13.9 Exercises
Chapter 13
Exercise 13.1
Evergreen Ltd. is planning to expand its operations and will be looking at various sources of financing to access enough cash to complete the project. Now, Evergreen Ltd. has a debt to total assets ratio of 56%, compared to the industry average of 60%.
Required:
- Identify and explain the three sources of financing available to Evergreen Ltd.
- Based on the information provided, recommend which would be the best alternative.
Exercise 13.2
On January 1, 2021, Vayron Corp. issued a $400,000, three-year, 5%, note at face value to Valleydale Ltd. in exchange for $400,000 cash. The note requires annual interest payments on December 31.
Required:
Prepare Vayron Corp.’s journal entries to record:
- Issuance of the note
- The December 31 interest payment
- What would the market interest rate be at the time the note was signed and why?
- What would the yield be?
- What is the current portion of the long-term debt, if any? When will this be reported?
Exercise 13.3
On January 1, 2021, Compton Corp. issued $500,000, 10-year, 8% bonds that pay interest semi-annually. At the time of issue, the market rate for bonds with similar characteristics and risks was 7%. Compton Corp. follows IFRS.
Required:
Prepare Compton Corp.’s journal entries to record:
- Issuance of the note
- The June 30 interest payment.
- The amount of the discount or premium, if any.
Note: Round the percentages to the nearest two decimals and the final answers to the nearest whole number.
Exercise 13.4
On January 1, 2021, Termund Co. issued a $120,000, three-year, zero-interest-bearing note to North Lace Ltd. in exchange for $95,260. At the time, the implicit interest rate was 8%. Termund Co. uses the effective interest rate method.
Required:
Prepare Termund Co.’s entries for:
- Issuance of the note
- Recognition of interest for year-end on December 31, 2021
- If the implicit rate has not been provided, provide the calculation proof that would determine the implicit rate of 8%.
- Prepare an amortization table for North Lace Ltd.
Note: Round the percentages to the nearest two decimals and the final answers to the nearest whole number.
Exercise 13.5
On January 1, 2021, Odessa Corp. issued an $80,000, four-year, 3% note to Yalta Ltd. in exchange for equipment that normally sells for $74,326. The note requires annual interest payments each December 31. The market rate for a note of similar risk is 5%.
Required:
Prepare Odessa Corp.’s entries for:
- Issuance of the note
- The first interest payment using the effective interest rate method
- The first interest payment if Odessa Corp. follows ASPE and has chosen to use the straight-line method for amortization.
Note: Round the percentages to the nearest two decimals and the final answers to the nearest whole number.
Exercise 13.6
On January 1, 2021, Edmund Inc. issued a $200,000, five-year, no-interest note to Hillary Ltd. and received $200,000 cash. Included in the terms of the note was an arrangement that Edmund Inc. would sell raw materials to Hillary Ltd. for a discounted price over the five-year period. Edmund Inc. follows IFRS and the market rate at that time was 2.5%.
Required:
Prepare Edmund Inc.’s journal entry for the issuance of the note.
Note: Round the percentages to the nearest two decimals and the final answers to the nearest whole number.
Exercise 13.7
On January 1, 2021, Melbourne Ltd. signed an instalment note in settlement of an outstanding account payable of $25,000 owed to Yardin Corp. Yardin Corp. is able to earn an 8% return on investments with similar risk. The payment terms determine that the note is to be repaid in three equal cash payments of principal and interest on December 31, 2021, 2022, and 2023.
Required:
Calculate the payment amount.
Note: Round the percentages to the nearest two decimals and the final answers to the nearest whole number.
Exercise 13.8
On January 1, 2021, Southerly Winds Inc. issued $350,000, 15-year, 5% bonds at face value. The issuance cost from the broker was $25,500 and the difference was paid to Southerly Winds Inc. in cash. The bonds require interest payments annually every December 31. Southerly Winds Inc. follows ASPE and amortizes the bond issue costs using the straight-line method.
Required:
Prepare the entries for:
- The bond issuance
- The first interest payment and amortization
Note: Round the percentages to the nearest two decimals and the final answers to the nearest whole number.
Exercise 13.9
On January 1, 2021, Hobart Services Ltd. issued $200,000 of 7% bonds at 98. Bonds are due January 1, 2026, with interest payable semi-annually on July 1 and January 1.
Required:
- Prepare all the journal entries relating to the bond for 2021 assuming that Hobart Services Ltd. follows IFRS.
- Prepare a classified partial statement of financial position as at December 31, 2021.
- Prepare the entries for 2021 assuming now that Hobart Services Ltd. follows ASPE and uses the straight-line method.
- Based on the data in part (c), prepare a classified partial balance sheet as at December 31, 2021.
