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Long Term Liabilities and Receivables
Chapter14
An electronic presentation by Norman Sunderman Angelo State University
An electronic presentation by Norman Sunderman Angelo State University
COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.
Intermediate AccountingIntermediate Accounting 10th edition 10th edition
Nikolai Bazley JonesNikolai Bazley Jones
2
1. A bond is a debt security that is issued to obtain large amounts of cash on a long term basis.
2. A bond indenture is the formal agreement which specifies the terms of the bonds.
Bonds
3
1. Debt financing may be the only available source of funds.
2. Debt financing may have a lower cost.
3. Debt financing offers an income tax advantage.
4. The voting privilege is not shared.
5. Debt financing offers the opportunity for leverage.
Reasons for Issuance of Long-Term Liabilities
4
Debenture bondsMortgage bondsRegistered bondsCoupon bondsZero-coupon bondsCallable bondsConvertible bondsSerial bonds
Characteristics of Bonds
5
1. The principal, face, par or maturity value is the amount that the corporation will pay the bond holder at the maturity of a term bond.
2. The stated rate, coupon rate, nominal rate, or contractual rate is the interest rate printed on the bond.
3. The market rate, effective rate, or yield is the interest rate at which the bonds are actually sold.
Bond Terminology
6
Company J sells bonds with a face value of $400,000 on the authorization date at 102.
Company J sells bonds with a face value of $400,000 on the authorization date at 102.
Cash ($400,000 x 1.02) 408,000 Bonds Payable 400,000 Premium on Bonds Payable 8,000
Company M sells bonds with a face value of $400,000 on the authorization date at 97.
Company M sells bonds with a face value of $400,000 on the authorization date at 97.
Cash ($400,000 x .97) 388,000Discount on Bonds Payable 12,000 Bonds Payable 400,000
Recording the Issuance of Bonds
7
On March 1, 2007, Grimes Corporation issues $800,000 of 10-year bonds dated January 1, 2007, at par. The bonds have a contract (stated) interest
rate of 12% and pay interest semiannually.
On March 1, 2007, Grimes Corporation issues $800,000 of 10-year bonds dated January 1, 2007, at par. The bonds have a contract (stated) interest
rate of 12% and pay interest semiannually.
Cash 816,000Bonds Payable 800,000Interest Expense 16,000
$800,000 x 0.12 x 2/12$800,000 x 0.12 x 2/12$800,000 x 0.12 x 2/12$800,000 x 0.12 x 2/12ContinuedContinuedContinuedContinued
Bonds Issued Between Interest Paying Dates
8
On July 1, 2007, Grimes Corporation records the semiannual interest payment.
On July 1, 2007, Grimes Corporation records the semiannual interest payment.
Interest Expense 48,000 Cash 48,000
$800,000 x 0.12 x 6/12
Interest Expense
48,000 16,000
Bonds Issued Between Interest Paying Dates
The balance of $32,000 represents the interest cost since the bonds were issued.
32,000
9
March 1 Cash 816,000Interest Payable ($800,000 X 0.12 X 6/12) 16,000Bonds Payable 800,000
July 1 Interest Expense ($800,000 X 0.12 X 4/12) $ 32,000Interest Payable 16,000
Cash $ 48,000
Bonds Issued Between Interest Paying Dates
Alternative MethodAlternative Method
11
Jet Company sells bonds for $92,976.39 on January 1, 2007. The bonds have a face
value of $100,000 and a 12% stated annual interest rate and a 14% effective rate. Interest is paid semiannually and the bonds mature on December 31, 2011.
Jet Company sells bonds for $92,976.39 on January 1, 2007. The bonds have a face
value of $100,000 and a 12% stated annual interest rate and a 14% effective rate. Interest is paid semiannually and the bonds mature on December 31, 2011.
Cash 92,976.39Discount on Bonds Payable 7,023.61 Bonds Payable 100,000.00
ContinuedContinuedContinuedContinued
Issuing Bonds at a Discount
12
Jet Company records the first interest payment on June 30, 2007.
Jet Company records the first interest payment on June 30, 2007.
