Chapter 14 Homework

Brief Exercise 14-8

Teton Corporation issued $704,000 of 9% bonds on November 1, 2014, for $745,018. The bonds
were dated November 1, 2014, and mature in 8 years, with interest payable each May 1 and
November 1. Teton uses the effective-interest method with an effective rate of 8%.

Prepare Teton’s December 31, 2014, adjusting entry. (Round answers to 0 decimal places, e.g.
38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the
amounts. Credit account titles are automatically indented when amount is entered. Do not
indent manually.)
Date Account Titles and Explanation Debit Credit
December 31, 2014

Interest Expense ($745,018 x 8% x 2/12) = $9,934

Interest Payable ($704,000 x 9% x 2/12) = $10,560

Brief Exercise 14-11

On January 1, 2014, Henderson Corporation redeemed $572,100 of bonds at 97. At the time of
redemption, the unamortized premium was $17,163 and unamortized bond issue costs were
$5,721.

Prepare the corporation’s journal entry to record the reacquisition of the bonds. (If no entry is
required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account
titles are automatically indented when amount is entered. Do not indent manually.)
Account Titles and Explanation Debit Credit

Brief Exercise 14-15

Shlee Corporation issued a 5-year, $70,300, zero-interest-bearing note to Garcia Company on
January 1, 2014, and received cash of $70,300. In addition, Shlee agreed to sell merchandise to
Garcia at an amount less than regular selling price over the 5-year period. The market rate of
interest for similar notes is 12%.

Prepare Shlee Corporation’s January 1 journal entry. (Round answers to 0 decimal places, e.g.
38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the
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amounts. Credit account titles are automatically indented when amount is entered. Do not
indent manually.)
Date Account Titles and Explanation Debit Credit
January 1, 2014

Brief Exercise 14-15

Unearned Sales Revenue $70,300 – ($70,300 x 0.56743) = $30,410

Exercise 14-2

Your answer is correct.

The following items are found in the financial statements.

Indicate how each of these items should be classified in the financial statements.
Classification
(a) Discount on bonds payable

(b) Interest expense (credit balance)

(c) Unamortized bond issue costs

(d) Gain on repurchase of debt

Mortgage payable (payable in equal amounts over

(e)
next 3 years)

(f) Debenture bonds payable (maturing in 5 years)

(g) Notes payable (due in 4 years)

(h) Premium on bonds payable

(i) Bonds payable (due in 3 years)

Exercise 14-2
(a) Discount on Bonds Payable-Contra account to bonds payable on balance sheet.
(b) Interest expense (credit balance)-Reclassify to interest payable on balance sheet.
(c) Unamortized Bond Issue Costs-Classified as “Other Assets” on balance sheet.
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Gain on repurchase of debt-Classify as part of other gains and losses on the income
(d)
statement.
Mortgage payable-Classify one-third as current liability and the remainder as long-term
(e)
liability on balance sheet.
(f) Debenture bonds-Classify as long-term liability on balance sheet.
(g) Notes payable-Classify as long-term liability on balance sheet.
(h) Premium on bonds payable-Classify as adjunct account to Bonds Payable on balance sheet
(i) Bonds payable-Classify as long-term liability on balance sheet.

Exercise 14-9
On June 30, 2014, Mischa Auer Company issued $4,166,000 face value of 13%, 20-year bonds
at $4,479,407, a yield of 12%. Auer uses the effective-interest method to amortize bond premium
or discount. The bonds pay semiannual interest on June 30 and December 31.

(a) Prepare the journal entries to record the following transactions. (Round answers to 0 decimal
places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0
for the amounts. Credit account titles are automatically indented when amount is entered. Do
not indent manually.)
(1) The issuance of the bonds on June 30, 2014.
(2) The payment of interest and the amortization of the premium on December 31, 2014.
(3) The payment of interest and the amortization of the premium on June 30, 2015.
(4) The payment of interest and the amortization of the premium on December 31, 2015.

No. Date Account Titles and Explanation Debit Credit

(1) June 30, 2014

(2) December 31, 2014

(3) June 30, 2015

(4) December 31, 2015

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(b) Show the proper balance sheet presentation for the liability for bonds payable on the
December 31, 2015, balance sheet. (Round answers to 0 decimal places, e.g. 38,548.)
Auer Company
Balance Sheet
December 31, 2015

(c) Provide the answers to the following questions.

(1) What amount of interest expense is reported for 2015? (Round answer to 0 decimal places,
e.g. 38,548.)
$
Interest expense reported for 2015

(2) Will the bond interest expense reported in 2015 be the same as, greater than, or less than the
amount that would be reported if the straight-line method of amortization were used?
The bond interest expense reported in 2015 will be

the amount that would be reported if the straight-line method of amortization were used.

(3) Determine the total cost of borrowing over the life of the bond. (Round answer to 0 decimal
places, e.g. 38,548.)
$
Total cost of borrowing over the life of the bond

(4) Will the total bond interest expense for the life of the bond be greater than, the same as, or
less than the total interest expense if the straight-line method of amortization were used?
The total bond interest expense for the life of the bond will be

the total interest expense if the straight-line method of amortization were used.
Exercise 14-9
(a) (2) Interest Expense = ($4,479,407 x 12% x 6/12) = $268,764
Cash = ($4,166,000 x 13% x 6/12) = $270,790

(3) Interest Expense = [($4,479,407 – $2,026) x 12% x 6/12] = $268,643

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[($4,479,407 – $2,026 – $2,147) x 12% x

(4) Interest Expense = = $268,514
6/12]

Premium on Bonds
(b) = ($313,407) – ($2,026 + $2,147 + $2,276) = $306,958
Payable

(c) (1) Interest expense for the period from

January 1 to June 30, 2015 from (a) 3 $268,643
Interest expense for the period from
July 1 to December 31, 2015 from (a) 4 268,514
Amount of bond interest expense reported for 2015 $537,157

(2) The amount of bond interest expense reported in 2015 will be greater than the amount that
would be reported if the straight-line method of amortization were used. Under the straight-line
method, the amortization of bond premium is $15,670 ($313,407/20). Bond interest expense for
2015 is the difference between the amortized premium, $15,670, and the actual interest paid,
$541,580 ($4,166,000 x 13%). Thus, the amount of bond interest expense is $525,910, which is
smaller than the bond interest expense under the effective-interest method.

