Using Excel: =RATE(nper,pmt,pv,fv,type)

Result: 6.1351945% rounded to three decimal places 6.135%

EXERCISE 14.19 (CONTINUED) a. (continued)

Schedule of Bond Discount Amortization Effective Interest Method

12% Semi-annual Bonds Sold to Yield 12.27%

6.0% 6.135%

Cash Interest Discount Carrying

Date Paid Expense Amortized Amount

June 30 2013 $784,000.00

Although not required, the entry at the issuance of the bonds is:

6/30/13 Cash ($800,000 X 98%) ... 784,000 Bonds Payable ... 784,000 At June 30, 2020,the carrying amount of the bonds is as indicated in the effective interest table: $786,087.57

EXERCISE 14.19 (CONTINUED) a. (continued)

June 30, 2020

Bonds Payable ... 786,087.57 Loss on Redemption of Bonds ... 45,912.43

Cash ... 832,000.00 To record reacquisition of bonds

payable

Reacquisition price ($800,000 X 104%) ... $832,000.00 Net carrying amount of bonds redeemed: 786,087.57 Loss on redemption ... $45,912.43 Cash ($1,000,000 X 102%) ... 1,020,000

Bonds Payable ... 1,020,000 To record issuance of new bonds

1. Using a financial calculator:

PV $ 1,020,000

I ? % Yields 4.885 %

N 40

PMT $ (50,000) FV $ (1,000,000)

Type 0

EXERCISE 14.19 (CONTINUED) a. (continued)

2.Using Excel: =RATE(nper,pmt,pv,fv,type)

Result: 0.048852691 Rounded to three decimal places 4.885%

b. December 31, 2020

Interest Expense¹ ... 49,827 Bonds Payable ... 173

Cash ... 50,000

1($1,020,000 X 4.885% = $49,827)

LO 3 BT: AP Difficulty: C Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 14.20 a.

Reacquisition price ($850,000 X 102%) $867,000 Less: Net carrying amount of bonds redeemed:

Par value 850,000

Unamortized discount¹ (43,917)

806,083

Loss on redemption $ 60,917

Calculation of unamortized discount—

Original amount of discount:

$850,000 X 3% = $25,500 $25,500

Bond issuance costs ($110,000 X

$850,000/$1,500,000 = 62,333

Amount to be amortized over 10 years $87,833 Amount of discount unamortized:

1($87,833 X 5) ÷ 10 = $43,917

January 2, 2020

Bonds Payable ... 806,083 Loss on Redemption of Bonds ... 60,917

Cash ... 867,000

EXERCISE 14.20 (CONTINUED)

b. Had the costs of issuing the bond of $110,000 been expensed on the date of issue (which is the required accounting treatment for transactions costs when the debt is subsequently measured at fair value rather than amortized cost), the issue costs would have been charged to expense in 2015.

Reacquisition price ($850,000 X 102%) $867,000 Less: Carrying amount of bonds on the

reacquisition date = fair value at that date (see

assumption) 867,000

Gain/Loss on redemption $ -0-

Note to instructor: Since the bonds are carried at fair value, there would be no separate gain or loss on retirement. All changes in the fair value of the bonds would have already been recognized in net income in prior years. If the company had adopted IFRS 9 early in prior years, all changes in the fair value of the bonds (which relate to changes in credit risk) would have already been recognized in Other Comprehensive Income.

January 2, 2020

Bonds Payable ... 867,000

Cash ... 867,000

EXERCISE 14.20 (CONTINUED)

c. If Kowalchuk were to follow IFRS, then the effective interest method must be used to amortize any discounts or premiums. Although the effective interest method is required under IFRS per IFRS 9.5.4.1, accounting standards for private enterprises do not specify that this method must be used and therefore, the straight-line method is also an option. The straight-line method is valued for its simplicity and might be used by companies whose financial statements are not constrained by this specific element of GAAP.

Under IAS 39, where the fair value option is selected, credit risk is incorporated into the measurement and resulting gains/losses are booked through net income. However, under IFRS 9, gains/losses related to changes in credit risk are booked through Other Comprehensive Income.

