Long-Term Liabilities

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Chapter 14 Long-Term Liabilities

QUESTIONS
1. (a) From what sources might a corporation obtain funds through long-term debt? (b) What is a bond indenture?
What does it contain? (c) What is a mortgage?
2
. Potlatch Corporation has issued various types of bonds such as term bonds, income bonds, and debentures.
Differentiate between term bonds, mortgage bonds, debenture bonds, income bonds, callable bonds, registered bonds, bearer or coupon bonds, convertible bonds, commodity-backed bonds, and deep discount bonds.
3
. Distinguish between the following interest rates for bonds payable:
(
a) Yield rate. (d) Market rate.
(
b) Nominal rate. (e) Effective rate.
(
c) Stated rate.
4
. Distinguish between the following values relative to bonds payable:
(
a) Maturity value. (c) Market (fair) value.
(
b) Face value. (d) Par value.
5
. Under what conditions of bond issuance does a discount on bonds payable arise? Under what conditions of bond issuance does a premium on bonds payable arise?
6
. How should discount on bonds payable be reported on the financial statements? Premium on bonds payable?
7
. What are the two methods of amortizing discount and premium on bonds payable? Explain each.
8
. Zopf Company sells its bonds at a premium and applies the effective-interest method in amortizing the premium.
Will the annual interest expense increase or decrease over the life of the bonds? Explain.
9
. Briggs and Stratton reported unamortized debt issue costs of $5.1 million. How should the costs of issuing these bonds be accounted for and classified in the financial statements?
1
0. Will the amortization of Discount on Bonds Payable increase or decrease Bond Interest Expense? Explain.
1
1. What is the “call” feature of a bond issue? How does the call feature affect the amortization of bond premium or discount?
1
2. Why would a company wish to reduce its bond indebtedness before its bonds reach maturity? Indicate how this can be done and the correct accounting treatment for such a transaction.
1
3. How are gains and losses from extinguishment of a debt classified in the income statement? What disclosures are required of such transactions?
1
4. What is done to record properly a transaction involving the issuance of a non-interest-bearing long-term note in exchange for property?
1
5. How is the present value of a non-interest-bearing note computed?
1
6. When is the stated interest rate of a debt instrument presumed to be fair?
1
7. What are the considerations in imputing an appropriate interest rate?
1
8. Differentiate between a fixed-rate mortgage and a variablerate mortgage.
1
9. What is the fair value option? Briefly describe the controversy of applying the fair value option to financial liabilities.
2
0. Pierre Company has a 12% note payable with a carrying value of $20,000. Pierre applies the fair value option to this note. Given an increase in market interest rates, the fair value of the note is $22,600. Prepare the entry to record the fair value option for this note.
2
1. What disclosures are required relative to long-term debt and sinking fund requirements?
2
2. What is off-balance-sheet financing? Why might a company be interested in using off-balance-sheet financing?
2
3. What are some forms of off-balance-sheet financing?
2
4. Explain how a non-consolidated subsidiary can be a form of off-balance-sheet financing.
*2
5. What are the types of situations that result in troubled debt?
*2
6. What are the general rules for measuring gain or loss by both creditor and debtor in a troubled-debt restructuring involving a settlement?
*2
7. (a) In a troubled-debt situation, why might the creditor grant concessions to the debtor?
(
b) What type of concessions might a creditor grant the debtor in a troubled-debt situation?
*2
8. What are the general rules for measuring and recognizing gain or loss by both the debtor and the creditor in a troubleddebt restructuring involving a modification of terms?
*2
9. What is meant by “accounting symmetry” between the entries recorded by the debtor and creditor in a troubleddebt restructuring involving a modification of terms? In what ways is the accounting for troubled-debt restructurings non-symmetrical?
*3
0. Under what circumstances would a transaction be recorded as a troubled-debt restructuring by only one of the two parties to the transaction?


BRIEF EXERCISES

BE14-1
Whiteside Corporation issues $500,000 of 9% bonds, due in 10 years, with interest payable semiannually.
At the time of issue, the market rate for such bonds is 10%. Compute the issue price of the bonds.

BE14-
2 The Colson Company issued $300,000 of 10% bonds on January 1, 2014. The bonds are due January 1,
2020, with interest payable each July 1 and January 1. The bonds are issued at face value. Prepare Colson’s journal entries for (a) the January issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.

