Chapter14BondsandLongTermNotes

Exercise141
1.PriceofthebondsatJanuary1,2013
Interest
$12,000,000
x
Principal
$240,000,000
x
Presentvalue(price)ofthebonds

*
**

11.46992*= $137,639,040
0.31180**= 74,832,000
$212,471,040

5%x$240,000,000
presentvalueofanordinaryannuityof$1:n=20,i=6%
presentvalueof$1:n=20,i=6%

2.January1,2013
Cash(pricedeterminedabove)....................................... 212,471,040
Discountonbonds(difference)................................... 27,528,960
Bondspayable(faceamount)..................................
240,000,000
3.June30,2013
Interestexpense(6%x$212,471,040)............................... 12,748,262
Discountonbondspayable(difference)..................
748,262
Cash(5%x$240,000,000)........................................
12,000,000
4.December31,2013
Interestexpense(6%x[$212,471,040+748,262)............ 12,793,158
Discountonbondspayable(difference)..................
793,158
Cash(5%x$240,000,000)........................................
12,000,000

Alternate Exercise and Problem Solutions

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Exercise142
Requirement1
Schmidt(Issuer)
Cash(102%x$60million)...........................................
Convertiblebondspayable(faceamount)...............
Premiumonbondspayable(difference)..................
FacialMapping(Investor)
Investmentinconvertiblebonds(10%x$60million)..
Premiumonbondinvestment(difference).....................
Cash(102%x$6million).........................................
Requirement2
Schmidt(Issuer)
Interestexpense($2,700,000$60,000)............................
Premiumonbondspayable($1,200,00020).............
Cash(4.5%x$60,000,000).......................................
FacialMapping(Investor)
Cash(4.5%x$6,000,000).............................................
Premiumonbondinvestment($120,00020)........
Interestrevenue($270,000$6,000)............................

61,200,000

6,000,000
120,000

2,640,000
60,000

270,000

60,000,000
1,200,000

6,120,000

2,700,000

6,000
264,000

[Usingthestraightlinemethod,eachinterestentryisthesame.]
Requirement3
Schmidt(Issuer)
Convertiblebondspayable(10%oftheaccountbalance)
Premiumonbondspayable
(($1,200,000[$60,000x11])x10%).......................
Commonstock([6,000x40shares]x$1par)............
Paidincapitalexcessofpar(tobalance).............

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6,000,000
54,000

240,000
5,814,000

Intermediate Accounting, 7e

FacialMapping(Investor)
Investmentincommonstock(tobalance)......................
Investmentinconvertiblebonds(accountbalance). .
Premiumonbondinvestment($120,000[$600x11])

Alternate Exercise and Problem Solutions

6,054,000

6,000,000
54,000

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Exercise143
Requirement1
June30,2013
Interest expense (5% x $368 million)
Discount on bonds payable (difference)
Cash (4% x $400 million)

18,400,000
2,400,000
16,000,000

Requirement2
December31,2013
Interest expense (5% x [$368 million + 2.4 million])
Discount on bonds payable (difference)
Cash (4% x $400 million)

18,520,000
2,520,000
16,000,000

Requirement3
The interest entries increased the book value from $368,000,000 to $372,920,000.
To increase the book value to $376,000,000, Unnatural needed the following entry:
Unrealized holding loss
Fair value adjustment ($376,000,000 372,920,000)

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3,080,000
3,080,000

Intermediate Accounting, 7e

PROBLEMSProblem141
Requirement1
Cash
Interest
4.5%xFaceAmount

1
2
3
4
5
6
7
8

9,000
9,000
9,000
9,000
9,000
9,000
9,000
9,000

Effective
Interest
5%xOutstandingBalance
.05(193,537)
.05(194,214)
.05(194,925)
.05(195,671)
.05(196,455)
.05(197,278)
.05(198,142)
.05(199,049)

72,000

=
=
=
=
=
=
=
=

9,677
9,711
9,746
9,784
9,823
9,864
9,907
9,951*
78,463

Increasein
Balance

677
711
746
784
823
864
907
951

Outstanding
Balance

193,537
194,214
194,925
195,671
196,455
197,278
198,142
199,049
200,000

6,463

*rounded.

Requirement2

Alternate Exercise and Problem Solutions

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Cash
Interest
4.5%xFaceAmount

1
2
3
4
5
6
7
8

9,000
9,000
9,000
9,000
9,000
9,000
9,000
9,000

Recorded
Interest
CashplusDiscountReduction
(9,000+808)
(9,000+808)
(9,000+808)
(9,000+808)
(9,000+808)
(9,000+808)
(9,000+808)
(9,000+808)

72,000

=
=
=
=
=
=
=
=

Increasein
Balance
$6,4638

9,808
9,808
9,808
9,808
9,808
9,808
9,808
9,808

808
808
808
808
808
808
808
808

78,463

6,463

Outstanding
Balance

193,537
194,345
195,153
195,961
196,769
197,577
198,385
199,192*
200,000

*rounded.

