SOLUTIONS TO EXERCISES

EXERCISE 14-1 (15–20 minutes)

(a) Valuation account relating to the long-term liability, bonds

payable (sometimes referred to as an adjunct account). The
$3,000 would continue to be reported as long-term.
(b) Current liability if current assets are used to satisfy the debt.
(c) Current liability, $200,000; long-term liability, $800,000.
(d) Current liability.
(e) Probably noncurrent, although if operating cycle is greater than
one year and current assets are used, this item would be
classified as current.
(f) Current liability.
(g) Current liability unless (a) a fund for liquidation has been
accumu-lated which is not classified as a current asset or (b)
arrangements have been made for refinancing.
(h) Current liability.
(i) Current liability.

EXERCISE 14-2 (15–20 minutes)

(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.

(d) Gain on repurchase of debt—Classify as part of other gains and

losses on the income statement.

(e) Mortgage payable—Classify one-third as current liability and the

remainder as long-term liability on balance sheet.
EXERCISE 14-2 (Continued)

(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) Treasury bonds—Classify as contra account to Bonds payable on

balance sheet.

(j) Bonds payable—Classify as long-term liability on balance sheet.

EXERCISE 14-3 (15–20 minutes)

1. Simon Company:

(a) 1/1/14 Cash.....................................................................

200,00
.............................................................................
0
Bonds Payable............................................. 200,000

(b) 7/1/14 Interest Expense.................................................

4,500
($200,000 X 9% X 3/12)
Cash.............................................................
4,500

(c) 12/31/1 Interest Expense.................................................

4,500
4
Interest Payable..........................................
4,500

2. Garfunkle Company:

(a) 6/1/14 Cash.....................................................................

105,00
.............................................................................
0
Bonds Payable............................................. 100,000
Interest Expense......................................... 5,000
($100,000 X 12% X
5/12)

(b) 7/1/14 Interest Expense.................................................

6,000
 Cash.............................................................
6,000
($100,000 X 12% X
6/12)
EXERCISE 14-3 (Continued)

(c) 12/31/1 Interest Expense.................................................

6,000
4
Interest Payable..........................................
6,000

Note to instructor: Some students may credit Interest Payable on

6/1/14. If they do so, the entry on 7/1/14 will have a debit to
Interest Payable for $5,000 and a debit to Interest Expense for
$1,000.

EXERCISE 14-4 (15–20 minutes)

(a) 1/1/14 Cash ($600,000 X 102%).....................................

612,00
0
Bonds Payable.............................................600,000
Premium on Bonds
Payable.....................................................
12,000

(b) 7/1/14 Interest Expense.................................................

29,700
Premium on Bonds Payable................................ 300
($12,000 ÷ 40)
Cash.............................................................
30,000
($600,000 X 10% X 6/12)

(c) 12/31/1 Interest Expense.................................................

29,700
4
Premium on Bonds Payable................................
300
Interest Payable..........................................
30,000

EXERCISE 14-5 (15–20 minutes)

(a) 1/1/14 Cash ($600,000 X 102%).....................................

612,00
0
Bonds Payable.............................................
600,000
Premium on Bonds Payable........................ 12,000

(b) 7/1/14 Interest Expense.................................................

29,898
($612,000 X 9.7705% X 1/2)
Premium on Bonds Payable................................ 102
Cash.............................................................
30,000
($600,000 X 10% X 6/12)
EXERCISE 14-5 (Continued)

(c) 12/31/1 Interest Expense.................................................

