CHAPTER 2

NON-CURRENT LIABILITIES

PROBLEMS

2-1. (Ruby Corporation)

At 8% At 12%
Bond issue price 5,405,725 4,632,025
Nominal interest for 2013 250,000 250,000
Interest expense for 2013 216,229 277,922
Premium/discount amortization in 2013 33,771 27,922
Bond carrying value at December 31, 2012 5,371,954 4,659,947
Nominal interest for 2014 500,000 500,000
Interest expense for 2014 428,351 560,970
Premium/discount amortization in 2014 71,649 60,970
Bond carrying value at December 31, 2014 5,300,305 4,720,917

Computations:
At 8%
Issue price = (5,000,000 x 0.6756) + (250,000 x 8.1109)
= 3,378,000 + 2,027,725 = 5,405,725

A B C D
Interest Interest Premium Bond
Date Paid Expense Amortization Carrying Value
06/30/13 5,405,725
12/31/13 250,000 216,229 33,771 5,371,954
06/30/14 250,000 214,878 35,122 5,336,832
12/31/14 250,000 213,473 36,527 5,300,305
A = Face value x 5%
B = Carrying value, beg of year x 4%

At 12%
Issue price = (5,000,000 x 0.5584) + (250,000 x 7.3601)
= 2,792,000 + 1,840,025 = 4,632,025

A B C D
Interest Interest Discount Bond
Date Paid Expense Amortization Carrying Value
06/30/13 4,632,025
12/31/13 250,000 277,922 27,922 4,659,947
06/30/14 250,000 279,597 29,597 4,689,544
12/31/14 250,000 281,373 31,373 4,720,917
A = Face value x 5%
B = Carrying value, beg of year x 6%

2-2. (Fire Company)

(a) Issue price

Present value of face value (4,000,000 x 0.6756) P2,702,400
Present value of interest payments (200,000 x 8.1109) 1,622,180
Issue price P4,324,580
• Chapter 2 - Non-Current Liabilities

(b) Amortization Table

Interest Interest Premium Bond Carrying
Date Paid Expense Amortization Value
3/01/13 - - - 4,324,580
8/31/13 200,000 172,983 27,017 4,297,563
2/28/14 200,000 171,903 28,097 4,269,466
8/31/14 200,000 170,779 29,221 4,240,245
2/28/15 200,000 169,610 30,390 4,209,855

(c)
03/01/13 Cash 4,324,580
Bonds Payable 4,000,000
Premium on Bonds Payable 324,580

08/31/13 Interest Expense 172,983

Premium on Bonds Payable 27,017
Cash 200,000

12/31/13 Interest Expense (171,903 x 4/6) 114,602

Premium on Bonds Payable 18,731
Interest Payable (320,000 x 4/6) 133,333

02/28/14 Interest Expense (171,903 – 114,602) 57,301

Prem. on Bonds Payable(28,097–18,731) 9,366
Interest Payable 133,333
Cash 200,000

2-3. (Metal Corporation)

Issue price of bonds and warrants 5,000,000 x 1.08 5,400,000
MV of bonds without warrants 5,000,000 x 1.02 5,100,000
Value assigned to warrants P 300,000

(a) Cash 5,400,000

Premium on Bonds Payable 100,000
Bonds Payable 5,000,000
Share Warrants Outstanding 300,000

(b) Cash (5,000 x 2 x 140) 1,400,000

Share Warrants Outstanding 300,000
Ordinary Shares (5,000 x 2 x 100) 1,000,000
Share Premium 700,000

2-4. (Onyx)
(a) Issue price of bonds with warrants (1,000,000 x 1.03) 1,030,000
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 2013 (887,020 x 12% x 10/12 88,702

12
• Chapter 2 - Non-Current Liabilities

(c) Bond carrying value, March 1, 2013 887,020

Amortization through December 31, 2013
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, 2013 892,389

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

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 2,000,000
Issue price of bonds without conversion privilege
2,000,000 x 0.5674 1,134,800
200,000 x 3.6048 720,960 1,855,760
Allocation to equity 144,240

(b) Amortization Table

Interest Interest Premium Bond Carrying
Date Paid Expense Amortization Value
07/01/13 - - - 1,855,760
06/30/14 200,000 222,691 22,691 1,878,451
06/30/15 200,000 225,414 25,414 1,903,865
06/30/15 (1,142,319)
06/30/15 761,546
06/30/16 80,000 91,386 11,386 772,932
06/30/17 80,000 92,572 12,752 785,684
06/30/18 80,000 94,316* 14,316 800,000
*Adjusted; difference is due to rounding off.

