CHAPTER 14 LONG-TERM LIABILITIES IFRS questions are avaia!e at t"e en# o$ t"is %"a&ter'
TR(E-FALSE)Con%e&tua Ans*er T F T F F T F F F T T F T T T T F F F F
No' 1. 2. 3. 4. 5. . ". %. '. 1). 11. 12. 13. 14. 15. 1. 1". 1%. 01'. 02).
+es%ri&tion Bond interest payments. Debenture bonds. Definition of serial bonds. Market rate vs. coupon rate. Definition of stated interest rate. !tated rate and coupon rate. #morti$ation of premium and discount. &ssuance of bonds. &nterest paid vs. interest e(pense. #ccountin* for bond issue costs. +efundin* of bond issue. ,on*-term notes payable. &mplicit interest rate. &mputation and imputed interest rate. ff-balance-s/eet financin*. Debt to total assets ratio. +efinancin* lon*-term debt. Times interest earned ratio. ,oss reco*ni$ed on impaired loan. ainloss in troubled debt restructurin*.
M(LTIPLE CHOICE)Con%e&tua Ans*er a a b a d a d d d d b a d d c d d c
No' 21. 22. 23. 24. 24. ! 25. 25. ! 2. ! 2". 2". 2%. 2'. 3). 31. 32. 33. 34. 35. 3. 3". 3%.
+es%ri&tion ,iability id identification. Bond terms. Definition of debenture bonds. Defi Defini niti tion on of bear bearer er bond bonds. s. Defi Defini niti tion on of inco income me bond bonds. s. ffect ffective ive-in -inter teres estt vs. strai* strai*/t-l /t-line ine met/od met/od.. &nte &ntere rest st rate rate of t/e t/e bon bond d ind inden entu ture re.. +ate of interest earned by t/e bond/olders. 6alculatin* t/e issue price of bonds. 6alculatin* t/e issue price of bonds. remium and interest rates. &nterest and discount amorti$ation. ffective-interest amorti$ation met/od. &mpact of effective-interest met/od. +ecordin* bonds issued bet7een interest dates. Bonds issued at ot/er t/an an interest date. 6lassification of bond issuance costs. Bond issuance costs.
14 - 2
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
M(LTIPLE CHOICE)Con%e&tua 0%ont' Ans*er b d d c c a d d c d c d d d c c. c d b b c
No' 3'. 4). 41. 42. 42. 43. 43. ! 44. 44. 45. 4. 4". 4%. ! 4'. 4'. ! 5). 5). 51. 52. 53. 54. 055. 05. 05". 05%. 05'.
+es%ri&tion 6lassification of treasury bonds. arly e(tin*uis/ment of bonds payable. ain or loss on e(tin*uis/ment of debt. &n-s &n-sub ubst stan ance ce defe defeas asan ance ce.. +epo +eport rtin in* * lon* lon*-t -ter erm m debt debt.. Debt Debt ins instr trum umen entt e(c/ e(c/an an*e *ed d for for prop proper erty ty.. 8aluation of note issued in noncas/ transaction. !tated interest rate of note. #ccountin* fo for discount on notes payable. ff-balance-s/eet financin*. ffff-ba bala lanc ncee-s/ s/ee eett fina financ ncin in*. *. ,on* ,on*-t -ter erm m debt debt mat matur urin in* * 7it/ 7it/in in one one yea year. r. +e9uired bond disclosures. ,on*-term debt disclosures. Times interest earned ratio. Debt to total assets ratio. Modification of terms in debt restructure. ainloss on troubled debt restructurin*. ainloss on troubled debt restructurin*. &nterest and troubled debt restructurin*. 6reditor:s ca calculations fo for mo modification of of terms.
T/ese 9uestions also appear in t/e roblem-!olvin* !urvival uide. T/ese 9uestions also appear in t/e !tudy uide. 0 T/is topic is dealt 7it/ in an #ppendi( to t/e c/apter.
!
M(LTIPLE CHOICE)Co&utationa Ans*er a b a c c c c c a d d c a d d b c d a
No' ). 1. 2. 3. 4. 5. . ". %. '. "). "1. "2. "3. "4. "5. ". "". "%.
+es%ri&tion 6alculate t/e present value of bond principal. 6alculate t/e present value of bond interest. Determine t/e issue price of bonds. roceeds from bond issuance. Bonds issued bet7een interest dates. roceeds from bond issuance. Bonds issued bet7een interest dates. ffective-interest met/od interest e(pense. ffective-interest me met/od ca carryin* va value. !trai*/t-line met/od carryin* value. !trai*/t-line amorti$ationinterest e(pense. ffective-interest met/od interest e(pense. ffective-interest me met/od ca carryin* va value. !trai*/t-line met/od carryin* value. !trai*/t-line me met/od am amorti$ationinterest e( e(pense. &nterest e(pense usin* effective-interest met/od. &nterest e(pense usin* effective-interest met/od. ntry to record issuance of bonds. 6alculate bond interest e(pense.
14 - 2
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
M(LTIPLE CHOICE)Con%e&tua 0%ont' Ans*er b d d c c a d d c d c d d d c c. c d b b c
No' 3'. 4). 41. 42. 42. 43. 43. ! 44. 44. 45. 4. 4". 4%. ! 4'. 4'. ! 5). 5). 51. 52. 53. 54. 055. 05. 05". 05%. 05'.
+es%ri&tion 6lassification of treasury bonds. arly e(tin*uis/ment of bonds payable. ain or loss on e(tin*uis/ment of debt. &n-s &n-sub ubst stan ance ce defe defeas asan ance ce.. +epo +eport rtin in* * lon* lon*-t -ter erm m debt debt.. Debt Debt ins instr trum umen entt e(c/ e(c/an an*e *ed d for for prop proper erty ty.. 8aluation of note issued in noncas/ transaction. !tated interest rate of note. #ccountin* fo for discount on notes payable. ff-balance-s/eet financin*. ffff-ba bala lanc ncee-s/ s/ee eett fina financ ncin in*. *. ,on* ,on*-t -ter erm m debt debt mat matur urin in* * 7it/ 7it/in in one one yea year. r. +e9uired bond disclosures. ,on*-term debt disclosures. Times interest earned ratio. Debt to total assets ratio. Modification of terms in debt restructure. ainloss on troubled debt restructurin*. ainloss on troubled debt restructurin*. &nterest and troubled debt restructurin*. 6reditor:s ca calculations fo for mo modification of of terms.
T/ese 9uestions also appear in t/e roblem-!olvin* !urvival uide. T/ese 9uestions also appear in t/e !tudy uide. 0 T/is topic is dealt 7it/ in an #ppendi( to t/e c/apter.
!
M(LTIPLE CHOICE)Co&utationa Ans*er a b a c c c c c a d d c a d d b c d a
No' ). 1. 2. 3. 4. 5. . ". %. '. "). "1. "2. "3. "4. "5. ". "". "%.
+es%ri&tion 6alculate t/e present value of bond principal. 6alculate t/e present value of bond interest. Determine t/e issue price of bonds. roceeds from bond issuance. Bonds issued bet7een interest dates. roceeds from bond issuance. Bonds issued bet7een interest dates. ffective-interest met/od interest e(pense. ffective-interest me met/od ca carryin* va value. !trai*/t-line met/od carryin* value. !trai*/t-line amorti$ationinterest e(pense. ffective-interest met/od interest e(pense. ffective-interest me met/od ca carryin* va value. !trai*/t-line met/od carryin* value. !trai*/t-line me met/od am amorti$ationinterest e( e(pense. &nterest e(pense usin* effective-interest met/od. &nterest e(pense usin* effective-interest met/od. ntry to record issuance of bonds. 6alculate bond interest e(pense.
,on*-Term ,iabilities
M(LTIPLE CHOICE)Co&utationa 0%ont' Ans*er No' b "'. c %). b %1. b %2. b %3. c %4. b %5. b %. b %". c %%. c %'. b '). b '1. b '2. b '3. b '4. b '5. a '. c '". b '%. d ''. a 1)). c 1)1. d 1)2. b 01)3. d 01)4. a 01)5.
+es%ri&tion ntry to record issuance of bonds. 6alculate bond interest e(pense. 6alculate interest e(pense for t7o pe periods. 6alculate unamorti$ed bond discount balance. 6alculate un unamorti$ed bo bond pr premium balance. 6alculate interest e(pense for t7o periods. ntry to record bond redemption. ntry to record bond redemption. 6alculate loss on bond redemption. 6alculate loss on bond redemption. 6alculate *ain on retirement of bonds. 6alculate *ain on retirement of bonds. 6alculate loss on retirement of bonds. Bond retirement 7it/ call premium. 6alculate loss on retirement of bonds. arly e(tin*uis/ment of debt. arly e(tin*uis/ment of debt. &nterest on noninterest-bearin* note. &nterest on installment note payable. Determine balance of discount on notes payable. 6alculate times interest earned ratio. 6alculate times interest earned ratio. 6alculate in income be before ta ta(es 7i 7it/ titimes interest earne rned ra ratio. Determine total lon*-term liabilities. Transfer of e9uipment in debt settlement. +eco*ni$in* *a *ain on on de debt re restructure. &nterest an and tr troubled de debt re restructurin*.
