1. January 1, 2011

Machinery 4,000,000 Notes payable 4,000,000

2. Amortization schedule

$4,000,000 ÷ 3.16987 = $1,261,881

amount (from Table 4) installment of loan n=4, i=10% payment

Cash Effective Decrease in Outstanding Dec.31 Payment Interest Balance Balance 10% x Outstanding Balance Balance Reduction

4,000,000 2011 1,261,881 .10 (4,000,000) = 400,000 861,881 3,138,119 2012 1,261,881 .10 (3,138,119) = 313,812 948,069 2,190,050 2013 1,261,881 .10 (2,190,050) = 219,005 1,042,876 1,147,174

2014 1,261,881 .10 (1,147,174) = 114,707* 1,147,174 0

5,047,524 1,047,524 4,000,000

^* rounded.

3. December 31, 2011

Interest expense(10% x outstanding balance) 400,000 Note payable (difference) 861,881 Cash(payment determined above) 1,261,881

4. December 31, 2013

Interest expense(10% x outstanding balance) 219,005 Note payable (difference) 1,042,876 Cash(payment determined above) 1,261,881

Exercise 14-19

1. November 1, 2011

Component inventory 24,000,000 Notes payable 24,000,000

2. November 30, 2011

Interest expense(1% x outstanding balance) 240,000 Note payable (difference) 1,892,370 Cash(payment determined below) 2,132,370

Calculation of installment payment:

$24,000,000 ÷ 11.25508 = $2,132,370

amount (from Table 4) installment of loan n=12, i=1% payment

3. December 31, 2011

November (1% x $24,000,000) $240,000

December (1% x [$24,000,000 – 1,892,370]) 221,076

2011 interest expense $461,076

Journal entry (not required):

Interest expense(1% x [$24,000,000 – 1,892,370]) 221,076 Note payable (difference) 1,911,294 Cash(payment determined above) 2,132,370

Exercise 14-20

The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles. The specific citation for each of the following items is:

1. Disclosure requirements for maturities of long-term debt:

FASB ASC 470–10–50–1: “Debt–Overall–Disclosure–Disclosure of Long-Term Obligations”

2. How to estimate the value of a note when a note having no ready market and no interest rate is exchanged for a noncash asset without a readily available fair value:

FASB ASC 835–30–25–11: “Interest–Imputation of Interest–Recognition–General”

3. When the straight-line method can be used as an alternative to the interest method of determining interest:

• 840 Leases > 20 Operating Leases > 50 Disclosure

  • Lessees

50-1 For all  operating leases , the lessee shall disclose rental expense for each period for which an income statement is presented, with separate amounts for minimum rentals, contingent rentals, and  sublease  rentals. Rental payments under leases with terms of a month or less that were not renewed need not be included.  50-2 For operating leases having initial or remaining noncancelable lease terms in excess of one year, the lessee shall disclose both of the following:  Future minimum rental payments required as of the date of the latest balance sheet presented, in the aggregate and for each of the five succeeding fiscal years  The total of minimum rentals to be received in the future under noncancelable subleases as of the date of the latest balance sheet presented.  50-3 Example 1 (see paragraph  840-10-55-40 ) illustrates a lessee's application of the disclosure requirements of Subtopic  840-10  for an operating lease. 

FASB ASC 835–30–55–2: “Interest–Imputation of Interest–Implementation Guidance and Illustrations–Application of the Interest MethodApplication of the Interest MethodApplication of the Interest Method”

Exercise 14-21

Bonds payable (face amount) 90,000,000 Loss on early extinguishment (to balance) 4,800,000 Discount on bonds (given) 3,000,000 Cash ($90,000,000 x 102%) 91,800,000

Exercise 14-22

Requirement 1

Gless (Issuer) Cash(101% x $12 million) 12,120,000 Convertible bonds payable (face amount) 12,000,000 Premium on bonds payable (difference) 120,000 Century (Investor) Investment in convertible bonds (10% x $12 million) 1,200,000 Premium on bond investment (difference)12,000 Cash(101% x $1.2 million) 1,212,000

Requirement 2

Gless (Issuer) Interest expense($540,000 – 6,000)534,000 Premium on bonds payable ($120,000 ÷ 20) 6,000 Cash(4.5% x $12,000,000) 540,000

Century (Investor) Cash(4.5% x $1,200,000) 54,000 Premium on bond investment ($12,000 ÷ 20) 600 Interest revenue($54,000 – 600)53,400

[Using the straight-line method, each interest entry is the same.]