(c)
07/01/13 Cash 2,000,000
Discount on Bonds Payable 144,240
Bonds Payable 2,000,000
PIC Arising from Bond Conversion Privilege 144,240

06/30/14 Interest Expense 222,691

Discount on Bonds Payable 22,691
Cash 200,000

06/30/15 Interest Expense 225,414

Discount on Bonds Payable 25,414
Cash 200,000

06/30/15 Bonds Payable 1,200,000

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

13
• Chapter 2 - Non-Current Liabilities

Carrying value,bonds converted (1,903,865 x 120/200 1,142,319

Face value of bonds converted 1,200,000
Discount on bonds payable cancelled 57,681
Value of equity converted (144,240 x 120/200) 86,544

Par value of ordinary shares issued (120 x 80 x 100) 960,000

06/30/16 Interest Expense 91,386

Discount on Bonds Payable 11,386
Cash 80,000

06/30/17 Interest Expense 92,752

Discount on Bonds Payable 12,752
Cash 80,000

06/30/18 Interest Expense 94,316

Discount on Bonds Payable 14,316
Cash 80,000

06/30/18 Bonds Payable 800,000

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

2-6. (Iron Company)

Bonds Payable 2,000,000
Premium on Bonds Payable (450,000 x 2/20) 45,000
PIC Arising from Bond Conversion Privilege(320,000 x 2/20) 32,000
Ordinary Shares (1,000 x 60 x 20) 1,200,000
Share Premium 877,000

2-7. (Lim Corporation)

Refer from the following table for the amounts included in the journal entries.

Interest Interest Discount Bond

Date Paid Expense Amortization Carrying Value
01/02/13 4,620,820
12/31/13 400,000 462,082 62,082 4,682,902
12/31/14 400,000 468,290 68,290 4,751,192
12/31/15 400,000 475,119 75,119 4,826,311
12/31/15 (965,262)
12/31/15 3,861,049
12/31/16 320,000 386,105 66,105 3,927,154
12/31/16 (1,963,577)
12/31/16 1,963,578
12/31/17 160,000 196,422* 36,422* 2,000,000
* Adjusted due to rounding off

14
• Chapter 2 - Non-Current Liabilities

(a) Cash 5,150,000

Discount on Bonds Payable 379,180
Bonds Payable 5,000,000
PIC Arising from Bond Conversion Privilege 529,180
(5M x .6209) + (400,000 x 3.7908) = 4,620,820
(5M x 1.03) – 4,620,820 = 529,180

(b) Interest Expense 468,290

Cash 400,000
Discount on Bonds payable 68,290

(c) Interest Expense 475,119

Cash 400,000
Discount on Bonds payable 75,119

Bonds Payable 1,000,000

PIC Arising from Bond Conversion Privilege 105,836
Discount on Bonds Payable 34,738
Ordinary Share (200 x 40 x 100) 800,000
Share Premium 271,098
529,180 x 1/5 = 105,836

(d) Interest Expense 386,105

Cash 320,000
Discount on Bonds payable 66,105

Bonds Payable 2,000,000

PIC Arising from Bond Conversion Privilege 211,672
Discount on Bonds Payable 36,423
Cash (2,000,000 x 1.01) 2,020,000
Gain on Retirement of Bonds 17,633
PIC from Unexercised Bond Conversion Privilege 137,616
Retirement price 2,020,000
Retirement price on account of liability
(2,000,000 + 160,000) x .9009 1,945,944
Retirement price on account of equity 74,056

Carrying value of bonds retired

Face value 1,963,577
Retirement price of bonds 1,945,944
Gain on retirement of bonds 17,633

Carrying value of equity cancelled 211,672

Retirement price on account of equity 74,056
Gain on cancellation taken to equity 137,616

(e) Interest Expense 196,422

Cash 160,000
Discount on Bonds payable 36,422

Bonds Payable 2,000,000

Cash 2,000,000

15
• Chapter 2 - Non-Current Liabilities

2-8. (Emerald Corporation)

The following table may facilitate the computations required in this problem.
Interest Interest Premium Bond
Date Paid Expense Amortization Carrying Value
12/01/13 - - - 5,386,072
06/01/14 300,000 269,304 30,696 5,355,376
12/01/14 300,000 267,769 32,231 5,323,145
06/01/15 300,000 266,157 33,843 5,289,302
12/01/15 300,000 264,465 35,535 5,253,767
06/01/16 300,000 262,688 37,312 5,216,455
12/01/16 180,000 156,494 23,506 3,106,367
06/01/17 180,000 155,318 24,682 3,081,685
12/01/17 180,000 154,084 25,916 3,055,769
06/01/18 180,000 152,788 27,212 3,028,557
12/01/18 180,000 151,443* 28,557 3,000,000
*Adjusted; difference is due to rounding off.

