bonds at a price to yield 12% per year.
(c) $15 million, 10-year, 10% mortgage bonds, interest payable annually to yield 12%.
Instructions
Prepare a schedule that identifies the following items for each bond: (1) maturity value, (2) number of interest periods
over life of bond, (3) stated rate per each interest period, (4) effective-interest rate per each interest period, (5) payment
amount per period, and (6) present value of bonds at date of issue.

j*5] E14-11 (Entries for Zero-Interest-Bearing Notes) On January 1,2011, McLean Company makes the two following
acquisitions.
1. Purchases land having a fair value of $300,000 by issuing a 5-year, zero-interest-bearing promissory note in
the face amount of $505,518.
2. Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $400,000 (interest
payable annually).
The company has to pay 11% interest for funds from its bank.
Instructions
(a) Record the two journal entries that should be recorded by McLean Company for the two purchases on January
1, 2011.
(b) Record the interest at the end of the first year on both notes.

f*5] E14-12 (Imputation of Interest) Presented below are two independent situations:
(a) On January 1, 2011, Spartan Inc. purchased land that had an assessed value of $390,000 at the time of purchase.
A $600,000, zero-interest-bearing note due January 1, 2014, was given in exchange. There was no established
exchange price for the land, nor a ready market value for the note. The interest rate charged on a note of this
type is 12%. Determine at what amount the land should be recorded at January 1, 2011, and the interest expense
to be reported in 2011 related to this transaction.
(b) On January 1, 2011, Geimer Furniture Co. borrowed $4,000,000 (face value) from Aurora Co., a major
customer, through a zero-interest-bearing note due in 4 years. Because the note was zero-interest-bearing,
Geimer Furniture agreed to sell furniture to this customer at lower than market price. A 10% rate of interest is
normally charged on this type of loan. Prepare the journal entry to record this transaction and determine the
amount of interest expense to report for 2011.

f*5] E14-13 (Imputation of Interest with Right) On January 1, 2010, Durdil Co. borrowed and received $500,000 from a
major customer evidenced by a zero-interest-bearing note due in 3 years. As consideration for the zero-interest-bearing
feature, Durdil agrees to supply the customer's inventory needs for the loan period at lower than the market price. The
appropriate rate at which to impute interest is 8%.
Instructions
(a) Prepare the journal entry to record the initial transaction on January 1, 2010. (Round all computations to the
nearest dollar.)
(b) Prepare the journal entry to record any adjusting entries needed at December 31, 2010. Assume that the sales
of Durdil's product to this customer occur evenly over the 3-year period.

|«3|«4|»e| E14-14 (Entry for Retirement of Bond; Bond Issue Costs) On January 2, 2007, Prebish Corporation issued $1,500,000 of
10% bonds to yield 11% due December 31, 2016. Interest on the bonds is payable annually each December 31. The
bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2010, Prebish called $1,000,000 face amount
of the bonds and retired them.
756 • Chapter 14 Non-Current Liabilities

Instructions
(a) Determine the price of the Prebish bonds when issued on January 2, 2007.
(b) Prepare an amortization schedule for 2007-2011 for the bonds.
(c) Ignoring income taxes, compute the amount of loss, if any, to be recognized by Prebish as a result of retiring
the $1,000,000 of bonds in 2010 and prepare the journal entry to record the retirement.
| 31 4-| »61 E14-15 (Entries for Retirement and Issuance of Bonds) On June 30, 2002, Mendenhal Company issued 8% bonds with
a par value of $600,000 due in 20 years. They were issued at 82.8414 to yield 10% and were callable at 104 at any date
after June 30, 2010. Because of lower interest rates and a significant change in the company's credit rating, it was
decided to call the entire issue on June 30, 2011, and to issue new bonds. New 6% bonds were sold in the amount of
$800,000 at 112.5513 to yield 5%; they mature in 20 years. Interest payment dates are December 31 and June 30 for
both old and new bonds.
Instructions
(a) Prepare journal entries to record the retirement of the old issue and the sale of the new issue on June 30, 2011.
Unamortized discount is $78,979.
(b) Prepare the entry required on December 31, 2011, to record the payment of the first 6 months' interest and the
amortization of premium on the bonds.
|'3|°4|*6| E14-16 (Entries for Retirement and Issuance of Bonds) Kobiachi Company had bonds outstanding with a maturity value
of ¥5,000,000. On April 30, 2011, when these bonds had an unamortized discount of ¥100,000, they were called in at
104. To pay for these bonds, Kobiachi had issued other bonds a month earlier bearing a lower interest rate. The newly
issued bonds had a life of 10 years. The new bonds were issued at 103 (face value ¥5,000,000).
Instructions
Ignoring interest, compute the gain or loss and record this refunding transaction.
p6J E14-17 (Settlement of Debt) Strickland Company owes $200,000 plus $18,000 of accrued interest to Moran State Bank.
The debt is a 10-year, 10% note. During 2010, Strickland's business deteriorated due to a faltering regional economy.
On December 31, 2010, Moran State Bank agrees to accept an old machine and cancel the entire debt. The machine
has a cost of $390,000, accumulated depreciation of $221,000, and a fair value of $180,000.
Instructions
(a) Prepare journal entries for Strickland Company to record this debt settlement.
(b) How should Strickland report the gain or loss on the disposition of machine and on restructuring of debt in its
2010 income statement?
(c) Assume that, instead of transferring the machine, Strickland decides to grant 15,000 of its ordinary shares ($10
par), which have a fair value of $180,000 in full settlement of the loan obligation. Prepare the entries to record
the transaction.
p6] E14-18 (Loan Modification) On December 31,2010, Sterling Bank enters into a debt restructuring agreement with
Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par,
£3,000,000 note receivable by the following modifications:
1. Reducing the principal obligation from £3,000,000 to £2,400,000.
2. Extending the maturity date from December 31, 2010, to January 1, 2014.
3. Reducing the interest rate from 12% to 10%. Barkley's market rate of interest is 15%.
Barkley pays interest at the end of each year. On January 1, 2014, Barkley Company pays £2,400,000 in cash to
Sterling Bank.
Instructions
(a) Can Barkley Company record a gain under the term modification mentioned above? Explain.
(b) Prepare the amortization schedule of the note for Barkley Company after the debt modification.
(c) Prepare the interest payment entry for Barkley Company on December 31, 2012.
(d) What entry should Barkley make on January 1, 2014?
1*61 E14-19 (Loan Modification) Use the same information as in E14-18 above except that Sterling Bank reduced the
principal to £1,900,000 rather than £2,400,000. On January 1, 2014, Barkley pays £1,900,000 in cash to Sterling Bank
for the principal.
Instructions
(a) Prepare the journal entries to record the loan modification for Barkley.
(b) Prepare the amortization schedule of the note for Barkley Company after the debt modification.
(c) Prepare the interest payment entries for Barkley Company on December 31 of 2011, 2012, and 2013.
(d) What entry should Barkley make on January 1, 2014?
Problems • 757