Requirement 3

Gless (Issuer) Convertible bonds payable (10% of the account balance) 1,200,000 Premium on bonds payable (($120,000 – [$6,000 x 11]) x 10%) 5,400 Common stock (to balance) 1,205,400

Century (Investor) Investment in common stock 1,205,400 Investment in convertible bonds (account balance)1,200,000 Premium on bond investment ($12,000 – [$600 x 11])5,400

Exercise 14-23

Under US GAAP, the entire issue price of convertible debt is recorded as debt:

Cash(101% x $12 million) 12,120,000 Convertible bonds payable (face amount) 12,000,000 Premium on bonds payable (difference) 120,000

Under IFRS, convertible debt is divided into its liability and equity elements. We achieve separation by measuring the fair value of a similar liability that does not have an associated equity component. In the exercise, we know that bonds similar in all respects, except that they are nonconvertible, currently are selling at 99 (99% of face amount), so the liability-first separation gives us the following entry:

Cash (101% x $12 million) 12,120,000

Bonds payable (99% x $12 million) 11,880,000*

Equity – conversion option (to balance) 240,000

* Note that the discount on the bonds ($12 million – [99% x $12 million] = $120,000) is combined with the face amount, and the net amount is recorded as Bonds payable. This is the “net method” which is the preferred approach under IFRS. By the gross method, typically used in U.S. GAAP, the entry would be:

Cash (101% x $12 million) 12,120,000 Discount on bonds payable ($12 million – [99% x $12 million]) 120,000 Bonds payable (face amount) 12,000,000 Equity – conversion option (to balance) 240,000

Exercise 14-24

Requirement 1

Cash(given) 40,800,000 Convertible bonds payable (face amount) 40,000,000 Premium on bonds payable (to balance) 800,000

Requirement 2

Interest expense($1,200,000 – 40,000)1,160,000 Premium on bonds payable ($800,000 ÷ 20) 40,000 Cash(3% x $40,000,000) 1,200,000

Requirement 3

Interest expense($1,200,000 – 40,000)1,160,000 Premium on bonds payable ($800,000 ÷ 20) 40,000 Cash(3% x $40,000,000) 1,200,000

Convertible bonds payable (account balance) 40,000,000 Premium on bonds payable ($800,000 – [$40,000 x 5]) 600,000 Common stock (to balance) 40,600,000

Exercise 14-25

Requirement 1

Under U.S. GAAP, the entire issue price of convertible debt is recorded as debt:

Cash(given) 40,800,000 Convertible bonds payable (face amount) 40,000,000 Premium on bonds payable (to balance) 800,000

Under IFRS, convertible debt is divided into its liability and equity elements. We achieve separation by measuring the fair value of a similar liability that does not have an associated equity component. In the exercise, we know that bonds similar in all respects, except that they are nonconvertible, currently are selling at 99 (99% of face amount), so the liability-first separation gives us the following entry:

Cash(given) 40,800,000

Convertible bonds payable (99% x $40 million) 39,600,000*

Equity – conversion option (to balance) 1,200,000

* Note that the discount on the bonds ($40 million – [99% x $40 million] = $400,000) is combined with the face amount, and the net amount is recorded as Bonds payable. This is the “net method” which is the preferred approach under IFRS. By the gross method, typically used in U.S. GAAP, the entry would be:

Cash (given) 40,800,000 Discount on bonds payable ($40 million – [99% x $40 million]) 400,000

Convertible bonds payable (face amount) 40,000,000

Equity – conversion option (to balance) 1,200,000

Requirement 2

Interest expense($1,200,000 + 20,000)1,220,000 Convertible bonds payable* ($400,000 ÷ 20) 20,000 Cash(3% x $40,000,000) 1,200,000

* When the net method is used, the discount (or premium) is amortized directly to the bonds account.

Exercise 14-25 (concluded)

Requirement 3

Interest expense($1,200,000 + 20,000)1,220,000 Convertible bonds payable* ($400,000 ÷ 20) 20,000 Cash(3% x $40,000,000) 1,200,000

Convertible bonds payable (account balance*) 39,700,000

Equity – conversion option (account balance)1,200,000

Common stock (to balance) 40,900,000

* $39,600,000 Initial balance

+ 100,000 ($20,000 x 5)Amortization for 5 periods (2 ½ years)

$39,700,000 Balance at conversion

Exercise 14-26

Requirement 1

($ in millions)

Limbaugh (Issuer)

Cash(104% x $30 million) 31.2 Discount on bonds payable(difference) 3.6 Bonds payable(face amount) 30.0 Equity – stock warrants ($8 x 20 warrants x [$30,000,000 ÷ $1,000] bonds) 4.8