BE14-
3 Assume the bonds in BE14-2 were issued at 98. Prepare the journal entries for (a) January 1, (b) July
1, and (c) December 31. Assume The Colson Company records straight-line amortization semiannually.

BE14-
4 Assume the bonds in BE14-2 were issued at 103. Prepare the journal entries for (a) January 1, (b) July 1, and (c) December 31. Assume The Colson Company records straight-line amortization semiannually.

BE14-
5 Devers Corporation issued $400,000 of 6% bonds on May 1, 2014. The bonds were dated January 1,
2014, and mature January 1, 2017, with interest payable July 1 and January 1. The bonds were issued at face value plus accrued interest. Prepare Devers’s journal entries for (a) the May 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.

BE14-
6 On January 1, 2014, JWS Corporation issued $600,000 of 7% bonds, due in 10 years. The bonds were issued for $559,224, and pay interest each July 1 and January 1. JWS uses the effective-interest method.
Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and
(c) the December 31 adjusting entry. Assume an effective-interest rate of 8%.

BE14-
7 Assume the bonds in BE14-6 were issued for $644,636 and the effective-interest rate is 6%. Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the
December 31 adjusting entry.

BE14-
8 Teton Corporation issued $600,000 of 7% bonds on November 1, 2014, for $644,636. The bonds were dated November 1, 2014, and mature in 10 years, with interest payable each May 1 and November 1.
Teton uses the effective-interest method with an effective rate of 6%. Prepare Teton’s December 31, 2014, adjusting entry.

BE14-
9 At December 31, 2014, Hyasaki Corporation has the following account balances:
B
onds payable, due January 1, 2023 $2,000,000
Discount on bonds payable 88,000
Interest payable 80,000
S
how how the above accounts should be presented on the December 31, 2014, balance sheet, including the proper classifications.

BE14-
10 Wasserman Corporation issued 10-year bonds on January 1, 2014. Costs associated with the bond issuance were $160,000. Wasserman uses the straight-line method to amortize bond issue costs. Prepare the
December 31, 2014, entry to record 2014 bond issue cost amortization.

BE14-
11 On January 1, 2014, Henderson Corporation redeemed $500,000 of bonds at 99. At the time of redemption, the unamortized premium was $15,000 and unamortized bond issue costs were $5,250. Prepare the corporation’s journal entry to record the reacquisition of the bonds.

BE14-
12 Coldwell, Inc. issued a $100,000, 4-year, 10% note at face value to Flint Hills Bank on January 1,
2014, and received $100,000 cash. The note requires annual interest payments each December 31. Prepare
Coldwell’s journal entries to record (a) the issuance of the note and (b) the December 31 interest payment.

BE14-
13 Samson Corporation issued a 4-year, $75,000, zero-interest-bearing note to Brown Company on
January 1, 2014, and received cash of $47,664. The implicit interest rate is 12%. Prepare Samson’s journal entries for (a) the January 1 issuance and (b) the December 31 recognition of interest.

BE14-
14 McCormick Corporation issued a 4-year, $40,000, 5% note to Greenbush Company on January 1,
2014, and received a computer that normally sells for $31,495. The note requires annual interest payments each December 31. The market rate of interest for a note of similar risk is 12%. Prepare McCormick’s journal entries for (a) the January 1 issuance and (b) the December 31 interest.

BE14-
15 Shlee Corporation issued a 4-year, $60,000, zero-interest-bearing note to Garcia Company on
January 1, 2014, and received cash of $60,000. In addition, Shlee agreed to sell merchandise to Garcia at an amount less than regular selling price over the 4-year period. The market rate of interest for similar notes is 12%. Prepare Shlee Corporation’s January 1 journal entry.

BE14
-16 Shonen Knife Corporation has elected to use the fair value option for one of its notes payable. The note was issued at an effective rate of 11% and has a carrying value of $16,000. At year-end, Shonen Knife’s borrowing rate has declined; the fair value of the note payable is now $17,500. (a) Determine the unrealized holding gain or loss on the note. (b) Prepare the entry to record any unrealized holding gain or loss.