29,893
4
($611,898 X 9.7705% X 1/2)
Premium on Bonds Payable................................
107
Interest Payable..........................................
30,000

Carrying amount of bonds at July 1,

2014:
Carrying amount of bonds at January 1, $612,000
2014
Amortization of bond premium
($30,000 – $29,898) (102)
Carrying amount of bonds at July 1, $611,898
2014

EXERCISE 14-6 (15–20 minutes)

Schedule of Discount Amortization

Straight-Line Method
Carrying
Cash Interest Discount Amount of
Year Paid Expense Amortized Bonds
Jan. 1, $1,855,816.
2014 00
Dec. 31, $200,000 $228,836. $28,836.8 1,884,652.
2014 ** 80 0** 80
Dec. 31, 200,000 228,836.8 28,836.8 1,913,489.
2015 0 0 60
Dec. 31, 200,000 228,836.8 28,836.8 1,942,326.
2016 0 0 40
Dec. 31, 200,000 228,836.8 28,836.8 1,971,163.
2017 0 0 20
Dec. 31, 200,000 228,836.8 28,836.8 2,000,000.
2018 0 0 00

**$2,000,000 X 10%
**$28,836.80 = ($2,000,000 – $1,855,816) ÷ 5.
EXERCISE 14-7 (15–20 minutes)

The effective-interest or yield rate is 12%. It is determined through

trial and error using Table 6-2 for the discounted value of the principal
($1,134,860) and Table 6-4 for the discounted value of the interest
($720,956); $1,134,860 plus $720,956 equals the proceeds of
$1,855,816. (A financial calculator may be used to determine the rate
of 12%.)
EXERCISE 14-7 (Continued)

Schedule of Discount Amortization

Effective-Interest Method (12%)
Carrying
Cash Interest Discount Amount of
Year Paid Expense Amortized Bonds
(1) (2) (3) (4)
Jan. 1, $1,855,816.
2014 00
Dec. 31, $200,00 $222,697. * $22,697.9 1,878,513.9
2014 0 92 2 2
Dec. 31, 200,000 225,421.6 25,421.67 1,903,935.5
2015 7 9
Dec. 31, 200,000 228,472.2 28,472.27 1,932,407.8
2016 7 6
Dec. 31, 200,000 231,888.9 31,888.94 1,964,296.8
2017 4 0
Dec. 31, 200,000 235,703.2 ** 35,703.20 2,000,000.0
2018 0 0

*$222,697.92 = $1,855,816 X .12.

**Rounded.

EXERCISE 14-8 (15–20 minutes)

(a) Printing and engraving costs of bonds $12,000

Legal fees 49,000
Commissions paid to underwriter 60,000
Amount to be reported as Unamortized Bond
Issue
Costs $121,000

The Unamortized Bond Issue Costs, $121,000, should be

reported as a deferred charge in the Other Assets section on
the balance sheet.

(b) Interest paid for the period from January 1

(July 1) to June 30 (December 31), 2014;
$2,000,000 X 10% X 6/12 $100,000
Less: Premium amortization for the period
from
January 1 (July 1) to June 30 (December
31), 2014
[($2,000,000 X 1.04) – $2,000,000] ÷ 10 X 4,000
6/12
Interest expense to be recorded on July 1
(December 31), 2014 $ 96,000
EXERCISE 14-8 (Continued)

(c) Carrying amount of bonds on June 30, 2014 $562,500

Effective-interest rate for the period from
June 30
to October 31, 2014 (.10 X 4/12) X.033333
Interest expense to be recorded on October $ 18,750
31, 2014

EXERCISE 14-9 (20–30 minutes)

(a) 1. June 30, 2014

Cash...................................................................
4,300,920.0
...........................................................................
0
Bonds Payable................. 4,000,000.00
Premium on Bonds 300,920.00
Payable....................................

2. December 31, 2014

Interest Expense..................... 258,055.20
($4,300,920.00 X 12% X
6/12)
Premium on Bonds Payable..... 1,944.80

Cash.................................. 260,000.00
($4,000,000 X 13% X
6/12)

3. June 30, 2015

Interest Expense..................... 257,938.51
[($4,300,920.00 – $1,944.80)
X 12% X 6/12]
Premium on Bonds Payable..... 2,061.49
Cash.................................. 260,000.00

4. December 31, 2015

Interest Expense..................... 257,814.82
[($4,300,920.00 – $1,944.80
–
$2,061.49) X 12% X 6/12]
Premium on Bonds Payable..... 2,185.18
Cash.................................. 260,000.00
EXERCISE 14-9 (Continued)

