Solution manual intermediate accounting 15th kiesoch14

$ 491,234 E14­6B 15–20 minutes Schedule of Premium Amortization Straight­Line Method Carrying Amount of Bonds... Schedule of Premium Amortization Effective­Interest Method 12% Carrying A

Interest Payable 10,000

2 Kumiko Company:

(a) 6/1/14 Cash 208,333

Bonds Payable 200,000 Bond Interest Expense

E14­4B (15–20 minutes)

(a) 1/1/14 Cash ($400,000 X 102%) 408,000

Bonds Payable 400,000 Premium on Bonds

   Payable 8,000

(b) 7/1/14 Bond Interest Expense 15,800

Premium on Bonds Payable    ($8,000 ÷ 40) 200

Cash ($400,000 X 8% X 6/12) 16,000    

(c) 12/31/14 Bond Interest Expense 15,800

Premium on Bonds Payable 200

Interest Payable 16,000

(a) 1/1/14 Cash 492,460*

Bonds Payable 400,000 Premium on Bonds Payable 92,460

*Present value = $400,000 X PV1   (40 periods, 3%) + $16,000 X PVOA   (40 periods, 3 %) = $492,460

   ($492,460 X 6% X 1/2) 14,774 Premium on Bonds Payable 1,226

Cash ($400,000 X 8% X 1/2) 16,000

(c) 12/31/14 Bond Interest Expense

   ($491,234 X 6% X 1/2) 14,737 Premium on Bonds Payable 1,263

Interest Payable 16,000 Carrying amount of bonds at July 1, 2014:

   Carrying amount of bonds at January 1, 2014 $492,460    Amortization of bond premium

      ($16,000 – $14,774)               (1,226)    Carrying amount of bonds at July 1, 2014 $  491,234 E14­6B (15–20 minutes)

Schedule of Premium Amortization

Straight­Line Method

Carrying Amount of Bonds

The effective­interest or yield rate is 6%. It is determined through trial and error using Table 6­2 for the discounted value of the principal ($3,736,291) and Table 6­4 for the discounted value of the interest ($1,684,945); $3,736,291  plus

$1,684,945 equals the proceeds of $5,421,236. (A financial calculator may be used to determine the rate of 6%.)

Schedule of Premium Amortization Effective­Interest Method (12%)

Carrying Amount of Bonds

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;

   $5,000,000 X 6% X 6/12 $150,000 Less:  Premium amortization for the period from

   January 1 to June 30, 2015 from (a) 3 $106,610.69 Interest expense for the period from

   July 1 to December 31, 2015 from (a) 4   107,006.90 Amount of bond interest expense

   reported for 2015 $213,617.59

than the amount that would be reported if the straight­line method

of amortization were used. Under the straight­line method, the amor­ tization of bond discount is $22,940 ($229,398/10). Bond interest expense for 2015 is the sum of the amortized  discount, $22,940, and the actual interest paid, $200,000 ($2,000,000 X  10%). Thus, the amount of bond interest expense is $222,940, which is greater than the bond interest expense under the effective­interest method.

   ($2,000,000 X 10% X 10) $2,000,000 Plus:  Discount        229,398 Total cost of borrowing over the life

Debit  Bond Premium

Carrying Value of Bonds

Secured Bonds

Zero­Coupon Bonds

Mortgage Bonds

at 4% for 40 periods

($10,000,000 X 0.20829)     2,082,900

$11,979,285

Loss on redemption $     33,000

Cash ($1,100,000 X 101%) 1,111,000

Bonds Payable 1,100,000

     cost represents the present      value of the note discounted      for 5 years at 8%)

   8 years at 8%—$350,000 

   X .54027 $189,094.50 Present value of $14,000

   payable annually for 8 years

   at 8% annually—$14,000

   X 5.74664     80,452.96 Present value of the note  (269,547.46) Discount $  80,452.54

(b) 1 Interest Expense 64,000.00

Discount on Notes Payable 64,000.00    ($800,000 X .08)

2 Interest Expense 21,563.80

   ($269,547.46 X .08)

Cash ($350,000 X .04) 14,000.00

Unrealized Holding Gain (Loss)

Change in Unrealized Holding Gain (Loss)

investors are receiving a  lower  rate relative to investors in similar­risk investments.

“accounting unsymmetry” treatment, FASB stated that  GAAP  does not

address   debtor   accounting   because   the   FASB   was   concerned   that expansion of the scope of the statement would delay its issuance.

(b) No. There is no gain under the modified terms because the total future

cash flows after restructuring exceed the total pre­restructuring carrying amount of the note (principal):

Total future cash flows after restructuring are:

Principal $  8,000,000

$10,400,000 Total pre­restructuring carrying amount of note 

   (principal): $10,000,000

LARKIN COMPANY Interest Payment Schedule After Debt Restructuring

Effective­Interest Rate 1.4276%

Date

Cash Interest (10%)

Effective Interest (1.4276%)

Reduction 

of Carrying Amount

Carrying Amount of Note

Interest Expense 133,377

Cash 800,000 (e) The payment entry at maturity is:

January 1, 2018 Note Payable 8,000,000

Cash 8,000,000

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

ZETTLEIN BANK Interest Receipt Schedule After Debt Restructuring

Effective­Interest Rate 12%

Date

Cash Interest (10%)

Effective Interest (12%)

Increase 

in Carrying Amount

Carrying Amount of Note

December 31, 2016 Cash 800,000

Allowance for Doubtful Accounts 127,551

January 1, 2018 Cash 8,000,000

Note Payable 1,550,000

$8,450,000) equals the sum of the undiscounted future cash flows ($6,500,000 principal + $1,950,000 interest = $8,450,000), the imputed interest rate is 0%. Consequently, all the future cash flows reduce the principal balance and no interest expense is recognized.

LARKIN COMPANY Interest Payment Schedule After Debt Restructuring

Effective­Interest Rate 0%

Date

Cash Interest (10%)

Effective Interest (0%)

Reduction 

of Carrying Amount

Carrying Amount of Note

Cash 650,000

January 1, 2018 Note Payable 6,500,000

Cash 6,500,000

Date

Cash Interest (10%)

Effective Interest (12%)

Increase 

in Carrying Amount

Carrying Amount of Note

December 31, 2015 Cash 650,000

Allowance for Doubtful Accounts 92,531

Interest Revenue 742,531

December 31, 2016 Cash 650,000

Allowance for Doubtful Accounts   103,635

Interest Revenue 753,635

December 31, 2017 Cash 650,000

Allowance for Doubtful Accounts 116,074

Interest Revenue    766,074

January 1, 2018 Cash 6,500,000

   ($30,000 X 2.48685)     74,606    450,266

Increase 

in Carrying Amount

Carrying Amount of Note

Allowance for Doubtful Accounts 15,027

December 31, 2016 Cash 30,000

Allowance for Doubtful Accounts 16,529

December 31, 2017 Cash 30,000