ED 1-14-20 (Entries for Settlement of Debt) Consider the following independent situations.
nit (a) Gottlieb Co. owes €199,800 to Ceballos Inc. The debt is a 10-year, 11% note. Because Gottlieb Co. is in
nt. financial trouble, Ceballos Inc. agrees to accept some property and cancel the entire debt. The property has a
book value of €90,000 and a fair value of €140,000. Prepare the journal entry on Gottlieb's books for debt
led settlement.
aid (b) Vargo Corp. owes $270,000 to First Trust. The debt is a 10-year, 12% note due December 31, 2010. Because
ige Vargo Corp. is in financial trouble, First Trust agrees to extend the maturity date to December 31, 2012, reduce
iew the principal to $220,000, and reduce the interest rate to 5%, payable annually on December 31. Vargo's market
ars. rate of interest is 8%. Prepare the journal entries on Vargo's books on December 31, 2010, 2011, and 2012.
.'■

?on ES E14-21 (Fair Value Option) Fallen Company commonly issues long-term notes payable to its various lenders. Fallen
has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis).
' in- Fallen has elected to use the fair value option for the long-term notes issued to Barclay's Bank and has the following
data related to the carrying and fair value for these notes.
Carrying Value Fair Value
iing €54,000 €54,000
.Hint December 31, 2010 44,000 42,500
anth December 31, 2011 36,000 38,000
,vere December 31, 2012

Instructions
(a) Prepare the journal entry at December 31 (Fallen's year-end) for 2010, 20T the fair and 2012, to record
value option for these notes.
(b) At what amount will the note be reported on Fallen's 2011 statement of financial position? What is the effect
•st to (0 of recording the fair value option on these notes on Fallen's 2012 income? Assuming that general market
I due (d) interest rates have been stable over the period, does the fair value data for the notes indicate that Fallen's
I ma- creditworthiness has improved or declined in 2012? Explain.
1,000,
!j9] E14-22 (Long-Term Debt Disclosure) At December 31, 2010, Redmond Company has outstanding three long-term debt
issues. The first is a $2,000,000 note payable which matures June 30, 2013. The second is a $6,000,000 bond issue
which matures September 30, 2014. The third is a $12,500,000 sinking fund debenture with annual sinking fund
payments of $2,500,000 in each of the years 2012 through 2016.
unng
Instructions
. ordi- Prepare the required note disclosure for the long-term debt at December 31, 2010.
•ation.

agree-
ucture PROBLEMS ,f
PLUS

Jj4] P14-1 (Analysis of Amortization Schedule and Interest Entries) The following amortization and in-
-_ terest schedule reflects the issuance of 10-year bonds by Capulet Corporation on January 1, 2004, and the
atri subsequent interest payments and charges. The company's year-end is December 31, and financial state-
,000 in R9 ments are prepared once yearly.

Amortization Schedule
am. Amount Book
ication. Year Cash Interest Unamortized Value
1/1/2004 $5,651 $ 94,349
2004 $11,000 $11,322 5,329 94,671
ig Bank 2005 11,000 11,361 4,968 95,032
0,000 in 2006 11,000 11,404 4,564 95,436
2007 11,000 11,452 4,112 95,888
2008 11,000 11,507 3,605 96,395
2009 11,000 11,567 3,038 96,962
2010 11,000 11,635 2,403 97,597
fication. 2011 11,000 11,712 1,691 98,309
rid 2013. 2012 11,000 11,797 894 99,106
2013 11,000 11,894 100,000