SOLUTIONS TO PROBLEMS

PROBLEM 14-1
(a)

The bonds were sold at a discount of $5,651. Evidence of the

discount is the January 1, 2008 book value of $94,349, which
is less than the maturity value of $100,000 in 2017.

(b)

The interest allocation and bond discount amortization are

based upon the effective-interest method; this is evident from
the increasing interest charge. Under the straight-line method
the amount of interest would have been $11,565.10 [$11,000 +
($5,651 10)] for each year of the life of the bonds.

(c)

The stated rate is 11% ($11,000 $100,000). The effective rate

is 12% ($11,322 $94,349).

(d)

January 1, 2008
Cash...................................................................................
94,349
Discount on Bonds Payable............................................
5,651
Bonds Payable.........................................................

100,000

December 31, 2008

Interest Expense...............................................................
11,322
Discount on Bonds Payable...................................
Interest Payable.......................................................

322
11,000

January 1, 2015 (Interest Payment)

Interest Payable................................................................
11,000
Cash..........................................................................

11,000

December 31, 2015

Interest Expense...............................................................
11,712
Discount on Bonds Payable...................................
Interest Payable.......................................................

712
11,000

(e)

(f)

PROBLEM 14-2
(a)

Present value of the principal

$2,000,000 X .38554 (PV10, 10%)...........................

$ 771,080

Present value of the interest payments

$210,000* X 6.14457 (PVOA10, 10%).....................

1,290,360

Present value (selling price of the bonds).........

$2,061,440

*$2,000,000 X 10.5% = $210,000

Cash...................................................................................
2,011,440
Unamortized Bond Issue Costs.......................................
50,000
Bonds Payable.........................................................
Premium Bonds Payable.........................................
(b)
Date
1/1/13
1/1/14
1/1/15
1/1/16
1/1/17
(c)

Cash
Paid
$210,000
210,000
210,000
210,000

Interest
Expense
$206,144
205,758
205,334
204,868

2,000,000
61,440

Carrying
Premium
Amount of
Amortization
Bonds
$2,061,440
$3,856
2,057,584
4,242
2,053,342
4,666
2,048,676
5,132
2,043,544

Carrying amount as of 1/1/16................................

Less: Amortization of bond premium
(5,132 2)....................................................
Carrying amount as of 7/1/16................................

$2,048,676

Reacquisition price................................................
Carrying amount as of 7/1/16
($2,046,110 2)....................................................

$1,065,000

Unamortized bond issue costs ($32,500 2).......

Loss on redemption of bonds...............................

2,566
$2,046,110

(1,023,055)
41,945
16,250
$ 58,195

PROBLEM 14-2 (Continued)

Entry for accrued interest
Interest Expense...............................................................
51,217
Premium on Bonds Payable
($5,132 X 1/2 X 1/2).........................................................
1,283
Cash
($210,000 X 1/2 X 1/2)...........................................

52,500

Entry for reacquisition

Bonds Payable..................................................................
1,000,000
Premium on Bonds Payable............................................
23,055*
Loss on Redemption of Bonds .......................................
58,195
Unamortized Bond Issue Costs.............................
16,250**
Cash..........................................................................
1,065,000
*Premium as of 7/1/14 to be written off
($2,046,110 $2,000,000) X 1/2 = $23,055
**($50,000 X 1/2) 10 = $2,500 per year
$2,500 X 3.5 = $8,750
Remaining Balance: $25,000 $8,750 = $16,250 on 1/2 Bonds
The loss is reported as an ordinary loss.
PROBLEM 14-3
(a)
Date
1/1/14
4/1/14
7/1/14
10/1/14
1/1/15

Cash
Paid

Interest
Expense

Discount
Amortized

$400
400
400
400

$640*
645
650
655

$240
245
250
255

Carrying
Amount of
Note
$32,000
32,240
32,485
32,735
32,990

*($32,000 X 8% X 1/4)
(b)

At this point, we see that the customer owes $32,990, or $990

more than at the beginning of the year.

