EXERCISE 14.

11 (10–15 minutes)

(a) 1. January 1, 2022

Land 300,000
..................................................................
..................................................................
Notes Payable ................................ 300,000
(The €300,000 capitalized land
cost represents the present
value of the note discounted
for five years at 11%.)

2. Equipment ............................................... 297,079*

Notes Payable ................................ 297,079

*Computation of the present value of the note:

Present value of €400,000
due in 8 years at 11%—
€400,000 × 0.43393 (PVF8, 11%) .... €173,572
Present value of €24,000
payable annually for
8 years at 11% —
€24,000 [(€400,000 × 0.06) ×
5.14612 (PVF-OA8, 11%)] ............... 123,507
Present value of the note .............. €297,079

December 31, 2022

(b) 1. Interest Expense ..................................... 33,000
Notes Payable (€300,000 × 0.11) .. 33,000

2. Interest Expense (€297,079 × 0.11) ....... 32,679

Notes Payable ................................ 8,679
Cash (€400,000 × 0.06) .................. 24,000
LO: 2, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: Analytic, AICPA BC: None, AICPA FC: Reporting, AICPA PC: None
EXERCISE 14.14 (15–20 minutes)

(a) Present value of the principal:

$1,500,000 × 0.35218 (Table 6-2; PVF10, 11%) .................. $ 528,270
Present value of the interest payments:
($1,500,000 × 0.10) × 5.88923 (Table 6-4; PVF-OA10, 11%) 883,385
Present value (selling price) of the bonds ..................... $1,411,655

(b) Amortization Schedule

10-Year, 10% Bonds Sold to Yield 11%
(1) (2) (2) – (1)
Cash Interest Carrying
Paid Expense Discount Amount of
Date @10% @11% Amortized Bonds
1/2/19 — — — $1,411,655
12/31/19 $150,000* $155,282** $5,282 1,416,937
12/31/20 150,000 155,863 5,863 1,422,800
12/31/21 150,000 156,508 6,508 1,429,308
12/31/22 150,000 157,224 7,224 1,436,532
12/31/23 150,000 158,019 8,019 1,444,551
*$1,500,000 × 0.10 **$1,411,655 × 0.11
(c) Bonds Payable
($1,429,308 × $1,000,000 ÷ $1,500,000) ..... 952,872
Loss on Extinguishment of Debt.................. 57,128
Cash ($1,000,000 × 101%) .................... 1,010,000
LO: 1,3, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, AICPA BC: None, AICPA FC: Reporting, AICPA PC: None
 PROBLEM 14.8

1. Sanford Co.

March 1, 2022
Cash 472,090*
.......................................................................................
.......................................................................................
Bonds Payable .................................................... 472,090

*Present value of $500,000 due in 7 periods at 6%

[($500,000 × 0.66506) (PVF7, 6%)] (Table 6-2) ............ $332,530
Present value of interest payable semiannually
[($25,000* × 5.58238) (PVF – OA7, 6%)] (Table 6-4) .. 139,560
Proceeds from sale of bonds ..................................... $472,090
*$500,000 × 0.10 × 1/2
September 1, 2022
Interest Expense ............................................................. 28,325*
Bonds Payable ....................................................... 3,325
Cash ........................................................................ 25,000
(See amortization table on next page)
December 31, 2022
Interest Expense ($16,667 + $2,350) or ($28,525 × 4/6) 19,017
Bonds Payable ($3,525 × 4/6) .............................. 2,350
Interest Payable ($25,000* × 4/6) .......................... 16,667
March 1, 2023
Interest Expense ($28,525 × 2/6) .................................... 9,508
Interest Payable .............................................................. 16,667
Bonds Payable ($3,525 × 2/6) ............................... 1,175
Cash ........................................................................ 25,000*
September 1, 2023 (Per Schedule)
Interest Expense ............................................................. 28,736
Bonds Payable ....................................................... 3,736
Cash ........................................................................ 25,000*
December 31, 2023
Interest Expense ($16,667 + $2,641) or ($28,961 × 4/6) 19,308
Bonds Payable ($3,961 × 4/6) ............................... 2,641
Interest Payable ($25,000* × 4/6) .......................... 16,667
PROBLEM 14.8 (Continued)