M(LTIPLE CHOICE)CPA A#a&t A#a&te# e# Ans*er a b a c a d d c c c d
No' 1). 1)". 1)%. 1)'. 11). 111. 112. 113. 114. 115. 011.
+es%ri&tion Determine proceeds from bond issue. Determine unamorti$ed bond premium. Determine un unamorti$ed bo bond di discount. 6alculate bond interest e(pense. 6alculate loss on retirement of bonds. 6alculate loss on retirement of bonds. 6alculate *ain on retirement of bonds. Determine carryin* value of bonds to be retired. 6arryin* va value of bonds 7i 7it/ ca call provision. 6lassification of of *ain fr from debt re refundin*. 6lassification of of *a *ain fr from tr troubled de debt re restructurin*.
14 - 3
14 - 4
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
EERCISES I te 1414-1 11" 1414-1 11% 1414-1 11' 14-12 -12) 14-121 1414-12 122 2 014 014-1 -123 23 014 014-12 -124 4 014 014-1 -125 25
+es%ri&tion Terms rms rela relate ted d to lon* lon*-t -ter erm m debt debt.. Bond Bond iss issue ue pri price ce and and pre premi mium um amo amort rti$ i$at atio ion. n. #mor #morti ti$a $ati tion on of disc discou ount nt or prem premiu ium. m. ntries fo for bo bonds pay payab ablle. +etirement of of bo bonds. arl arly y e(ti e(tin* n*ui uis s/men /mentt of of debt debt.. #cco #ccoun unti tin* n* for for a tro troub uble led d debt debt set settl tlem emen ent. t. #cco #ccoun unti tin* n* for for trou troubl bled ed debt debt rest restru ruct ctur urin in*. *. #cc #ccount ountin in* * fo for tr troubl oubled ed debt debt..
PROBLEMS I te 1414-12 12 1414-12 12" " 14-12 -12% 14-12 -12' 014 014-1 -13) 3)
+es%ri&tion Bond Bond disc discou ount nt amor amorti ti$a $ati tion on.. Bond Bond int inter eres estt and and disc discou ount nt amor amorti ti$a $ati tion on.. ntries fo for bo bonds pay payab ablle. ntries fo for bo bonds pay payab ablle. #cco #ccoun unti tin* n* for for a tro troub uble led d debt debt set settl tlem emen ent. t.
CHAPTER LEARNING OB5ECTI6ES 1.
Descri Describe be t/e forma formall procedu procedures res assoc associat iated ed 7it/ 7it/ issuin issuin* * lon*-te lon*-term rm debt. debt.
2.
&den &denti tify fy vari variou ous s typ types es of bond bond issu issues es..
3.
Descri Describe be t/e t/e accoun accountin tin* * valuat valuation ion for for bonds bonds at at date date of issua issuance nce..
4.
#pply #pply t/e t/e met/ met/ods ods of bond bond disc discoun ountt and premium premium amorti amorti$at $ation ion..
5.
Descri Describe be t/e t/e acco account untin* in* for t/e e(tin* e(tin*uis uis/me /ment nt of of debt. debt.
.
(plai (plain n t/e t/e accou accounti ntin* n* for for lon*-t lon*-term erm notes notes payabl payable. e.
".
(plai (plain n t/e report reportin* in* of off-b off-bala alance nce-s/ -s/eet eet finan financin cin* * arran*e arran*emen ments. ts.
%.
&ndica &ndicate te /o7 /o7 to presen presentt and and analy$ analy$e e lon*-t lon*-term erm debt. debt.
0'. 0'.
Desc Descri ribe be t/e t/e acco accoun unti tin* n* for for a loan loan impa impair irme ment nt..
01). 01).
Descri Describe be t/e t/e accoun accountin tin* * for for debt debt rest restruc ructur turin* in*..
,on*-Term ,iabilities
14 - :
S(MMAR7 OF LEARNING OB5ECTI6ES B7 8(ESTIONS Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
M6 M6 M6 M6 M6 M6
11'. 12). 12. 12". 12%. 12'.
M6 M6 M6 M6
115. 11". 12). 121.
M6
M6 M6
'%.
M6
M6 M6
1)1. 1)2.
M6 M6
Item
Type
122. 12%.
Learnin. O!9e%tive 1
1.
TF
21.
M6
22.
2.
TF
3.
TF
23.
4. 5. .
TF TF TF
2". 2%. 2'.
M6 M6 M6
3). ). 1.
". %. '. 1). 2. 31. 32. 33.
TF TF TF TF M6 M6 M6 M6
34. 35. 3. 3". 3%. 3'. 4. .
M6 M6 M6 M6 M6 M6 M6 M6
". %. '. "). "1. "2. "3. "4.
11. 4). 41. 42.
TF M6 M6 M6
%5. %. %". %%.
M6 M6 M6 M6
%'. '). '1. '2.
12. 13.
TF TF
14. 43.
TF M6
!
15.
TF
4%.
M6
!
1. 1".
TF TF
1%. 5).
TF M6
51. 52.
1'. 2). 55.
TF TF M6
5. 5". 5%.
M6 M6 M6
5'. 1)3. 1)4.
;ote<
!
44. 45. 4'.
TF = True-False M6 = Multiple 6/oice
M6 Learnin. O!9e%tive 2 ! M6 24. M6 25. Learnin. O!9e%tive 3 M6 2. M6 11". M6 3. M6 11%. M6 5. M6 12. Learnin. O!9e%tive 4 M6 "5. M6 %3. M6 ". M6 %4. M6 "". M6 1). M6 "%. M6 1)". M6 "'. M6 1)%. M6 %). M6 1)'. M6 %1. M6 11". M6 %2. M6 11%. Learnin. O!9e%tive : M6 '3. M6 111. M6 '4. M6 112. M6 '5. M6 113. M6 11). M6 114. Learnin. O!9e%tive ; M6 4. M6 '. M6 4". M6 '". Learnin. O!9e%tive < M6 Learnin. O!9e%tive = M6 53. M6 ''. M6 54. M6 1)). Learnin. O!9e%tive >? M6 1)5. M6 124. M6 1). M6 125. M6 123. 13).
= (ercise = roblem
M6
14 - ;
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
TR(E FALSE)Con%e&tua 1. 6ompanies usually make bond interest payments semiannually> alt/ou*/ t/e interest rate is *enerally e(pressed as an annual rate. 2. # mort*a*e bond is referred to as a debenture bond. 3. Bond issues t/at mature in installments are called serial bonds. 4. &f t/e market rate is *reater t/an t/e coupon rate> bonds 7ill be sold at a premium. 5. T/e interest rate 7ritten in t/e terms of t/e bond indenture is called t/e effective yield or market rate. . T/e stated rate is t/e same as t/e coupon rate. ". #morti$ation of a premium increases bond interest e(pense> 7/ile amorti$ation of a discount decreases bond interest e(pense. %. # bond may only be issued on an interest payment date. '. T/e cas/ paid for interest 7ill al7ays be *reater t/an interest e(pense 7/en usin* effective-interest amorti$ation for a bond. 1). Bond issue costs are capitali$ed as a deferred c/ar*e and amorti$ed to e(pense over t/e life of t/e bond issue. 11. T/e replacement of an e(istin* bond issue 7it/ a ne7 one is called refundin*. 12. &f a lon*-term note payable /as a stated interest rate> t/at rate s/ould be considered to be t/e effective rate. 13. T/e implicit interest rate is t/e rate t/at e9uates t/e cas/ received 7it/ t/e amounts received in t/e future. 14. T/e process of interest-rate appro(imation is called imputation> and t/e resultin* interest rate is called an imputed interest rate. 15. ff-balance-s/eet financin* is an attempt to borro7 monies in suc/ a 7ay to minimi$e t/e reportin* of debt on t/e balance s/eet. 1. T/e debt to total assets ratio 7ill *o up if an e9ual amount of assets and liabilities are added to t/e balance s/eet. 1". &f a company plans to retire lon*-term debt from a bond retirement fund> it s/ould report t/e debt as current. 1%. T/e times interest earned ratio is computed by dividin* income before interest e(pense by interest e(pense.
,on*-Term ,iabilities
14 - <
01'. T/e loss to be reco*ni$ed by a creditor on an impaired loan is t/e difference bet7een t/e investment in t/e loan and t/e e(pected undiscounted future cas/ flo7s from t/e loan. 02). &n a troubled debt restructurin*> t/e loss reco*ni$ed by t/e creditor 7ill e9ual t/e *ain reco*ni$ed by t/e debtor.
True Fase Ans*ers) Con%e&tua Ite
Ans'
Ite
Ans'
Ite
Ans'
Ite
1. 2. 3. 4. 5.
T F T F F
. ". %. '. 1).
T F F F T
11. 12. 13. 14. 15.
T F T T T
1. 1". 1%. 1'. 2).
Ans'
T F F F F
M(LTIPLE CHOICE)Con%e&tua 21.
#n e(ample of an item 7/ic/ is not a liability is a. dividends payable in stock. b. advances from customers on contracts. c. accrued estimated 7arranty costs. d. t/e portion of lon*-term debt due 7it/in one year.
