Chapter

2 Noncurrent Liabilities

2-1.
At 8% At 12%
Bond issue price 5,405,725 4,632,025
Nominal interest for 2015 250,000 250,000
Interest expense for 2015 216,229 277,922
Premium/discount amortization in 2015 33,771 27,922
Bond carrying value at December 31, 205 5,371,954 4,659,947
Nominal interest for 2016 500,000 500,000
Interest expense for 2016 428,351 560,970
Premium/discount amortization in 2016 71,649 60,970
Bond carrying value at December 31, 2016 5,300,305 4,720,917

Computations:
At 8%: Issue price = (5,000,000 x 0.6756) + (250,000 x 8.1109)
= 3,378,000 + 2,027,725 = 5,405,725
A B C D
Interest Premium Bond
Date Paid Interest Expense Amortization Carrying Value
06/30/15 5,405,725
12/31/15 250,000 216,229 33,771 5,371,954
06/30/16 250,000 214,878 35,122 5,336,832
12/31/16 250,000 213,473 36,527 5,300,305
A = Face value x 5%
B = Carrying value, beg of year x 4%

At 12%: Issue price = (5,000,000 x 0.5584) + (250,000 x 7.3601)
= 2,792,000 + 1,840,025 = 4,632,025
A B C D
Interest Discount Bond
Date Paid Interest Expense Amortization Carrying Value
06/30/15 4,632,025
12/31/15 250,000 277,922 27,922 4,659,947
06/30/16 250,000 279,597 29,597 4,689,544
12/31/16 250,000 281,373 31,373 4,720,917
A = Face value x 5%
B = Carrying value, beg of year x 6%

2-2. (a) Issue price
Present value of face value (4,000,000 x 0.6756) P2,702,400
Present value of interest payments (200,000 x 8.1109) 1,622,180
Issue price P4,324,580

(b) Amortization Table
Interest Interest Premium Bond Carrying
Date Paid Expense Amortization Value
3/01/15 - - - 4,324,580
8/31/15 200,000 172,983 27,017 4,297,563
2/28/16 200,000 171,903 28,097 4,269,466
8/31/16 200,000 170,779 29,221 4,240,245
2/28/17 200,000 169,610 30,390 4,209,855


 (c)
2015
Mar. 1 Cash 4,324,580
Bonds payable 4,000,000
Premium on bonds payable 324,580

Aug. 31 Interest expense 172,983
Premium on bonds payable 27,017
Cash 200,000

Dec. 31 Interest expense (171,903 x 4/6) 114,602
Premium on bonds payable 18,731
Interest payable (320,000 x 4/6) 133,333

2016
Feb. 28 Interest expense (171,903 114,602) 57,301
Prem. on bonds payable (28,09718,731) 9,366
Interest payable 133,333
Cash 200,000

2-3. (a)
2015
Aug. 1 Cash 4,458,429
Discount on bonds payable 708,238
Interest payable 166,667
Bonds payable 5,000,000
5M x 8% x 5/12 = 166,667
4,458,429 166,667 = 4,291,762
5,000,000 4,291,762 = 708,238

Dec. 31 Interest expense 178,823
Interest payable 166,666
Discount on bonds payable 12,157
5M x 8% x 5/12 = 166,666
4,291,762 x 10% x 5/12 = 178,823
178,823 166,666 = 12,157
2016
Mar. 1 Interest expense 71,529
Interest payable 333,333
Discount on bonds payable 4,862
Cash 400,000
4,291,762 x 10% x 2/12 = 71,529
5M x 8% x 2/12 = 66,667
71,529 66,667 = 4,862
5M x 8% = 400,000

Dec. 31 Interest expense 359,065
Discount on bonds payable 25,732
Interest payable 333,333
4,291,762 + 12,157 + 4,862 = 4,308,781
4,308,781 x 10% x 10/12 = 359,065
5M x 8% x 10/12 = 333,333
359,065 333,333 = 25,732