(b) Long-term Liabilities:

Bonds payable, 13% (due on June 30, $4,000,000.00
2034)
Premium on bonds payable* 294,728.53
Book value of bonds payable $4,294,728.53

*($4,300,920.00 – $4,000,000) – ($1,944.80 + $2,061.49 + $2,185.18) =

$294,728.53

(c) 1. Interest expense for the period from

January 1 to June 30, 2015 from $257,938.5
(a) 3. 1
Interest expense for the period from
July 1 to December 31, 2015 from 257,814.8
(a) 4. 2
Amount of interest expense
reported for 2015 $515,753.3
3

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 $15,046 ($300,920/20). Bond interest
expense for 2015 is the difference between the
amortized premium, $15,046, and the actual interest
paid, $520,000 ($4,000,000 X 13%). Thus, the amount of
bond interest expense is $504,954 ($520,000 – $15,046),
which is smaller than the bond interest expense under
the effective-interest method.

3. Total interest to be paid for the

bond
($4,000,000 X 13% X 20) $10,400,00
0
Principal due in 2034 4,000,00
0
 Total cash outlays for the bond 14,400,000
Cash received at issuance of the (4,300,920
bond )
Total cost of borrowing over the
life
of the bond $10,099,08
0

4. They will be the same.

EXERCISE 14-10 (15–20 minutes)

(a) January 1, 2014

Cash...................................................................
537,907.37
...........................................................................
Premium on Bonds Payable.... 37,907.37
Bonds Payable........................ 500,000.00

(b) Schedule of Interest Expense and Bond Premium

Amortization
Effective-Interest Method
12% Bonds Sold to Yield 10%
Carrying
Cash Interest Premium Amount of
Date Paid Expense Amortized Bonds
1/1/14 – – – $537,907.3
7
12/31/14 $60,000.0 $53,790. $6,209.2 531,698.11
0* 74 6
12/31/15 60,000.00 53,169.8 6,830.19 524,867.92
1
12/31/16 60,000.00 52,486.7 7,513.21 517,354.71
9

*$500,000 X 12%

(c) December 31, 2014

Interest Expense............................ 53,790.74
Premium on Bonds Payable............ 6,209.26
Cash........................................ 60,000.00

(d) December 31, 2015

Interest Expense............................ 52,486.79
Premium on Bonds Payable............ 7,513.21
Cash........................................ 60,000.00
EXERCISE 14-11 (20–30 minutes)

Unsecured Zero-Coupon Mortgage

Bonds Bonds Bonds
(1) Maturity value $10,000,000 $25,000,00 $20,000,000
0

(2) Number of interest 40 10 10

periods

(3) Stated rate per period 3.75% 15% 0 10%

)
( 4

(4) Effective rate per 12% 12% 12%

period 3% ( )
4

(5) Payment amount per $375,000(a) 0 $2,000,000(b)

period

(6) Present value $11,733,639(c $8,049,250( $17,739,840(

) d) e)

(a)
$10,000,000 X 15% X 1/4 = $375,000
(b)
$20,000,000 X 10% = $2,000,000
(c)
Present value of an annuity of $375,000
discounted at 3% per period for
40 periods ($375,000 X 23.11477) = $
8,668,039
Present value of $10,000,000 discounted
at 3% per period for 40 periods
($10,000,000 X .30656) = 3,065,60
0
$11,733,63
9
(d)
Present value of $25,000,000 discounted
at 12% for 10 periods
($25,000,000 X .32197) = $
8,049,250
(e)
Present value of an annuity of $2,000,000 discounted
at 12% for 10 periods
 ($2,000,000 X 5.65022) = $11,300,44
0
Present value of $20,000,000 discounted
at 12% for 10 years
($20,000,000 X .32197) 6,439,40
0
$17,739,84
0
EXERCISE 14-12 (15–20 minutes)