22.
T/e covenants and ot/er terms of t/e a*reement bet7een t/e issuer of bonds and t/e lender are set fort/ in t/e a. bond indenture. b. bond debenture. c. re*istered bond. d. bond coupon.
23.
T/e term used for bonds t/at are unsecured as to principal is a. ?unk bonds. b. debenture bonds. c. indebenture bonds. d. callable bonds.
24.
Bonds for 7/ic/ t/e o7ners: names are not re*istered 7it/ t/e issuin* corporation are called a. bearer bonds. b. term bonds. c. debenture bonds. d. secured bonds.
!
25.
Bonds t/at pay no interest unless t/e issuin* company is profitable are called a. collateral trust bonds. b. debenture bonds. c. revenue bonds. d. income bonds.
14 - = !
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
2.
&f bonds are issued initially at a premium and t/e effective-interest met/od of amorti$ation is used> interest e(pense in t/e earlier years 7ill be a. *reater t/an if t/e strai*/t-line met/od 7ere used. b. *reater t/an t/e amount of t/e interest payments. c t/e same as if t/e strai*/t-line met/od 7ere used. d. less t/an if t/e strai*/t-line met/od 7ere used.
2".
T/e interest rate 7ritten in t/e terms of t/e bond indenture is kno7n as t/e a. coupon rate. b. nominal rate. c. stated rate. d. coupon rate> nominal rate> or stated rate.
2%.
T/e rate of interest actually earned by bond/olders is called t/e a. stated rate. b. yield rate. c. effective rate. d. effective> yield> or market rate.
@se t/e follo7in* information for 9uestions 2' and 3)< Fo( 6o. issued A1))>))) of ten-year> 1) bonds t/at pay interest semiannually. T/e bonds are sold to yield %. 2'.
ne step in calculatin* t/e issue price of t/e bonds is to multiply t/e principal by t/e table value for a. 1) periods and 1) from t/e present value of 1 table. b. 2) periods and 5 from t/e present value of 1 table. c. 1) periods and % from t/e present value of 1 table. d. 2) periods and 4 from t/e present value of 1 table.
3).
#not/er step in calculatin* t/e issue price of t/e bonds is to a. multiply A1)>))) by t/e table value for 1) periods and 1) from t/e present value of an annuity table. b. multiply A1)>))) by t/e table value for 2) periods and 5 from t/e present value of an annuity table. c. multiply A1)>))) by t/e table value for 2) periods and 4 from t/e present value of an annuity table. d. none of t/ese.
31.
+eic/> &nc. issued bonds 7it/ a maturity amount of A2))>))) and a maturity ten years from date of issue. &f t/e bonds 7ere issued at a premium> t/is indicates t/at a. t/e effective yield or market rate of interest e(ceeded t/e stated Cnominal rate. b. t/e nominal rate of interest e(ceeded t/e market rate. c. t/e market and nominal rates coincided. d. no necessary relations/ip e(ists bet7een t/e t7o rates.
,on*-Term ,iabilities
14 - ?
32.
&f bonds are initially sold at a discount and t/e strai*/t-line met/od of amorti$ation is used> interest e(pense in t/e earlier years 7ill a. e(ceed 7/at it 7ould /ave been /ad t/e effective-interest met/od of amorti$ation been used. b. be less t/an 7/at it 7ould /ave been /ad t/e effective-interest met/od of amorti$ation been used. c. be t/e same as 7/at it 7ould /ave been /ad t/e effective-interest met/od of amorti$ation been used. d. be less t/an t/e stated Cnominal rate of interest.
33.
@nder t/e effective-interest met/od of bond discount or premium amorti$ation> t/e periodic interest e(pense is e9ual to a. t/e stated Cnominal rate of interest multiplied by t/e face value of t/e bonds. b. t/e market rate of interest multiplied by t/e face value of t/e bonds. c. t/e stated rate multiplied by t/e be*innin*-of-period carryin* amount of t/e bonds. d. t/e market rate multiplied by t/e be*innin*-of-period carryin* amount of t/e bonds.
34.
E/en t/e effective-interest met/od is used to amorti$e bond premium or discount> t/e periodic amorti$ation 7ill a. increase if t/e bonds 7ere issued at a discount. b. decrease if t/e bonds 7ere issued at a premium. c. increase if t/e bonds 7ere issued at a premium. d. increase if t/e bonds 7ere issued at eit/er a discount or a premium.
35.
&f bonds are issued bet7een interest dates> t/e entry on t/e books of t/e issuin* corporation could include a a. debit to &nterest ayable. b. credit to &nterest +eceivable. c. credit to &nterest (pense. d. credit to @nearned &nterest.
3.
E/en t/e interest payment dates of a bond are May 1 and ;ovember 1> and a bond issue is sold on une 1> t/e amount of cas/ received by t/e issuer 7ill be a. decreased by accrued interest from une 1 to ;ovember 1. b. decreased by accrued interest from May 1 to une 1. c. increased by accrued interest from une 1 to ;ovember 1. d. increased by accrued interest from May 1 to une 1.
3".
T/eoretically> t/e costs of issuin* bonds could be a. e(pensed 7/en incurred. b. reported as a reduction of t/e bond liability. c. debited to a deferred c/ar*e account and amorti$ed over t/e life of t/e bonds. d. any of t/ese.
3%.
T/e printin* costs and le*al fees associated 7it/ t/e issuance of bonds s/ould a. be e(pensed 7/en incurred. b. be reported as a deduction from t/e face amount of bonds payable. c. be accumulated in a deferred c/ar*e account and amorti$ed over t/e life of t/e bonds. d. not be reported as an e(pense until t/e period t/e bonds mature or are retired.
14 - 1@
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
3'.
Treasury bonds s/ould be s/o7n on t/e balance s/eet as a. an asset. b. a deduction from bonds payable issued to arrive at net bonds payable and outstandin*. c. a reduction of stock/olders: e9uity. d. bot/ an asset and a liability.
4).
#n early e(tin*uis/ment of bonds payable> 7/ic/ 7ere ori*inally issued at a premium> is made by purc/ase of t/e bonds bet7een interest dates. #t t/e time of reac9uisition a. any costs of issuin* t/e bonds must be amorti$ed up to t/e purc/ase date. b. t/e premium must be amorti$ed up to t/e purc/ase date. c. interest must be accrued from t/e last interest date to t/e purc/ase date. d. all of t/ese.
41.
T/e *enerally accepted met/od of accountin* for *ains or losses from t/e early e(tin*uis/ment of debt treats any *ain or loss as a. an ad?ustment to t/e cost basis of t/e asset obtained by t/e debt issue. b. an amount t/at s/ould be considered a cas/ ad?ustment to t/e cost of any ot/er debt issued over t/e remainin* life of t/e old debt instrument. c. an amount received or paid to obtain a ne7 debt instrument and> as suc/> s/ould be amorti$ed over t/e life of t/e ne7 debt. d. a difference bet7een t/e reac9uisition price and t/e net carryin* amount of t/e debt 7/ic/ s/ould be reco*ni$ed in t/e period of redemption.
42.
&n-substance defeasance is a term used to refer to an arran*ement 7/ereby a. a company *ets anot/er company to cover its payments due on lon*-term debt. b. a *overnmental unit issues debt instruments to corporations. c. a company provides for t/e future repayment of a lon*-term debt by placin* purc/ased securities in an irrevocable trust. d. a company le*ally e(tin*uis/es debt before its due date.
43.
# corporation borro7ed money from a bank to build a buildin*. T/e lon*-term note si*ned by t/e corporation is secured by a mort*a*e t/at pled*es title to t/e buildin* as security for t/e loan. T/e corporation is to pay t/e bank A%)>))) eac/ year for 1) years to repay t/e loan. E/ic/ of t/e follo7in* relations/ips can you e(pect to apply to t/e situationG a. T/e balance of mort*a*e payable at a *iven balance s/eet date 7ill be reported as a lon*-term liability. b. T/e balance of mort*a*e payable 7ill remain a constant amount over t/e 1)-year period. c. T/e amount of interest e(pense 7ill decrease eac/ period t/e loan is outstandin*> 7/ile t/e portion of t/e annual payment applied to t/e loan principal 7ill increase eac/ period. d. T/e amount of interest e(pense 7ill remain constant over t/e 1)-year period.
!
44.
# debt instrument 7it/ no ready market is e(c/an*ed for property 7/ose fair market value is currently indeterminable. E/en suc/ a transaction takes place a. t/e present value of t/e debt instrument must be appro(imated usin* an imputed interest rate. b. it s/ould not be recorded on t/e books of eit/er party until t/e fair market value of t/e property becomes evident. c. t/e board of directors of t/e entity receivin* t/e property s/ould estimate a value for t/e property t/at 7ill serve as a basis for t/e transaction. d. t/e directors of bot/ entities involved in t/e transaction s/ould ne*otiate a value to be assi*ned to t/e property.
,on*-Term ,iabilities
14 - 11
45.
E/en a note payable is issued for property> *oods> or services> t/e present value of t/e note is measured by a. t/e fair value of t/e property> *oods> or services. b. t/e market value of t/e note. c. usin* an imputed interest rate to discount all future payments on t/e note. d. any of t/ese.