 (b) 2015 2016
4,291,761 x 10% x 5/12 178,823
4,291,761 x 10% x 2/12 71,529
4,308,780 x 10% x 10/12 359,065
Interest expense for the year 178,823 430,594

(c) December 31, 2015 December 31, 2016
Bonds payable P5,000,000 P5,000,000
Less discount on bonds payable 696,081 665,487
Carrying amount P4,303,919 P4,334,513

OR COMPUTATIONS MAY BE MADE AFTER A PARTIAL TABLE OF AMORTIZATION IS
COMPLETED AS FOLLOWS:
August 1, 2015 4,291,762
March 1, 2016 250,353 233,333 17,020 4,308,782
March 1, 2017 430,878 400,000 30,878 4,339,659

Interest expense for 2015: 250,353 x 5/7 = 178,824
Interest expense for 2016: (250,353 x 2/7) + (430,878 x 10/12) = 430,594

Carrying amount, December 31, 2015: 4,291,762 + (17,020 x 5/7) = 4,303,919
Carrying amount, December 31, 2016: 4,308,782 + (30,878 x 10/12) = 4,334,514

2-4.
Issue price of bonds and warrants (5,000,000 x 1.08) P5,400,000
MV of bonds without warrants (5,000,000 x 1.02) 5,100,000
Value assigned to warrants P 300,000

(a) Cash 5,400,000
Premium on bonds payable 100,000
Bonds payable 5,000,000
Share warrants outstanding 300,000

(b) Cash (5,000 x 2 x 140) 1,400,000
Share warrants outstanding 300,000
Ordinary shares capital (5,000 x 2 x 100) 1,000,000
Share premium - ordinary 700,000
2-5.
(a) Issue price of bonds with warrants (1,000,000 x 1.04) 1,040,000
Bond price without warrants
1,000,000 x 0.3220 322,000
100,000 x 5.6502 565,020 887,020
Value of share warrants 152,980

(b) Interest expense for 2013 (887,020 x 12% x 10/12) 88,702

(c) Bond carrying value, March 1, 2015 887,020
Amortization through December 31, 2015
887,020 x 12% x 10/12 88,702
1,000,000 x 12% x 10/12 83,333 5,369
Bond carrying value, December 31, 2015 892,389



 (d) Cash (1,000 x 30 x 40) 1,200,000
Share warrants outstanding 152,980
Ordinary share capital (30,000 x 25) 750,000
Share premium - ordinary 602,980

2-6.
(a) Issue price of convertible bonds 2,000,000
Issue price of bonds without conversion privilege
2,000,000 x 0.5674 1,134,800
200,000 x 3.6048 720,960 1,855,760
Allocation to equity 144,240

(b) Amortization Table
Interest Interest Premium Bond Carrying
Date Paid Expense Amortization Value
07/01/15 - - - 1,855,760
06/30/16 200,000 222,691 22,691 1,878,451
06/30/17 200,000 225,414 25,414 1,903,865
06/30/17 (1,142,319)
06/30/17 761,546
06/30/18 80,000 91,386 11,386 772,932
06/30/19 80,000 92,572 12,752 785,684
06/30/20 80,000 94,316* 14,316 800,000
*Adjusted; difference is due to rounding off.

(c)
2016
July 1 Cash 2,000,000
Discount on bonds payable 144,240
Bonds payable 2,000,000
PIC arising from bond conversion privilege 144,240

2016
June 30 Interest expense 222,691
Discount on bonds payable 22,691
Cash 200,000


2017
June 30 Interest expense 225,414
Discount on bonds payable 25,414
Cash 200,000

Bonds payable 1,200,000
PIC arising from conversion privilege 86,544
Discount on bonds payable 57,681
Ordinary share capital 960,000
Share premium - ordinary 268,863