Reacquisition price ($900,000 X 101%) $909,000

Less: Net carrying amount of bonds
redeemed:
Par value $900,00
0
Unamortized discount (13,500)
Unamortized bond issue costs (7,200 879,300
)
Loss on redemption $ 29,700
Calculation of unamortized discount—
Original amount of discount:
$900,000 X 3% = $27,000
$27,000/10 = $2,700 amortization per
year
Amount of discount unamortized:
$2,700 X 5 = $13,500
Calculation of unamortized bond issue
costs—
Original amount of costs:
$24,000 X $900,000/$1,500,000 =
$14,400
$14,400/10 = $1,440 amortization per
year
Amount of costs unamortized:
$1,440 X 5 = $7,200

January 2, 2014
Bonds Payable.....................................................
900,000
Loss on Redemption of Bonds............................ 29,700
Unamortized Bond Issue Costs................... 7,200
Discount on Bonds Payable........................ 13,500
Cash............................................................. 909,000

EXERCISE 14-13 (15–20 minutes)

Cash.....................................................................
8,820,000
.............................................................................
Discount on Bonds Payable (.02 X 180,000
$9,000,000)..........................................................
Bonds Payable............................................. 9,000,000
(To record issuance of 10%
bonds)
EXERCISE 14-13 (Continued)

Bonds Payable.....................................................
6,000,000
Loss on Redemption of Bonds............................ 270,000
Cash ($6,000,000 X 1.02)............................ 6,120,000
Discount on Bonds Payable........................ 120,000
Unamortized Bond Issue Costs................... 30,000
(To record retirement of 11%
bonds)

Reacquisition price............................................. $6,120,000

Less: Net carrying amount of bonds
redeemed:
Par value......................................................
$6,000,000
Unamortized bond discount........................ (120,000)
Unamortized bond issue costs.................... (30,000) 5,850,000
Loss on redemption............................................ $ 270,000

EXERCISE 14-14 (12–16 minutes)

(a) June 30, 2015

Bonds Payable.....................................................
800,000
Loss on Redemption of Bonds............................ 40,800
Discount on Bonds Payable........................ 8,800
Cash............................................................. 832,000

Reacquisition price ($800,000 X $832,000

104%)...................................................................
Less: Net carrying amount of bonds
redeemed:
Par value......................................................
$800,000
Unamortized discount................................. (8,800) 791,200
(.02 X $800,000 X 11/20)
Loss on redemption............................................ $ 40,800

Cash ($1,000,000 X 102%)..................................

1,020,000
Premium on Bonds Payable........................ 20,000
Bonds Payable............................................. 1,000,000

(b) December 31, 2015

Interest Expense.................................................
49,500
Premium on Bonds Payable
(1/40 X $20,000)...............................................
500
Cash (.05 X $1,000,000).............................. 50,000
EXERCISE 14-15 (10–15 minutes)

Reacquisition price ($300,000 X 104%)............. $312,000

Less: Net carrying amount of bonds
redeemed:
Par value....................................................
$300,000
Unamortized discount................................ (10,000) 290,000
Loss on redemption............................................ $ 22,000

Bonds Payable.....................................................300,000
Loss on Redemption of Bonds............................22,000
Discount on Bonds Payable........................ 10,000
Cash............................................................. 312,000
(To record redemption of bonds
payable)

Cash ($300,000 X 1.03)....................................... 306,000

.............................................................................
Unamortized Bond Issue Costs.......................... 3,000
Premium on Bonds Payable........................ 9,000
Bonds Payable............................................. 300,000
(To record issuance of new
bonds)

EXERCISE 14-16 (15–20 minutes)

(a) 1. January 1, 2014

Land.....................................................................
200,000.0
0
Discount on Notes Payable.................................
137,012.0
0
Notes Payable.............................................337,012.00
(The $200,000 capitalized
land
cost represents the
present
value of the note
discounted
 for five years at 11%.)

