CHP 14 - Long term Liabilities

Question 1

CHP 14 - Long Term Liabilities

• face value = maturity value
• PV(-pmt,-fv)
• calc @end, fractional n only when bond issued/redeemed

Question 2

Amortization table (in paper notes)

Question 3

Example(sell bond, face value/maturity amount, stated rate of, semi-annual payments, market rate, mkt rate = < stated rate, prorate, Bond trade redemption Gain/ Loss, PV calculations, Journal entries)

Answer 3

1. PV calculations (mkt rate=stat rate)

• PV = maturity/face value
• PV(nx2, mkt rate/2,-pmt=mat*stat rate/2),-fv,0)

2. PV calculations (stated rate>market rate)
   * PV higher

Journal entry

Jan 1/1
Dr Cash(pv)
Cr Bond premium(plug)
Cr Bond payable (maturity value)

June 30/1
Dr Interest expense (pv x mkt rate)
Dr Bond premium (plug)
Cr Cash (pmt)

Dec 31/1
Dr Interest expense (pv2 x mkt rate)
Dr Bond premium (plug)
Cr Cash (pmt)

3. PV calculations (June 30->Sep 30 = 3/6)

Sep 30/1

Dr Interest expense (int exp june30 * x/6)
Cr Bond discount (plug)
Cr Interest payable(pmt*x/6)

Dec 31/1 (interest paid)

Dr Interest expense (same sep 30/1)
Dr Interest payable(same sep 30/1)
Cr Bond Discount (same sep 30/1)
Cr Cash (pmt)

4. Bond trade redemption gain/loss

1) pv2 og [(n-2), begin mkt rate/2] = carrying amount
2) pv2 new [(n-2), new market rate/2] = redeem amount

3) Carrying - Redeem = gain
* carrying > redeem = gain

Journal entry Bond redemption

Dr Bond payable (maturity)
Cr Bond discount (plug)
Cr Cash (new pv2)
Cr Gain on bond redemption/retirement (pv2 og - new pv)

Question 4

Example(sell bond Jan not sold until April, semi-annual pmts, mkt rate = stated rate, partial n, PV calculations, Journal entries)

Answer 4

1) semi-annual April, PV1 (n-0.5)
2) annual April, PV1 (n-0.25)
3) Extra cash (Jan–>Mar) = (3/6 x pmt)

4) Journal entry April 1/1

Dr Cash (maturity+extra cash)
Cr Bond payable(maturity)
Cr Interest expense (extra cash)

5) Journal entry June 30/1
Dr Interest expense(pmt)
Cr Cash

Question 5

Example (sell bond Jan nold sold until March , willing to pay more for bond, fixed payment, semi-annual, Journal entries)

Answer 5

1. March 1/1 (Jan 1-> Mar 1 = 2/6)

Dr Cash (plug)
Cr Interest Expense (fixed pmt*x/6)
Cr Bond payable (maturity)

2. June 30/1

Dr Int exp (fixed pmt)
Cr Cash

Question 6

Example(issue/sell bond, stated rate =<> mkt rate, semi-annual pmts, PV calculations, journal entries)

Answer 6

1. Bond (mkt rate = stated rate)
   1) PV calculations (bond amount =pv)
   2) Journal entries

Jan 1/1

Dr Cash (pv) 
Cr Bond Payable 

1st payment period

Dr interest exp (pmt)
Cr Cash

End bond

Dr Bond payable
Cr Cash

2. Bond (stated rate < mkt rate)

1) PV calculations (bond amount > pv)
2) Journal entries

Jan 1/1

Dr Cash (pv)
Dr Bond discount (plug)
Cr Bond Payable (maturity)

1st payment period

Dr Int expense (plug)
Cr Bond Discount (bond discount#1/n)
Cr Cash (pmt)

3. Bond (stated rate > mkt rate) = premium

1) PV calculations (bond amount < pv)
2) Journal entries

Jan 1/1

Dr Cash (pv)
Dr Bond Premium (plug)
Cr Bond Payable (maturity)

