Week 5 (SU 10 Bonds and 11 Leases) Sp24 to present(2)

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e. Bond date B. coupon A. Face (maturity) value f. Issuance date G. Maturity date H. Term C. Pay dates I.Proceeds D. Market Int J.Bond Issuance CPA Review – FAR – Spring 2024 - Week 5 Handouts (covers SU 10 and 11) 10.1 and 10.3 Types of Bond Liabilities and Bonds Payable – Initial Measurement A. Face (maturity) value B. Stated (coupon) interest rate C. Interest payment dates D. Market (yield, effective) interest rate E. Bond date F. Issuance date G. Maturity date H. Bond term I. Bond proceeds J. Bond issuance costs On January 1, Year 1 the company issued $700,000 of 12% bonds , dated January 1. Interest is payable semiannually on June 30 and December 31. The bonds mature in three years on December 31, Year 3. The market yield for bonds of similar risk and maturity is 14% . $700,000 of the issuance was purchased by ABC. The bonds sold for $666,633 and the company incurred $100,000 in costs to issue the bonds. 10.3 Calculate the PV or Price of the bonds: PV of Annuity Stream of Cash Interest 12%*700K*1/2 = 42,000 4.76654*$42k cash =$200,195 n= 6 i= 14%* ½ = 7% PV of Principle 0.66634*700k = 466,438 N = 6 i= 14%* ½ = 7% Selling price of the Bond or PV of the Bond $666,633 1.Prepare the Bond Amortization table for the initial $700,000 bond issuance. MARKET Selling price of the Bond or PV of the Bond $666,633 0.06 0.07 DISCOUNT Dates Cash Inter Exp Change Carry Value/OS Balance inception - 1/1/20 - - 33,367.00 $666,633 6/30/2020 42,000.00 46,664.31 4,664.31 671,297.31 12/31/2020 42,000.00 46,990.81 4,990.81 676,288.12 6/30/2021 42,000.00 47,340.17 5,340.17 681,628.29 12/31/2021 42,000.00 47,713.98 5,713.98 687,342.27 6/30/2022 42,000.00 48,113.96 6,113.96 693,456.23 12/31/2022 42,000.00 48,543.94 6,543.94 700,000.00 <-- GOAL *never change 700,000.17 (0.17) Calculate the ENTIRE amortization schedule using the market interest rate on the date of issuance – do not adjust in the future 1 st Interest payment date  6/30/20 At Dec. 31, 2021, what entry would be recorded? Interest expense 46,664 Interest expense 47,714 Discount 4,664 Discount 5,714 CASH 42,000 CASH 42,000 1 PV Principal PV - OA interest = n= % % US > Market premium ----------------------------------------------------- US < Market discount % %

2.The following information pertains to Camp Corp.'s issuance of bonds on July 1, 20X5: Face amount $800,000 Ordinary Annuity = On the Border ( eat, then pay) *Normal for bonds!! Annuity due = Dairy Queen (Pay, then eat) *Normal for LEASES!!! Term 10 years Stated interest rate 6 %  cash interest Interest payment dates Annually on July 1 Yield 9%  market Factors At 6% At 9% 1,000.00 0.42 422.00 60.00 6.42 385.08 807.08 Present value of 1 for 10 periods 0.558 0.422 Future value of 1 for 10 periods 1.791 2.367 Present value of ordinary annuity of 1 for 10 periods 7.360 6.418 What should be the issue price for each $1,000 bond? A. $1,000 B. $864 C. $807 D. $700 3. On July 1, 2019, Noble, Inc. issued 9% bonds in the face amount of $10,000,000, which mature on July 1, 2025 . The bonds were issued for $ 9,560,000 to yield 10%, resulting in a bond discount of $440,000. Noble uses the effective- interest method of amortizing bond discount. Interest is payable annually on June 30. At June 30, 2021, Noble's unamortized bond discount should be A . $322,400. B. $340,000. C. $352,000. D. $310,000. What is considered long-term/noncurrent liability? If does not meet the definition of a current liability, it must be long-term. Bonds Sold Between Interest Dates - Buyer pays the issues the amount of interest that has accrued since the last payment date in addition to the purchase price of the bonds 4.1.2021 (Bond date) 7.1.2021 (Bonds sold) 10.1.2021 (Interest date) Issued 4.On July 1, 2021, Spear Co. issued 4,000 of its 10%, $1,000 bonds at 99 plus accrued interest . The bonds are dated April 1, 2021 and mature on April 1, 2031. Interest is payable semiannually on April 1 and October 1. What amount did Spear receive from the bond issuance? a. $4,060,000 b. $4,000,000 c. $3,960,000 d. $3,860,000 Pay attention: Look at dates! Year end dates are not always the same as the interest payment dates. All interest rates are expressed at annual rates, so be sure to adjust for the time period. 2 900,000.00 0.09 0.10 DISCOUNT Dates Cash Inter Exp Change Carry Value/OS Balance inception -7/1/19 - - 440,000.00 $9,560,000 6/30/2020 900,000.00 956,000.00 56,000.00 9,616,000.00 6/30/2021 900,000.00 961,600.00 61,600.00 9,677,600.00 322,400.00 Bond proceeds PLUS Accrued interest 4,000#*$1000 = 4,000,000 * .99 = 3,960,000 discount Cash interest = 4m *.10 * ½ year = $200,000 for 6 months Prepaid for (3/6) = 50% Preaid interest of 200k * 50% = 100k Cash received 3,960,000+ 100,000 accrued interest = 4060000 Dr. Cash 4,060,000 Dr. Discount 40,000 Cr. Int payable 100,000 (or Interest exp) Cr. Bonds payable 4,000,000