Interest Expense 6,702.36 Discount on Bonds Payable 702.36 Cash 6,000.00
$6,000 + $702.36$6,000 + $702.36$6,000 + $702.36$6,000 + $702.36
$7,023.61 ÷ 10$7,023.61 ÷ 10
$100,000 x 0.12 x 1/2$100,000 x 0.12 x 1/2$100,000 x 0.12 x 1/2$100,000 x 0.12 x 1/2
Straight-Line MethodStraight-Line Method
Bonds Issued at a Discount
13
Jet Company sold the 5-year bonds on January 1, 2007, for $107,721.71. Interest is
paid semiannually.
Jet Company sold the 5-year bonds on January 1, 2007, for $107,721.71. Interest is
paid semiannually.
Cash 107,721.71 Bonds Payable 100,000.00 Premium on Bonds Payable 7,721.71
ContinuedContinuedContinuedContinued
Straight-Line MethodStraight-Line Method
Bonds Issued at a Premium
14
The first interest payment is made on June 30.The first interest payment is made on June 30.
Interest Expense 5,227.83Premium on Bonds Payable 772.17 Cash ($100,0000 x 0.12 x 1/2) 6,000.00
ContinuedContinuedContinuedContinued
Straight-Line Method
Bonds Issued at a Premium
$7,721.71 ÷ 10$7,721.71 ÷ 10
15
Jet Company desires to sell $100,000 of 5-year bonds paying semiannual interest with a stated rate of 12%.
The current effective interest rate is 14%.
Jet Company desires to sell $100,000 of 5-year bonds paying semiannual interest with a stated rate of 12%.
The current effective interest rate is 14%.
Present value of principal($100,000 x 0.508349) $ 50,834.90
Present value of interest($6,000 x 7.023582) 42,141.49
$ 92,976.39 Less face value (100,000.00
)Discount $ 7,023.61
Determining the Selling Price
16
Jet Company desires to sell $100,000 of 5-year bonds paying semiannual interest with a stated rate of 12%.
The bonds are sold to yield 14% interest.
Jet Company desires to sell $100,000 of 5-year bonds paying semiannual interest with a stated rate of 12%.
The bonds are sold to yield 14% interest.
Present value of principal($100,000 x 0.613913)
$ 61,391.30 Present value of interest
($6,000 x 7.721735)
46,330.41
$107,721.71 Less face value
(100,000.00
)Premium
$ 7,721.71
Determining the Selling Price
17
Effective Effective Interest Interest MethodMethod
Effective Effective Interest Interest MethodMethod
18
Using the straight-line method, Interest Expense is the same every
year—which is not realistic when a premium or discount is involved.
Instead, the effective-interest method allows for a stable interest rate per
year.
Using the straight-line method, Interest Expense is the same every
year—which is not realistic when a premium or discount is involved.
Instead, the effective-interest method allows for a stable interest rate per
year.
Effective Interest Method
19
Jet Company sells bonds for $92,976.39 on January 1, 2007. The bonds have a face value of $100,000 and a 12% stated annual interest rate and a 14%
effective rate. Interest is paid semiannually and the bonds mature on December 31, 2011.
Jet Company sells bonds for $92,976.39 on January 1, 2007. The bonds have a face value of $100,000 and a 12% stated annual interest rate and a 14%
effective rate. Interest is paid semiannually and the bonds mature on December 31, 2011.
Cash 92,976.39Discount on Bonds Payable 7,023.61 Bonds Payable 100,000.00
ContinuedContinuedContinuedContinued
Issuing Bonds at a DiscountEffective InterestEffective Interest
20
$100,000 x 0.12 x 1/2$100,000 x 0.12 x 1/2$100,000 x 0.12 x 1/2$100,000 x 0.12 x 1/2
Jet Company records the first interest payment on June 30,
2007.
Jet Company records the first interest payment on June 30,
2007.