(c)

To earn 8% over the next two years the quarterly payments

must be $4,503 computed as follows:

$32,990 7.32548 (PVOA8, 2%) = $4,503

(d)
Date
1/1/14
4/1/14
7/1/14
10/1/14
1/1/15
4/1/15
7/1/15
10/1/15
1/1/16

Cash
Paid

Interest
Expense

Discount
Amortized

$4,503
4,503
4,503
4,503
4,503
4,503
4,503
4,503

$660
583
505
425
343
260
175
83*

$3,843
3,920
3,998
4,078
4,160
4,243
4,328
4,420

Carrying
Amount of
Note
$32,990
29,147
25,227
21,229
17,151
12,991
8,748
4,420
0

*rounded up $5
(e)

The new sales gimmick may bring people into the showroom
the first time but will drive them away once they learn of the
amount of their year 2 and year 3 payments. Many will not
have budgeted for these increases, and will be in a bind
because they owe more on their car than its worth. One should
question the ethics of a dealer using this tactic.
PROBLEM 14-4

(a)

Entry to record the issuance of the 11% bonds on December 18, 2014:
Cash ($4,000,000 X 1.02)..................................................
4,080,000
Bonds Payable.........................................................
Premium on Bonds Payable...................................

4,000,000
80,000

Entry to record the retirement of the 9% bonds on January 2, 2015:

Bonds Payable..................................................................
3,000,000
Loss on Redemption of Bonds........................................
180,000
Discount on Bonds Payable...................................
($150,000 X 10/25)
Cash ($3,000,000 X 104%).......................................
[The loss represents the excess of the
cash paid ($3,120,000) over the

60,000
3,120,000

carrying amount of the bonds

($2,940,000).]
(b) The loss is reported as an ordinary loss.
Note 1. Loss on Bond Redemption
The loss represents a loss of $180,000 from the redemption
and retirement of $3,000,000 of the Companys outstanding
bond issue due in 2025. The funds used to purchase the
mortgage bonds represent a portion of the proceeds from the
sale of $4,000,000 of 11% debenture bonds issued December
18, 2014 and due in 2034.

PROBLEM 14-5
1. Sanford Co.
Schedule of Bond Discount Amortization
Effective-Interest Method
10% Bonds Sold to Yield 12%
Date
3/1/14
9/1/14
3/1/15
9/1/15
3/1/16
9/1/16
3/1/17
9/1/17

Cash
Paid

Interest
Expense

Discount
Amortized

$25,000*
25,000
25,000
25,000
25,000
25,000
25,000

$28,325
28,525
28,736
28,961
29,198
29,450
29,715**

$3,325
3,525
3,736
3,961
4,198
4,450
4,715

Carrying
Amount of
Bonds
$472,090
475,415
478,940
482,676
486,637
490,835
495,285
500,000

*($500,000 X 10% X 1/2)

**Rounded $2
3/1/14

Cash...................................................................................
472,090
Discount on Bonds Payable............................................
27,910*
Bonds Payable.........................................................

500,000

*Maturity value of bonds payable....................................

Present value of $500,000 due in 7 periods at 6%
($500,000 X .66506)....................................................... $332,530
Present value of interest payable semiannually
($25,000 X 5.58238)....................................................... 139,560
Proceeds from sale of bonds..........................................
Discount on bonds payable............................................

$500,000

(472,090)
$ 27,910

9/1/14

Interest Expense...............................................................
28,325
Discount on Bonds Payable...................................
Cash..........................................................................

3,325
25,000

12/31/14

Interest Expense...............................................................
19,017
Discount on Bonds Payable
($3,525 X 4/6).........................................................
Interest Payable ($25,000 X 4/6).............................

2,350
16,667

Interest Expense...............................................................
9,508
Interest Payable................................................................
16,667
Discount on Bonds Payable
($3,525 X 2/6).........................................................
Cash..........................................................................

1,175
25,000

9/1/15

Interest Expense...............................................................
28,736
Discount on Bonds Payable...................................
Cash..........................................................................

3,736
25,000

12/31/15

Interest Expense...............................................................
19,308
Discount on Bonds Payable
($3,961 X 4/6).........................................................
Interest Payable.......................................................

2,641
16,667

3/1/15

2. Titania Co.

Date
6/1/14
12/1/14
6/1/15

Cash
Paid

Interest
Expense

Premium
Amortized

$24,000
24,000

$21,293
21,157

$2,707
2,843

Carrying
Amount of
Bonds
$425,853
423,146
420,303

12/1/15
6/1/16
12/1/16
6/1/17
12/1/17
6/1/18

24,000
24,000
24,000
24,000
24,000
24,000

21,015
20,866
20,709
20,545
20,372
20,190**

2,985
3,134
3,291
3,455
3,628
3,810

417,318
414,184
410,893
407,438
403,810
400,000

*($400,000 X 12% X 1/2)

**$.50 adjustment due to rounding.
6/1/14

Cash...................................................................................
425,853
Premium on Bonds Payable...................................
Bonds Payable.........................................................