Carrying value of bonds converted (1,903,865 x 120/200 1,142,319
Face value of bonds converted 1,200,000
Discount on bonds payable cancelled 57,681
Value of equity converted (144,240 x 120/200) 86,544

Par value of ordinary shares issued (120 x 80 x 100) 960,000

 2018
June 30 Interest expense 91,386
Discount on bonds payable 11,386
Cash 80,000
2019
June 30 Interest expense 92,752
Discount on bonds payable 12,752
Cash 80,000
2020
June 30 Interest expense 94,316
Discount on bonds payable 14,316
Cash 80,000

Bonds payable 800,000
PIC arising from bond conversion privilege 57,696
Cash 800,000
PIC from unexercised bond conversion privilege 57,696
(144,240 86,544)

2-7. Refer to the following table for the amounts included in the journal entries.
Interest Interest Discount Bond
Date Paid Expense Amortization Carrying Value
01/02/15 4,620,820
12/31/15 400,000 462,082 62,082 4,682,902
12/31/16 400,000 468,290 68,290 4,751,192
12/31/17 400,000 475,119 75,119 4,826,311
12/31/17 (965,262)
12/31/17 3,861,049
12/31/18 320,000 386,105 66,105 3,927,154
12/31/18 (1,963,577)
12/31/18 1,963,578
12/31/19 160,000 196,422* 36,422* 2,000,000
* Adjusted due to rounding off

(a) Cash 5,200,000
Discount on bonds payable 379,180
Bonds payable 5,000,000
PIC arising from bond conversion privilege 579,180
(5M x .6209) + (400,000 x 3.7908) = 4,620,820
(5M x 1.04) 4,620,820 = 579,180
5M 4,620,820 = 379,180

(b) Interest expense 468,290
Cash 400,000
Discount on bonds payable 68,290

(c) Interest expense 475,119
Cash 400,000
Discount on bonds payable 75,119

Bonds payable 1,000,000
PIC arising from bond conversion privilege 115,836
Discount on bonds payable 34,738
Ordinary share capital (200 x 40 x 100) 800,000
Share Premium - ordinary 281,098
579,180 x 1/5 = 115,836
 (d) Interest expense 386,105
Cash 320,000
Discount on bonds payable 66,105

Bonds payable 2,000,000
PIC arising from bond conversion privilege 231,672
Discount on bonds payable 36,423
Cash (2,000,000 x 1.01) 2,020,000
Gain on retirement of bonds 17,633
PIC from unexercised bond conversion privilege 157,616
Retirement price 2,020,000
Retirement price on account of liability
(2,000,000 + 160,000) x .9009 1,945,944
Retirement price on account of equity 74,056

Carrying value of bonds retired
Face value 1,963,577
Retirement price of bonds 1,945,944
Gain on retirement of bonds 17,633

Carrying value of equity cancelled 231,672
Retirement price on account of equity 74,056
Gain on cancellation taken to equity 157,616

(e) Interest expense 196,422
Cash 160,000
Discount on bonds payable 36,422

Bonds Payable 2,000,000
Cash 2,000,000

2-8. The following table may facilitate the computations required in this problem.
Interest Interest Premium Bond
Date Paid Expense Amortization Carrying Value
12/01/15 - - - 5,386,072
06/01/16 300,000 269,304 30,696 5,355,376
12/01/16 300,000 267,769 32,231 5,323,145
06/01/17 300,000 266,157 33,843 5,289,302
12/01/17 300,000 264,465 35,535 5,253,767
06/01/18 300,000 262,688 37,312 5,216,455
12/01/18 180,000 156,494 23,506 3,106,367
06/01/19 180,000 155,318 24,682 3,081,685
12/01/19 180,000 154,084 25,916 3,055,769
06/01/20 180,000 152,788 27,212 3,028,557
12/01/20 180,000 151,443* 28,557 3,000,000
*Adjusted; difference is due to rounding off.