(a) Carrying value, December 1, 2014 (see, table) 5,323,145

Amortization for one month (33,843 x 1/6) ____5,640
Carrying value, December 31, 2014 5,317,505

(b) Interest Expense for year 2014

January 1-June 1, 2014 (269,304 x 5/6) 224,420
June 1-December 1, 2014 267,769
December 1-31, 2014 (266,157 x 1/6) _44,360
Total 536,549

(c) Carrying value of bonds retired on December 1, 2015

5,253,767 x 2/5 2,101,507
Amortization through April 1, 2016 (37,312 x 4/6 x 2/5) ____9,950
Carrying value of bonds retired on April 1, 2016 2,091,557

(d) Carrying value of bonds retired 2,091,557

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

(e) Carrying value of remaining bonds, December 1, 2016 3,106,367

Amortization through December 31, 2016 (24,682 x 1/6) 4,114
Carrying value of remaining bonds, December 31, 2016 3,102,253

(f) On bonds redeemed: 2016 2017

January 1-April 1, 2016 (262,688 x 2/5 x 3/6) 52,538
On remaining bonds
January 1-June 1, 2016 (262,688 x 3/5 x 5/6) 131,344
June 1-December 1, 2016 156,494
December 1-31, 2016 (155,318 x 1/6) 25,886
January 1-June 1, 2017 (155,318 x 5/6) 129,432
June 1-December 1, 2017 154,084
December 1-31, 2017 (152,788 x 1/6) ______ 25,465
Interest Expense 366,262 308,981

16
• Chapter 2 - Non-Current Liabilities

2-9. (Ohio Company) Partial Amortization Table

Interest Interest Premium Bond Carrying
Date Paid Expense Amortization Value
01/02/13 - - - 12,684,120
12/31/13 1,200,000 1,014,730 185,270 12,498,850
12/31/14 1,200,000 999,908 200,092 12,298,758
12/31/15 1,200,000 983,901 216,099 12,082,659
12/31/16 1,200,000 966,613 233,387 11,849,272
12/31/17 600,000 473,971 126,029 5,798,607
12/31/18 600,000 463,889 136,111 5,662,496

(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 2013 185,270

(b) Carrying value of bonds on December 31, 2016 (see table) 11,849,272

(c) Carrying value of bonds called (11,849,272 x 5/10) 5,924,636

Call price/retirement price (5,000,000 x 110%) 5,500,000
Gain on retirement of bonds 424,636

(d) Interest Expense for year 2017 (see table) 473,971

(e) Unamortized premium on bonds payable, Dec. 31, 2017

5,798,605 – 5,000,000 798,605

2-10. (Sim Company)

Partial Amortization Table
Nominal Effective Premium Bond
Date Interest Interest Amortization Carrying value
03/01/13 P1,963,000
09/01/13 85,000 88,335 3,335 1,966,335
03/01/14 85,000 88,485 3,485 1,969,820
09/01/14 85,000 88,642 3,642 1,973,462
03/01/15 85,000 88,806 3,806 1,977,268
09/01/15 85,000 88,977 3,977 1,981,245
03/01/16 85,000 89,156 4,156 1,985,401
09/01/16 85,000 89,343 4,343 1,989,744
3
(a) Interest expense recorded on September 1, 2012 88,335
Discount amortization recorded on September 1, 2013 3,335

(b) Carrying amount of the bonds, September 1, 2013 1,966,335

Amortization through December 31, 2013 (3,485 x 4/6) 2,323
Carrying amount of the bonds, December 31, 2013 1,968,658

(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, 2016 2,056,667
6
(d) Carrying value, March 1, 2015 (see table) 1,985,401
Amortization through June 30, 2016 (4,343 x 4/6) 2,895
Carrying value, June 30, 2016 1,988,296
Retirement price (at face value) 2,000,000
Loss on retirement of bonds 11,704

17
• Chapter 2 - Non-Current Liabilities

2-11. (Kim Company)