4.
E/en a note payable is e(c/an*ed for property> *oods> or services> t/e stated interest rate is presumed to be fair unless a. no interest rate is stated. b. t/e stated interest rate is unreasonable. c. t/e stated face amount of t/e note is materially different from t/e current cas/ sales price for similar items or from current market value of t/e note. d. any of t/ese.
4".
Discount on ;otes ayable is c/ar*ed to interest e(pense a. e9ually over t/e life of t/e note. b. only in t/e year t/e note is issued. c. usin* t/e effective-interest met/od. d. only in t/e year t/e note matures.
4%.
E/ic/ of t/e follo7in* is an e(ample of off-balance-s/eet financin*G 1. ;on-consolidated subsidiary. 2. !pecial purpose entity. 3. peratin* leases. a. 1 b. 2 c. 3 d. #ll of t/ese are e(amples of off-balance-s/eet financin*.
!
4'.
E/en a business enterprise enters into 7/at is referred to as off-balance-s/eet financin*> t/e company a. is attemptin* to conceal t/e debt from s/are/olders by /avin* no information about t/e debt included in t/e balance s/eet. b. 7is/es to confine all information related to t/e debt to t/e income statement and t/e statement of cas/ flo7. c. can en/ance t/e 9uality of its financial position and per/aps permit credit to be obtained more readily and at less cost. d. is in violation of *enerally accepted accountin* principles.
!
5).
,on*-term debt t/at matures 7it/in one year and is to be converted into stock s/ould be reported a. as a current liability. b. in a special section bet7een liabilities and stock/oldersH e9uity. c. as noncurrent. d. as noncurrent and accompanied 7it/ a note e(plainin* t/e met/od to be used in its li9uidation.
14 - 12
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
51.
E/ic/ of t/e follo7in* must be disclosed relative to lon*-term debt maturities and sinkin* fund re9uirementsG a. T/e present value of future payments for sinkin* fund re9uirements and lon*-term debt maturities durin* eac/ of t/e ne(t five years. b. T/e present value of sc/eduled interest payments on lon*-term debt durin* eac/ of t/e ne(t five years. c. T/e amount of sc/eduled interest payments on lon*-term debt durin* eac/ of t/e ne(t five years. d. T/e amount of future payments for sinkin* fund re9uirements and lon*-term debt maturities durin* eac/ of t/e ne(t five years.
52.
;ote disclosures for lon*-term debt *enerally include all of t/e follo7in* except a. assets pled*ed as security. b. call provisions and conversion privile*es. c. restrictions imposed by t/e creditor. d. names of specific creditors.
53.
T/e times interest earned ratio is computed by dividin* a. net income by interest e(pense. b. income before ta(es by interest e(pense. c. income before income ta(es and interest e(pense by interest e(pense. d. net income and interest e(pense by interest e(pense.
54.
T/e debt to total assets ratio is computed by dividin* a. current liabilities by total assets. b. lon*-term liabilities by total assets. c. total liabilities by total assets. d. total assets by total liabilities.
055.
&n a troubled debt restructurin* in 7/ic/ t/e debt is continued 7it/ modified terms and t/e carryin* amount of t/e debt is less t/an t/e total future cas/ flo7s> a. a loss s/ould be reco*ni$ed by t/e debtor. b. a *ain s/ould be reco*ni$ed by t/e debtor. c. a ne7 effective-interest rate must be computed. d. no interest e(pense or revenue s/ould be reco*ni$ed in t/e future.
05.
# troubled debt restructurin* 7ill *enerally result in a a. loss by t/e debtor and a *ain by t/e creditor. b. loss by bot/ t/e debtor and t/e creditor. c. *ain by bot/ t/e debtor and t/e creditor. d. *ain by t/e debtor and a loss by t/e creditor.
05".
&n a troubled debt restructurin* in 7/ic/ t/e debt is settled by a transfer of assets 7it/ a fair market value less t/an t/e carryin* amount of t/e debt> t/e debtor 7ould reco*ni$e a. no *ain or loss on t/e settlement. b. a *ain on t/e settlement. c. a loss on t/e settlement. d. none of t/ese.
,on*-Term ,iabilities
14 - 13
05%.
&n a troubled debt restructurin* in 7/ic/ t/e debt is continued 7it/ modified terms> a *ain s/ould be reco*ni$ed at t/e date of restructure> but no interest e(pense s/ould be reco*ni$ed over t/e remainin* life of t/e debt> 7/enever t/e a. carryin* amount of t/e pre-restructure debt is less t/an t/e total future cas/ flo7s. b. carryin* amount of t/e pre-restructure debt is *reater t/an t/e total future cas/ flo7s. c. present value of t/e pre-restructure debt is less t/an t/e present value of t/e future cas/ flo7s. d. present value of t/e pre-restructure debt is *reater t/an t/e present value of t/e future cas/ flo7s.
05'.
&n a troubled debt restructurin* in 7/ic/ t/e debt is continued 7it/ modified terms and t/e carryin* amount of t/e debt is less t/an t/e total future cas/ flo7s> t/e creditor s/ould a. compute a ne7 effective-interest rate. b. not reco*ni$e a loss. c. calculate its loss usin* t/e /istorical effective rate of t/e loan. d. calculate its loss usin* t/e current effective rate of t/e loan.
Muti&e C"oi%e Ans*ers) Con%e&tua Ite
21. 22. 23. 24. 25. 2.
Ans'
a a b a d a
Ite
2". 2%. 2'. 3). 31. 32.
Ans'
d d d d b a
Ite
33. 34. 35. 3. 3". 3%.
Ans'
d d c d d c
Ite
3'. 4). 41. 42. 43. 44.
Ans'
Ite
b d d c c a
45. 4. 4". 4%. 4'. 5).
Ans'
d d c d c d
Ite
51. 52. 53. 54. 055. 05.
Ans'
Ite
Ans'
d d c c c d
05". 05%. 05'.
b b c
!olutions to t/ose Multiple 6/oice 9uestions for 7/ic/ t/e ans7er is Inone of t/ese.J 3).
multiply A5>))) by t/e table value for 2) periods and 4 from t/e present value of an annuity table.
M(LTIPLE CHOICE)Co&utationa @se t/e follo7in* information for 9uestions ) t/rou*/ 2< n anuary 1> 2)1)> llison 6o. issued ei*/t-year bonds 7it/ a face value of A1>)))>))) and a stated interest rate of > payable semiannually on une 3) and December 31. T/e bonds 7ere sold to yield %. Table values are< resent value of 1 for % periods at .......................................... resent value of 1 for % periods at %.......................................... resent value of 1 for 1 periods at 3........................................ resent value of 1 for 1 periods at 4........................................ resent value of annuity for % periods at ................................ resent value of annuity for % periods at %................................ resent value of annuity for 1 periods at 3.............................. resent value of annuity for 1 periods at 4..............................
.2" .54) .23 .534 .21) 5."4" 12.51 11.52
14 - 14
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
).
T/e present value of t/e principal is a. A534>))). b. A54)>))). c. A23>))). d. A2">))).
1.
T/e present value of t/e interest is a. A344>%2). b. A34'>5). c. A3"2>)). d. A3">%3).
2.
T/e issue price of t/e bonds is a. A%%3>5). b. A%%4>%2). c. A%%'>5). d. A'''>)).
3.
Do7nin* 6ompany issues A5>)))>)))> > 5-year bonds dated anuary 1> 2)1) on anuary 1> 2)1). T/e bonds pay interest semiannually on une 3) and December 31. T/e bonds are issued to yield 5. E/at are t/e proceeds from t/e bond issueG resent value of a sin*le sum for 5 periods resent value of a sin*le sum for 1) periods resent value of an annuity for 5 periods resent value of an annuity for 1) periods a. b. c. d.
2.5 .%%3%5 ."%12) 4.45%3 %."52)
3.) .%21 ."44)' 4.5"'"1 %.53)2)
5.) ."%353 .13'1 4.32'4% "."21"3
.) ."4"2 .55%3' 4.2123 ".3))'
A5>)))>))) A5>21>4'4 A5>21%>%)' A5>21">3)%
4. Feller 6ompany issues A2)>)))>))) of 1)-year> ' bonds on Marc/ 1> 2)1) at '" plus accrued interest. T/e bonds are dated anuary 1> 2)1)> and pay interest on une 3) and December 31. E/at is t/e total cas/ received on t/e issue dateG a. A1'>4))>))) b. A2)>45)>))) c. A1'>"))>))) d. A1'>1))>)))
,on*-Term ,iabilities
14 - 1:
5. ver/art 6ompany issues A1)>)))>)))> > 5-year bonds dated anuary 1> 2)1) on anuary 1> 2)1). T/e bonds pays interest semiannually on une 3) and December 31. T/e bonds are issued to yield 5. E/at are t/e proceeds from t/e bond issueG resent value of a sin*le sum for 5 periods resent value of a sin*le sum for 1) periods resent value of an annuity for 5 periods resent value of an annuity for 1) periods a. b. c. d.