Schedule of Bond Discount Amortization

Effective-Interest Method
10% Bonds Sold to Yield 12%
(1) (2) (1) – (1)
Interest Carrying
Cash Paid Expense Discount Amount of
Date @ 5% @ 6% Amortized Bonds
3/1/22 — — — $472,090
9/1/22 $25,000 $28,325 $3,325 475,415
3/1/23 25,000 28,525 3,525 478,940
9/1/23 25,000 28,736 3,736 482,676
3/1/24 25,000 28,961 3,961 486,637

2. Titania Co.

June 1, 2022
Cash 425,853
.......................................................................................
.......................................................................................
Bonds Payable .................................................... 425,853

Present value of $400,000 due in 8 periods at 5%

[$400,000 × 0.67684 (PVF8,5%)] .................................. $270,736
Present value of interest payable semiannually
[$24,000* × 6.46321 PVF-OA8,5%)] ............................. 155,117
Proceeds from sale of bonds ...................................... $425,853
*$400,000 × 0.12 × 6/12
December 1, 2022
Interest Expense .......................................................... 21,293*
Bonds Payable ............................................................. 2,707
Cash ($400,000 × 0.12 × 6/12) ............................ 24,000
From amortization schedule on next page.
PROBLEM 14.8 (Continued)

Schedule of Bond Discount Amortization

Effective-Interest Method - Semiannual
12% Bonds Sold to Yield 10%
(1) (2) (1) – (2) Carrying
Cash Paid Interest Premium Amount of
Date @ 6% Expense @ 5% Amortized Bonds
6/1/22 — — — $425,853
12/1/22 $24,000 $21,293 $2,707 423,146
6/1/23 24,000 21,157 2,843 420,303
12/1/23 24,000 21,015 2,985 417,318
6/1/24 24,000 20,866 3,134 414,184
12/1/24 24,000 20,709 3,291 410,893

December 31, 2022

Interest Expense ($21,157 × 1/6) ................................. 3,526
Bonds Payable ($2,843 × 1/6) ...................................... 474
Interest Payable ($24,000 × 1/6) ......................... 4,000

June 1, 2023
Interest Expense ($21,157 × 5/6) ................................. 17,631
Interest Payable ........................................................... 4,000
Bonds Payable ($2,843 × 5/6) ...................................... 2,369
Cash ($400,000 × 0.12 × 6/12) ............................ 24,000

October 1, 2023
Interest Expense ($21,015 × 0.3* × 4/6) ...................... 4,203
Bonds Payable ($2,985 × 0.3 × 4/6)............................. 597
Cash ($24,000 × 0.3 × 4/6) .................................. 4,800

*$120,000 ÷ $400,000 = 0.30 of the bonds bought back

October 1, 2023
Bonds Payable ............................................................. 125,494
Gain on Extinguishment of Bonds .................... 4,294*
Cash ..................................................................... 121,200
PROBLEM 14.8 (Continued)

*Reacquisition price/Gain on extinguishment:

$126,000 – ($120,000 × 0.12 × 4/12) $121,200
Net carrying amount of bonds redeemed:
($420,303^ × 0.30) – $597 ................................ 125,494
Gain on extinguishment ..................................... $ 4,294

December 1, 2023
Interest Expense ($21,015 × 0.7*) ............................... 14,711
Bonds Payable ($2,985 × 0.7) ...................................... 2,089
Cash ($24,000 × 0.7) ........................................... 16,800

*($400,000 – $120,000) ÷ $400,000 = 0.70 of the bonds remaining

December 31, 2023

Interest Expense ($20,866 × 0.7 × 1/6) ................ 2,434
Bonds Payable ($3,134 × 0.7 × 1/6) ..................... 366
Interest Payable ($24,000 × 0.7 × 1/6) ........ 2,800