5.On January 1, 2021, Solis Co. issued its 10% bonds in the face amount of $8,000,000, which mature on January 1, 2031. The bonds were issued for $ 9,080,000 to yield 8%, resulting in bond premium of $1,080,000 . Solis uses the effective- interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2021, Solis's adjusted unamortized bond premium should be a. $1,080,000. b. $1,006,400. c. $972,000. d. $812,000. SU 10.5 Debt Issuance Costs Costs to bring debt to market – printing, legal, accounting, underwriters, promotion costs Balance Sheet: RECORD as a Contra-liability (so they have a debit balance). Not an asset!!! When present, net against face amount of the debt. Income Statement: AMORTIZE using effective interest method into interest expense (unless state use S/L) 6.Determine Proper Amounts in Account Balances. Presented below are three independent situations. a.Snider Corporation incurred the following costs in connection with the issuance of bonds : (1) printing and engraving costs $40,000; (2) legal fees $120,000, and (3) commissions paid to underwriter $320,000. What amount should be reported as Unamortized Bond Issue Costs, and where should this amount be reported on the balance sheet ? 40,000 +120,000 + 320,000 = $480,000 Contra-liability nets with the bonds payable on the B/S b. Banks Co. sold $5,000,000 of 6%, 10-year bonds at 104 on January 1, 2020. The bonds were dated January 1, 2020, and pay interest on July 1 and January 1 . If Banks uses the straight-line method to amortize bond premium or discount , determine the amount of interest expense to be reported on July 1, 2020, and December 31, 2020. Issuance Cash (5m*1.04) 5,200,000 Premium 200,000 Bonds Payable 5,000,000 July 1 **Use S/L for interest expense Interest expense 140,000  plug Premium* 10,000 Cash 150,000 *200,000/ 20# n = 10,000 amort December 31  no cash until 1/1 Interest expense 140,000  plug Premium* 10,000 Int payable 150,000 January 1 (next day) Interest payable 150,000 Cash 150,000 c.Cey Inc. issued $1,000,000 of 10%, 10-year bonds on June 30, 2020, for $885,296 . This price provided a yield of 12% on the bonds. Interest is payable semiannually on December 31 and June 30. If Cey uses the effective-interest method, determine the amount of interest expense to record if financial statements are issued on October 31, 2020 . Issue 6.30.2020  pay interest 12.31.2020 Interest exp for 10.31.20 Carrying value $885,296 * 12% * ½ year = 53,118 PROPRaTE – expense for 4 of the 6 months over 6.00 months 8,852.96 35,411.84 months Inter expense 35,412 Discount 2,079 Inter payable (1m* 10%*1/2 yr * 4/6) 33,333 3 Issue 1.1.21  premium at 12.31.21 8,000,000.00 MARKET Selling price of the Bond or PV of the Bond 800,000.00 0.10 0.08 Premium Dates Cash Inter Exp Change Carry Value/OS Balance Inception 1.1.21 - - 1,080,000.00 $9,080,000 12/31/21/ 800,000.00 726,400.00 (73,600.00) 9,006,400.00 1,006,400.00 Can use effective or S/L amortization of discount/ premium – have to show that it’s not a material difference

7.On December 1, 2021, Lester Company issued at 103, eight hundred of its 9%, $1,000 bonds. Attached to each bond was one detachable stock warrant entitling the holder to purchase 10 shares of Lester's common stock. On December 1, 2021, the market value of the bonds, without the stock warrants, was 95, and the market value of each stock purchase warrant was $50. The amount of the proceeds from the issuance that should be accounted for as the initial carrying value of the bonds payable would be a. $774,560. b. $782,800. c. $800,000. d. $824,000. SU 10.6 Extinguishment of Debt Debt Retirement Principles - Must Know: Financial statement presentation Calculation of bond net carrying value Calculation of gain or loss on extinguishment  PLUG from everything When bonds are retired at maturity, the final payment extinguishes the liability  GOAL! No I/s Impact!!! When bonds are retired before maturity, the final payment is compared to net book value and a gain or loss is recognized Net book value = face +/– unamortized premium/discount –unamortized bond issue costs [contra-liability acct] Gains/Losses are recognized in earnings in the period of extinguishment Can only derecognize the liability if it (1) pays and is relieved of obligation OR (2) is legally released 8.On January 1, 2021, Goll Corp. issued 3,000 of its 10%, $1,000 bonds for $3,120,000. These bonds were to mature on January 1, 2031 but were callable at 101 any time after December 31, 2024 . Interest was payable semiannually on July 1 and January 1. On July 1, 2026 , Goll called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, Goll's gain or loss in 2026 on this early extinguishment of debt was a. $90,000 gain. b. $36,000 gain. c. $30,000 loss. d. $24,000 gain. JE @ issuance Cash 3,120,000 Premium 120,000 Bonds payable 3,000,000 Premium Amort 120,000 S/L N=20# PREMIUM AMORT PER PERIOD = 120K/20 = 6,000 Amortized premium = 6k * 11n# = 66,000 Unamortized premium = 54,000 JE @ Retirement Bonds payable 3,000,000 Premium 54,000 GAIN (plug) 24,000 Cash (101) 3,030,000 4 **check coverage on 2024 FAR** 1.1.21 12.31.22 12.31.23 12.31.24 12.31.25 12.31.26 # years Year 1 # I pays 2 2 2 2 2 1 – 7.1.26 Total n’s = 11#