2. Equipment...........................................................
185,674.3
0
Discount on Notes Payable.................................
64,325.70*
Notes Payable.............................................250,000.00
EXERCISE 14-16 (Continued)

*Computation of the discount

on
notes payable:
Maturity value $250,000.0
0
Present value of $250,000
due in
8 years at 11%—
$250,000
X .43393 $108,482.
50
Present value of $15,000
payable annually for 8
years
at 11% annually—
$15,000
X 5.14612 77,191.
80
Present value of the note (185,674.30
)
Discount $
64,325.70

(b) 1. Interest Expense.................................................

22,000.00
Discount on Notes Payable......................... 22,000.00
($200,000 X .11)

2. Interest Expense.................................................
20,424.17
($185,674.30 X .11)
Discount on Notes Payable......................... 5,424.17
Cash ($250,000 X .06)................................. 15,000.00

EXERCISE 14-17 (15–20 minutes)

(a) Face value of the zero-interest-bearing note $550,000

Discount factor (12% for 3 periods) X .71178
Amount to be recorded for the land at January $391,479
1, 2014

Carrying value of the note at January 1, 2014 $391,479

Applicable interest rate (12%) X .12
 Interest expense to be reported in 2014 $ 46,977

(b) January 1, 2014

Cash.....................................................................
5,000,000
.............................................................................
Discount on Notes Payable................................. 1,584,950
Notes Payable............................................. 5,000,000
Unearned Sales Revenue............................ 1,584,950

$5,000,000 – ($5,000,000 X .68301) =

$1,584,950
EXERCISE 14-17 (Continued)

Carrying value of the note

at January 1, 2014 $3,415,050
**
Applicable interest rate X .
(10%) 10
Interest expense to be
reported for 2014 $
341,505

**$5,000,000 – $1,584,950 =
$3,415,050

EXERCISE 14-18 (15–20 minutes)

(a) Cash...................................................................
400,000
...........................................................................
Discount on Notes Payable............ 82,468
Notes Payable......................... 400,000
Unearned Sales Revenue....... 82,468
($400,000 – $317,532)

Face value $400,000

Present value of 1 at 8%
for 3 years X .79383
Present value $317,532

(b) Interest Expense ($317,532 X 8%) 25,403

Discount on Notes Payable.... 25,403

Unearned Sales Revenue ($82,468 27,489

÷ 3)
Sales........................................ 27,489
EXERCISE 14-19 (10–15 minutes)

Change in
Unrealized Unrealized
Carrying Holding Holding
Year Value Fair Value Gain or Gain or
Ending Loss Loss
2014 $54,000 $54,000 $ 0 $ 0
2015 44,000 42,500 1,500 1,500
2016 36,000 38,000 (2,000) (500)

(a) 2014
No Entry (Carrying value = Fair Value)

2015
Notes Payable.....................................................
1,500
Unrealized Holding Gain or Loss—
Income.................................................... 1,500

2016
Unrealized Holding Gain or Loss— 3,500
Income.................................................................
Notes Payable................................ Income 3,500

(b) The fair value of $42,500.

(c) Unrealized holding loss of $3,500.

(d) Fallen’s creditworthiness has improved during 2016 because

bond investors are receiving a higher rate relative to investors in
similar-risk investments.

EXERCISE 14-20 (10–15 minutes)

At December 31, 2014, disclosures would be as follows:

Maturities and sinking fund requirements on long-term debt are as

follows:

2015 $
0
2016 2,500,00
 0
2017 4,500,00 ($2,000,000 + $2,500,000)
0
2018 8,500,00 ($6,000,000 + $2,500,000)
0
2019 2,500,00
0
*EXERCISE 14-21 (15–20 minutes)

(a) Transfer of property on December 31,

2014:

Strickland Company (Debtor):

Notes Payable.............................................200,000
Interest Payable.......................................... 18,000
Accumulated Depreciation— 221,000
Machinery............................................................
Machinery............................................ 390,000
Gain on Disposal of Machinery........... 11,000a
Gain on Restructuring of Debt............ 38,000b
a
$180,000 – ($390,000 – $221,000) =
$11,000.
b
($200,000 + $18,000) – $180,000 =
$38,000.