July31/1

Dr Int exp (pv1*mkt rate)
Dr Bond premium (plug)
Cr Cash (pmt)

Dec 31/1 (accrue int payable) 
Dr Int expense (pv1*mkt rate*x/6) 
Dr Bond Premium (plug)
Dr Int payable (pmt x proprate) 
Cr Cash

Question 7

Example(sell bond Oct, buyback bonds, later market rate rise, semi-annual, prorate, stated rate>mkt rate = premium, Journal entries)

Answer 7

1. Oct 1/1 (sale of bonds)

Dr Cash (pv)
Cr Bond Premium (plug)
Cr Bond Payable (maturity)

2. Dec 31/1 (x=3/6) Accruals

Dr Int exp (pvmkt ratex/6)
Dr Bond premium (plug)
Cr Interest Payable (pmt*x/6)

3. Mar 31/2 (x=3/6)

Dr Int expense (pvmkt ratex/6)
Dr Int payable (pmt*x/6)
Dr Bond premium (plug)
Cr Cash (pmt)

4. Buyback date Oct 1 20X5

1) PV buyback date (new mkt rate)
2) Premium or discount = Maturity - PV
3) Gain = PV buyback date with new mkt rate - PV buyback date old mkt rate

Oct1/5
Dr Bond Payable (maturity)
Dr Bond premium 
Cr Cash (PV new mkt rate) 
Cr Gain on retirement

Question 8

Example(issue/sell note payable, zero-interest bearing, maturity note, sell at reduced price, 1/3 sold on credit)

Answer 8

1. Jan 1/1

Dr Cash (price note)
Dr Discount on note payable (maturity - PV)
Cr Note Payable (maturity note)
Cr Unearned Rev (plug)

2. Dec 31/1

Dr Int exp (Pv*rate)
Cr Discount on note payable

Dr Unearned Rev (Unearned rev jan1/1 *fraction sold)
Dr AR (plug) 
Cr Sales (sold for credit amount)

Question 9

Example(issue/sell note, non-int bearing, exchange for land, list price, maturity value, if you don’t know market rate then calculate imputed rate)

Answer 9

1. Jan 1/1

Dr Land (PV)
Dr Discount on note payable (maturity-pv)
Cr Note Payable (maturity note)

2. Dec 31/1

Dr int exp (pv * mkt rate)
Cr Discount on note payable

3. If mkt rate not known, then land @fair value so imputed rate calc
   1) rate(n,pmt=0,pv=list price, -fv=maturity value,0)

Jan 1/1

Dr Land (list price)
Dr Discount on note payable (plug)
Cr Note Payable (maturity)

Dec 31/1

Dr Int exp (imputed rate*list price)
Cr Discount on note payable

Question 10

Example(issue note to purchase equipment, fixed payments, fv=0)

Answer 10

1. Jan 1/1

Dr Equipment (pv)
Dr Discount on Note payable (plug)
Cr Note payable (fixed pmt*n)

2. Dec 31/1

Dr Int exp (pv*rate)
Cr Discount on note payable

3. Dec 31/2

Dr Int expense (maturity-pv2)
Dr Note Payable (fixed pmtn)
Cr Discount Note Payable (maturity-pv2)
Cr Cash (fixed pmtn)

Question 11

Example(Financial difficulty, Renegotiation of expiration of bond terms, criteria if PV new bond more then 90% of PV og = not substantial, ASPE vs IFRS)

Answer 11

1. PV og bond vs PV new bond

• mkt rate stays same
• fv = maturity

2. divide PV new bond/PV og bond > 90% = not substantial
3. Not substantial ASPE Journal entries
   1) imputed rate (n=new bond n, -pmt=new bond pmt, pv=og bond maturity, -fv=new bond maturity)
   2) Dec 31/1

Dr Int exp (og pv maturity*imputed rate)
Dr Bond Payable (plug)
Cr Cash (new bond pmt)