Maturity value of bonds payable.....................................

Present value of $400,000 due in 8 periods at 5%
($400,000 X .67684)........................................................ $270,736
Present value of interest payable semiannually
($24,000 X 6.46321)........................................................ 155,117
Proceeds from sale of bonds...........................................
Premium on bonds payable.............................................
12/1/14

12/31/14

6/1/15

10/1/15

25,853
400,000
$400,000

(425,853)
$ 25,853

Interest Expense...............................................................
21,293*
Premium on Bonds Payable............................................
2,707
Cash ($400,000 X .12 X 6/12)...................................

24,000

Interest Expense ($21,157 X 1/6).....................................

3,526
Premium on Bonds Payable
($2,843 X 1/6)..................................................................
474
Interest Payable ($24,000 X 1/6).............................

4,000

Interest Expense ($21,157 X 5/6).....................................

17,631
Interest Payable................................................................
4,000
Premium on Bonds Payable
($2,843 X 5/6)..................................................................
2,369
Cash..........................................................................

24,000

Interest Expense
($21,015 X .3* X 4/6).......................................................
4,203
Premium on Bonds Payable
($2,985 X .3 X 4/6)...........................................................
597
Cash..........................................................................

4,800

*$120,000 $400,000 = .3
10/1/15

Bonds Payable..................................................................
120,000
Premium on Bonds Payable............................................
5,494
Gain on Redemption of Bonds...............................
Cash..........................................................................

*Reacquisition price
$126,000 ($120,000 X 12% X 4/12)
Net carrying amount of bonds redeemed:
Par value
Unamortized premium
[.3 X ($25,853 $2,707 $2,843)] $597
Gain on redemption
12/1/15

12/31/15

6/1/16

12/1/16

4,294*
121,200
$121,200

$120,000
5,494

Interest Expense ($21,015 X .7*)......................................

14,711
Premium on Bonds Payable
($2,985 X .7)....................................................................
2,089
Cash ($24,000 X .7)..................................................
*($400,000 $120,000) $400,000 = .7

(125,494)
$ (4,294)

16,800

Interest Expense ($20,866 X .7 X 1/6)..............................

2,434
Premium on Bonds Payable
($3,134 X .7 X 1/6)...........................................................
366
Interest Payable
($24,000 X .7 X 1/6)...............................................

2,800

Interest Expense ($20,866 X .7 X 5/6)..............................

12,172
Interest Payable................................................................
2,800
Premium on Bonds Payable
($3,134 X .7 X 5/6)...........................................................
1,828
Cash ($24,000 X .7)..................................................

16,800

Interest Expense ($20,709 X .7).......................................

14,496
Premium on Bonds Payable
($3,291 X .7)....................................................................
2,304
Cash ($24,000 X .7)..................................................

16,800

PROBLEM 14-6

May 1, 2014

Cash
($900,000 X 106%) + ($900,000 X 12% X 4/12).............
990,000.00
Bonds Payable.........................................................
900,000.00
Premium on Bonds Payable...................................
54,000.00
Interest Expense ($900,000 X 12% X 4/12).............
36,000.00
December 31, 2014
Interest Expense ($900,000 X 12%).................................
108,000.00
Interest Payable.......................................................
108,000.00
Premium on Bonds Payable............................................ 3,724.14
Interest Expense
($54,000 X 8/116* = $3,724.14).............................