(3) Total interest to be paid for the bond ($4,166,000 x 13% x 20) $10,831,600
Principal due in 2034 4,166,000
Total cash outlays for the bond 14,997,600
Cash received at issuance of the bond 4,479,407
Total cost of borrowing over the life of the bond $10,518,193

(4) They will be the same.

Exercise 14-19

Your answer is correct.

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). 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
December 31, 2014 $56,930 $56,930
December 31, 2015 46,660 45,060
December 31, 2016 38,850 40,980

(a) Prepare the journal entry at December 31 (Fallen’s year-end) for 2014, 2015, and 2016, to
record the fair value option for these notes. (If no entry is required, select "No Entry" for the
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account titles and enter 0 for the amounts.Credit account titles are automatically indented
when amount is entered. Do not indent manually.)
Date Account Titles and Explanation Debit Credit
Dec. 31, 2014

Dec. 31, 2015

Dec. 31, 2016

(b) At what amount will the note be reported on Fallen’s 2015 balance sheet?
$
Note to be reported on Fallen’s 2015 balance sheet

(c) What is the effect of recording the fair value option on these notes on Fallen’s 2016 income?
The effect of recording the fair value option would result in unrealized holding
$

of

Exercise 14-19
Change in
Unrealized Unrealized
Carrying Holding Gain Holding
Year Ending Value Fair Value or Loss Gain or Loss
2014 $56,930 $56,930 $0 $0
2015 46,660 45,060 1,600 1,600
2016 38,850 40,980 (2,130 ) (3,730 )

Problem 14-4
Holiday Company issued its 7%, 25-year mortgage bonds in the principal amount of
$3,019,000 on January 2, 2000, at a discount of $158,000, which it proceeded to amortize by
charges to expense over the life of the issue on a straight-line basis. The indenture securing the
issue provided that the bonds could be called for redemption in total but not in part at any time
before maturity at 104% of the principal amount, but it did not provide for any sinking fund.

On December 18, 2014, the company issued its 11%, 20-year debenture bonds in the principal
amount of $4,277,000 at 101, and the proceeds were used to redeem the 7%, 25-year mortgage
bonds on January 2, 2015. The indenture securing the new issue did not provide for any sinking
fund or for redemption before maturity.

(a) Prepare journal entries to record the issuance of (1) the 11% bonds and (2) the redemption of
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the 7% bonds. (If no entry is required, select "No Entry" for the account titles and enter 0 for
the amounts. Credit account titles are automatically indented when amount is entered. Do not
indent manually.)
No. Date Account Titles and Explanation Debit Credit
(1) December 18, 2014

(2) January 2, 2015

(b) Indicate the income statement treatment of the gain or loss from redemption.

The

is reported as

Problem 14-4
(a) Discount on Bonds Payable = ($158,000 x 10/25) = $63,200
Cash = ($3,019,000 x 104%) = $3,139,760

(b) The loss is reported as an ordinary loss.

IFRS Practice Question 1

Under IFRS, bond issuance costs, including the printing costs and legal fees associated with the
issuance, should be:

expensed in the period when the debt is issued.

recorded as a reduction in the carrying value of bonds payable.

accumulated in a deferred charge account and amortized over the life of the bonds.

reported as an expense in the period the bonds mature or are retired.

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IFRS Practice Question 2

Correct!

Which of the following is stated correctly?

Current liabilities follow non-current liabilities on the statement of financial position under
GAAP but non-current liabilities follow current liabilities under IFRS.

IFRS does not treat debt modifications as extinguishments of debt.

Under GAAP, bonds payable is recorded at the face amount and any premium or discount
is recorded in a separate account. Under IFRS, bonds payable is recorded at the carrying
value so no separate premium or discount accounts are used.

Bond issuance costs are recorded as a reduction of the carrying value of the debt under
GAAP but are recorded as an asset and amortized to expense over the term of the debt
under IFRS.

IFRS Practice Question 3

All of the following are differences between IFRS and GAAP in accounting for liabilities except:

When a bond is issued at a discount, GAAP records the discount in a separate contra
liability account. IFRS records the bond net of the discount.

Under IFRS, bond issuance costs reduce the carrying value of the debt. Under GAAP,
these costs are recorded as an asset and amortized to expense over the terms of the bond.

GAAP, but not IFRS, uses the term “troubled-debt restructurings.”

GAAP, but not IFRS, uses the term “provisions” for contingent liabilities which are
accrued.

IFRS Practice Question 4

Correct!

On January 1, Patterson Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of
interest for these bonds is 10%. Interest is payable annually on December 31. Patterson uses the
effectiveinterest method of amortizing bond discount. At the end of the first year, Patterson
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should report bonds payable of:

$4,725,500.

$4,714,500.

$258,050.

$4,745,000.

IFRS Practice Question 5

Correct!

On January 1, Martinez Inc. issued $3,000,000, 11% bonds for $3,195,000. The market rate of
interest for these bonds is 10%. Interest is payable annually on December 31. Martinez uses the
effectiveinterest method of amortizing bond premium. At the end of the first year, Martinez
should report bonds payable of:

$3,185,130.

$3,184,500.

$3,173,550.

$3,165,000.