2.5 .%%3%5 ."%12) 4.45%3 %."52)
3.) .%21 ."44)' 4.5"'"1 %.53)2)
5.) ."%353 .13'1 4.32'4% "."21"3
.) ."4"2 .55%3' 4.2123 ".3))'
A1)>)))>))) A1)>432>'%% A1)>43">1% A1)>434>1
.
Farmer 6ompany issues A1)>)))>))) of 1)-year> ' bonds on Marc/ 1> 2)1) at '" plus accrued interest. T/e bonds are dated anuary 1> 2)1)> and pay interest on une 3) and December 31. E/at is t/e total cas/ received on t/e issue dateG a. A'>"))>))) b. A1)>225>))) c. A'>%5)>))) d. A'>55)>)))
".
# company issues A2)>)))>)))> ".%> 2)-year bonds to yield % on anuary 1> 2)1). &nterest is paid on une 3) and December 31. T/e proceeds from t/e bonds are A1'>)4>145. @sin* effective-interest amorti$ation> /o7 muc/ interest e(pense 7ill be reco*ni$ed in 2)1)G a. A"%)>))) b. A1>5)>))) c. A1>5%>4'% d. A1>5%>332
%.
# company issues A2)>)))>)))> ".%> 2)-year bonds to yield % on anuary 1> 2)1). &nterest is paid on une 3) and December 31. T/e proceeds from t/e bonds are A1'>)4>145. @sin* effective-interest amorti$ation> 7/at 7ill t/e carryin* value of t/e bonds be on t/e December 31> 2)1) balance s/eetG a. A1'>12>43 b. A2)>)))>))) c. A1'>25>125 d. A1'>)%>31)
'.
# company issues A2)>)))>)))> ".%> 2)-year bonds to yield % on anuary 1> 2))'. &nterest is paid on une 3) and December 31. T/e proceeds from t/e bonds are A1'>)4>145. @sin* strai*/t-line amorti$ation> 7/at is t/e carryin* value of t/e bonds on December 31> 2)11G a. A1'>")>231 b. A1'>'4)>22 c. A1'>33>%34 d. A1'>3>523
14 - 1;
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
").
# company issues A2)>)))>)))> ".%> 2)-year bonds to yield % on anuary 1> 2)1). &nterest is paid on une 3) and December 31. T/e proceeds from t/e bonds are A1'>)4>145. E/at is interest e(pense for 2)11> usin* strai*/t-line amorti$ationG a. A1>54)>2)" b. A1>5)>))) c. A1>5'>1'2 d. A1>5"'>"'3
"1.
# company issues A5>)))>)))> ".%> 2)-year bonds to yield % on anuary 1> 2)1). &nterest is paid on une 3) and December 31. T/e proceeds from t/e bonds are A4>')1>)3. @sin* effective-interest amorti$ation> /o7 muc/ interest e(pense 7ill be reco*ni$ed in 2)1)G a. A1'5>))) b. A3')>))) c. A3'2>124 d. A3'2>)%3
"2.
# company issues A5>)))>)))> ".%> 2)-year bonds to yield % on anuary 1> 2)1). &nterest is paid on une 3) and December 31. T/e proceeds from t/e bonds are A4>')1>)3. @sin* effective-interest amorti$ation> 7/at 7ill t/e carryin* value of t/e bonds be on t/e December 31> 2)1) balance s/eetG a. A4>')3>1) b. A5>)))>))) c. A4>')>2%1 d. A4>')2>)""
"3.
# company issues A5>)))>)))> ".%> 2)-year bonds to yield % on anuary 1> 2))'. &nterest is paid on une 3) and December 31. T/e proceeds from t/e bonds are A4>')1>)3. @sin* strai*/t-line amorti$ation> 7/at is t/e carryin* value of t/e bonds on December 31> 2)11G a. A4>'1">55% b. A4>'%5>15 c. A4>')%>45% d. A4>'15>%%1
"4.
# company issues A5>)))>)))> ".%> 2)-year bonds to yield % on anuary 1> 2)1). &nterest is paid on une 3) and December 31. T/e proceeds from t/e bonds are A4>')1>)3. E/at is interest e(pense for 2)11> usin* strai*/t-line amorti$ationG a. A3%5>)52 b. A3')>))) c. A3'2>2'% d. A3'4>'4%
"5.
n anuary 1> 2)1)> Kuber 6o. sold 12 bonds 7it/ a face value of A))>))). T/e bonds mature in five years> and interest is paid semiannually on une 3) and December 31. T/e bonds 7ere sold for A4>2)) to yield 1). @sin* t/e effective-interest met/od of amorti$ation> interest e(pense for 2)1) is a. A)>))). b. A4>43. c. A4>2). d. A"2>))).
,on*-Term ,iabilities
14 - 1<
".
n anuary 2> 2)1)> a calendar-year corporation sold % bonds 7it/ a face value of A))>))). T/ese bonds mature in five years> and interest is paid semiannually on une 3) and December 31. T/e bonds 7ere sold for A553>)) to yield 1). @sin* t/e effectiveinterest met/od of computin* interest> /o7 muc/ s/ould be c/ar*ed to interest e(pense in 2)1)G a. A4%>))). b. A55>3). c. A55>544. d. A)>))). T"e $oo*in. in$oration a&&ies to !ot" questions << an# <=' n ctober 1> 2)1) Macklin 6orporation issued 5> 1)-year bonds 7it/ a face value of A1>)))>))) at 1)4. &nterest is paid on ctober 1 and #pril 1> 7it/ any premiums or discounts amorti$ed on a strai*/t-line basis. "".
T/e entry to record t/e issuance of t/e bonds 7ould include a credit of a. A25>))) to interest ayable. b. A4)>))) to Discount on Bonds ayable. c. A')>))) to Bonds ayable. d. A4)>))) to remium on Bonds ayable.
"%.
Bond interest e(pense reported on t/e December 31> 2)1) income statement of Macklin 6orporation 7ould be a. A11>5)) b. A12>5)) c. A13>5)) d. A23>)))
T"e $oo*in. in$oration a&&ies to !ot" questions an# =@' n ctober 1> 2)1) Bartley
6orporation issued 5> 1)-year bonds 7it/ a face value of A5))>))) at 1)4. &nterest is paid on ctober 1 and #pril 1> 7it/ any premiums or discounts amorti$ed on a strai*/t-line basis. "'.
T/e entry to record t/e issuance of t/e bonds 7ould include a a. credit of A12>5)) to interest ayable. b. credit of A2)>))) to remium on Bonds ayable. c. credit of A4%)>))) to Bonds ayable. d. debit of A2)>))) to Discount on Bonds ayable.
%).
Bond interest e(pense reported on t/e December 31> 2)1) income statement of Bartley 6orporation 7ould be a. A>"5) b. A11>5)) c. A5>"5) d. A>25)
%1.
#t t/e be*innin* of 2)1)> Eallace 6orporation issued 1) bonds 7it/ a face value of A'))>))). T/ese bonds mature in t/e five years> and interest is paid semiannually on une 3) and December 31. T/e bonds 7ere sold for %33>") to yield 12. Eallace uses a calendar-year reportin* period. @sin* t/e effective-interest met/od of amorti$ation> 7/at amount of interest e(pense s/ould be reported for 2)1)G C+ound your ans7er to t/e nearest dollar. a. A1)3>24% b. A1))>353 c. A1))>)5) d. A''>"5)
14 - 1=
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
%2.
n anuary 1> atterson &nc. issued A5>)))>)))> ' bonds for A4>'5>))). T/e market rate of interest for t/ese bonds is 1). &nterest is payable annually on December 31. atterson uses t/e effective-interest met/od of amorti$in* bond discount. #t t/e end of t/e first year> atterson s/ould report unamorti$ed bond discount of a. A2"4>5)). b. A2%5>5)). c. A25%>)5). d. A255>))).
%3.
n anuary 1> Martine$ &nc. issued A3>)))>)))> 11 bonds for A3>1'5>))). T/e market rate of interest for t/ese bonds is 1). &nterest is payable annually on December 31. Martine$ uses t/e effective-interest met/od of amorti$in* bond premium. #t t/e end of t/e first year> Martine$ s/ould report unamorti$ed bond premium of< a. A1%5>13) b. A1%4>5)) c. A1"3>55) d. A15>)))
%4.
#t t/e be*innin* of 2)1)> Einston 6orporation issued 1) bonds 7it/ a face value of A))>))). T/ese bonds mature in five years> and interest is paid semiannually on une 3) and December 31. T/e bonds 7ere sold for 555>%4) to yield 12. Einston uses a calendar-year reportin* period. @sin* t/e effective-interest met/od of amorti$ation> 7/at amount of interest e(pense s/ould be reported for 2)1)G C+ound your ans7er to t/e nearest dollar. a. A>5)) b. A>")) c. A>')1 d. A%>%32
%5.
Lant 6orporation retires its A1))>))) face value bonds at 1)2 on anuary 1> follo7in* t/e payment of interest. T/e carryin* value of t/e bonds at t/e redemption date is A'>25). T/e entry to record t/e redemption 7ill include a a. credit of A3>"5) to ,oss on Bond +edemption. b. credit of A3>"5) to Discount on Bonds ayable. c. debit of A5>"5) to ain on Bond +edemption. d. debit of A2>))) to remium on Bonds ayable.