3,724.14

*(12 X 10) 4 = 116

January 1, 2015
Interest Payable................................................................
108,000.00
Cash..........................................................................
108,000.00
April 1, 2015
Bonds Payable..................................................................
360,000.00
Premium on Bonds Payable............................................19,551.72*
Interest Expense ($360,000 X .12 X 3/12)........................10,800.00
Cash ($367,200 + $10,800)......................................
378,000.00
Gain on Redemption of Bonds...............................
12,351.72**
*[($360,000 $900,000) X $54,000 X 105/116 = $19,551.72]
**[($360,000 + $19,551.72) ($360,000 X 102%)]
Reacquisition price (including accrued interest)
($360,000 X 102%) + ($360,000 X 12% X 3/12).............
$378,000.00
Net carrying value of bonds redeemed:
Par value............................................................................
$360,000.00
Unamortized premium
[$54,000 X ($360,000 $900,000) X 105/116]...............
19,551.72 (379,551.72)
Accrued interest ($360,000 X 12% X 3/12)......................
(10,800.00)
Gain on redemption of bonds..........................................
$ (12,351.72)
December 31, 2015
Interest Expense ($540,000 X .12)...................................64,800.00

Interest Payable.......................................................
Premium on Bonds Payable............................................ 3,910.34
Interest Expense......................................................
Amortization per year on $540,000
($54,000 X 12/116 X .60*)...............................................
Amortization on $360,000 for 3 months
($54,000 X 3/116 X .40**)................................................
Total premium amortization.............................................
*($900,000 $360,000) $900,000 = .6
**$360,000 $900,000 = .4

PROBLEM 14-7

64,800.00
3,910.34
$3,351.72
558.62
$3,910.34

(a)

4/1/14

Cash (15,000 X $1,000 X 97%)...........................................

14,550,000
Discount on Bonds Payable..............................................
450,000
Bonds Payable.........................................................
15,000,000

(b)

10/1/14

Interest Expense................................................................
840,000
Cash..........................................................................
825,000*
Discount on Bonds Payable...................................
15,000**
*$15,000,000 X .11 X 6/12 =
$825,000
**$450,000 180 months =
$2,500/mo.; $2,500/mo.
X 6 months = $15,000

(c)

12/31/14 Interest Expense................................................................

420,000
Interest Payable
($825,000 X 3/6).....................................................
412,500
Discount on Bonds Payable
($2,500 X 3 months)..............................................7,500

(d)

3/1/15

Interest Payable
($6,000,000 X 10% X 3/12)...............................................
165,000
Interest Expense................................................................
112,000
Cash..........................................................................
275,000*
Discount on Bonds Payable...................................2,000**
*Cash paid to retiring
bondholders: $6,000,000
X .11 X 5/12 = $275,000
**$2,500/mo. X 2 months X
6
/15 of the bonds = $2,000

At March 1, 2015 the carrying amount of the retired

bonds is:
Bonds payable......................................................................... $6,000,000
Less: Unamortized discount.................................................
169,000*
$5,831,000
6
*$2,500/mo. X 169 months X /15 of the bonds = $169,000

The reacquisition price: 200,000 shares X $31 = $6,200,000.

The loss on redemption of bonds is:
Reacquisition price........................................................
Less: Carrying amount.................................................
Loss on redemption of bonds.......................................
The entry to record extinguishment of the bonds is:
Bonds Payable.........................................................
6,000,000
Loss on Redemption of Bonds...............................
369,000
Discount on Bonds Payable...........................
Common Stock................................................
Paid-in Capital in Excess of Par
Common Stock...........................................

$6,200,000
5,831,000
$ 369,000

169,000
2,000,000
4,200,000

PROBLEM 14-8

(a)

(b)

December 31, 2014

Equipment.........................................................................
409,806.00
Discount on Notes Payable..............................................
190,194.00
Notes Payable..........................................................
(Computer capitalized at the present
value of the note$600,000 X .68301)

600,000.00

December 31, 2015

Depreciation Expense......................................................
67,961.20
Accumulated DepreciationEquipment
[($409,806 $70,000) 5].....................................

67,961.20

Interest Expense...............................................................
40,980.60
Discount on Notes Payable....................................

40,980.60

Date
12/31/14
12/31/15
12/31/16

Schedule of Note Discount Amortization

Debit, Interest Expense Credit,
Carrying Amount
Discount on Notes Payable
of Note
$409,806.00
$40,980.60
450,786.60
45,078.66
495,865.26

12/31/17
12/31/18

49,586.53
54,548.21*

545,451.79
600,000.00

*3.03 adjustment due to rounding.

(c)

December 31, 2016

Depreciation Expense......................................................
67,961.20
Accumulated DepreciationEquipment...............

67,961.20

Interest Expense...............................................................
45,078.66
Discount on Notes Payable....................................