9.A ten-year bond was issued in 2019 at a discount with a call provision to retire the bonds . When the bond issuer exercised the call provision on an interest date in 2021, the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts in 2021 should have equaled the a. call price. b. call price less unamortized discount. c. face amount less unamortized discount. d. face amount plus unamortized discount SU10.7 Noncurrent Notes Payable – may require no payments, just interest payments or interest + principle payments over time 10.Entries for Zero-Interest-Bearing Note On December 31, 2020, Payson Company acquired a press from Sugar Corporation by issuing a $400,000 zero-interest-bearing note, payable in full on December 31, 2023 . Payson’s credit rating permits it to borrow funds from its several lines of credit at 8%. The press is expected to have a 6-year life and a $40,000 salvage value. Prepare the journal entry for the purchase on December 31, 2020. PVF n=3, I = 8 .79383 * 400,000 = 317,532 PV of my NP Equipment (PV of the NP) 317,532 NP Discount 82,468 Notes payable (gross) 400,000 Date Cash Payment Effective Interest Change in Balance Outstanding Balance 12/31/2020 - - 82,468.00 317,532.00 - 25,402.56 25,402.56 342,934.56 - 27,434.76 27,434.76 370,369.32 - 29,631.55 29,631.55 400,000.00 <-- goal 400,000.87 12/31/2021 12/31/2022 12/31/2023 Prepare any necessary adjusting entries relative to depreciation (use straight-line) and amortization (use effective- interest method) on December 31, 2022. Depr = (317,532 – 40,000 SV)/ 6 year = 46,255 Depr exp 46,255 Interest expe 27,434.76 Accum dep 46,255 Np Discount 27,434.76 5 Issued in 2019 (made up numbers) Cash 3,000 Discount 1,000 Bonds payable 4,000 Called in 2021….. CV< Call price CV 3,500, < Call 4,000 Bonds payable 4,000 Discount 1,000 Cash 4,000

11.Entries for Zero-Interest-Bearing Note; Payable in Installments North Sea Drilling Co. purchased machinery on December 31, 2019, paying $100,000 down and agreeing to pay the balance in f ou r equal installments of $125,000 payable each December 31. An assumed interest of 6% is implicit in the purchase price. Prepare the journal entries that would be recorded for the purchase and for the payments and interest. Equipment (PV of NP + $100k down) 533,139 PVOA n= 4, I = 6% 3.46511 125,000* 3.46511 = Discount on NP 66,861 Notes payable (500,000) Cash ( $100,000) Date Cash Payment Effective Interest Discount Change in Principle Balance Outstanding Balance 12/31/2019 0.06 Reduce NP Date Cash paym Inter Diff CV inception - 433,138.75 12/31/2020 125,000.00 25,988.33 99,011.68 334,127.08 12/31/2021 125,000.00 20,047.62 104,952.38 229,174.70 12/31/2022 125,000.00 13,750.48 111,249.52 117,925.18 12/31/2023 125,000.00 7,075.51 117,924.49 - 12/31/2020 12/31/2021 12/31/2022 12/31/2023 JE at 12/31/20 JE at 12/31/21 Interest expense 25,988 Interest expense 20,048 NP 125,000 NP 125,000 Discount 25,988 Discount 20,048 Cash 125,000 Cash 125,000 SU 10.8 Troubled Debt Restructurings In a debt restructuring, the creditor grants concessions to the debtor that would not otherwise be considered. PV of the consideration paid under the restructured agreement is LESS than the carrying value of the debt (including unpaid inteerst) at the date of restructure. KNOW: accounting for both the creditor and debtor Creditor Debtor Settlement – settlement in full Records a LOSS – Difference between assets FV received and BV of the receivable (1)Records a GAIN– Difference between BV of debt and FV of consideration (2) Gain/Loss on non-monetary asset transferred between BV and FV of asset (no +/- with cash transfer) Modification Type 1 Modification of terms; New cash flows < =BV of debt Nominal/Minimum CF <= BV of Debt Decrease CV Debt Records a GAIN of the difference Nominal/Minimum CF <= BV of Debt Decrease CV Debt No future I expense – all Principle Modification Type 2 Modification of terms; New cash flows > =BV of debt Loan impairment NO gain/loss Use new interest rate for interest Expense 6

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