%.
6arr 6orporation retires its A1))>))) face value bonds at 1)5 on anuary 1> follo7in* t/e payment of interest. T/e carryin* value of t/e bonds at t/e redemption date is A1)3>"45. T/e entry to record t/e redemption 7ill include a a. credit of A3>"45 to ,oss on Bond +edemption. b. debit of A3>"45 to remium on Bonds ayable. c. credit of A1>255 to ain on Bond +edemption. d. debit of A5>))) to remium on Bonds ayable.
%".
#t December 31> 2)1) t/e follo7in* balances e(isted on t/e books of Fo(7ort/ 6orporation< Bonds ayable A2>)))>))) Discount on Bonds ayable 1)>))) &nterest ayable 5)>))) @namorti$ed Bond &ssue 6osts 12)>)))
,on*-Term ,iabilities
14 - 1?
&f t/e bonds are retired on anuary 1> 2)11> at 1)2> 7/at 7ill Fo(7ort/ report as a loss on redemptionG a. A3")>))) b. A32)>))) c. A2")>))) d. A2))>))) %%.
#t December 31> 2)1) t/e follo7in* balances e(isted on t/e books of +entro 6orporation< Bonds ayable A1>5))>))) Discount on Bonds ayable 12)>))) &nterest ayable 3">))) @namorti$ed Bond &ssue 6osts ')>))) &f t/e bonds are retired on anuary 1> 2)11> at 1)2> 7/at 7ill +entro report as a loss on redemptionG a. A15)>))) b. A2)2>5)) c. A24)>))) d. A2"">5))
%'.
T/e December 31> 2)1)> balance s/eet of Kess 6orporation includes t/e follo7in* items< ' bonds payable due December 31> 2)1' @namorti$ed premium on bonds payable
A1>)))>))) 2">)))
T/e bonds 7ere issued on December 31> 2))'> at 1)3> 7it/ interest payable on uly 1 and December 31 of eac/ year. Kess uses strai*/t-line amorti$ation. n Marc/ 1> 2)11> Kess retired A4))>))) of t/ese bonds at '% plus accrued interest. E/at s/ould Kess record as a *ain on retirement of t/ese bondsG &*nore ta(es. a. A1%>%)). b. A1)>%)). c. A1%>)). d. A2)>))). ').
n anuary 1> 2))4> Kernande$ 6orporation issued A4>5))>))) of 1) ten-year bonds at 1)3. T/e bonds are callable at t/e option of Kernande$ at 1)5. Kernande$ /as recorded amorti$ation of t/e bond premium on t/e strai*/t-line met/od C7/ic/ 7as not materially different from t/e effective-interest met/od. n December 31> 2)1)> 7/en t/e fair market value of t/e bonds 7as '> Kernande$ repurc/ased A1>)))>))) of t/e bonds in t/e open market at '. Kernande$ /as recorded interest and amorti$ation for 2)1). &*norin* income ta(es and assumin* t/at t/e *ain is material> Kernande$ s/ould report t/is reac9uisition as a. a loss of A4'>))). b. a *ain of A4'>))). c. a loss of A1>))). d. a *ain of A1>))).
14 - 2@
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
'1.
T/e 1) bonds payable of ;i(on 6ompany /ad a net carryin* amount of A5")>))) on December 31> 2)1). T/e bonds> 7/ic/ /ad a face value of A))>)))> 7ere issued at a discount to yield 12. T/e amorti$ation of t/e bond discount 7as recorded under t/e effective-interest met/od. &nterest 7as paid on anuary 1 and uly 1 of eac/ year. n uly 2> 2)11> several years before t/eir maturity> ;i(on retired t/e bonds at 1)2. T/e interest payment on uly 1> 2)11 7as made as sc/eduled. E/at is t/e loss t/at ;i(on s/ould record on t/e early retirement of t/e bonds on uly 2> 2)11G &*nore ta(es. a. A12>))). b. A3">%)). c. A33>)). d. A42>))).
'2.
# corporation called an outstandin* bond obli*ation four years before maturity. #t t/at time t/ere 7as an unamorti$ed discount of A3))>))). To e(tin*uis/ t/is debt> t/e company /ad to pay a call premium of A1))>))). Ignoring income tax considerations > /o7 s/ould t/ese amounts be treated for accountin* purposesG a. #morti$e A4))>))) over four years. b. 6/ar*e A4))>))) to a loss in t/e year of e(tin*uis/ment. c. 6/ar*e A1))>))) to a loss in t/e year of e(tin*uis/ment and amorti$e A3))>))) over four years. d. it/er amorti$e A4))>))) over four years or c/ar*e A4))>))) to a loss immediately> 7/ic/ever mana*ement selects.
'3.
T/e 12 bonds payable of ;yman 6o. /ad a carryin* amount of A%32>))) on December 31> 2)1). T/e bonds> 7/ic/ /ad a face value of A%))>)))> 7ere issued at a premium to yield 1). ;yman uses t/e effective-interest met/od of amorti$ation. &nterest is paid on une 3) and December 31. n une 3)> 2)11> several years before t/eir maturity> ;yman retired t/e bonds at 1)4 plus accrued interest. T/e loss on retirement> i*norin* ta(es> is a. A). b. A>4)). c. A'>'2). d. A32>))).
'4.
Didde 6ompany issues A1)>)))>))) face value of bonds at ' on anuary 1> 2))'. T/e bonds are dated anuary 1> 2))'> pay interest semiannually at % on une 3) and December 31> and mature in 1) years. !trai*/t-line amorti$ation is used for discounts and premiums. n !eptember 1> 2)12> A>)))>))) of t/e bonds are called at 1)2 plus accrued interest. E/at *ain or loss 7ould be reco*ni$ed on t/e called bonds on !eptember 1> 2)12G a. A))>))) loss b. A2"2>))) loss c. A3)>))) loss d. A453>333 loss
,on*-Term ,iabilities
14 - 21
'5.
6orte$ 6ompany issues A5>)))>))) face value of bonds at ' on anuary 1> 2))'. T/e bonds are dated anuary 1> 2))'> pay interest semiannually at % on une 3) and December 31> and mature in 1) years. !trai*/t-line amorti$ation is used for discounts and premiums. n !eptember 1> 2)12> A3>)))>))) of t/e bonds are called at 1)2 plus accrued interest. E/at *ain or loss 7ould be reco*ni$ed on t/e called bonds on !eptember 1> 2)12G a. A3))>))) loss b. A13>))) loss c. A1%)>))) loss d. A22>" loss
'.
n anuary 1> 2)1)> #nn rice loaned A45>)"% to oe Li*er. # $ero-interest-bearin* note Cface amount> A)>))) 7as e(c/an*ed solely for cas/ no ot/er ri*/ts or privile*es 7ere e(c/an*ed. T/e note is to be repaid on December 31> 2)12. T/e prevailin* rate of interest for a loan of t/is type is 1). T/e present value of A)>))) at 1) for t/ree years is A45>)"%. E/at amount of interest income s/ould Ms. rice reco*ni$e in 2)1)G a. A4>5)%. b. A>))). c. A1%>))). d. A13>524.
'".
n anuary 1> 2)1)> acobs 6ompany sold property to Dains 6ompany 7/ic/ ori*inally cost acobs A")>))). T/ere 7as no establis/ed e(c/an*e price for t/is property. Danis *ave acobs a A1>2))>))) $ero-interest-bearin* note payable in t/ree e9ual annual installments of A4))>))) 7it/ t/e first payment due December 31> 2)1). T/e note /as no ready market. T/e prevailin* rate of interest for a note of t/is type is 1). T/e present value of a A1>2))>))) note payable in t/ree e9ual annual installments of A4))>))) at a 1) rate of interest is A''4>%)). E/at is t/e amount of interest income t/at s/ould be reco*ni$ed by acobs in 2)1)> usin* t/e effective-interest met/odG a. A). b. A4)>))). c. A''>4%). d. A12)>))).
'%.
n anuary 1> 2)1)> 6ro7n 6ompany sold property to ,eary 6ompany. T/ere 7as no establis/ed e(c/an*e price for t/e property> and ,eary *ave 6ro7n a A2>)))>))) $erointerest-bearin* note payable in 5 e9ual annual installments of A4))>)))> 7it/ t/e first payment due December 31> 2)1). T/e prevailin* rate of interest for a note of t/is type is '. T/e present value of t/e note at ' 7as A1>442>))) at anuary 1> 2)1). E/at s/ould be t/e balance of t/e Discount on ;otes ayable account on t/e books of ,eary at December 31> 2)1) after ad?ustin* entries are made> assumin* t/at t/e effective-interest met/od is usedG a. A) b. A42%>22) c. A44>4)) d. A55%>)))
14 - 22
''.
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
utnam 6ompanyHs 2)1) financial statements contain t/e follo7in* selected data< &ncome ta(es &nterest e(pense ;et income
A4)>))) 2)>))) )>)))
utnamHs times interest earned for 2)1) is a. 3 times b. 4 times. c. 5 times. d. times. 1)).