(Note that under ASPE, where the fair value option is used, credit risk is incorporated into the measurement and resulting gains/losses are booked through net income.)

LO 3 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 14.21

Cash($5,000,000 X .97) ... 4,850,000

Bonds Payable ... 4,850,000 To record issuance of 6% bonds

Bonds Payable ... 8,900,000 Loss on Redemption of Bonds ... 1,600,000

Cash ($10,000,000 X 1.05) ... 10,500,000 To record retirement of 8% bonds

Reacquisition price ... $10,500,000 Less: Net carrying amount of bonds redeemed:

Par value ... $10,000,000

Unamortized bond discount ... ( 1,100,000) 8,900,000 Loss on redemption ... $ 1,600,000

LO 3 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 14.22

a. Journal entry to record issuance of loan by Par Bank:

December 31, 2019

Computation of the impairment loss:

Carrying amount of investment (12/31/20) $88,553 1. Using tables:

Less: Present value of $93,750 due in 4 years

at 9% ($93,750 X .70843) 66,415

Loss due to impairment $22,138

2. Using a financial calculator:

PV $ ? Yields $66,415

EXERCISE 14.22 (CONTINUED) b. (continued)

3. Using Excel: = PV(rate,nper,pmt,fv,type)

Result: $66,414.86354 rounded to $66,415

The entry to record the loss by Par Bank is as follows:

Bad Debt Expense ... 22,138

Allowance for Doubtful Accounts ... 22,138

c. Mohr Inc., the debtor, makes no entry because it still legally owes $125,000.

LO 3 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 14.23

a. Transfer of property on December 31, 2020:

Strickland Inc. (Debtor):

Notes Payable ... 200,000 Interest Payable ... 18,000 Accumulated Depreciation—Machinery ... 221,000

Machinery ... 390,000 Allowance for Doubtful Accounts³ ... 38,000

Notes Receivable ... 200,000 Interest Receivable ... 18,000

3As given in the problem, this assumes Heartland had previously recognized a loss when they determined the loan was impaired and set up an allowance for doubtful accounts or had otherwise included this category of notes in allowance calculations.

b. If ―Gain on Disposalof Machinery‖ and ―Gain on Restructuring of Debt‖ do not occur frequently, they are still presented as part of income from continuing operations. If they are not material in amount, they are combined with the other items in the income statement. If they are material, they are disclosed separately. However, if the same types of gains/losses recur each year, then they are not really unusual and care must be taken to classify them with other gains and losses as normal transactions.

EXERCISE 14.23 (CONTINUED)

c. Granting of equity interest on December 31, 2020:

Strickland Inc. (Debtor):

Notes Payable ... 200,000 Interest Payable ... 18,000

Common Shares ... 190,000 Gain on Restructuring of Debt ... 28,000 Heartland Bank (Creditor):

FV-NI Investments ... 190,000 Allowance for Doubtful Accounts⁴ ... 28,000

Notes Receivable ... 200,000 Interest Receivable ... 18,000

4Assumes Heartland had previously recognized a loss when they determined the loan was impaired and set up an allowance for doubtful accounts or had otherwise included this category of notes in allowance calculations.

LO 3 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 14.24

a. The first step is to determine the economic substance of the debt renegotiation and determine if it should be accounted for as a settlement or a modification/exchange regarding the old debt. In this case, the creditor is the same and so is the currency and therefore the test to establish whether there is a settlement or not revolves around the cash flows. The present value of the cash flow streams of the new debt are calculated using the historical interest rate of 12% for consistency and comparability.

Present value of old debt is $2,000,000.

Present value of new debt is calculated as follows:

1.Using tables:

12% Present

Factor Value Single amount $1,900,000 0.71178 $1,352,382 Interest annuity 190,000 2.40183 456,348

$1,808,730

2.Using a financial calculator:

PV $? Yields $1,808,730

I 12%

N 3

PMT $ (190,000)

FV $ (1,900,000)

Type 0

EXERCISE 14.24 (CONTINUED) a. (continued)