Moran State Bank (Creditor):

Machinery....................................................
180,000
Allowance for Doubtful Accounts............... 38,000
Notes Receivable................................ 200,000
Interest Receivable............................. 18,000

(b) “Gain on Disposal of Machinery” and the “Gain on Restructuring

of Debt” should be reported as an ordinary gain in the income
statement.

(c) Granting of equity interest on December 31, 2014:

Strickland Company (Debtor):

Notes Payable.............................................
200,000
Interest Payable..........................................
18,000
Common Stock.................................... 150,000
Paid-in Capital in Excess of
Par- 30,000
Common Stock...............................
Gain on Restructuring of Debt............ 38,000

Moran State Bank (Creditor):

Equity Investments.....................................
180,000
Allowance for Doubtful Accounts............... 38,000
Notes Receivable................................ 200,000
Interest Receivable............................. 18,000
*EXERCISE 14-22 (20–30 minutes)

(a) No. The gain recorded by Barkley is not equal to the loss
recorded by American Bank under the debt restructuring
agreement. (You will see why this happens in the following four
exercises.) In response to this “accounting asymmetry” treatment,
GAAP did not address debtor accounting because the FASB was
concerned that expansion of the scope of its pronouncement
would delay issuance of GAAP for the creditor.

(b) No. There is no gain under the modified terms because the total
future cash flows after restructuring exceed the total pre-
restructuring carrying amount of the note (principal):

Total future cash flows after restructuring

are:
Principal....................................................... $2,400,000
Interest ($2,400,000 X 10% X 3)................. 720,000
$3,120,000

Total pre-restructuring carrying amount of

note $3,000,000
(principal):........................................................

(c) The interest payment schedule is prepared as follows:

BARKLEY COMPANY
Interest Payment Schedule After Debt Restructuring
Effective-Interest Rate 1.4276%
Cash Interest Reduction Carrying
Paid Expense Amount of
Date (10%) (1.4276 of Note
%) Carrying
Amount
12/31/1 $3,000,00
4 0
c
12/31/1 $240,00 $ $197,172
a b
5 0 42,828 2,802,828
12/31/1 40,013 199,987
6 240,000 2,602,841
12/31/1 202,841
d
7 240,000 37,159 2,400,000
Total $720,00 $120,000 $600,000
 0

a
$2,400,000 X 10% = $240,000.
b
$3,000,000 X 1.4276% = $42,828.
c
$240,000 – $42,828 = $197,172.
d
Adjusted $1 due to rounding.
*EXERCISE 14-22 (Continued)

(d) Interest payment entry for Barkley Company is:

December 31, 2016

Notes Payable.....................................................
199,987
Interest Expense.................................................
40,013
Cash............................................................. 240,000

(e) The payment entry at maturity is:

January 1, 2018
Notes Payable.....................................................
2,400,0
00
Cash............................................................. 2,400,000

*EXERCISE 14-23 (25–30 minutes)

(a) American Bank should use the historical interest rate of 12% to
calculate the loss.

(b) The loss is computed as follows:

Pre-restructuring carrying amount of note $3,000,000
Less: Present value of restructured future cash
flows:
Present value of principal $2,400,000
due in 3 years at 12% $1,708,272a
Present value of interest $240,000
paid annually for 3 years at 576,439b 2,284,711
12%
Loss on restructuring of debt $ 715,289

a
$2,400,000 X .71178 = $1,708,272.
b
$240,000 X 2.40183 = $576,439.