45,078.66

PROBLEM 14-9

(a)

12/31/13 Machinery..........................................................................
182,485.20
Discount on Notes Payable..............................................
27,514.80
Cash..........................................................................
50,000.00
Notes Payable..........................................................
160,000.00
[To record machinery at the
present value of the note plus
the immediate cash payment:
PV of $40,000 annuity @ 8%
for 4 years ($40,000 X
3.31213)]................................................................
$132,485.20
Down payment.........................................................
50,000.00
Capitalized value of
Machinery..............................................................
$182,485.20

(b)

12/31/14 Notes Payable...................................................................

40,000.00
Cash..........................................................................
40,000.00
Interest Expense...............................................................
10,598.82
Discount on Notes Payable....................................
10,598.82

Date
12/31/13
12/31/14
12/31/15
12/31/16

Schedule of Note Discount Amortization

Interest
Carrying
Cash Paid
Expense
Amortization
Amount of Note
$132,485.20
$40,000.00
$10,598.82*
$29,401.18
103,084.02**
40,000.00
8,246.72
31,753.28
71,330.74
40,000.00
5,706.46
34,293.54
37,037.20

12/31/17

40,000.00

2,962.80***

37,037.20

*$132,485.20 X 8%
**$103,084.02 = $132,485.20 $29,401.18.
***$0.18 adjustment due to rounding.
(c)

12/31/15 Notes Payable...................................................................

40,000.00
Cash..........................................................................
40,000.00
Interest Expense...............................................................
8,246.72
Discount on Notes Payable....................................
8,246.72

(d)

12/31/16 Notes Payable...................................................................

40,000.00
Cash..........................................................................
40,000.00
Interest Expense...............................................................
5,706.46
Discount on Notes Payable....................................
5,706.46

(e)

12/31/17 Notes Payable...................................................................

40,000.00
Cash..........................................................................
40,000.00
Interest Expense...............................................................
2,962.80
Discount on Notes Payable....................................
2,962.80
PROBLEM 14-10

(a)

(b)

Wilke Co.
Selling price of the bonds ($4,000,000 X 103%)......
Accrued interest from January 1 to February
28, 2015 ($4,000,000 X 9% X 2/12)..........................
Total cash received from issuance of the bonds....
Less: Bond issuance costs.......................................
Net amount of cash received....................................
Langley Co.
Carrying amount of the bonds on 1/1/14.................
Effective-interest rate (10%)......................................
Interest expense to be reported for 2014.................

$4,120,000
60,000
4,180,000
27,000
$4,153,000
$656,992
X 0.10
$ 65,699

(c)

Tweedie Building Co.

Maturities and sinking fund requirements on long-term debt for
the next five year are as follows:
2015
$400,000
2018 $200,000
2016
350,000
2019
350,000
2017
200,000
(d)

Beckford Inc.
Since the three bonds reported by Beckford Inc. are secured by
either real estate, securities of other corporations, or plant equipment, none of the bonds are classified as debenture bonds.
PROBLEM 14-11

Dear Samantha,
When a bond is issued at face value, the annual interest expense
and the interest payout equals the face value of the bond times the
interest rate stated on its face. However, if the bond is issued to
yield a higher or lower interest rate than what is stated on its face,
the interest expense and the actual interest payout will differ.
Labeled as a discount or premium respectively, this difference in
interest must be systematically associated with the interest periods
which occur over the bonds life through a process called
amortization.
One method of amortization is the straight-line method whereby the
amount of the premium or discount is divided by the number of
interest periods in the bonds life. The result is an even amount of
amortization for every period.
However, a better way of recording interest expense in the period
during which it is incurred is the effective-interest method. Assume a
premium: the theory behind this method is that, as time passes, the
difference between the face value of the bond and its carrying
amount becomes smaller, resulting in a lower interest expense
every period. (The carrying amount equals the face value of the
bond plus any unamortized portion of the premium.) Because the
carrying amount of the bond becomes smaller over time, the
effective-interest expense also does. Since the stated interest rate

remains constant, the resulting difference between the actual interest

payout and the interest expense recognized must be reflected when
interest expense is recorded for the period.
To amortize the premium applying this method to the data
provided, you must know the bonds face amount, its stated rate of
interest, its effective rate of interest, and its premium.
1.

Multiply the stated rate times the face amount. This is the
interest payout.

2.

Calculate the carrying amount by adding the premium to the

bonds face amount. Now multiply this carrying amount by the
effective rate which gives you the actual interest expense.