- Will the total cost of borrowing over the life of the bond, using the effective interest method, be higher, lower, or the same as the total cost of borrowing using the straight-line method?
Note: Round the percentages to the nearest two decimals and the final answers to the nearest whole number.
Exercise 13.10
On May 1, 2021, Harper Boyle Construction Ltd. issued $800,000 of 5% bonds. Bonds were dated January 1, 2021, and mature on January 1, 2041, with interest payable each July 1 and January 1. The bonds were issued at 99 plus accrued interest, less brokerage fees of $7,000. Harper Boyle Construction Ltd. follows IFRS and their year-end is December 31.
Required:
- Complete an interest schedule for 2021 to 2023.
- Prepare all the entries related to the bonds for 2021.
- Prepare a partial classified statement of financial position as at December 31, 2021 including current liability disclosures, if any. Round the interest rate percentage to the nearest four decimals and the amortization schedule to the nearest whole number.
- What is the accounting treatment for the brokerage fees of $7,000?
Exercise 13.11
On November 1, 2021, Tribecca Ltd., issued $1M of 4%, 15-year bonds, at face value. Interest is payable each December 31. The company has chosen to apply the fair value option as the accounting treatment for the bonds. A risk assessment at December 31, 2022 shows that Tribecca’s credit rating has slipped to a lower rating. As a result, the fair value of the bonds on December 31, 2022 is $950,000.
Required:
- Prepare the journal entries on December 31, 2022, if any, assuming that Tribecca follows ASPE.
- Prepare the journal entries on December 31, 2022, if any, assuming that Tribecca follows IFRS.
- What significant issue arises using the fair value method? Round the percentages to the nearest two decimals and the final answers to the nearest whole number.
Exercise 13.12
On July 31, 2021, Elmer Fudd Co. retired bonds with a face value of $300,000 at 99. The unamortized discount at that time was $10,150.
Required:
Record the entry for the retirement.
Note: Round the percentages to the nearest two decimals and the final answers to the nearest whole number.
Exercise 13.13
Kishmir Corp. has a loan that is currently due at December 31, 2021, year-end. This debt is being refinanced by a three-year loan. The refinance documents were signed on January 4, 2022. The financial statements have not yet been issued.
Required:
- How would the loan be reported in the December 31, 2021, statement of financial position (IFRS)?
- How would the loan be reported in the December 31, 2021, balance sheet (ASPE)?
Exercise 13.14
As at December 31, 2021, Smith and Smith Co. owes $25,000 to First Nearly Trust Co., for a three-year, 8% note due on this date. The note was issued at par. The oil and gas market has dropped significantly, so Smith and Smith Co. is in serious financial trouble due to the decrease in sales. First Nearly Trust Co., agrees to some concessions as follows:
- Extend the due date from December 31, 2021, to December 31, 2024.
- Reduce the principal amount owing to $18,000.
- Reduce the interest rate to 6%, payable annually on December 31 at a time when the market rate was 7%.
Required:
Prepare the journal entries for the debtor for December 31, 2021, 2022, and 2023. (Note: Round the final answers to the nearest whole number.)
Exercise 13.15
On January 1, 2021, Dimor Ltd. purchased a house with a tax assessment value of $590,000 in exchange for an $800,000, zero-interest-bearing note due on January 1, 2027. The house had not been appraised recently, nor did the note have a market value. The bank’s interest rate for this type of transaction and risk characteristics was 5.75%. Dimor Ltd. intends to use the entire house as their main office.
Required:
- What is the carrying value of the note payable on December 31, 2021?
- What role, if any, would the tax assessment value of $590,000 play?
Exercise 13.16
On January 1, 2021, Seutor Corp. issued an instalment note in exchange for equipment with a list price of $150,000. The note is to be paid in four equal payments of $40,541 of principal and interest each December 31. The market rate that this time is 7% for this type of transaction.
Required:
- How will the equipment value be established?
- Prepare the journal entries for 2021 for the note payable.
- Why would a creditor prefer the instalment note compared to a regular interest-bearing note?
Exercise 13.17
On December 31, 2021, Firstly Trust agreed to restructure a $700,000, 8% note, issued at par with Hornblower Corp. The interest is paid annually each December 31. Below are the terms:
- Principal is reduced from $700,000 to $650,000.
- The maturity date is extended from December 31, 2021, to December 31, 2023.
- The interest rate is reduced from 8% to 7%.
On January 1, 2024, Hornblower Corp. pays $650,000 to Firstly Trust.
Required:
For Hornblower Corp.:
- What entry, if any, would Hornblower Corp. make regarding the loan restructure?
- What is the interest rate that Hornblower Corp. should use for future periods?