(a) Carrying value, December 1, 2016 (see, table) 5,323,145
Amortization for one month (33,843 x 1/6) 5,640
Carrying value, December 31, 2016 5,317,505




 (b) Interest Expense for year 2016
January 1-June 1, 2014 (269,304 x 5/6) 224,420
June 1-December 1, 2016 267,769
December 1-31, 2016 (266,157 x 1/6) 44,360
Total 536,549

(c) Carrying value of bonds retired on June 1, 2018
5,216,455 x 2/5 2,086,582
Amortization through August 1, 2018 (23,506 x 2/6 x 2/5) 3,134
Carrying value of bonds retired on August 1, 2018 2,083,448

(d) Carrying value of bonds retired 2,083,448
Redemption price (2,000,000 x 1.05) 2,100,000
Loss on redemption of bonds 16,552

(e) Carrying value of remaining bonds, December 1, 2018 3,106,367
Amortization through December 31, 2018 (24,682 x 1/6) 4,114
Carrying value of remaining bonds, December 31, 2018 3,102,253

(f) On bonds redeemed: 2018 2019
January 1-June 1, 2018 (262,688 x 2/5 x 5/6) 87,563
June 1-August 1, 2018
(5,216,455 x 2/5 x 5% x 2/6) 34,776
On remaining bonds
January 1-June 1, 2018 (262,688 x 3/5 x 5/6) 131,344
June 1-December 1, 2018 156,494
December 1-31, 2018 (155,318 x 1/6) 25,886
January 1-June 1, 2019 (155,318 x 5/6) 129,432
June 1-December 1, 2019 154,084
December 1-31, 2019 (152,788 x 1/6) 25,465
Interest Expense 436,063 308,981

2-9.
Interest Interest Premium Bond Carrying
Date Paid Expense Amortization Value
01/02/15 - - - 12,684,120
12/31/15 1,200,000 1,014,730 185,270 12,498,850
12/31/16 1,200,000 999,908 200,092 12,298,758
12/31/17 1,200,000 983,901 216,099 12,082,659
12/31/18 1,200,000 966,613 233,387 11,849,272
12/31/18 8,294,490
12/31/19 840,000 663,559 176,441 8,118,049
12/31/20 840,000 649,444 190,556 7,927,493

(a) Amortization of premium for 2015 (see table) 185,270

(b) Carrying value of bonds on December 31, 2018 (see table) 11,849,272

(c) Carrying value of bonds called (11,849,272 x 3/10) 3,554,782
Call price/retirement price (3,000,000 x 110%) 3,300,000
Gain on retirement of bonds 254,782

(d) Interest expense for year 2019 (see table) 663,559

 (e) Unamortized premium on bonds payable, Dec. 31, 2019
8,118,049 7,000,000 1,118,049

2-10.
Nominal Effective Discount Bond
Date Interest Interest Amortization Carrying value
03/01/15 3,926,000
09/01/15 170,000 176,670 6,670 3,932,670
03/01/16 170,000 176,970 6,970 3,939,640
09/01/16 170,000 177,284 7,284 3,946,924
03/01/17 170,000 177,612 7,612 3,954,536
09/01/17 170,000 177,954 7,954 3,962,490
03/01/18 170,000 178,312 8,312 3,970,802
09/01/18 170,000 178,686 8,686 3,979,488

(a) Interest expense recorded on September 1, 2015 176,670
Discount amortization recorded on September 1, 2015 6,670

(b) Carrying amount of the bonds, September 1, 2016 3,946,924
Amortization through December 31, 2016 (7,612 x 4/6) 5,075
Carrying amount of the bonds, December 31, 2016 3,951999

(c) Retirement price (4M x 1.01) 4,040,000
Accrued interest (4,000,000 x 8.5% x 3/12) 85,000
Amount of cash paid on May 31, 2018 4,125,000