Interest Expense 6,508.35 Discount on Bonds Payable 508.35 Cash 6,000.00
$92,976.39 x 0.14 x 1/2$92,976.39 x 0.14 x 1/2$92,976.39 x 0.14 x 1/2$92,976.39 x 0.14 x 1/2
$6,508.35- $6,000.00$6,508.35- $6,000.00
Issuing Bonds at a DiscountEffective Interest
21
$100,000 x 0.12 x 1/2$100,000 x 0.12 x 1/2$100,000 x 0.12 x 1/2$100,000 x 0.12 x 1/2
Jet Company records the second interest payment on
December 31, 2007.
Jet Company records the second interest payment on
December 31, 2007.
Interest Expense 6,543.93 Discount on Bonds Payable 543.93 Cash 6,000.00
($92,976.39 + $508.35) x 0.14 x 1/2($92,976.39 + $508.35) x 0.14 x 1/2($92,976.39 + $508.35) x 0.14 x 1/2($92,976.39 + $508.35) x 0.14 x 1/2
$6,543.93 - 6,000.00$6,543.93 - 6,000.00
Issuing Bonds at a DiscountEffective Interest
22
Jet Company sold bonds on January 1, 2007, for $107,721.71. Interest is paid semiannually.
Jet Company sold bonds on January 1, 2007, for $107,721.71. Interest is paid semiannually.
Cash 107,721.71 Bonds Payable 100,000.00 Premium on Bonds Payable 7,721.71
ContinuedContinuedContinuedContinued
Effective Interest
Issuing Bonds at a Premium
23
The first interest payment is made on June 30.The first interest payment is made on June 30.
Premium on Bonds Payable 613.91Interest Expense 5,386.09
Cash 6,000.00
ContinuedContinuedContinuedContinued
Effective Interest
$107,721.71 x $107,721.71 x 0.10 x 1/20.10 x 1/2
$107,721.71 x $107,721.71 x 0.10 x 1/20.10 x 1/2 $100,000 x $100,000 x
0.12 x 1/20.12 x 1/2$100,000 x $100,000 x 0.12 x 1/20.12 x 1/2
Issuing Bonds at a Premium
$6,000.00 –$6,000.00 –$5,386.09$5,386.09
$6,000.00 –$6,000.00 –$5,386.09$5,386.09
24
$100,000 x 0.12 x 1/2$100,000 x 0.12 x 1/2$100,000 x 0.12 x 1/2$100,000 x 0.12 x 1/2
Jet Company records the second interest payment on December 31, 2007.
Jet Company records the second interest payment on December 31, 2007.
Interest Expense 5,355.39Premium on Bonds Payable 644.61 Cash 6,000.00
($107,721.71 - $613.91) x 0.10 x 1/2($107,721.71 - $613.91) x 0.10 x 1/2
$6,000.00 - $5,355.39$6,000.00 - $5,355.39$6,000.00 - $5,355.39$6,000.00 - $5,355.39
Issuing Bonds at a PremiumEffective Interest
25
On January 1, 2007, Bergen Company issues 10-year bonds with a face value of $500,000 at 107.
Expenditures connected with the issue totaled $8,000.
On January 1, 2007, Bergen Company issues 10-year bonds with a face value of $500,000 at 107.
Expenditures connected with the issue totaled $8,000.
Cash ($520,000 - $8,000) 512,000Deferred Bond Issue Costs 8,000
Bonds Payable 500,000 Premium on Bonds Payable 20,000
0.04 x $500,0000.04 x $500,000
Bond Issue Costs
26
Each year for the ten years Deferred Bond Issue Costs is amortized on a straight-line
basis by charging Bond Interest Expense for $800.
Each year for the ten years Deferred Bond Issue Costs is amortized on a straight-line
basis by charging Bond Interest Expense for $800.
Bond Issue Costs
However, the FASB is planning to change GAAP, so that all debt issue costs are expensed as incurred.
However, the FASB is planning to change GAAP, so that all debt issue costs are expensed as incurred.
27
McAdams Company issues $200,000 of 10%, 5-year bonds on October 1, 2007, for $185,279.87. Interest
on these bonds is payable each October 1 and April 1.
McAdams Company issues $200,000 of 10%, 5-year bonds on October 1, 2007, for $185,279.87. Interest
on these bonds is payable each October 1 and April 1.