(a) Issue price of the bonds
Principal Interest Amount Present
Due Date Due Due Due PV Factor Value
12/31/14 2,000,000 800,000 2,800,000 0.8929 2,500,120
12/31/15 2,000,000 640,000 2,640,000 0.7972 2,104,608
12/31/16 2,000,000 480,000 2,480,000 0.7118 1,765,264
12/31/17 2,000,000 320,000 2,320,000 0.6355 1,474,360
12/31/18 2,000,000 160,000 2,160,000 0.5674 1,225,584
Selling price of bonds P9,069,936

(b) Amortization Table

Principal Interest Effective Discount Carrying
Due Date Due Due Interest Amortization Value, end
12/31/13 P9,069,936
12/31/14 2,000,000 800,000 1,088,392 288,392 7,358,328
12/31/15 2,000,000 640,000 882,999 242,999 5,601,327
12/31/16 2,000,000 480,000 672,159 192,159 3,793,486
12/31/17 2,000,000 320,000 455,218 135,218 1,928,704
12/31/18 2,000,000 160,000 231,296 71,296* -0-
*Adjusted; difference is due to rounding off.

(c)
12/31/14 Interest Expense 1,088,392
Discount on Bonds Payable 288,392
Cash 800,000

Bonds Payable 2,000,000

Cash 2,000,000

12/31/15 Interest Expense 882,999

Discount on Bonds Payable 242,999
Cash 640,000

Bonds Payable 2,000,000

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 Factor Value
12/31/13 2,000,000 960,000 2,960,000 0.9259 2,740,664
12/31/14 2,000,000 720,000 2,720,000 0.8573 2,331,856
12/31/15 2,000,000 480,000 2,480,000 0.7938 1,968,624
12/31/16 2,000,000 240,000 2,240,000 0.7355 1,646,400
Selling price of bonds P8,687,544

(b) Amortization Table

Principal Interest Effective Discount Carrying
Due Date Due Due Interest Amortization Value, end
01/01/13 8,687,544
12/31/13 2,000,000 960,000 695,004 264,996 6,422,548
12/31/14 2,000,000 720,000 513,804 206,196 4,216,352
12/31/15 2,000,000 480,000 337,308 142,692 2,073,660
12/31/16 2,000,000 240,000 166,340* 73,660 -0-
*Adjusted; difference is due to rounding off.

18
• Chapter 2 - Non-Current Liabilities

(c)
01/01/13 Cash 8,687,544
Bonds Payable 8,000,000
Premium on Bonds Payable 687,544

12/31/13 Interest Expense 695,004

Premium on Bonds Payable 264,996
Cash 960,000

Bonds Payable 2,000,000

Cash 2,000,000

12/31/14 Interest Expense 513,804

Premium on Bonds Payable 206,196
Cash 720,000

Bonds Payable 2,000,000

Cash 2,000,000

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 interest for this transaction is 9%.

(b) Date Amortization Carrying Value of Note

09/01/13 6,949,800
08/31/14 9% x 6,949,800 = 625,482 7,575,282
08/31/15 9% x 7,575,282 = 681,775 8,257,057
08/31/16 9% x 8,257,057 = 742,943* 9,000,000
*Adjusted; difference is due to rounding off.

(c) Interest expense for 2013 (625,482 x 4/12) 208,494

Carrying value, September 1, 2013 6,949,800

Amortization through December 31, 2013 208,494
Carrying value, December 31, 2013 7,158,294
(d)
09/01/13 Land 6,949,800
Discount on Notes Payable 2,050,200
Notes Payable 9,000,000

12/31/13 Interest Expense 208,494

Discount on Notes Payable 208,494

09/01/14 Interest Expense (625,482 -208,494) 416,988

Discount on Notes Payable 416,988

12/31/14 Interest Expense (681,775 x 4/12) 227,258

Discount on Notes Payable 227,258

09/01/15 Interest Expense (681,775 – 227,258) 454,517

Discount on Notes Payable 454,517

12/31/15 Interest Expense (742,943 x 4/12) 247,648

Discount on Notes Payable 247,648

19
• Chapter 2 - Non-Current Liabilities

08/31/16 Interest Expense (742,943 – 247,648) 495,295

Discount on Notes Payable 495,295

Notes Payable 9,000,000

Cash 9,000,000

2-14. (JFC)
(a) 2013 2014 2015
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 = 8,257,057
8,257,057 x 9%= 743,135
743,135 x 4/12 _______ _______ 247,712
Totals 208,494 644,246 702,229

(b) Notes Payable 6,949,800

Accrued interest (208,494 + 644,246) 852,740
Total, December 31, 2014 7,802,540

(c) Non-current Liabilities

Notes Payable 6,949,800
Accrued interest (208,494 + 644,246) 852,740
Total, December 31, 2014 7,802,540