EXERCISES



E14
-1 (Classification of Liabilities)
Presented below are various account balances of K.D. Lang Inc.
(
a) Unamortized premium on bonds payable, of which $3,000 will be amortized during the next year.
(
b) Bank loans payable of a winery, due March 10, 2018. (The product requires aging for 5 years before sale.)
(
c) Serial bonds payable, $1,000,000, of which $200,000 are due each July 31.
(
d) Amounts withheld from employees’ wages for income taxes.
(
e) Notes payable due January 15, 2017.
(
f) Credit balances in customers’ accounts arising from returns and allowances after collection in full of account.
(
g) Bonds payable of $2,000,000 maturing June 30, 2016.
(
h) Overdraft of $1,000 in a bank account. (No other balances are carried at this bank.)
(
i) Deposits made by customers who have ordered goods.
Instructions

I
ndicate whether each of the items above should be classified on December 31, 2014, as a current liability, a long-term liability, or under some other classification. Consider each one independently from all others; that is, do not assume that all of them relate to one particular business. If the classification of some of the items is doubtful, explain why in each case.

E14-
2 (Classification) The following items are found in the financial statements.
(
a) Discount on bonds payable.
(
b) Interest expense (credit balance).
(
c) Unamortized bond issue costs.
(
d) Gain on repurchase of debt.
(
e) Mortgage payable (payable in equal amounts over next 3 years).
(
f) Debenture bonds payable (maturing in 5 years).
(
g) Notes payable (due in 4 years).
(
h) Premium on bonds payable.
(
i) Treasury bonds.
(
j) Bonds payable (due in 3 years).
Instructions

I
ndicate how each of these items should be classified in the financial statements.

E14-
3 (Entries for Bond Transactions) Presented below are two independent situations.
1
. On January 1, 2014, Simon Company issued $200,000 of 9%, 10-year bonds at par. Interest is payable quarterly on April 1, July 1, October 1, and January 1.
2
. On June 1, 2014, Garfunkel Company issued $100,000 of 12%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semiannually on July 1 and January 1.
Instructions

F
or each of these two independent situations, prepare journal entries to record the following.
(
a) The issuance of the bonds.
(
b) The payment of interest on July 1.
(
c) The accrual of interest on December 31.

E14-
4 (Entries for Bond Transactions—Straight-Line) Celine Dion Company issued $600,000 of 10%,
20-year bonds on January 1, 2014, at 102. Interest is payable semiannually on July 1 and January 1. Dion
Company uses the straight-line method of amortization for bond premium or discount.
Instructions

P
repare the journal entries to record the following.
(
a) The issuance of the bonds.
(b) The payment of interest and the related amortization on July 1, 2014.
(
c) The accrual of interest and the related amortization on December 31, 2014.

E14-
5 (Entries for Bond Transactions—Effective-Interest) Assume the same information as in E14-4, except that Celine Dion Company uses the effective-interest method of amortization for bond premium or discount. Assume an effective yield of 9.7705%.
Instructions

P
repare the journal entries to record the following. (Round to the nearest dollar.)
(
a) The issuance of the bonds.
(
b) The payment of interest and related amortization on July 1, 2014.
(
c) The accrual of interest and the related amortization on December 31, 2014.

E14-
6 (Amortization Schedule—Straight-Line) Devon Harris Company sells 10% bonds having a maturity value of $2,000,000 for $1,855,816. The bonds are dated January 1, 2014, and mature January 1, 2019.
Interest is payable annually on January 1.
Instructions

S
et up a schedule of interest expense and discount amortization under the straight-line method. (Round answers to the nearest cent.)

E14-
7 (Amortization Schedule—Effective-Interest) Assume the same information as E14-6.
Instructions

S
et up a schedule of interest expense and discount amortization under the effective-interest method.
(
Hint: The effective-interest rate must be computed.)

E14-
8 (Determine Proper Amounts in Account Balances) Presented below are three independent situations.
(
a) CeCe Winans Corporation incurred the following costs in connection with the issuance of bonds:
(1) printing and engraving costs, $12,000; (2) legal fees, $49,000; and (3) commissions paid to underwriter, $60,000. What amount should be reported as Unamortized Bond Issue Costs, and where should this amount be reported on the balance sheet?
(
b) George Gershwin Co. sold $2,000,000 of 10%, 10-year bonds at 104 on January 1, 2014. The bonds were dated January 1, 2014, and pay interest on July 1 and January 1. If Gershwin uses the straightline method to amortize bond premium or discount, determine the amount of interest expense to be reported on July 1, 2014, and December 31, 2014.
(
c) Ron Kenoly Inc. issued $600,000 of 9%, 10-year bonds on June 30, 2014, for $562,500. This price provided a yield of 10% on the bonds. Interest is payable semiannually on December 31 and
June 30. If Kenoly uses the effective-interest method, determine the amount of interest expense to record if financial statements are issued on October 31, 2014.