December 31, 2014

Bad Debt Expense...............................................
715,289
Allowance for Doubtful Accounts............... 715,289
*EXERCISE 14-23 (Continued)

(c) The interest receipt schedule is prepared as follows:

AMERICAN BANK
Interest Receipt Schedule After Debt Restructuring
Effective-Interest Rate 12%
Cash Interest Increase Carrying
Receive Revenue in Amount of
Date d (10%) (12%) Carrying Note
Amount
12/31/1 $2,284,71
4 1
b
12/31/1 $240,00 $274,165 $ 2,318,87
a c
5 0 34,165 6
12/31/1 240,000 278,265 38,265 2,357,14
6 1
12/31/1 240,00 282,859 42,85 2,400,00
7 0 * 9 0
Total $720,00 $835,289 $115,28
0 9

a
$2,400,000 X 10% = $240,000.
b
$2,284,711 X 12% = $274,165.
c
$274,165 – $240,000 = $34,165.
*Rounded $2

(d) Interest receipt entry for American Bank is:

December 31, 2016

Cash.....................................................................
240,000
.............................................................................
Allowance for Doubtful Accounts....................... 38,265
Interest Revenue......................................... 278,265

(e) The receipt entry at maturity is:

January 1, 2018
Cash.....................................................................
2,400,00
............................................................................. 0
Allowance for Doubtful Accounts....................... 600,000
Notes Receivable........................................ 3,000,000
*EXERCISE 14-24 (25–30 minutes)

(a) Yes. Barkley Company can record a gain under this term
modification. The gain is calculated as follows:

Total future cash flows after

restructuring are:
Principal....................................................... $1,900,00
0
Interest ($1,900,000 X 10% X 3)......... 570,00
0
$2,470,00
0
Total pre-restructuring carrying amount
of note $3,000,00
(principal):............................................... 0

Therefore, the gain = $3,000,000 – $2,470,000 = $530,000.

(b) The entry to record the gain on December 31,

2014:
Notes Payable.............................................
530,00
0
Gain on Restructuring of Debt............ 530,000

(c) Because the new carrying value of the note ($3,000,000 –

$530,000 = $2,470,000) equals the sum of the undiscounted
future cash flows ($1,900,000 principal + $570,000 interest =
$2,470,000), the imputed interest rate is 0%. Consequently,
all the future cash flows reduce the principal balance and no
interest expense is recognized.

(d) The interest payment schedule is prepared as follows:

BARKLEY COMPANY
Interest Payment Schedule After Debt Restructuring
Effective-Interest Rate 0%
Cash Interest Reduction Carrying
Paid Expense Amount of
Date (10%) (0%) of Note
Carrying
Amount
12/31/1 $2,470,00
 4 0
12/31/1 $190,00 $0 $190,000 2,280,000
5 0a b

12/31/1 190,00 0 190,000 2,090,00

6 0 0
12/31/1 190,00 0 190,000 1,900,00
7 0 0
Total $570,00 $0 $570,000
0

a
$1,900,000 X 10% = $190,000.
b
$2,470,000 – $190,000 = $2,280,000.
*EXERCISE 14-24 (Continued)

(e) Cash interest payment entries for Barkley Company are:

December 31, 2015, 2016, and 2017

Notes Payable.....................................................
190,000

Cash............................................................. 190,000

(f) The payment entry at maturity is:

January 1, 2018
Notes Payable.....................................................
1,900,000
Cash............................................................. 1,900,000

*EXERCISE 14-25 (20–30 minutes)

(a) The loss can be calculated as follows:

Pre-restructuring carrying amount of $3,000,00
note 0
Less: Present value of restructured
future
cash flows:
Present value of principal
$1,900,000
due in 3 years at 12%.............................
$1,352,38
2a
Present value of interest
$190,000
paid annually for 3 years at 456,34 1,808,73
12% 8b 0
Loss on restructuring of debt............................. $1,191,27
0

a
$1,900,000 X .71178 = $1,352,382
b
$190,000 X 2.40183 = $456,348

December 31, 2014

Bad Debt Expense...............................................
1,191,27
0
Allowance for Doubtful Accounts............... 1,191,270
*EXERCISE 14-25 (Continued)

(b) The interest receipt schedule is prepared as follows:

AMERICAN BANK
Interest Receipt Schedule After Debt Restructuring
Effective-Interest Rate 12%
Cash Interest Increase Carrying
Receive Revenue in Amount of
Date d (10%) (12%) Carrying Note
Amount
12/31/1 $1,808,73
4 0
c
12/31/1 $190,00 $217,048 $27,048 1,835,77
a b
5 0 8
12/31/1 190,00 220,29 30,293 1,866,07
6 0 3 1
12/31/1 190,00 223,92 33,929 1,900,00
7 0 9 0
Total $570,00 $661,27 $91,270
0 0
a
$1,900,000 X 10% = $190,000.
b
$1,808,730 X 12% = $217,048.
c
$217,048 – $190,000 = $27,048.