(d) Carrying value, March 1, 2018 (see table) 3,970,802
Amortization through (May 31, 2018 (8,686 x 3/6) 4,343
Carrying value, May 31, 2018 3,975,145
Retirement price (at face value) 4,040,000
Loss on retirement of bonds 64,855

2-11.
(a) Issue price of the bonds
Principal Interest Amount
Due Date Due Due Due PV Factor Present Value
12/31/16 2,000,000 800,000 2,800,000 0.8929 2,500,120
12/31/17 2,000,000 640,000 2,640,000 0.7972 2,104,608
12/31/18 2,000,000 480,000 2,480,000 0.7118 1,765,264
12/31/19 2,000,000 320,000 2,320,000 0.6355 1,474,360
12/31/20 2,000,000 160,000 2,160,000 0.5674 1,225,584
Selling price of bonds P9,069,936

(b) Amortization Table
Principal Interest Effective Discount Carrying
Due Date Due Due Interest Amortization Value, end
12/31/15 P9,069,936
12/31/16 2,000,000 800,000 1,088,392 288,392 7,358,328
12/31/17 2,000,000 640,000 882,999 242,999 5,601,327
12/31/18 2,000,000 480,000 672,159 192,159 3,793,486
12/31/19 2,000,000 320,000 455,218 135,218 1,928,704
12/31/20 2,000,000 160,000 231,296 71,296* -0-
*Adjusted; difference is due to rounding off.

 (c)
2016
Dec. 31 Interest expense 1,088,392
Discount on bonds payable 288,392
Cash 800,000

Bonds payable 2,000,000
Cash 2,000,000
2017
Dec. 31 Interest expense 882,999
Discount on bonds payable 242,999
Cash 640,000

Bonds payable 2,000,000
Cash 2,000,000

2-12.
(a) Issue price of the bonds
Principal Interest Amount
Due Date Due Due Due PV Factor Present Value
12/31/15 - 960,000 960,000 0.9259 888,864
12/31/16 - 960,000 960,000 0.8573 823,008
12/31/17 2,000,000 960,000 2,960,000 0.7938 2,349,648
12/31/18 2,000,000 720,000 2,720,000 0.7350 1,999,200
12/31/19 2,000,000 480,000 2,480,000 0.6806 1,687,888
12/31/20 2,000,000 240,000 2,240,000 0.6302 1,411,648
Selling price of bonds 9,160,256
(b) Amortization Table
Principal Interest Effective Premium Carrying
Due Date Due Due Interest Amortization Value, end
01/01/15 9,160,256
12/31/15 - 960,000 732,820 227,180 8,933,076
12/31/16 - 960,000 714,646 245,354 8,687,722
12/31/17 2,000,000 960,000 695,018 264,982 6,422,740
12/31/18 2,000,000 720,000 513,819 206,181 4,216,559
12/31/19 2,000,000 480,000 337,325 142,675 2,073,884
12/31/20 2,000,000 240,000 166,116 73.884 -0-
*Adjusted; difference is due to rounding off.

(c)
2015
Jan. 1 Cash 9,160,256
Bonds payable 8,000,000
Premium on bonds payable 1,160,256

Dec. 31 Interest expense 732.820
Premium on bonds payable 227,180
Cash 960,000

2016
Dec. 31 Interest expense 714,646
Premium on bonds payable 264,982
Cash 960,000


2017
Dec. 31 Interest expense 695,018
Premium on bonds payable 142,692
Cash 480,000

Bonds payable 2,000,000
Cash 2,000,000
2018
Dec. 31 Interest expense 513.819
Premium on bonds payable 206,181
Cash 720,000

Bonds payable 2,000,000
Cash 2,000,000

2-13.
(a) 6,949,800/9,000,000 = 0.7722 This present value factor for three periods is under
the rate of 9% (Table II, Present Value of a Single Payment). Hence, effective interest
for this transaction is 9%.