&n t/e recent year Kill 6orporation /ad net income of A14)>)))> interest e(pense of A4)>)))> and ta( e(pense of A2)>))). E/at 7as Kill 6orporation:s times interest earned ratio for t/e yearG a. 5.) b. 4.) c. 3.5 d. 3.)
1)1.
&n recent year 6ey 6orporation /ad net income of A25)>)))> interest e(pense of A5)>)))> and a times interest earned ratio of '. E/at 7as 6ey 6orporation:s income before ta(es for t/e yearG a. A5))>))) b. A45)>))) c. A4))>))) d. ;one of t/e above.
1)2.
T/e ad?usted trial balance for ,ifesaver 6orp. at t/e end of t/e current year> 2)1)> contained t/e follo7in* accounts. 5-year Bonds ayable % A1>5))>))) Bond &nterest ayable 5)>))) remium on Bonds ayable 1))>))) ;otes ayable C3 mo. 4)>))) ;otes ayable C5 yr. 15>))) Mort*a*e ayable CA15>))) due currently 2))>))) !alaries ayable 1%>))) Ta(es ayable Cdue 315 of 2)11 25>))) T/e total lon*-term liabilities reported on t/e balance s/eet are a. A1>%5>))). b. A1>%5)>))). c. A1>'5>))). d. A1>'5)>))).
@se t/e follo7in* information for 9uestions 01)3 t/rou*/ 01)5< n December 31> 2))%> ;olte 6o. is in financial difficulty and cannot pay a note due t/at day. &t is a A))>))) note 7it/ A)>))) accrued interest payable to iper> &nc. iper a*rees to accept from ;olte e9uipment t/at /as a fair value of A2')>)))> an ori*inal cost of A4%)>)))> and accumulated depreciation of A23)>))). iper also for*ives t/e accrued interest> e(tends t/e maturity date to December 31> 2)11> reduces t/e face amount of t/e note to A25)>)))> and reduces t/e interest rate to > 7it/ interest payable at t/e end of eac/ year.
,on*-Term ,iabilities
14 - 23
01)3. ;olte s/ould reco*ni$e a *ain or loss on t/e transfer of t/e e9uipment of a. A). b. A4)>))) *ain. c. A)>))) *ain. d. A1')>))) loss. 01)4. ;olte s/ould reco*ni$e a *ain on t/e partial settlement and restructure of t/e debt of a. A). b. A15>))). c. A55>))). d. A"5>))). 01)5. ;olte s/ould record interest e(pense for 2)11 of a. A). b. A15>))). c. A3)>))). d. A45>))).
Muti&e C"oi%e Ans*ers) Co&utationa Ite
Ans'
Ite
Ans'
Ite
Ans'
Ite
Ans'
Ite
Ans'
Ite
Ans'
Ite
Ans'
). 1. 2. 3. 4. 5. .
a b a c c c c
". %. '. "). "1. "2. "3.
c a d d c a d
"4. "5. ". "". "%. "'. %).
d b c d a b c
%1. %2. %3. %4. %5. %. %".
b b b c b b b
%%. %'. '). '1. '2. '3. '4.
c c b b b b b
'5. '. '". '%. ''. 1)). 1)1.
b a c b d a c
1)2. 01)3. 01)4. 01)5.
d b d a
M(LTIPLE CHOICE)CPA A#a&te# 1).
n uly 1> 2)1)> !pear 6o. issued 1>))) of its 1)> A1>))) bonds at '' plus accrued interest. T/e bonds are dated #pril 1> 2)1) and mature on #pril 1> 2)2). &nterest is payable semiannually on #pril 1 and ctober 1. E/at amount did !pear receive from t/e bond issuanceG a. A1>)15>))) b. A1>)))>))) c. A'')>))) d. A'5>)))
14 - 24
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
1)".
n anuary 1> 2)1)> !olis 6o. issued its 1) bonds in t/e face amount of A3>)))>)))> 7/ic/ mature on anuary 1> 2)2). T/e bonds 7ere issued for A3>4)5>))) to yield %> resultin* in bond premium of A4)5>))). !olis uses t/e effective-interest met/od of amorti$in* bond premium. &nterest is payable annually on December 31. #t December 31> 2)1)> !olis:s ad?usted unamorti$ed bond premium s/ould be a. A4)5>))). b. A3"">4)). c. A34>5)). d. A3)4>5)).
1)%.
n uly 1> 2))'> ;oble> &nc. issued ' bonds in t/e face amount of A5>)))>)))> 7/ic/ mature on uly 1> 2)15. T/e bonds 7ere issued for A4>'5>))) to yield 1)> resultin* in a bond discount of A3)5>))). ;oble uses t/e effective-interest met/od of amorti$in* bond discount. &nterest is payable annually on une 3). #t une 3)> 2)11> ;oble:s unamorti$ed bond discount s/ould be a. A24>)5). b. A255>))). c. A244>))). d. A215>))).
1)'.
n anuary 1> 2)1)> Kuff 6o. sold A1>)))>))) of its 1) bonds for A%%5>2' to yield 12. &nterest is payable semiannually on anuary 1 and uly 1. E/at amount s/ould Kuff report as interest e(pense for t/e si( mont/s ended une 3)> 2)1)G a. A44>2 b. A5)>))) c. A53>11% d. A)>)))
11).
n anuary 1> 2)11> Doty 6o. redeemed its 15-year bonds of A2>5))>))) par value for 1)2. T/ey 7ere ori*inally issued on anuary 1> 1''' at '% 7it/ a maturity date of anuary 1> 2)14. T/e bond issue costs relatin* to t/is transaction 7ere A15)>))). Doty amorti$es discounts> premiums> and bond issue costs usin* t/e strai*/t-line met/od. E/at amount of loss s/ould Doty reco*ni$e on t/e redemption of t/ese bonds Ci*nore ta(esG a. A')>))) b. A)>))) c. A5)>))) d. A)
111.
n its December 31> 2)1) balance s/eet> mi* 6orp. reported bonds payable of A>)))>))) and related unamorti$ed bond issue costs of A32)>))). T/e bonds /ad been issued at par. n anuary 2> 2)11> mi* retired A3>)))>))) of t/e outstandin* bonds at par plus a call premium of A")>))). E/at amount s/ould mi* report in its 2)11 income statement as loss on e(tin*uis/ment of debt Ci*nore ta(esG a. A) b. A")>))) c. A1)>))) d. A23)>)))
,on*-Term ,iabilities
14 - 2:
112.
n anuary 1> 2))> oll 6orp. issued 1>))) of its 1)> A1>))) bonds for A1>)4)>))). T/ese bonds 7ere to mature on anuary 1> 2)1 but 7ere callable at 1)1 any time after December 31> 2))'. &nterest 7as payable semiannually on uly 1 and anuary 1. n uly 1> 2)11> oll called all of t/e bonds and retired t/em. Bond premium 7as amorti$ed on a strai*/t-line basis. Before income ta(es> oll:s *ain or loss in 2)11 on t/is early e(tin*uis/ment of debt 7as a. A3)>))) *ain. b. A12>))) *ain. c. A1)>))) loss. d. A%>))) *ain.
113.
n une 3)> 2)11> mara 6o. /ad outstandin* %> A3>)))>))) face amount> 15-year bonds maturin* on une 3)> 2)21. &nterest is payable on une 3) and December 31. T/e unamorti$ed balances in t/e bond discount and deferred bond issue costs accounts on une 3)> 2)11 7ere A1)5>))) and A3)>)))> respectively. n une 3)> 2)11> mara ac9uired all of t/ese bonds at '4 and retired t/em. E/at net carryin* amount s/ould be used in computin* *ain or loss on t/is early e(tin*uis/ment of debtG a. A2>'")>))). b. A2>%'5>))). c. A2>%5>))). d. A2>%2)>))).
114.
# ten-year bond 7as issued in 2))' at a discount 7it/ a call provision to retire t/e bonds. E/en t/e bond issuer e(ercised t/e call provision on an interest date in 2)11> t/e carryin* amount of t/e bond 7as less t/an t/e call price. T/e amount of bond liability removed from t/e accounts in 2)11 s/ould /ave e9ualed t/e a. call price. b. call price less unamorti$ed discount. c. face amount less unamorti$ed discount. d. face amount plus unamorti$ed discount.
115.
ai*e 6o. took advanta*e of market conditions to refund debt. T/is 7as t/e fourt/ refundin* operation carried out by ai*e 7it/in t/e last t/ree years. T/e e(cess of t/e carryin* amount of t/e old debt over t/e amount paid to e(tin*uis/ it s/ould be reported as a a. *ain> net of income ta(es. b. loss> net of income ta(es. c. part of continuin* operations. d. deferred credit to be amorti$ed over t/e life of t/e ne7 debt.