3.

Subtract the amount calculated in #2 from that found in #1.

This is the amount to be amortized for the period.

4.

Subtract the difference computed in #3 from the carrying

amount. The process begins all over when you apply the
effective rate to this new carrying amount for the following
period.

The schedule below illustrates this calculation. The face value

($2,000,000) is multiplied by the stated rate of 11 percent, while the
carrying amount ($2,171,600) is multiplied by the effective rate of 10
percent. Because this bond pays interest semiannually, you must
also multiply these amounts by 6/12. The result is the stated
interest of $110,000 and effective-interest of $108,580. The difference
($1,420) is amortized, lowering the carrying amount of the bond to
$2,170,180. For the next period, this new carrying amount will be
multiplied by the effective rate times 6/12 and subtracted from the
constant $110,000. Obviously this time the effective-interest will be
lower than it was last period, resulting in a greater amount of
amortization in the next period.
Follow these steps and you should have no trouble amortizing
premiums and discounts over the life of a bond.
Sincerely,
Attachment to letter

Date
6/30/14
12/31/14
6/30/15
12/31/15
6/30/16

HOBART COMPANY
Interest and Discount Amortization Schedule
11% Bond Issued to Yield 10%
Cash
Interest
Carrying
Paid
Expense
Premium
Amount of
(11%)
(10%)
Amortized
Bond
$2,171,600
$110,000
$108,580
$1,420
2,170,180
110,000
108,509
1,491
2,168,689
110,000
108,434
1,566
2,167,123
110,000
108,356
1,644
2,165,479
*PROBLEM 14-12

(a)

It is a troubled debt restructuring.

(b)

1.

No entry.

2.

Bad Debt Expense...................................................

237,311*
Allowance for Doubtful Accounts..................

237,311

*Calculation of loss.
Pre-restructure carrying amount
Present value of restructured cash flows:
Present value of $600,000 due in 10 years at
12%, interest payable annually
($600,000 X .32197).........................................................
$193,182
Present value of $30,000 interest payable
annually for 10 years at 12%
($30,000 X 5.65022).........................................................
169,507
Creditors loss on restructuring of debt.........................
(c)

$600,000

(362,689)
$237,311

Losses are calculated based upon the discounted present

value of future cash flows. However, the debtors gain is
calculated using the undiscounted cash flows. This does not
fairly state the economic benefits derived by the debtor as a
result of the restructuring.

*PROBLEM 14-13
(a)

On the books of Halvor Corporation:

Notes Payable...................................................................
5,000,000
Common Stock........................................................
Paid-in Capital in Excess of Par
Common Stock...................................................
Gain on Restructuring of Debt...............................
Fair value of equity
Carrying amount of debt
Gain on restructuring
of debt

(b)

1,700,000
2,000,000
1,300,000

$3,700,000
(5,000,000)
($1,300,000)

On the books of Frontenac National Bank:

Equity Investments...........................................................
3,700,000
Allowance for Doubtful Accounts...................................
1,300,000
Notes Receivable.....................................................

5,000,000

On the books of Halvor:

Notes Payable...................................................................
5,000,000
Land..........................................................................
Gain on Disposal of Plant Assets..........................
Gain on Restructuring of Debt...............................

3,250,000
750,000
1,000,000

Fair value of land

Book value of land
Gain on disposal of
plant assets
Note payable (carrying
amount)
Fair value of land
Gain on restructuring
of debt

$4,000,000
(3,250,000)
$ 750,000
$5,000,000
(4,000,000)
$1,000,000

On the books of Frontenac National Bank:

Land...................................................................................
4,000,000
Allowance for Doubtful Accounts...................................
1,000,000
Notes Receivable.....................................................

5,000,000

(c)

On the books of Halvor:

No entry is needed because aggregate cash flows equal
the carrying amount.
Aggregate cash flowsprincipal...........................
Carrying amount......................................................
On the books of Frontenac National Bank:
Bad Debt Expense............................................................
1,243,400*
Allowance for Doubtful Accounts..........................
*Calculation of loss:
Pre-restructure carrying amount
Less: Present value of restructured cash flows:
Present value of $5,000,000 due in
3 years at 10% (Table 6-2);
($5,000,000 X 0.75132)......................................
Creditors loss on restructuring of debt.........................