- Record the interest entry for Hornblower Corp. on December 31, 2022.
- Record the entry for Hornblower Corp. on January 1, 2024.
For Firstly Trust:
- Calculate the loss for the debt restructuring and record the entry, if any.
- Prepare an interest schedule after the debt restructuring.
- Record the interest entry on December 31, 2022.
- Record the entry on January 1, 2024.
Exercise 13.18
Ulting Ltd. owes Sleazy Finance Co. $150,000 for a 3-year, 10% note, issued at par and due on December 31, 2021. Interest was paid annually each December 31. Ulting Ltd. is now in financial difficulties, so Sleazy Finance Co. agrees to extend the note’s maturity date to December 31, 2023, reduce the principal to $130,000, and reduce the interest rate to 9%. The market rate is currently 5%. Both companies follow IFRS.
Required:
- Prepare all related journal entries for Ulting Ltd. for 2021, 2022, and 2023.
- Prepare all related journal entries for Sleazy Trust Co. for 2021, 2022, and 2023, if an allowance account was used for this note.
1. According to IAS (2013) “IFRS 13 Fair Value Measurement applies to IFRSes that require or permit fair value measurements or disclosures and provides a single IFRS framework for measuring fair value and requires disclosures about fair value measurement. The Standard defines fair value based on an ‘exit price’ notion and uses a ‘fair value hierarchy’, which results in a market-based, rather than entity-specific, measurement. IFRS 13 was originally issued in May 2011 and applies to annual periods beginning on or after 1 January 2013” (para 1). IFRS 13 is beyond the scope of this course. For simplicity, the fair value of the property, goods, or services given up, as explained in the chapter material, assumes that IFRS 13 assumptions and hierarchy to determine fair values have been appropriately considered.
2. CPA Canada (2016) Part II, Section 3856 and IFRS 7 detail the full disclosure requirements.
Exercise 13.19
Big Bank entered into a debt restructuring agreement with First-One Holdings, on December 31, Y3.
First-One is experiencing financial troubles.
The bank agreed to restructure a $2,500,000, 10% note receivable (issued at par) by offering the following modifications:
- Extend the maturity date from December 31, Y3 to December 31, Y6.
- Reduce the interest rate from 10% to 8%.
- Reduce the principle obligation from $2,500,000 to $2,400,000.
First-One follows IFRS and pays interest at the end of each year. Both companies have a December 31 year end
On January 1, Y7, First-One pays $2,400,000 cash to Big Bank.
Required:
- Determine if this is a substantial modification (> 10%) or not.
- Prepare the required and necessary entry for First-One at December 31, Y3.
- Prepare the appropriate amortization schedule for the remaining term of the note.
- Prepare the interest payment entry for First-One at December 31, Y4, Y5 and Y6 and at January 1, Y7.
- How would your answers to the above questions differ if First-One follows ASPE?
Please round all calculations to nearest dollar.
Exercise 13.20
Big Bank entered into a debt restructuring agreement with First-One Holdings, on December 31, Y3.
First-One is experiencing financial troubles.
The bank agreed to restructure a $2,500,000, 10% note receivable (issued at par) by offering the following modifications:
- Extend the maturity date from December 31, Y3 to December 31, Y6.
- Reduce the interest rate from 10% to 8%.
- Reduce the principle obligation from $2,500,000 to $2,400,000.
First-One follows IFRS and pays interest at the end of each year. Both companies have a December 31 year end
On January 1, Y7, First-One pays $2,400,000 cash to Big Bank.
Required:
- Determine if this is a substantial modification (>10%) or not.
- Prepare the required and necessary entry for Big Bank at December 31, Y3.
- Prepare the appropriate amortization schedule for the remaining term of the note.
- Prepare the interest payment entry for Big Bank at December 31, Y4, Y5, and Y6 and at January 1, Y7.
Please round all calculations to the nearest dollar.
Exercise 13.21
On January 1, Y2, Liu Corporation issued 10%, 5 year bonds with a face value of $3,000,000.
Interest on the bonds is paid annually. Liu follows IFRS.
The bonds are callable at any time and were issued to provide a yield of 13%.
Required:
- Determine the present value of the bonds.
- Create an amortization schedule
- Assume the bonds were called on December 31, Y4 and Liu paid $2,950,000 to the bondholders, prepare the appropriate journal entry
Exercise 13.22
On January 1, Y2, Pontiac Corp issued 10% bonds with a par value of $1,000,000 due in 20 years. Pontiac follows ASPE.
The bonds were issued at 98 and were callable at 103 at any date, on or, after January 1, Y8.
On January 1, Y8, Pontiac decided to call the bonds.
Required:
Prepare the necessary and required journal entry at January 1, Y8.