E14-
9 (Entries and Questions for Bond Transactions) On June 30, 2014, Mischa Auer Company issued $4,000,000 face value of 13%, 20-year bonds at $4,300,920, a yield of 12%. Auer uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and
December 31.
Instructions

(
Round answers to the nearest cent.)
(
a) Prepare the journal entries to record the following transactions.
(
1) The issuance of the bonds on June 30, 2014.
(
2) The payment of interest and the amortization of the premium on December 31, 2014.
(
3) The payment of interest and the amortization of the premium on June 30, 2015.
(
4) The payment of interest and the amortization of the premium on December 31, 2015.
(
b) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2015, balance sheet.
(
c) Provide the answers to the following questions.
(
1) What amount of interest expense is reported for 2015?
(
2) Will the bond interest expense reported in 2015 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used?
(
3) Determine the total cost of borrowing over the life of the bond.
(
4) Will the total bond interest expense for the life of the bond be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used?

E14-
10 (Entries for Bond Transactions) On January 1, 2014, Aumont Company sold 12% bonds having a maturity value of $500,000 for $537,907.37, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2014, and mature January 1, 2019, with interest payable December 31 of each year.
Aumont Company allocates interest and unamortized discount or premium on the effective-interest basis.
Instructions

(
Round answers to the nearest cent.)
(
a) Prepare the journal entry at the date of the bond issuance.
(
b) Prepare a schedule of interest expense and bond amortization for 2014–2016.
(
c) Prepare the journal entry to record the interest payment and the amortization for 2014.
(
d) Prepare the journal entry to record the interest payment and the amortization for 2016.

E14-
11 (Information Related to Various Bond Issues) Karen Austin Inc. has issued three types of debt on
January 1, 2014, the start of the company’s fiscal year.
(
a) $10 million, 10-year, 15% unsecured bonds, interest payable quarterly. Bonds were priced to yield 12%.
(
b) $25 million par of 10-year, zero-coupon bonds at a price to yield 12% per year.
(
c) $20 million, 10-year, 10% mortgage bonds, interest payable annually to yield 12%.
Instructions

P
repare a schedule that identifies the following items for each bond: (1) maturity value, (2) number of interest periods over life of bond, (3) stated rate per each interest period, (4) effective-interest rate per each interest period, (5) payment amount per period, and (6) present value of bonds at date of issue.

E14-
12 (Entry for Redemption of Bond; Bond Issue Costs) On January 2, 2009, Banno Corporation issued $1,500,000 of 10% bonds at 97 due December 31, 2018. Legal and other costs of $24,000 were incurred in connection with the issue. Interest on the bonds is payable annually each December 31. The $24,000 issue costs are being deferred and amortized on a straight-line basis over the 10-year term of the bonds. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable “interest method.”)
The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2014, Banno called $900,000 face amount of the bonds and redeemed them.
Instructions

I
gnoring income taxes, compute the amount of loss, if any, to be recognized by Banno as a result of retiring the $900,000 of bonds in 2014 and prepare the journal entry to record the redemption.
(AICPA adapted)

E14-
13 (Entries for Redemption and Issuance of Bonds) Matt Perry, Inc. had outstanding $6,000,000 of
11% bonds (interest payable July 31 and January 31) due in 10 years. On July 1, it issued $9,000,000 of 10%,
15-year bonds (interest payable July 1 and January 1) at 98. A portion of the proceeds was used to call the
11% bonds at 102 on August 1. Unamortized bond discount and issue cost applicable to the 11% bonds were $120,000 and $30,000, respectively.
Instructions

P
repare the journal entries necessary to record issue of the new bonds and the refunding of the bonds.

E14-
14 (Entries for Redemption and Issuance of Bonds) On June 30, 2006, County Company issued 12% bonds with a par value of $800,000 due in 20 years. They were issued at 98 and were callable at 104 at any date after June 30, 2014. Because of lower interest rates and a significant change in the company’s credit rating, it was decided to call the entire issue on June 30, 2015, and to issue new bonds. New 10% bonds were sold in the amount of $1,000,000 at 102; they mature in 20 years. County Company uses straight-line amortization. Interest payment dates are December 31 and June 30.
Instructions

(
a)
Prepare journal entries to record the redemption of the old issue and the sale of the new issue on June 30, 2015.
(
b) Prepare the entry required on December 31, 2015, to record the payment of the first 6 months’ interest and the amortization of premium on the bonds.