(d)

On the books of Halvor:

No entry is needed because aggregate cash flows equal
the carrying amount.
Principal...................................................................
Interest ($4,166,667 X 10% X 2)..............................
Aggregate cash flows
Carrying amount

On the books of Frontenac National Bank:

Bad Debt Expense............................................................
1,212,100*
Allowance for Doubtful Accounts..........................
*PROBLEM 14-13 (Continued)

$5,000,000
$5,000,000

1,243,400
$5,000,000

3,756,600
$1,243,400

$4,166,667
833,333
$5,000,000
$5,000,000

1,212,100

*Calculation of loss:
Pre-restructure carrying amount...................................
Present value of restructured cash flows:
Present value of $4,166,667 due in
3 years at 10%, interest payable
annually (Table 6-2); ($4,166,667 X
.75132)...................................................................
$3,130,500
Present value of $416,667 interest
payable annually for 3 years at 10%,
(Table 6-4); ($416,667 X 2.48685).........................
1,036,188
Less first year payment:
Present value of $416,667 interest due
in 1 year at 10% (Table 6-2);
($416,667 X .90909)...............................................
378,788
Creditors loss on restructuring of debt.......................

$5,000,000

3,787,900
$1,212,100

*PROBLEM 14-14
Carrying amount of the debt at date of restructure, $330,000 +
$33,000 = $363,000. Total future cash flow, $300,000 + ($300,000 X .
10 X 3) = $390,000. Because the future cash flow exceeds the
carrying amount of the debt, no gain is recognized at the date of
restructure.
(a)

The effective-interest rate subsequent to restructure is

computed by trial and error using the assumed partial present
value tables based on the present value of $300,000 (new
principal) plus $30,000 (interest per year) for three years to
equal $363,000.
Try 2 1/2%
($300,000)(.92859) =
($30,000)(2.85602) =
PV =

$278,577
85,681
$364,258

Try 2 5/8%
($300,000)(.92521) =
($30,000)(2.84913) =
PV =

$277,563
85,474
$363,037

Try 2 3/4%
($300,000)(.92184) =
($30,000)(2.84226) =
PV =

$276,552
85,268
$361,820

Therefore, the approximate effective rate is 2 5/8%.

(b)

Date
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18

SCHEDULE OF DEBT REDUCTION

AND INTEREST EXPENSE AMORTIZATION
Carrying Amount
Cash
Interest
Premium
of Note
Paid
Expense
Amortized
$363,000
$ 30,000
$9,529*
$ 20,471
342,529
30,000
8,991
21,009
321,520
30,000
8,480**
21,520
300,000
300,000
300,000
0

*$9,529 = $363,000 X 2.625%

**Adjusted $40 due to rounding.
(c)

Calculation of loss:
Pre-restructure carrying amount.....................................
$363,000
Present value of restructured cash flows:
Present value of $300,000 due in 3 years
at 10% , interest payable annually
(Table 6-2); ($300,000 X .75132)...........................
$225,396
Present value of $30,000 interest payable
annually for 3 years at 10% (Table 6-4);
($30,000 X 2.48685)...............................................
74,605 (300,000*)
Creditors loss on restructuring of debt.........................
$ 63,000
*Although the sum of the present value amounts is $300,001,
the true present value of a 10% note discounted at 10% is
face value, or $300,000. The $1 difference is due to rounding.

Date
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18

Cash
Received

Interest
Revenue

$ 30,000a
30,000
30,000
300,000

$30,000b
30,000
30,000
0

$30,000 = $300,000 X 10%.

Change in
Carrying
Amount
$

0
0
0
300,000

Carrying
Amount of
Note
$300,000
300,000c
300,000
300,000
0

$30,000 = $300,000 X 10%.

$300,000 = $300,000 $0.

b
c

(d)

(e)

Crocker Corp. entries:

December 31, 2014

Interest Payable................................................................
33,000
Notes Payable..........................................................

33,000

December 31, 2015

Interest Expense...............................................................
9,529
Notes Payable...................................................................
20,471
Cash..........................................................................

30,000

December 31, 2016

Interest Expense...............................................................
8,991
Notes Payable...................................................................
21,009
Cash..........................................................................

30,000

December 31, 2014

Bad Debt Expense............................................................
63,000
Allowance for Doubtful Accounts..........................

63,000

December 31, 2015, 2016

Cash...................................................................................
30,000
Interest Revenue......................................................

30,000