long term liabilities and receivables c hapter 14 an electronic presentation by norman sunderman...

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


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


Alternative MethodAlternative Method

10

Straight-LineStraight-LineMethodMethod

Straight-LineStraight-LineMethodMethod

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


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


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%.


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


The bonds are sold to yield 14% interest.


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.



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.


$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.


($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


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


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.



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


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


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.


On June 30, 2007, the company recalls the bonds.On June 30, 2007, the company recalls the bonds.


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


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


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 Warrants

Issuance Price

x

Amount Assigned to 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.


40

Amount Assigned to

Bonds=




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


41


=Market Value of Warrants



Issuance Price

x


=$3 x 10 warrants x 800 bonds

($990 x 800) + ($3 x 800 x 10)$808,000x


= $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


$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

44

Why issue convertible

bonds?

Why issue convertible

bonds?

Convertible Bonds

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.



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


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


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






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)


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


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.


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)


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


64

Chapter14

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long term liabilities and receivables c hapter 14 an electronic presentation by norman sunderman...

Documents

sells bonds

bonds payable400

continuedcontinued bonds

issuance of bonds

bonds payable800

bonds payable7

bonds payable100

bonds payable12