E14-
15 (Entries for Redemption and Issuance of Bonds) Linda Day George Company had bonds outstanding with a maturity value of $300,000. On April 30, 2014, when these bonds had an unamortized discount of $10,000, they were called in at 104. To pay for these bonds, George had issued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 103 (face value $300,000). Issue costs related to the new bonds were $3,000.
Instructions

I
gnoring interest, compute the gain or loss and record this refunding transaction.
(AICPA adapted)

E14
-16 (Entries for Zero-Interest-Bearing Notes) On January 1, 2014, Ellen Greene Company makes the two following acquisitions.
1
. Purchases land having a fair value of $200,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $337,012.
2
. Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $250,000
(interest payable annually).
The company has to pay 11% interest for funds from its bank.
Instructions

(
Round answers to the nearest cent.)
(
a) Record the two journal entries that should be recorded by Ellen Greene Company for the two purchases on January 1, 2014.
(
b) Record the interest at the end of the first year on both notes using the effective-interest method.

E14-
17 (Imputation of Interest) Presented below are two independent situations.
(
a) On January 1, 2014, Robin Wright Inc. purchased land that had an assessed value of $350,000 at the time of purchase. A $550,000, zero-interest-bearing note due January 1, 2017, was given in exchange.
There was no established exchange price for the land, nor a ready fair value for the note. The interest rate charged on a note of this type is 12%. Determine at what amount the land should be recorded at January 1, 2014, and the interest expense to be reported in 2014 related to this transaction.
(
b) On January 1, 2014, Field Furniture Co. borrowed $5,000,000 (face value) from Gary Sinise Co., a major customer, through a zero-interest-bearing note due in 4 years. Because the note was zerointerest- bearing, Field Furniture agreed to sell furniture to this customer at lower than market price.
A 10% rate of interest is normally charged on this type of loan. Prepare the journal entry to record this transaction and determine the amount of interest expense to report for 2014.

E14-
18 (Imputation of Interest with Right) On January 1, 2014, Margaret Avery Co. borrowed and received $400,000 from a major customer evidenced by a zero-interest-bearing note due in 3 years. As consideration for the zero-interest-bearing feature, Avery agrees to supply the customer’s inventory needs for the loan period at lower than the market price. The appropriate rate at which to impute interest is 8%.
Instructions

(
a)
Prepare the journal entry to record the initial transaction on January 1, 2014. (Round all computations to the nearest dollar.)
(
b) Prepare the journal entry to record any adjusting entries needed at December 31, 2014. Assume that the sales of Avery’s product to this customer occur evenly over the 3-year period.

E14-
19 (Fair Value Option) Fallen Company commonly issues long-term notes payable to its various lenders. Fallen has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Fallen has elected to use the fair value option for the long-term notes issued to Barclay’s Bank and has the following data related to the carrying and fair value for these notes.
C
arrying Value Fair Value
December 31, 2014 $54,000 $54,000
December 31, 2015 44,000 42,500
December 31, 2016 36,000 38,000
Instructions

(
a)
Prepare the journal entry at December 31 (Fallen’s year-end) for 2014, 2015, and 2016, to record the fair value option for these notes.
(
b) At what amount will the note be reported on Fallen’s 2015 balance sheet?
(
c) What is the effect of recording the fair value option on these notes on Fallen’s 2016 income?
(
d) Assuming that general market interest rates have been stable over the period, does the fair value data for the notes indicate that Fallen’s creditworthiness has improved or declined in 2016? Explain.

E14-
20 (Long-Term Debt Disclosure) At December 31, 2014, Redmond Company has outstanding three long-term debt issues. The first is a $2,000,000 note payable which matures June 30, 2017. The second is a $6,000,000 bond issue which matures September 30, 2018. The third is a $12,500,000 sinking fund debenture with annual sinking fund payments of $2,500,000 in each of the years 2016 through 2020.
Instructions

P
repare the required note disclosure for the long-term debt at December 31, 2014.
* E14-21 (Settlement of Debt) Strickland Company owes $200,000 plus $18,000 of accrued interest to
Moran State Bank. The debt is a 10-year, 10% note. During 2014, Strickland’s business deteriorated due to a faltering regional economy. On December 31, 2014, Moran State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of $390,000, accumulated depreciation of $221,000, and a fair value of $180,000.
Instructions

(
a)
Prepare journal entries for Strickland Company and Moran State Bank to record this debt settlement.
(
b) How should Strickland report the gain or loss on the disposition of machine and on restructuring of debt in its 2014 income statement?
(
c) Assume that, instead of transferring the machine, Strickland decides to grant 15,000 shares of its common stock ($10 par) which has a fair value of $180,000 in full settlement of the loan obligation.
If Moran State Bank treats Strickland’s stock as a trading investment, prepare the entries to record the transaction for both parties.