(b) Date Amortization Carrying Value of Note
04/01/15 6,949,800
03/31/16 9% x 6,949,800 = 625,482 7,575,282
03/31/17 9% x 7,575,282 = 681,775 8,257,057
03/31/18 9% x 8,257,057 = 742,943* 9,000,000
*Adjusted; difference is due to rounding off.

(c) Interest expense for 2015 (625,482 x 9/12) P469,112

Carrying value, April 1, 2015 6,949,800
Amortization through December 31, 2015 (625.482 x 9/12) 469,112
Carrying value, December 31, 2013 7,418,912
(d)
2015
Apr. 1 Land 6,949,800
Discount on notes payable 2,050,200
Notes payable 9,000,000

Dec. 31 Interest expense 469,112
Discount on notes payable 2469,112
2016
Apr. 1 Interest expense (625,482 -469,112) 156,370
Discount on notes payable 156,370

Dec. 31 Interest expense (681,775 x 9/12) 511,331
Discount on notes payable 511,331
2017
Apr. 1 Interest expense (681,775 511,331) 170,444
Discount on notes payable 170,444

Dec. 31 Interest expense (742,943 x 9/12) 557,207
Discount on notes payable 557,207

2016
 Dec. 31 Interest expense (742,943 557207) 185,736
Discount on notes payable 185,736

Notes payable 9,000,000
Cash 9,000,000

2-14.
(a) 2015 2016 2017
6,949,800 x 9%= 625,482
625,482 x 8/12 416,988
625,482 x 4/12 208,494
6,949,800 x 1.09 = 7,575,282
7,575,282 x 9%= 681,775
681,775 x 8/12 454,517
681,775 x 4/12 227,258
7,575,282 x 1.09 = 8,257,057
8,257,057 x 9%= 743,135
743,135 x 8/12 _______ _______ 495,423
Totals 416,988 663,011 722,681

(b) Notes payable 6,949,800
Accrued interest (416,988 + 663,011) 1,079,999
Total, December 31, 2016 8,029,799

(c) Noncurrent liabilities
Notes payable 6,949,800
Accrued interest (416,988 + 663,011) 1,079,999
Total, December 31, 2016 8,029,799

Current liabilities
Notes payable 6,949,800
Accrued interest 1,802,680
Total, December 31, 2017 8,752,480

(d)
2015
May. 1 Land 6,949,800
Notes payable 6,949,800

Dec. 31 Interest expense 416,988
Interest payable 416,988

2016
Dec. 31 Interest expense 663,011
Interest payable 663,011

2015
Dec. 31 Interest expense 722,681
Interest payable 722,681

2016
Aug. 31 Interest expense (adjusted) 247,712
Interest payable 1,802,680
Notes payable 6,949,800
Cash 9,000,192
2-15.
(a) Present value of note (800,000 x 3.2397) 2,591,760

(b) Date Principal Due Amortization Carrying Value of Note
4/01/15 2,591,760
3/31/16 800,000 233,258 2,025,018
3/31/17 800,000 182,252 1,407,270
3/31/18 800,000 126,654 733,924
3/31/19 800,000 66,076* -0-
*Adjusted; difference is due to rounding off.

(c)
2015
Apr. 1 Equipment 2,591,760
Discount on notes payable 608,240
Notes payable 3,200,000

Dec. 31 Interest expense (233,258 x 9/12) 174,944
Discount on notes payable 174,944

2016
Mar. 31 Notes payable 800,000
Interest expense 58,314
Cash 800,000
Discount on notes payable (233,258-174,944) 58,314

Dec. 31 Interest expense (182,252 x 9/12) 136,689
Discount on notes payable 136,689

2017
Mar. 31 Notes payable 800,000
Interest expense 45,463
Cash 800,000
Discount on notes payable (182,252-136,689) 45,563

Dec. 31 Interest expense (126,654 x 9/12) 94,991
Discount on notes payable 94,991