Cash 185,279.87Discount on Bonds Payable 14,720.13 Bonds Payable 200,000.00
ContinuedContinuedContinuedContinued
Accruing Bond Interest
28
At the end of the fiscal year, December 31, 2007, an adjusting entry is required to record interest for
three months (assume straight-line amortization).
At the end of the fiscal year, December 31, 2007, an adjusting entry is required to record interest for
three months (assume straight-line amortization).
Interest Expense (plug) 5,736.01 Discount on Bonds Payable 736.01 Interest Payable 5,000.00
($14,720.13 ÷ 5) x 3/12($14,720.13 ÷ 5) x 3/12
$200,000 x 0.10 x 3/12$200,000 x 0.10 x 3/12
Accruing Bond Interest
29
At the end of the fiscal year, December 31, 2007, an adjusting entry is required to record interest for 3
months (assume the effective-interest amortization).
At the end of the fiscal year, December 31, 2007, an adjusting entry is required to record interest for 3
months (assume the effective-interest amortization).
Interest Expense 5,558.40 Interest Payable 5,000.00
Discount on Bonds Payable (plug) 558.40
$185,279 x 0.12 x 3/12$185,279 x 0.12 x 3/12
$5,558.40 - $5,000.00$5,558.40 - $5,000.00
Accruing Bond Interest
30
1. The debtor pays the creditor and is relieved of its obligation for the liability.
2. The debtor is released legally from being the primary obligor under the liability, either judicially or by the creditor.
Under FASB Statement No. 140, a liability is considered extinguished for financial reporting purposes if either of the following occurs:
Extinguishment of Debt
31
Over the remaining life of the old issue.
Over the life of the new bond issue.
In the current period.
Conceptually, gains or losses from refundings
could be recognized either--
Conceptually, gains or losses from refundings
could be recognized either--
Bonds Retired Prior toMaturity
32
Whether bonds are recalled, retired, or refunded prior to maturity, any gain or loss is reported as a component of
income from continuing operations in the current period.
Whether bonds are recalled, retired, or refunded prior to maturity, any gain or loss is reported as a component of
income from continuing operations in the current period.
Bonds Retired Prior to Maturity
33
Channing Corporation originally issued $100,000 of 12% bonds at 97 on January 1, 2002. The bonds have a 10-year life, pay interest on January 1 and
July 1, and are callable at 105 plus accrued interest. The company amortizes the discount by the
straight-line method.
Channing Corporation originally issued $100,000 of 12% bonds at 97 on January 1, 2002. The bonds have a 10-year life, pay interest on January 1 and
July 1, and are callable at 105 plus accrued interest. The company amortizes the discount by the
straight-line method.
ContinuedContinuedContinuedContinued
On June 30, 2007, the company recalls the bonds.On June 30, 2007, the company recalls the bonds.
Bonds Retired Prior to Maturity
34
Interest Expense 6,150 Discount on Bonds Payable 150 Interest Payable 6,000
First, Channing records the current interest expense and liability, including the amortization of
the discount that expired since the last interest payment.
First, Channing records the current interest expense and liability, including the amortization of
the discount that expired since the last interest payment.
($3,000 ÷ 10) x 1/2($3,000 ÷ 10) x 1/2
$100,000 x 0.12 x 1/2$100,000 x 0.12 x 1/2
Bonds Retired Prior to Maturity
35
Bonds Payable 100,000Interest Payable 6,000Loss on Bond Redemption 6,350 Discount on Bonds Payable 1,350 Cash 111,000
Channing then records the reacquisition of the bonds at 105 plus accrued interest of $6,000.
Channing then records the reacquisition of the bonds at 105 plus accrued interest of $6,000.
Original discountOriginal discount $ 3,000 $ 3,000 Less: AmortizationLess: Amortization for 5 1/2 yearsfor 5 1/2 years ((1,650)1,650)Unamortized discountUnamortized discount $1,350 $1,350
Bonds Retired Prior to Maturity
36
1. the right to receive interest on the bonds, and…
2. the right to acquire common stock and to participate in the potential appreciation of the market value of the company’s common stock.