Current Liabilities
Notes Payable 6,949,800
Accrued interest 1,554,969
Total, December 31, 2015 8,504,769

(d)
09/01/13 Land 6,949,800
Notes Payable 6,949,800

12/31/13 Interest Expense 208,494

Interest Payable 208,494

12/31/14 Interest Expense 644,246

Interest Payable 644,246

12/31/15 Interest Expense 702,229

Interest Payable 702,229

12/31/16 Interest Expense (adjusted) 495,423

Interest Payable 1,554,969
Notes Payable 6,949,800
Cash 9,000,192

2-15. (Wendy’s Catering Service)

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

20
• Chapter 2 - Non-Current Liabilities

(b) Date Principal Due Amortization Carrying Value of Note

4/01/13 2,591,760
3/31/14 800,000 233,258 2,025,018
3/31/15 800,000 182,252 1,407,270
3/31/16 800,000 126,654 733,924
3/31/17 800,000 66,076* -0-
*Adjusted; difference is due to rounding off.

(c)
04/01/13 Equipment 2,591,760
Discount on Notes Payable 608,240
Notes Payable 3,200,000

12/31/13 Interest Expense (233,258 x 9/12) 174,944

Discount on Notes Payable 174,944

03/31/14 Notes Payable 800,000

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

12/31/14 Interest Expense (182,252 x 9/12) 136,689

Discount on Notes Payable 136,689

03/31/15 Notes Payable 800,000

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

12/31/15 Interest Expense (126,654 x 9/12) 94,991

Discount on Notes Payable 94,991

03/31/16 Notes Payable 800,000

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

12/31/16 Interest Expense (66,076 x 9/12) 49,557

Discount on Notes Payable 49,557

03/31/17 Notes Payable 800,000

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

2-16. (Burgee’s Food Corporation)

(a) Principal
Date Annual Payment Interest Payment Carrying Value
04/01/13 2,591,760
03/31/14 800,000 233,258 566,742 2,025,018
03/31/15 800,000 182,252 617,748 1,407,270
03/31/16 800,000 126,654 673,346 733,924
03/31/17 800,000 66,076* 733,924 -0-
*Adjusted

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• Chapter 2 - Non-Current Liabilities

(b)
04/01/13 Equipment 2,591,760
Notes Payable 2,591,760

12/31/13 Interest Expense (233,258 x 9/12) 174,944

Interest Payable 174,944

04/01/14 Interest Payable 174,944

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

12/31/14 Interest Expense (182,252 x 9/12) 136,689

Interest Payable 136,689

04/01/15 Interest Payable 136,689

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

12/31/15 Interest Expense (126,654 x 9/12) 94,991

Interest Payable 94,991

04/01/16 Interest Payable 94,991

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

12/31/16 Interest Expense (66,076 x 9/12) 49,557

Interest Payable 49,557

04/01/17 Interest Payable 49,557

Interest Expense (66,076 – 49,557) 16,519
Notes Payable 733,924
Cash 800,000

(c) Current portion at December 31, 2014

Notes Payable 617,748
Interest Payable 136,689

Noncurrent portion at December 31, 2014

Notes Payable 1,407,270

2-17.
(a) (South Company)
Notes Payable 900,000
Interest Payable 90,000
Accumulated Depreciation 350,000
Equipment 1,000,000
Gain on Disposal of Equipment 150,000
Gain on Debt Restructuring 190,000

22
• Chapter 2 - Non-Current Liabilities

(b) (Joy Company)

Bonds Payable 10,000,000
Interest Payable 900,000
Ordinary Share 7,500,000
Share Premium 30,000 x (30-25) 150,000
Gain on Debt Restructuring 3,250,000

(c) (Capshell Company)

Notes Payable 10,000,000
Interest Payable 1,200,000
Restructured Notes Payable 7,332,384
Gain on Debt Restructuring 3,867,616

(see computations and explanation belowJ)

Present value of future payments at historical
rate:
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
Difference 3,740,736

3,740,736/11,200,000 = 33%, thus the

restructuring qualifies as a derecognition
of the old liability and creation of a new
liability.
The old liability shall be cancelled; the new
liability shall be measured based on the
discounted cash flow of the future
payments based on the entity’s
incremental borrowing rate considering its
credit rating:

Present value of future payments at

incremental borrowing rate, considering its
credit rating:
8,000,000 x 0.7831 = 6,264,800
8,000,000 x 8% x 1.6681 = 1,067,584
Total 7,332,384
Carrying value of the old 11,200,000
Gain on debt restructuring 3,867,616

Alternatively, the entry may be recorded as:

Notes Payable 10,000,000
Interest Payable 1,200,000
Discount on Restructured Notes Payable 667,616
Restructured Notes Payable 8,000,000
Gain on Debt Restructuring 3,867,616

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• Chapter 2 - Non-Current Liabilities

(d) (Solid Company)

Notes Payable 3,000,000
Interest Payable 330,000
Restructured Notes Payable 3,111,024
Deferred 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
Difference 218,976

218,976/3,330,000 < 10% of 3,330,000.

Thus, the debt restructuring does not
qualify for derecognition of the old
obligation. No gain shall be recognized
and a new effective interest rate shall be
computed.

Alternatively, the restructuring may be

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

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• Chapter 2 - Non-Current Liabilities

MULTIPLE CHOICE QUESTIONS

Theory
MC1 D MC11 C
MC2 D MC12 B
MC3 D MC13 B
MC4 C MC14 D
MC5 D MC15 B
MC6 D MC16 D
MC7 D MC17 D
MC8 C MC18 A
MC9 D MC19 A
MC10 C MC20 D

Problems
MC21 B
MC22 D (1,000,000 x 0.38554) + (80,000 x 6.14457) = 877,106
MC23 B (1,000 x 0.31) + (40 x 11.47) = 768.80
MC24 A (2,000,000 x 97%) + (2,000,000 x 10% x 3/12) = 1,990,000
MC25 B (2,000 X 1,040) - 2,000,000 = 80,000
MC26 B (4,000,000 x 97%) + (4,000,000 x 12% x 3/12) = 4,000,000
MC27 C 1,070,000 - (96% x 1,000,000) = 110,000
MC28 A 1,000,000 x 12% x 1/12 = 10,000
MC29 B (1,000,000 x 1.02) – 50,000 = 970,000
MC30 D 1,000,000 - 30,000 + 50,000 = 1,020,000;
1,020,000 - (40,000 x 20) - 10,000 = 210,000
MC31 D P0; No gain or loss is recognized upon conversion of bonds.
MC32 C 1,032,880 x 10% x 6/12 = 51,644
MC33 A 1,032,880 - {(1,000,000 x 6%) - 51,644}= 1,024,524
MC34 A 1,878,000 - {(10% x 1,878,000) -(2,000,000 x 9%) = 1,885,800
MC35 B 10,000,000 – 1,145,000 = 8,855,000;
(8,855,000 x 6%) - (10,000,000 x 5%) = 31,300
MC36 C 5,680,000 x 8% x 6/12 = 227,200
MC37 A (2,100,000 x 6%) – (2,000,000 x 7%) = 14,000; 2,100,000 – 14,000 = 2,086,000 BCV;
BCV of P2,086,000 – face value of P2,000,000 = P86,000 premium
MC38 C 1,032,880 x 10% = 103,288
MC39 D 1,902,800 x 10% = 190,280 effective interest; 190,280 effective interest – nominal
interest of 160,000=30,280 discount amortization; carrying value = 1,902,800 +
30,280 – principal payment of 400,000 = 1,533,080
MC40 B 2,400,000 X 12% = 288,000
MC41 D 2,400,000 – 1,000,000 + 288,000 = 1,688,000
1,688,000 X 12% = 202,560; 1,000,000 – 202,560 = 797,440
MC42 B 3,000,000 – 2,400,000 = 600,000; 600,000 – 288,000 = 312,000
MC43 A (1) 49,737 X 10%= 4,974; 49,737 – (20,000 – 4,974) = 34,711
MC44 D 5,500,000 – 3,000,000 = 2,500,000
MC45 D 6,000,000 + 600,000 = 6,600,000
(6000,000 x 0.621) +(6000,000 x 12% x 3.791) = 6,455,520
6,600,000 – 6455,520= 144,480, which is less than 10% of 6,600,000; no gain is
recognized.
MC46 C 6,600,000 – [(5,000,000 x .6209) +(5,000,000 x .12 x 3.7908)] =1,221,020
MC47 B 8,000,000 + 640,000 = 8,640,000
(6,000,000 x 0.8573) + (6,000,000 x 10% x 1.7833) = 6,213,780
8,640,000 – 6,213,780 = 2,426,220
MC48 B 150,000 x 65 = 9,750,000; 11,000,000 – 9,750,000 = 1,250,000

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