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Intermediate Accounting, 7e

Problem141(continued)
Requirement3
(effectiveinterest)
Interestexpense(5%x$196,455)......................................
Discountonbondspayable(difference)..................
Cash(4.5%x$200,000)............................................
(straightline)
Interestexpense(9,000+808)...........................................
Discountonbondspayable(6,4638)...................
Cash(4.5%x$200,000)............................................

9,823

9,808

823
9,000

808
9,000

Requirement4
By the straightline method, a company determines interest indirectly by
allocatingadiscountorapremiumequallytoeachperiodoverthetermtomaturity.
Thisisallowedifdoingsoproducesresultsthatarenotmateriallydifferentfromthe
interestmethod.Thedecisionshouldbeguidedbywhetherthestraightlinemethod
wouldtendtomisleadinvestorsandcreditorsintheparticularcircumstance.
Allocatingthediscountorpremiumequallyoverthelifeofthebondsbythe
straightlinemethodresultsinanunchangingdollaramountofinteresteachperiod.
Bythestraightlinemethod,theamountofthediscounttobereducedperiodicallyis
calculated,andtheeffectiveinterestistheplugfigure.
Unchangingdollaramountslikethesearenotproducedwhentheeffectiveinterest
approachisused.Bythatapproach,thedollaramountsofinterestvaryovertheterm
tomaturitybecausethepercentagerateofinterestremainsconstant,butisappliedto
achangingdebtbalance.
Remember that the straightline method, is not an alternative method of
determininginterestinaconceptualsense,butisanapplicationofthe materiality
concept.TheappropriateapplicationofGAAP,theeffectiveinterestmethod,isby
passedasapracticalexpediencyinsituationswhendoingsohasnomaterialeffect
ontheresults.

Alternate Exercise and Problem Solutions

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Problem141(concluded)
Requirement5
Theamortizationscheduleinrequirement1givesustheanswer$19,728.The
outstanding debt balance after the June 30, 2015, interest payment (line 5) is the
presentvalueatthattime($197,278)oftheremainingpayments.Since$20,000face
amountofthebondsis10%oftheentireissue,wetake10%ofthetableamount.
Thiscanbeconfirmedbycalculatingthepresentvalue:
Interest
$900 x 2.72325*=
Principal
$20,000 x 0.86384**=
Presentvalue(price)ofthebonds

$2,451
17,276
$19,727(rounded)

4.5%x$20,000
* presentvalueofanordinaryannuityof$1:n=3,i=5%
** presentvalueof$1:n=3,i=5%

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Intermediate Accounting, 7e

Problem142
Requirement1
Interest $25,000 x 3.16987*=
Principal
$500,000 x 0.68301**=
Presentvalue(price)ofthenote

$79,247
341,505
$420,752

5%x$500,000
* presentvalueofanordinaryannuityof$1:n=4,i=10%
** presentvalueof$1:n=4,i=10%

Operationalassets(pricedeterminedabove).....................
Discountonnotespayable(difference)...........................
Notespayable(faceamount).......................................

420,752
79,248

500,000

Requirement2

Dec.31

Cash
Interest

2013 25,000
2014201425,000
2015 25,000
2016 25,000

Effective
Interest
.10(420,753)
.10(437,827)
.10(456,610)
.10(477,271)

100,000

= 42,075
= 43,783
= 45,661
=47,729*
179,248

Increasein
Balance

17,075
18,783
20,661
22,729

Outstanding
Balance

420,752
437,827
456,610
477,271
500,000

79,248

*rounded

Requirement3
Interestexpense(marketratexoutstandingbalance)...........
Discountonnotespayable(difference).......................
Cash(statedratexfaceamount)....................................

Alternate Exercise and Problem Solutions

45,661

20,661
25,000

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Problem142(concluded)
Requirement4
$420,753 3.16987 =
amount
ofloan

$132,735

(fromTable6A4) installment
n=4,i=10%
payment

Requirement5
Cash
Dec.31 Payment

Effective
Interest
10%xOutstandingBalance

2013 132,735 .10(420,753)

20142014132,735 .10(330,093)
2015 132,735 .10(230,367)
2016 132,735 .10(120,669)
530,940

=
=
=
=

42,075
33,009
23,037
12,066*
110,187

Decreasein
Balance
BalanceReduction

90,660
99,726
109,698
120,669

Outstanding
Balance

420,753
330,093
230,367
120,669
0

420,753

*rounded

Requirement6
Interestexpense(marketratexoutstandingbalance)...........
Notepayable(difference)................................................
Cash(paymentdeterminedabove)..................................

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23,037
109,698

132,735

Intermediate Accounting, 7e

Problem143
Requirement1
Bondspayable(faceamount)..........................................
Premiumonbonds(20/40x$30,000,000)........................
Gainonearlyextinguishment(tobalance).................
Cash($100,000,000x102%).......................................
Requirement2
Bondspayable(faceamount)..........................................
Premiumonbonds(10/40x$30,000,000)........................
Gainonearlyextinguishment(tobalance).................
Cash(given)..............................................................

Alternate Exercise and Problem Solutions

100,000,000
15,000,000
13,000,000
102,000,000
50,000,000
7,500,000
5,000,000
52,500,000

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