By acquiring bonds with detachable stock warrants or with a conversion feature, the bondholder has--
Bonds with Equity Characteristics
37
Some bonds are issued with rights, warrants, to acquire capital stock. If
the warrants are detachable, a portion of the proceeds from selling the bonds
must be allocated to the warrants.Proportional methodIncremental method
Some bonds are issued with rights, warrants, to acquire capital stock. If
the warrants are detachable, a portion of the proceeds from selling the bonds
must be allocated to the warrants.Proportional methodIncremental method
Bonds with Equity Characteristics
38
Amount Assigned to
Bonds=
Market Value of Bonds Without Warrants
Market Value of Bonds Without Warrants
+ Market Value of Warrants
Issuance Price
x
Amount Assigned to Warrants
=Market Value of Warrants
Market Value of Bonds Without Warrants
+ Market Value of Warrants
Issuance Price
x
Bonds Issued with Detachable Stock Warrants
39
Paul Company sold $800,000 of 12% bonds at 101
($808,000). Each bond carried 10 warrants, and each warrant allows the holder to acquire one share of $5 par common stock for $25 per
share. The bonds are quoted at 99 ex rights and the warrants at $3 each.
Paul Company sold $800,000 of 12% bonds at 101
($808,000). Each bond carried 10 warrants, and each warrant allows the holder to acquire one share of $5 par common stock for $25 per
share. The bonds are quoted at 99 ex rights and the warrants at $3 each.
Bonds Issued with Detachable Stock Warrants
40
Amount Assigned to
Bonds=
Market Value of Bonds Without Warrants
Market Value of Bonds Without Warrants
+ Market Value of Warrants
Issuance Price
x
Amount Assigned to
Bonds=
$990 per bond x 800 bonds
($990 x 800) + ($3 x 800 x 10)$808,000x
Amount Assigned to
Bonds= $784,235.29
Bonds Issued with Detachable Stock Warrants
41
Amount Assigned to Warrants
=Market Value of Warrants
Market Value of Bonds Without Warrants
+ Market Value of Warrants
Issuance Price
x
Amount Assigned to Warrants
=$3 x 10 warrants x 800 bonds
($990 x 800) + ($3 x 800 x 10)$808,000x
Amount Assigned to Warrants
= $23,764.71
Bonds Issued with Detachable Warrants
42
Cash 808,000.00Discount on Bonds Payable 15,764.71 Bonds Payable 800,000.00 Common Stock Warrants 23,764.71
From last slideFrom last slide
Bonds Issued with Detachable Stock Warrants
$800,000.00 - $784,235.29$800,000.00 - $784,235.29
43
Cash 12,500.00Common Stock Warrants 1,485.50 Common Stock 2,500.00 Additional Paid-in Capital on Common Stock 11,485.50
Later, 500 warrants are exercised at $25 each. Later, 500 warrants are exercised at $25 each.
($23,765.71 ÷ 8,000) x 500($23,765.71 ÷ 8,000) x 500
Common Stock Warrants 22,279.21 Additional Paid-in Capital from Expired Warrants 22,279.21
The remaining warrants expire.The remaining warrants expire. $23,764.71 - $1,485.50$23,764.71 - $1,485.50
Bonds Issued with Detachable Warrants
45
1. Avoid the downward price pressures on its stock that placing a large new issue of common stock on the market would cause.
2. Avoid the direct sale of common stock when it believes its stock currently is undervalued in the market.
3. Penetrate that segment of the capital market that is unwilling or unable to participate in a direct common stock issue.
4. Minimize the costs associated with selling securities.
Convertible Bonds
46
Book value method. Record the stock at the book value of the convertible bonds and do not record a gain or loss. This method is the most widely used.
Market value method. Record the stock at the market value of the stock or debt, whichever is more reliable, and recognize a gain or loss.
Conversion Methods
47
Conversion MethodsShannon Corporation has
outstanding convertible bonds with a face value of $10,000 and a book value of $10,500. Each
bond is convertible into 40 shares of $20 par common stock. The
market price is $26.50 per share when the
shares are converted.
Shannon Corporation has outstanding convertible bonds with a face value of $10,000 and a book value of $10,500. Each
bond is convertible into 40 shares of $20 par common stock. The
market price is $26.50 per share when the
shares are converted.
