FJD 60. 116
V. DISCUSIÓN
$500,000 × 1.01 = $ 505,000
$2,500,000 × 1.04 = 2,600,000 $3,105,000
Less net carrying amount:
$2,946,000 + ($54,000 × 26/60) = 2,969,400
Loss on early extinguishment $ 135,600
*Ex. 14-123—Accounting for a troubled debt settlement.
Mann, Inc., which owes Doran Co. $600,000 in notes payable with accrued interest of $54,000, is in financial difficulty. To settle the debt, Doran agrees to accept from Mann equipment with a fair value of $570,000, an original cost of $840,000, and accumulated depreciation of $195,000.
Instructions
(a) Compute the gain or loss to Mann on the settlement of the debt.
(b) Compute the gain or loss to Mann on the transfer of the equipment.
(c) Prepare the journal entry on Mann 's books to record the settlement of this debt.
(d) Prepare the journal entry on Doran's books to record the settlement of the receivable.
*Solution 14-123
(a) Note payable $600,000
Interest payable 54,000
Carrying amount of debt 654,000
Fair value of equipment 570,000
Gain on settlement of debt $ 84,000
(b) Cost $840,000
Accumulated depreciation 195,000
Book value 645,000
Fair value of plant assets 570,000 Loss on disposal of equipment $ 75,000
(c) Notes Payable... 600,000 Interest Payable... 54,000 Accumulated Depreciation... 195,000 Loss on Disposal of Equipment... 75,000
Equipment... 840,000 Gain on Settlement of Debt... 84,000 (d) Equipment... 570,000
Allowance for Doubtful Accounts... 84,000
Notes Receivable... 600,000 Interest Receivable... 54,000
*Ex. 14-124—Accounting for a troubled debt restructuring.
On December 31, 2009, Short Co. is in financial difficulty and cannot pay a note due that day. It is a $500,000 note with $50,000 accrued interest payable to Bryan, Inc. Bryan agrees to forgive the accrued interest, extend the maturity date to December 31, 2011, and reduce the interest rate to 4%. The present value of the restructured cash flows is $428,000.
Instructions
Prepare entries for the following:
(a) The restructure on Short’s books.
(b) The payment of interest on December 31, 2010.
(c) The restructure on Bryan’s books.
*Solution 14-124
(a) Interest Payable... 50,000
Notes Payable ($500,000 × 4% × 2)... 40,000 Gain on Restructuring... 10,000 (b) Notes Payable... 20,000
Cash... 20,000 (c) Allowance for Doubtful Accounts... 122,000
Notes Receivable... 72,000 Interest Receivable... 50,000
*Ex. 14-125—Accounting for troubled debt.
(a) What are the general rules for measuring and recognizing a gain or loss by the debtor on a settlement of troubled debt which includes the transfer of noncash assets?
(b) What are the general rules for measuring and recognizing a gain and for recording future payments by the debtor in a troubled debt restructuring?
*Solution 14-125
(a) If the settlement of debt includes the transfer of noncash assets, a gain is measured by the debtor as the difference between the fair value of the assets transferred and the carrying amount of the debt, including accrued interest. The debtor also recognizes a gain or loss on the disposal of assets as the difference between the fair value of the assets transferred and their book value.
(b) If the carrying amount of the payable is greater than the undiscounted total future cash flows, the gain is measured by the debtor as the difference between the carrying amount and the future cash flows. Future payments reduce the principal; no interest expense is recorded by the debtor.
If the carrying amount of the payable is less than the future cash flows, no restructuring gain is recognized by the debtor. A new effective-interest rate is calculated that equates the present value of the future cash flows with the carrying amount of the debt. A part of the future cash flows is recorded as interest expense by the debtor.
PROBLEMS
Pr. 14-126—Bond discount amortization.
On June 1, 2009, Everly Bottle Company sold $400,000 in long-term bonds for $351,040. The bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under the effective-interest method.
Instructions
(a) Construct a bond amortization table for this problem to indicate the amount of interest expense and discount amortization at each May 31. Include only the first four years. Make sure all columns and rows are properly labeled. (Round to the nearest dollar.)
(b) The sales price of $351,040 was determined from present value tables. Specifically explain how one would determine the price using present value tables.
(c) Assuming that interest and discount amortization are recorded each May 31, prepare the adjusting entry to be made on December 31, 2011. (Round to the nearest dollar.)
Solution 14-126
(a) Debit Credit Carrying Amount
Date Credit Cash Interest Expense Bond Discount of Bonds
6/1/09 $351,040
5/31/10 $32,000 $35,104 $3,104 354,144
5/31/11 32,000 35,414 3,414 357,558
5/31/12 32,000 35,756 3,756 361,314
5/31/13 32,000 36,131 4,131 365,445
(b) (1) Find the present value of $400,000 due in 10 years at 10%.
(2) Find the present value of 10 annual payments of $32,000 at 10%.
Add (1) and (2) to obtain the present value of the principal and the interest payments.
(c) Interest Expense... 20,858*
Interest Payable... 18,667**
Discount on Bonds Payable... 2,191
*7/12 × $35,756 (from Table) = $20,858
**7/12 × 8% × $400,000 = $18,667
Pr. 14-127—Bond interest and discount amortization.
Grove Corporation issued $800,000 of 8% bonds on October 1, 2010, due on October 1, 2015.