2018
Mar. 31 Notes payable 800,000
Interest expense 31,663
Cash 800,000
Discount on notes payable (126,654-94,991) 31,663

Dec. 31 Interest expense (66,076 x 9/12) 49,557
Discount on notes payable 49,557

2019
Mar. 31 Notes payable 800,000
Interest expense 16,519
Cash 800,000
Discount on notes payable (66,076-49,557) 16,519




 2-16.
(a) Principal
Date Annual Payment Interest Payment Carrying Value
10/01/15 2,591,760
09/30/16 800,000 233,258 566,742 2,025,018
09/30/17 800,000 182,252 617,748 1,407,270
09/30/18 800,000 126,654 673,346 733,924
09/30/19 800,000 66,076* 733,924 -0-
*Adjusted
(b)
2015
Oct. 1 Equipment 2,591,760
Notes Payable 2,591,760

Dec. 31 Interest Expense (233,258 x 3/12) 58,314
Interest Payable 58,314

2016
Oct. 1 Interest Payable 58,314
Interest Expense (233,258 58,314) 174,944
Notes Payable 566,748
Cash 800,000

Dec. 31 Interest Expense (182,252 x 3/12) 45,563
Interest Payable 45,563

2017
Oct. 1 Interest Payable 45,563
Interest Expense (182,252 45,563) 136,689
Notes Payable 617,748
Cash 800,000

Dec. 31 Interest Expense (126,654 x 3/12) 31,663
Interest Payable 31,663

2018
Oct. 1 Interest Payable 31,663
Interest Expense (126,654 31,663) 94,991
Notes Payable 673,346
Cash 800,000

Dec. 31 Interest Expense (66,076 x 3/12) 16,519
Interest Payable 16,519

2019
Oct. 1 Interest Payable 16,519
Interest Expense (66,076 49,557) 49,557
Notes Payable 733,924
Cash 800,000

(c) Current portion at December 31, 2016
Notes Payable 617,748
Interest Payable 45,563

Noncurrent portion at December 31, 2016
Notes Payable 1,407,270
2-17.
(a) Notes payable 900,000
Interest payable 90,000
Accumulated depreciation 400,000
Equipment 1,000,000
Gain on disposal of equipment 200,000
Gain on debt restructuring 190,000

(b) Bonds payable 10,000,000
Interest payable 900,000
Ordinary share capital 7,500,000
Share premium ordinary (300,000 x 3) 900,000
Gain on debt restructuring 2,500,000

(c) Notes payable 10,000,000
Interest payable 1,200,000
Restructured notes payable 7,332,384
Gain on debt restructuring 3,867,616

(see computations and explanation on next page)
Present value of future payments at historical
rate:
8,000,000 x 0.7972 6,377,600
8,000,000 x 8% x 1.6901 1,081,664
Total 7,459,264
Carrying value of liability 11,200,000
Difference 3,740,736

3,740,736/11,200,000 = 33%, thus the
restructuring qualifies as a derecognition of the
old liability and creation of a new liability.

The old liability shall be cancelled; the new
liability shall be measured based on the
discounted cash flow of the future payments
discounted at the entitys incremental borrowing
rate considering its credit rating:

Present value of future payments at incremental
borrowing rate, considering its credit rating:
8,000,000 x 0.7831 6,264,800
8,000,000 x 8% x 1.6681 1,067,584
Total 7,332,384
Carrying value of the old 11,200,000
Gain on debt restructuring 3,867,616

(d) Notes payable 3,000,000
Interest payable 330,000
Restructured notes payable 3,111,024
Deferred gain on debt restructuring 218,976





Present value of future payments
3,000,000 x 0.5935 = 1,780,500
3,000,000 x 12% x 3.6959 = 1,330,524
Total 3,111,024
Carrying value of liability 3,330,000
Difference 218,976

218,976/3,330,000 < 10% of 3,330,000.
Thus, the debt restructuring does not qualify for
derecognition of the old obligation. No gain shall
be recognized and a new effective interest rate
shall be computed.