(c) Interest receipt entries for American Bank are:

December 31, 2015
Cash.....................................................................
190,000
.............................................................................
Allowance for Doubtful Accounts....................... 27,048
Interest Revenue......................................... 217,048
December 31, 2016
Cash.....................................................................
190,000
.............................................................................
Allowance for Doubtful Accounts....................... 30,293
Interest Revenue......................................... 220,293
December 31, 2017
Cash.....................................................................
190,000
.............................................................................
Allowance for Doubtful Accounts....................... 33,929
Interest Revenue......................................... 223,929
(d) The receipt entry at maturity is:
January 1, 2018
Cash.....................................................................
1,900,00
............................................................................. 0
Allowance for Doubtful Accounts....................... 1,100,00
0
Notes Receivable........................................ 3,000,000
*EXERCISE 14-26 (15–20 minutes)

(a) Gottlieb Co.’s entry:

Notes Payable.....................................................
199,800
Land............................................................. 90,000
Gain on Disposal of Plant Assets
($140,000 – $90,000)................................ 50,000
Gain on Restructuring of Debt.................... 59,800*

*$199,800 – $140,000

(b) Ceballos Inc. entry:

Land.....................................................................
140,000
Allowance for Doubtful Accounts....................... 59,800
Notes Receivable........................................ 199,800

*EXERCISE 14-27 (20–25 minutes)

Because the carrying amount of the debt, $270,000 exceeds the total
future cash flows $242,000 [$220,000 + ($11,000 X 2)], a gain and a
loss are recognized and no interest is recorded by the debtor.

(a) Vargo Corp.’s entries:

2014.............................................Notes Payable
28,000

Gain on Restructuring of Debt............ 28,000

2015.............................................Notes Payable
11,000

Cash (5% X $220,000)......................... 11,000

2016.............................................Notes Payable
231,000

Cash
[$220,000 + (5% X 231,000
$220,000)]............................................................
*EXERCISE 14-27 (Continued)

(b) First Trust’s entry on December 31,

2014:
Bad Debt Expense...............................................
76,027
Allowance for Doubtful Accounts............... 76,027

Pre-restructure carrying amount $270,000

Present value of restructured cash
flows:
Present value of $220,000 due in 2
years
at 12%, interest payable annually
(Table 6-2); ($220,000 X .79719)..............$175,38
2
Present value of $11,000 interest
payable
annually for 2 years at 12% (Table
6-4);
($11,000 X 1.69005).................................
18,59 193,973
1
Creditor’s loss on restructuring of debt............. $
(76,027)

Increase Carrying
Cash Effective in Amount of
Date Interest -Interest Carrying Note
Amount
12/31/1 $193,973
4
12/31/1 $11,000 $23,277b $12,277c 206,250
a
5
12/31/1 11,000 24,750 13,750 220,000
6
a
$11,000 = $220,000 X .05
b
$23,227 = $193,973 X 12%
c
$12,277 = $23,277 – $11,000

December 31, 2015

Cash.....................................................................
11,000
.............................................................................
Allowance for Doubtful Accounts....................... 12,277
 Interest Revenue......................................... 23,277

December 31, 2016

Cash.....................................................................
11,000
.............................................................................
Allowance for Doubtful Accounts....................... 13,750
Interest Revenue......................................... 24,750

Cash.....................................................................
220,000
.............................................................................
Allowance for Doubtful Accounts....................... 50,000
Notes Receivable........................................ 270,000