The interest is to be paid twice a year on April 1 and October 1. The bonds were sold to yield 10% effective annual interest. Grove Corporation closes its books annually on December 31.
Instructions
(a) Complete the following amortization schedule for the dates indicated. (Round all answers to the nearest dollar.) Use the effective-interest method.
Debit Credit Carrying Amount
Credit Cash Interest Expense Bond Discount of Bonds
October 1, 2010 $738,224
April 1, 2011 October 1, 2011
(b) Prepare the adjusting entry for December 31, 2011. Use the effective-interest method.
(c) Compute the interest expense to be reported in the income statement for the year ended December 31, 2011.
Solution 14-127
(a) Debit Credit Carrying Amount
Credit Cash Interest Expense Bond Discount of Bonds
October 1, 2010 $738,224
April 1, 2011 $32,000 $36,911 $4,911 743,135
October 1, 2011 32,000 37,157 5,157 748,292
(b) Interest Expense ($748,292 × 10% × 3/12)... 18,707
Interest Payable (1/2 × $32,000) ... 16,000 Discount on Bonds Payable ($18,707 – $16,000) ... 2,707 (c) $18,456 (1/2 of $36,911)
37,157 18,707
$74,320
Pr. 14-128—Entries for bonds payable.
Prepare the necessary journal entries to record the following transactions relating to the long-term issuance of bonds of Pitts Co.:
March 1
Issued $800,000 face value Pitts Co. second mortgage, 8% bonds for $872,160, including accrued interest. Interest is payable semiannually on December 1 and June 1 with the bonds maturing 10 years from this past December 1. The bonds are callable at 102.
June 1
Paid semiannual interest on Pitts Co. bonds. (Use straight-line amortization of any premium or discount.)
December 1
Paid semiannual interest on Pitts Co. bonds and purchased $400,000 face value bonds at the call price in accordance with the provisions of the bond indenture.
Solution 14-128
March 1: Cash... 872,160
Bonds Payable... 800,000 Premium on Bonds Payable... 56,160 Interest Expense ($800,000 × 8% × 3/12)... 16,000 June 1: Interest Expense... 30,560
Premium on Bonds Payable ($56,160 × 3/117)... 1,440
Cash... 32,000 Dec. 1: Interest Expense... 29,120
Premium on Bonds Payable ($56,160 × 6/117)... 2,880
Cash... 32,000 Bonds Payable... 400,000
Premium on Bonds Payable*... 25,920
Gain on Redemption of Bonds... 17,920 Cash... 408,000
*1/2 × ($56,160 – $1,440 – $2,880) = $25,920.
Pr. 14-129—Entries for bonds payable.
Prepare journal entries to record the following transactions relating to long-term bonds of Kirby, Inc. (Show computations.)
(a) On June 1, 2009, Kirby, Inc. issued $600,000, 6% bonds for $587,640, which includes accrued interest. Interest is payable semiannually on February 1 and August 1 with the bonds maturing on February 1, 2019. The bonds are callable at 102.
(b) On August 1, 2009, Kirby paid interest on the bonds and recorded amortization. Kirby uses straight-line amortization.
(c) On February 1, 2011, Kirby paid interest and recorded amortization on all of the bonds, and purchased $360,000 of the bonds at the call price. Assume that a reversing entry was made on January 1, 2011.
Solution 14-129
(a) Cash... 587,640 Discount on Bonds Payable... 24,360
Bonds Payable... 600,000 Interest Expense ($600,000 × 6% × 4/12)... 12,000 (b) Interest Expense ($600,000 × 6% × 6/12) + $420... 18,420
Cash... 18,000 Discount on Bonds Payable ($24,360 × 2/116)... 420
Solution 14-129 (Cont.)
(c) Interest Expense ($18,000 + $1,260)... 19,260
Cash... 18,000 Discount on Bonds Payable ($24,360 × 6/116)... 1,260 Bonds Payable... 360,000
Loss on Bond Redemption... 19,296
Discount on Bonds Payable [.6 × ($24,360 – $4,200)] ... 12,096 Cash... 367,200
*Pr. 14-130—Accounting for a troubled debt settlement.
Ludwig, Inc., which owes Giffin Co. $800,000 in notes payable, is in financial difficulty. To eliminate the debt, Giffin agrees to accept from Ludwig land having a fair market value of
$610,000 and a recorded cost of $450,000.
Instructions
(a) Compute the amount of gain or loss to Ludwig, Inc. on the transfer (disposition) of the land.
(b) Compute the amount of gain or loss to Ludwig, Inc. on the settlement of the debt.
(c) Prepare the journal entry on Ludwig 's books to record the settlement of this debt.
(d) Compute the gain or loss to Giffin Co. from settlement of its receivable from Ludwig.
(e) Prepare the journal entry on Giffin's books to record the settlement of this receivable.
*Solution 14-130
(a) Fair market value of the land $610,000
Cost of the land to Ludwig, Inc. 450,000
Gain on disposition of land $160,000
(b) Carrying amount of debt $800,000
Fair market value of the land given 610,000
Gain on settlement of debt $190,000
(c) Notes Payable... 800,000
Land... 450,000 Gain on Disposition of Land... 160,000 Gain on Settlement of Debt... 190,000
(d) Carrying amount of receivable $800,000
Land received in settlement 610,000
Loss on settled debt $190,000
(e) Land... 610,000 Allowance for Doubtful Accounts... 190,000
Notes Receivable... 800,000