Solved Exercises on Chapters 14 & 15

EXERCISE 14-12

Reacquisition price ($900,000 X 101%) $909,000

Less: Net carrying amount of bonds redeemed:
Par value $900,000
Unamortized discount (13,500)
886,500
Loss on redemption $ 22,500
Calculation of unamortized discount—
Original amount of discount:
$900,000 X 3% = $27,000
$27,000/10 = $2,700 amortization per year;
5 X $2,700 = $13,500.

January 2, 2017
Bonds Payable..................................................................900,000
Loss on Redemption of Bonds........................................22,500
Discount on Bonds Payable................................... 13,500
Cash.......................................................................... 909,000

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EXERCISE 14-16

(a) 1. January 1, 2017

Land ...................................................................................
200,000.00
Discount on Notes Payable..............................................
137,012.00
Notes Payable.......................................................... 337,012.00
(The $200,000 capitalized land
cost represents the present
value of the note discounted
for five years at 11%.)

2. Equipment.........................................................................
185,674.30
Discount on Notes Payable..............................................
64,325.70*
Notes Payable.......................................................... 250,000.00

*Computation of the discount on

notes payable:
Maturity value $250,000.00
Present value of $250,000 due in
8 years at 11%—$250,000
X .43393 $108,482.50
Present value of $15,000
payable annually for 8 years
at 11% annually—$15,000
X 5.14612 77,191.80
Present value of the note (185,674.30)
Discount $ 64,325.70

(b) 1. Interest Expense...............................................................

22,000.00
Discount on Notes Payable.................................... 22,000.00
($200,000 X .11)

2. Interest Expense...............................................................
20,424.17
($185,674.30 X .11)
Discount on Notes Payable.................................... 5,424.17
Cash ($250,000 X .06).............................................. 15,000.00

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EXERCISE 14-19

Change in
Unrealized Unrealized
Carrying Holding Gain Holding
Year Value Fair Value or Loss Gain or
Ending Loss
2017 $54,000 $54,000 $ 0 $ 0
2018 44,000 42,500 1,500 1,500
2019 36,000 38,000 (2,000) (3,500)

(a) 2017
No Entry (Carrying value = Fair Value)

2018
Notes Payable...................................................................
1,500
Unrealized Holding Gain or Loss—
Income................................................................. 1,500

2019
Unrealized Holding Gain or Loss—Income.................... 3,500
Notes Payable............................................ 3,500

(b) The fair value of $42,500.

(c) Unrealized holding loss of $3,500.

(d) Fallen’s creditworthiness has improved during 2019 because

bond investors are receiving a higher rate relative to investors in
similar-risk investments. Any gain and losses arising from
changes in fallen credit risk should be recorded in other
comprehensive income.

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*EXERCISE 15-22

Preferred Common Total

(a) Preferred stock is cumulative,
fully participating $36,000 $330,000 $366,000

The computation for these amounts is as follows:

Preferred Common Total

Dividends in arrears
(7% X $10 X 20,000) $14,000 $ 14,000
Current dividend
Preferred 14,000
Common (7% X $100 X 30,000) $210,000 224,000
Balance dividend pro-rata 8,000 120,000 128,000*
$36,000 $330,000 $366,000

*Additional amount available for participation

($366,000 – $14,000 – $224,000) $ 128,000
Par value of stock that is to participate
($200,000 + $3,000,000) $3,200,000
Rate of participation
$128,000 ÷ $3,200,000 4%
Participating dividend
Preferred, 4% X $200,000 $ 8,000
Common, 4% X $3,000,000 120,000
$128,000

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Please note that the requirements for section (b) has been
changed from non-cumulative and non-participating
preferred stock to cumulative and participating up to 10%.

Preferred Common Total

(b) Preferred stock is cumulative,
participating up to 10% $36,000 $330,000 $366,000

The computation for these amounts is as follows:

Preferred Common Total

Dividends in arrears
(7% X $10 X 20,000) $14,000 $ 14,000
Current dividend
Preferred 14,000
Common (7% X $100 X 30,000) $210,000 224,000

Additional 3% to Preferred 6,000 6,000

(3% X $10 X 20,000)
122,000 122,000
Remaining balance available
to Common $34,000 $332,000 $366,000