48
Book Value Method- The market price is not considered.
Bonds Payable 10,000
Premium on Bonds Payable 500
Common Stock 8,000
Additional-Paid-in Capital-plug 2,500
Book Value Method- The market price is not considered.
Bonds Payable 10,000
Premium on Bonds Payable 500
Common Stock 8,000
Additional-Paid-in Capital-plug 2,500
Market Value Method-Equity accounts equal market price.Bonds Payable 10,000Premium on Bonds Payable 500Loss on Conversion 100
Common Stock 8,000Additional-Paid-in Capital 2,600
Market Value Method-Equity accounts equal market price.Bonds Payable 10,000Premium on Bonds Payable 500Loss on Conversion 100
Common Stock 8,000Additional-Paid-in Capital 2,600
Conversion Methods
49
Induced Conversions
A company that has convertible bonds may desire bondholders to convert the bonds to common stock.
A company that has convertible bonds may desire bondholders to convert the bonds to common stock.
To induce conversion, the company may add a “sweetener” to the convertible bond.
To induce conversion, the company may add a “sweetener” to the convertible bond.
The debtor recognizes an expense equal to the fair value
of the “sweetener” and is measured on the date the offer is accepted by the
bondholders.
The debtor recognizes an expense equal to the fair value
of the “sweetener” and is measured on the date the offer is accepted by the
bondholders.
50
Induced Conversions
Assume that Harmon Company had $10,000 of outstanding convertible bonds, which had been
issued at par. The original terms of issuance allowed each bond to be converted into 40 shares of no-par
common stock. To induce conversion, the terms were changed to offer 50 shares per bond. All shares were converted when the market price was $30 per share.
Bonds Payable 10,000Bond Conversion Expense 3,000
Common Stock, no par 13,000
51
On January 1 of the current year, Johnson Company issues a 3-year, non-interest-bearing note with a face value of $8,000 and receives $5,694.24 in
exchange.
On January 1 of the current year, Johnson Company issues a 3-year, non-interest-bearing note with a face value of $8,000 and receives $5,694.24 in
exchange.
Cash 5,694.24Discount on Notes Payable 2,305.76 Notes Payable 8,000.00
Contra account Contra account to Notes Payableto Notes Payable
Contra account Contra account to Notes Payableto Notes Payable
Notes Payable Issued for Cash
52
Johnson Company records the interest expense on the note for the first year.
Johnson Company records the interest expense on the note for the first year.
Interest Expense 683.31 Discount on Notes Payable 683.31
Notes payable $8,000.00 Less: Unamortized discount (2,305.76)Carrying value at beginning of year $5,694.24 x Effective interest rate 0.12 Entry amount $ 683.31
Notes Payable Issued for Cash
53
1. No interest is stated, or
2. The stated rate of interest is clearly unreasonable, or
3. The face value of the note is materially different from the cash sales price of the property, goods, or services, or the fair value of the note at the date of the transaction.
APB Opinion No. 21 states that the stipulated rate of interest should be presumed fair. This presumption can be overcome only if--
Notes Payable Exchanged for Property, Goods or Services
54
A note receivable is recorded at the fair value of the property, goods, or services or the fair
value of the note, whichever is more reliable.
A note receivable is recorded at the fair value of the property, goods, or services or the fair
value of the note, whichever is more reliable.
Long-Term Notes Receivable
55
On January 1, 2007, Marsden Company purchased used equipment from Joyce Company, issuing a 5
year, $10,000 non-interest-bearing note in exchange. Marsden’s incremental interest rate is 12%.
On January 1, 2007, Marsden Company purchased used equipment from Joyce Company, issuing a 5
year, $10,000 non-interest-bearing note in exchange. Marsden’s incremental interest rate is 12%.