*
E 14-22 (Term Modification without Gain—Debtor’s Entries)
On December 31, 2014, the American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $3,000,000 note receivable by the following modifications:
1
. Reducing the principal obligation from $3,000,000 to $2,400,000.
2
. Extending the maturity date from December 31, 2014, to January 1, 2018.
3
. Reducing the interest rate from 12% to 10%.
Barkley pays interest at the end of each year. On January 1, 2018, Barkley Company pays $2,400,000 in cash to Firstar Bank.
Instructions

(
a)
Will the gain recorded by Barkley be equal to the loss recorded by American Bank under the debt restructuring?
(
b) Can Barkley Company record a gain under the term modification mentioned above? Explain.
(
c) Assuming that the interest rate Barkley should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note for Barkley Company after the debt restructuring.
(
d) Prepare the interest payment entry for Barkley Company on December 31, 2016.
(
e) What entry should Barkley make on January 1, 2018? * E14-23 (Term Modification without Gain—Creditor’s Entries) Using the same information as in E14-22, answer the following questions related to American Bank (creditor).
Instructions

(
a)
What interest rate should American Bank use to calculate the loss on the debt restructuring?
(
b) Compute the loss that American Bank will suffer from the debt restructuring. Prepare the journal entry to record the loss.
(
c) Prepare the interest receipt schedule for American Bank after the debt restructuring.
(
d) Prepare the interest receipt entry for American Bank on December 31, 2016.
(
e) What entry should American Bank make on January 1, 2018?
*
E 14-24 (Term Modification with Gain—Debtor’s Entries)
Use the same information as in E14-22 above except that American Bank reduced the principal to $1,900,000 rather than $2,400,000. On January 1, 2018,
Barkley pays $1,900,000 in cash to American Bank for the principal.
Instructions

(
a)
Can Barkley Company record a gain under this term modification? If yes, compute the gain for
Barkley Company.
(
b) Prepare the journal entries to record the gain on Barkley’s books.
(
c) What interest rate should Barkley use to compute its interest expense in future periods? Will your answer be the same as in E14-22 above? Why or why not?
(
d) Prepare the interest payment schedule of the note for Barkley Company after the debt restructuring.
(
e) Prepare the interest payment entries for Barkley Company on December 31, of 2015, 2016, and 2017.
(
f) What entry should Barkley make on January 1, 2018?
*
E 14-25 (Term Modification with Gain—Creditor’s Entries)
Using the same information as in E14-22 and E14-24, answer the following questions related to American Bank (creditor).
Instructions
(
a)
Compute the loss American Bank will suffer under this new term modification. Prepare the journal entry to record the loss on American’s books.
(
b) Prepare the interest receipt schedule for American Bank after the debt restructuring.
(
c) Prepare the interest receipt entry for American Bank on December 31, 2015, 2016, and 2017.
(
d) What entry should American Bank make on January 1, 2018?
*
E 14-26 (Debtor/Creditor Entries for Settlement of Troubled Debt)
Gottlieb Co. owes $199,800 to Ceballos
Inc. The debt is a 10-year, 11% note. Because Gottlieb Co. is in financial trouble, Ceballos Inc. agrees to accept some property and cancel the entire debt. The property has a book value of $90,000 and a fair value of $140,000.
Instructions

(
a)
Prepare the journal entry on Gottlieb’s books for debt restructure.
(
b) Prepare the journal entry on Ceballos’s books for debt restructure.
*
E 14-27 (Debtor/Creditor Entries for Modification of Troubled Debt) Vargo Corp. owes $270,000 to First
Trust. The debt is a 10-year, 12% note due December 31, 2014. Because Vargo Corp. is in financial trouble,
First Trust agrees to extend the maturity date to December 31, 2016, reduce the principal to $220,000, and reduce the interest rate to 5%, payable annually on December 31.
Instructions

(
a)
Prepare the journal entries on Vargo’s books on December 31, 2014, 2015, 2016.
(
b) Prepare the journal entries on First Trust’s books on December 31, 2014, 2015, 2016.

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