June 1, 2024
Interest Expense ($20,866 × 0.7 × 5/6) .............. 12,172
Interest Payable .................................................. 2,800
Bonds Payable ($3,134 × 0.7 × 5/6) ................... 1,828
Cash ($24,000 × 0.7) .................................. 16,800

December 1, 2024
Interest Expense ($20,709 × 0.7) ....................... 14,496
Bonds Payable ($3,291 × 0.7) ............................ 2,304
Cash ($24,000 × 0.7) .................................. 16,800
LO: 1,3, Bloom: AP, Difficulty: Moderate, Time: 50-65, AACSB: Analytic, AICPA BC: None, AICPA FC: Reporting, AICPA PC: None
 PROBLEM 14.9

July 1, 2022
Cash
(€900,000 × 1.12290) + (€900,000 × 0.12 × 6/12) . 1,064,610
Bonds Payable (€900,000 × 1.12290)............ 1,010,610
Interest Expense (€900,000 × 0.12 × 6/12) ... 54,000

December 31, 2022

Interest Expense (€900,000 × 0.12) ........................ 108,000
Interest Payable ............................................. 108,000

Bonds Payable ........................................................ 3,469.50

Interest Expense [(€108,000 – €54,000) –
(€1,010,610 × 0.10 × 6/12)] ......................... 3,469.50

January 1, 2023
Interest Payable ...................................................... 108,000
Cash ................................................................ 108,000

January 2, 2023
Bonds Payable ..................................................... 402,856.20*
Cash (€360,000 × 1.02) ............................... 367,200.00
Gain on Extinguishment of Debt ............... 35,656.20

*[(€360,000 ÷ €900,000) = 40% extinguished.

.40 × (€1,010,610 – €3,469.50)].

Reacquisition price (€360,000 × 1.02) .................. €367,200.00

Net carrying value of bonds redeemed:
[(€1,010,610 – €3,469.50) × (€360,000 €900,000)] 402,856.20
Gain on redemption .............................................. € 35,656.20
PROBLEM 14.9 (Continued)

December 31, 2023

Interest Expense (€540,000* × 0.12) ........................ 64,800.00
Interest Payable ............................................... 64,800.00
*$900,000 – $360,000

Bonds Payable .......................................................... 4,371.57

Interest Expense
[(€1,010,610 – €3,469.50 – €402,856.20)
× 0.10] – €64,800 ......................................... 4,371.57
LO: 1,3, Bloom: AP, Difficulty: Moderate, Time: 20-25, AACSB: Analytic, AICPA BC: None, AICPA FC: Reporting, AICPA PC: None
 PROBLEM 14.12

(a) Notes Payable ................................................... 5,000,000

Share Capital—Ordinary ......................... 1,700,000
Share Premium—Ordinary ..................... 2,000,000
Gain on Extinguishment of Debt............ 1,300,000

Carrying amount of debt $5,000,000

Fair value of equity (3,700,000)
Gain on extinguishment of debt $1,300,000

(b) Notes Payable ................................................... 5,000,000

Land .......................................................... 3,250,000
Gain on Disposition of Land .................. 750,000
Gain on Extinguishment of Debt............ 1,000,000

Fair value of land ....................... $4,000,000

Book value of land..................... (3,250,000)
Gain on disposition of
real estate ................................ $ 750,000

Note payable (carrying

amount) ................................... $5,000,000
Fair value of land ....................... (4,000,000)
Gain on extinguishment
of debt ..................................... $1,000,000
PROBLEM 14.12 (Continued)

(c) Notes Payable (Old).......................................... 5,000,000

Gain on Extinguishment of Debt............ 1,441,100*
Notes Payable (New) ............................... 3,558,900

*Calculation of gain.

Pre-restructure carrying amount .................. $ 5,000,000

Less: Present value of restructured cash flows:
Present value of $5,000,000 due in
3 years at 12% (Table 6-2);
[$5,000,000 × 0.71178 (PVF3,12%)] ............... 3,558,900
Debtor’s gain on extinguishment .............................. $ 1,441,100

LO: 3, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, AICPA BC: None, AICPA FC: Reporting, AICPA PC: None