PROBLEM 1

a. Note payable 900,000

Accrued interest 90,000
Total liability 990,000
CA of the equipment (600,000)
Gain on extinguishment of debt 390,000

CA of the liability 990,000

Fair value of the equipment (800,000)
Gain on debt restructuring 190,000

JOURNAL ENTRY:
Note payable 900,000
Accrued interest payable 90,000
Accumulated depreciation 400,000
Equipment 1,000,000
Gain on extinguishment of debt 390,000

b. Bonds payable 10,000,000

Accrued interest 900,000
Total liability 10,900,000
Fair value of shares issued (300k x 28) 8,400,000
Gain on extinguishment of debt 2,500,000

JOURNAL ENTRY:
Bonds payable 10,000,000
Accrued interest payable 900,000
Share capital (300k x 25) 7,500,000
Share premium (300k x 28-25) 900,000
Gain on extinguishment of debt 2,500,000

c. PV of principal (8M x 0.7972) 6,377,600

PV of interest payments (8M x 8%x 1.6901) 1,081,664
Present value of the new loan 7,459,264
Face value of the new loan 8,000,000
Discount on loans payable 540,736

Loans payable-old 10,000,000

Accrued interest (10M x 12%) 1,200,000
CA of the old liability 11,200,000
Present value of the new loan 7,459,264
Gain on extinguishment of debt 3,740,736
 JOURNAL ENTRY:
Loans payable – old 10,000,000
Accrued interest payable 1,200,000
Discount on loans payable 540,736
Loans payable – new 8,000,000
Gain on extinguishment of debt 3,740,736

d. PV of principal (3M x 0.5935) 1,780,500

PV of interest (3M x 12% x 3.6959) 1,330,524
Present value of the new notes 3,111,024
CA of old note (3M + 330k) 3,330,000
Gain on extinguishment of debt 218,976

JOURNAL ENTRY:
Notes payable – old 3,000,000
Accrued interest payable 330,000
Notes payable – new 3,000,000
Premium on notes payable 330,000

PROBLEM 2:
a. JOURNAL ENTRIES:
2018:
April 1 Banking equipment 2,591,760
Notes Payable 2,591,760
Dec 31 Interest expense (2,591,760 x 9%x 9/12) 174,944
Accrued interest payable 174,944
2019:
March 31 Interest expense (2,591,760 x 9% x 3/12) 58,315
Accrued interest payable 174,944
Notes payable 566,741
Cash 800,000

Dec 31 Interest expense (2,025,019 x 9%x 9/12) 136,689

Accrued interest payable 136,689

b. Current liabilities, 2019:

Notes payable – due on 3/31/19
(800k – (2,025,019 x 9%) 617,748
Interest payable 136,689

Noncurrent liabilities, 2019:

Notes payable (2,025,019 – 617,748) 1,407,271
PROBLEM 3:
a. 2,591,760
b. JOURNAL ENTRIES:
2018:

PV of OA of principal (800k x 3.2397) 2,591,760

April 1 Equipment 2,591,760

Discount on notes payable 608,240
Notes Payable 3,200,000

Date Payment Interest expense Principal Present Value

4/1/18 - - - 2,591,760
3/1/19 800,000 233,258 566,742 2,025,018
3/1/20 800,000 182,252 617,748 1,407,270
3/1/21 800,000 126,654 673,346 733,924
3/1/22 800,000 66,076 733,924 0

Dec 31 Interest expense (233,258 x 9/12) 174,944

Discount on notes payable 174,944

2019:
March 1 Notes Payable 800,000
Cash 800,000
Dec 31 Interest expense
(233,258 x 3/12 + 182,252 x 9/12) 195,003
Discount on Notes Payable 195,003

PROBLEM 4
a. Interest expense, 2018 (6,949,800 x 9% x 4/12) 208,494
CA, 9/1/18 6,949,800
CA, 12/31/2018 7,158,294
Interest expense, 2019 (7,158,294 x 9%) 644,246
CA, 12/31/2019 7,802,540
Interest expense, 2020 (7,802,540 x 9%) 702,229
CA, 12/31/2020 7,784,769
Interest expense, 2021 (7,784,769 x 9% x 8/12) 467,086
CA, 8/31/2021 8,251,855

b. 7,802,540
c. Dec. 31, 2019
Noncurrent liability
 Dec 31, 2020:
Current liability

PROBLEM 5

Date Payment Interest expense Amortization Present Value

1/2/18 - - - 12,684,120
12/31/18 1,200,000 1,014,730 185,270 12,498,850
12/31/19 1,200,000 999,908 200,092 12,298,758
12/31/20 1,200,000 983,901 216,099 12,082,659
12/31/21 1,200,000 966,613 233,387 11,849,272

a. 185,270
b. CA, 12/31/2021 11,849,272

c. Call price (3M x 110%) 3,300,000

Accrued interest (3M x 12%) 360,000
Total cash payment 3,660,000

Bonds retired 3,000,000

Premium (3M/10M x 1,849,272) 554,782
CA of the bonds 3,554,782
Call price 3,300,000
Gain on retirement of bonds 254,782

d. Bonds payable 10,000,000

Retired (3,000,000)
Premium (2,684,120 – 834,848) 1,849,272
CA of the bonds 8,849,272
X 8%
Interest expense,2022 707,942

e. Face of the bonds 7,000,000

X 12%
Interest paid 840,000
Interest expense 707,942
Premium amortization 132,058
CA of the bonds, 2021 8,849,272
CA, 2022 8,717,214