Alternatively, the restructuring may be recorded as:
Notes payable 3,000,000
Interest payable 330,000
Premium on restructured notes payable 111,024
Restructured notes payable 3,000,000
Deferred gain on debt restructuring 218,976



































 MULTIPLE CHOICE QUESTIONS
Theory
MC1 D MC11 C
MC2 F MC12 C
MC3 D MC13 B
MC4 A MC14 B
MC5 A MC15 D
MC6 C MC16 B
MC7 D MC17 D
MC8 D MC18 A
MC9 C MC19 A
MC10 C MC20 A
MC21 A
Problems
MC22 B
MC23 D (1,000,000 x 0.38554) + (80,000 x 6.14457) = 877,106
MC24 B (1,000 x 0.31) + (40 x 11.47) = 768.80
MC25 A (4,000,000 x 97%) + (4,000,000 x 10% x 3/12) = 3,980,000
MC26 B 2,000 x 1,040 = 2,080,000; 2,080,000 2,000,000 = 80,000
MC27 B (4,000,000 x 97%) + (4,000,000 x 12% x 3/12) = 4,000,000
MC28 C 1,070,000 - (96% x 1,000,000) = 110,000
MC29 A 1,000,000 x 12% x 1/12 = 10,000
MC30 B (1,000,000 x 1.02) 50,000 = 970,000
MC31 D 1,000,000 - 30,000 + 50,000 = 1,020,000;
1,020,000 - (40,000 x 20) - 10,000 = 210,000
MC32 D P0; No gain or loss is recognized upon conversion of bonds.
MC33 C 1,032,880 x 10% x 6/12 = 51,644
MC34 A 1,032,880 - {(1,000,000 x 6%) - 51,644}= 1,024,524
MC35 A 1,878,000 - {(10% x 1,878,000) -(2,000,000 x 9%) = 1,885,800
MC36 B 10,000,000 1,145,000 = 8,855,000;
(8,855,000 x 6%) - (10,000,000 x 5%) = 31,300
MC37 C 5,680,000 x 8% x 6/12 = 227,200
MC38 A (2,100,000 x 6%) (2,000,000 x 7%) = 14,000; 2,100,000 14,000 = 2,086,000 BCV;
BCV of P2,086,000 face value of P2,000,000 = P86,000 premium
MC39 C 1,032,880 x 10% = 103,288
MC40 D 1,902,800 x 10% = 190,280 effective interest; 190,280 effective interest nominal interest
of 160,000=30,280 discount amortization; carrying value = 1,902,800 + 30,280 principal
payment of 400,000 = 1,533,080
MC41 B 2,400,000 X 12% = 288,000
MC42 D 2,400,000 1,000,000 + 288,000 = 1,688,000
1,688,000 X 12% = 202,560; 1,000,000 202,560 = 797,440
MC43 B 3,000,000 2,400,000 = 600,000; 600,000 288,000 = 312,000
MC44 A (1) 49,737 X 10%= 4,974; 49,737 (20,000 4,974) = 34,711
MC45 D 5,500,000 3,000,000 = 2,500,000
MC46 D 6,000,000 + 600,000 = 6,600,000
(6000,000 x 0.621) +(6000,000 x 12% x 3.791) = 6,455,520
6,600,000 6455,520= 144,480, which is less than 10% of 6,600,000; no gain is recognized.
MC47 C 6,600,000 [(5,000,000 x .6209) +(5,000,000 x .12 x 3.7908)] =1,221,020
MC48 B 8,000,000 + 640,000 = 8,640,000
(6,000,000 x 0.8573) + (6,000,000 x 10% x 1.7833) = 6,213,780
8,640,000 6,213,780 = 2,426,220
MC49 B 150,000 x 65 = 9,750,000; 11,000,000 9,750,000 = 1,250,000