Equipment 5,574.27Discount on Notes Payable 4,325.73 Equipment 10,000.00
Long-Term Notes Payable
Present valuePresent value
56
Interest Expense 680.91 Discount on Notes Payable 680.91
December 31, 2007
($10,000 ($10,000 –– $4,325.73) x 0.12 $4,325.73) x 0.12($10,000 ($10,000 –– $4,325.73) x 0.12 $4,325.73) x 0.12
Interest Expense 762.62 Discount on Notes Payable 762.62
December 31, 2008
$10,000 $10,000 –– ($4,325.73 ($4,325.73 –– $680.91) x 0.12 $680.91) x 0.12$10,000 $10,000 –– ($4,325.73 ($4,325.73 –– $680.91) x 0.12 $680.91) x 0.12
Long-Term Notes Payable
Depreciation Expense 567.62 Accumulated Depreciation
567.43
57
A note receivable is recorded at the fair value of the property, goods, or services or the fair
value of the note, whichever is more reliable.
A note receivable is recorded at the fair value of the property, goods, or services or the fair
value of the note, whichever is more reliable.
Long-Term Notes Receivable
58
On January 1, 2007, Joyce Company accepted a $10,000 non-interest-bearing, 5-year note in exchange
for used equipment it sold to Marsden Company (12%).
On January 1, 2007, Joyce Company accepted a $10,000 non-interest-bearing, 5-year note in exchange
for used equipment it sold to Marsden Company (12%).
Notes Receivable 10,000.00Accumulated Depreciation 3,000.00 Discount on Notes Receivable 4,325.73 Equipment 8,000.00 Gain on Sale of Equipment 674.27
$10,000 $10,000 –– $5,674.27 $5,674.27(present value of equipment)(present value of equipment)
Long-Term Notes Receivable
59
Discount on Notes Receivable 680.91 Interest Revenue 680.91
December 31, 2007
($10,000 ($10,000 –– $4,325.73) x 0.12 $4,325.73) x 0.12
Discount on Notes Receivable 762.62 Interest Revenue 762.62
December 31, 2008
$10,000 $10,000 –– ($4,325.73 ($4,325.73 –– $680.91) x 0.12 $680.91) x 0.12
Long-Term Notes Receivable
60
A loan is impaired if it is probable that the creditor will
not be able to collect all amounts due according to the
contract terms.
A loan is impaired if it is probable that the creditor will
not be able to collect all amounts due according to the
contract terms.
Impairment of a Loan
61
Snook Company has a $100,000 note receivable from the Ullman Company that it is carrying at
face value. The loan agreement called for Ullman to pay 8% interest each December 31 and the
principal on December 31, 2012. Ullman paid the December 31, 2007, interest, but informed Snook that it probably would miss the next two year’s
interest payments because of financial difficulties. In addition, the principal payment would be one
year late.
Snook Company has a $100,000 note receivable from the Ullman Company that it is carrying at
face value. The loan agreement called for Ullman to pay 8% interest each December 31 and the
principal on December 31, 2012. Ullman paid the December 31, 2007, interest, but informed Snook that it probably would miss the next two year’s
interest payments because of financial difficulties. In addition, the principal payment would be one
year late.
Impairment of a Loan
62
Snook Company computes the present value of the impaired loan.
Snook Company computes the present value of the impaired loan.
Present value of the principal = $100,000 x present value of a single sum for 6 years at 8%
= $100,000 x 0.630170= $63,017.00
Present value of the interest = $8,000 x present value of anannuity for 4 years at 8% deferred 2 years
= $8,000 x 3.312127 x 0.857339= $22,716.93
Value of the impaired loan is Value of the impaired loan is $85,733.93 ($63,017.00 + $22,716.93)$85,733.93 ($63,017.00 + $22,716.93)
Value of the impaired loan is Value of the impaired loan is $85,733.93 ($63,017.00 + $22,716.93)$85,733.93 ($63,017.00 + $22,716.93)
Impairment of a Loan
63
Bad Debt Expense 14,266.07 Allowance for Doubtful Accts. 14,266.07
December 31, 2007, (Snook Company)
Allowance for Doubtful Accounts 6,858.71 Interest Revenue 6,858.71
December 31, 2008, (Snook Company)
$100,000 $100,000 –– $85,733.93 $85,733.93$100,000 $100,000 –– $85,733.93 $85,733.93
8% x $85,733.938% x $85,733.938% x $85,733.938% x $85,733.93
Impairment of a Loan
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