011. ddy 6o. is indebted to 6ole under a A4))>)))> 12> t/ree-year note dated December 31> 2))'. Because of ddy:s financial difficulties developin* in 2)11> ddy o7ed accrued interest of A4%>))) on t/e note at December 31> 2)11. @nder a troubled debt restructurin*> on December 31> 2)11> 6ole a*reed to settle t/e note and accrued interest for a tract of land /avin* a fair value of A3)>))). ddy:s ac9uisition cost of t/e land is A2')>))). &*norin* income ta(es> on its 2)11 income statement ddy s/ould report as a result of t/e troubled debt restructurin* ain on Disposal +estructurin* ain a. A15%>))) A) b. A11)>))) A) c. A")>))) A4)>))) d. A")>))) A%%>)))
14 - 2;
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
Muti&e C"oi%e Ans*ers) CPA A#a&te# Ite
Ans'
Ite
Ans'
Ite
Ans'
Ite
Ans'
Ite
Ans'
Ite
Ans'
1). 1)".
a b
1)%. 1)'.
a c
11). 111.
a d
112. 113.
d c
114. 115.
c c
011.
d
+ERI6ATIONS ) Co&utationa No' Ans*er +erivation ). a A1>)))>))) N .534 = A534>))). 1.
b
CA1>)))>))) N .)3 N 11.52 = A34'>5).
2.
a
A534>))) O A34'>5) = A%%3>5).
3.
c
CA5>)))>))) N ."%12) O CA15)>))) N %."52) = A5>21%>%)'.
4.
c
CA2)>)))>))) N .'" O CA1>%))>))) N 212 = A1'>"))>))).
5.
c
CA1)>)))>))) N ."%12) O CA3))>))) N %."52) = A1)>43">1%.
.
c
CA1)>)))>))) N .'" O CA'))>))) N 212 = A'>%5)>))).
".
c
CA1'>)4>145 N .)4 O CA1'>)%>31) N .)4 = A1>5%>4'%.
%.
a
A1'>)4>145 O PCA1'>)4>145 N .)4 Q A"%)>)))R O PA1'>)%>31) N .)4 Q A"%)>)))R = A1'>12>43.
'.
d
A1'>)4>145 O CA3'5>%55 N 32) = A1'>3>523.
").
d
CA2)>)))>))) N .)"% O CA3'5>%55 S 2) = A1>5"'>"'3.
"1.
c
CA4>')1>)3 N .)4 O CA4>')2>)"" N .)4 = A3'2>124.
"2.
a
A4>')1>)3 O PCA4>')1>)3 N .)4 Q A1'5>)))R O PCA4>')2>)"" N .)4 Q A1'5>)))R = A4>')3>1).
"3.
d
A4>')1>)3 O CA'%>'4 N 32) = A4>'15>%%1.
"4.
d
CA5>)))>))) N .)"% O CA'%>'4 S 2) = A3'4>'4%.
"5.
b
A4>2)) N .)5 PA4>2)) Q CA3>))) Q A32>31)R N .)5
= A32>31) = 32>12 A4>43
".
c
A553>)) N .)5 PA553>)) O CA2">%) Q A24>)))R N .)5
= A2">%) = 2">%4 A55>544
,on*-Term ,iabilities
14 - 2<
+ERI6ATIONS ) Co&utationa 0%ont' No' Ans*er "". d
+erivation CA1>)))>))) N 1.)4 Q A1>)))>))) = A4)>))) premium.
"%.
a
PCA1>)))>))) N .)5 N 312R Q PCA4)>))) S 1) N 312R = A11>5)).
"'.
b
CA5))>))) N 1.)4 Q A5))>))) = A2)>))) premium.
%).
c
PCA5))>))) N .)5 N 312R Q PCA2)>))) S 1) N 312R = A5>"5).
%1.
b
CA%33>") N .) = A5)>)2 PA5)>)2 Q CA'))>))) N .)5R = A5>)2 CA%33>") O A5>)2 N .) = A5)>32" A5)>)2 O A5)>32" = A1))>353.
%2.
b
CA4>'5>))) N .1) Q CA5>)))>))) N .)' = A1'>5)) CA5>)))>))) Q A4>'5>))) Q A1'>5)) = A2%5>5)).
%3.
b
CA3>)))>))) N .11 Q CA3>1'5>))) N .1) = A1)>5)) CA3>1'5>))) Q A3>)))>))) Q A1)>5)) = A1%4>5)).
%4.
c
CA555>%4) N .) = A33>35) PA33>35) Q CA))>))) N .)5R = A3>35) CA555>%4) O A3>35) N .) = A33>551 A33>35) O A33>551 = A>')1.
%5.
b
A1))>))) Q A'>25) = A3>"5) discount.
%.
b
A1)3>"45 Q A1))>))) = A3>"45 premium.
%".
b
CA2>)))>))) N 1.)2 Q CA2>)))>))) Q A1)>))) Q A12)>))) = A32)>))).
%%.
c
CA1>5))>))) N 1.)2 Q CA1>5))>))) Q A12)>))) Q A')>))) = A24)>))).
%'.
c
A27> 000 2 × ÷ A1>027> 000 − 6 18
× .4 = A41)>)) C68 of retired bonds
A41)>)) Q CA4))>))) N .'% = A1%>)).
A135>))) × " × 2' 4>500>000 (1.)3 − A = A1>))'>))) C68 of retired bonds ÷ 1) A1>))'>))) Q CA1>)))>))) × .' = A4'>))).
').
b
'1.
b
A5")>))) O PCA5")>))) N .) Q CA))>))) N .)5R = A5"4>2)) C68 of bonds A5"4>2)) Q CA))>))) N 1.)2 = A3">%)).
'2.
b
A3))>))) O A1))>))) = A4))>))).
'3.
b
A%32>))) Q PCA%))>))) N .) Q CA%32>))) N .)5R = A%25>)) C68 of bonds CA%))>))) N 1.)4 Q A%25>)) = A>4)).
14 - 2=
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
,on*-Term ,iabilities
14 - 2?
+ERI6ATIONS ) Co&utationa 0%ont' No' Ans*er '4. b
+erivation A'>))>))) O PA4))>))) N C3 23 S 1)RU N .) = A5>%4%>))) A>12)>))) Q A5>%4%>))) = A2"2>))).
'5.
b
A4>%))>))) O PA2))>))) N C3 23 S 1)RU N .) = A2>'24>))) A3>))>))) Q A2>'24>))) = A13>))).
'.
a
A45>)"% N .1) = A4>5)%.
'".
c
A''4>%)) N .1) = A''>4%).
'%.
b
A2>)))>))) Q A1>442>))) Q CA1>442>))) N .)' = A42%>22).
''.
d
A)>))) O A4)>))) O A2)>))) VVVVVVVVVVVVV = times. A2)>)))
1)).
a
CA14)>))) O A4)>))) O A2)>))) S A4)>))) = 5.).
1)1.
c
CA25)>))) O A5)>))) O W S A5)>))) = ' CA3))>))) O W = ' N A5)>))) W = A15)>))) &BT = A4))>))) CA25)>))) O A15)>))).
1)2.
d
A1>5))>))) O A1))>))) O A15>))) O CA2))>))) Q A15>))) = A1>'5)>))).
01)3.
b
A2')>))) Q CA4%)>))) Q A23)>))) = A4)>))).
01)4.
d
CA))>))) O A)>))) Q PA2')>))) O A25)>))) O CA25)>))) N .) N 3R = A"5>))).
01)5.
a
). T/e effective-interest rate is ).
+ERI6ATIONS ) CPA A#a&te# No' Ans*er 1). a
+erivation CA1>)))>))) N .'' O CA1>)))>))) N .1) N 312 = A1>)15>))).
1)".
b
A4)5>))) Q PCA3>)))>))) N .1) Q CA3>4)5>))) N .)%R = A3"">4)).
1)%.
a
2))'Q2)1)
'5>))) O PCA4>'5>))) N .1 Q CA5>)))>))) N .)'R = A4>"14>5)). 2)1)Q2)11"14>5)) O CA4"1>45) Q A45)>))) = A4>"35>'5) A5>)))>))) Q A4>"35>'5) = A24>)5).
1)'.
c
A%%5>2' N .) = A53>11%.
11).
a
A200> 000 × 12 ÷ = A')>))). CA2>5))>))) N 1.)2 Q A2>300>000 + 15
14 - 3@
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
+ERI6ATIONS ) CPA A#a&te# 0%ont' No' Ans*er 111. d
+erivation CA3>)))>))) O A")>))) Q PCA>)))>))) Q A32)>))) N 12R = A23)>))).
112.
d
A40> 000 × 11÷ Q CA1>)))>))) N 1.)1 = A%>))). A1> 040> 000 − 20
113.
c
A3>)))>))) Q CA1)5>))) O A3)>))) = A2>%5>))).
114.
c
6onceptual.
115.
c
6onceptual.
011.
d
A3)>))) Q A2')>))) = A")>))) CA4))>))) O A4%>))) Q A3)>))) = A%%>))).
EERCISES E' 14-11< VTerms related to lon*-term debt.
lace t/e letter of t/e best matc/in* p/rase before eac/ 7ord. XXXXX 1. &ndenture
XXXXX . Times &nterest arned +atio
XXXXX 2. Treasury Bonds
XXXXX ". Mort*a*e
XXXXX 3. Bonds &ssued at ar
XXXXX %. remium on Bonds
XXXXX 4. 6arryin* 8alue
XXXXX '. +eac9uisition rice
XXXXX 5. ;ominal +ate
XXXXX 1). Market +ate
a. +e9uires t/at bond discount be reported in t/e balance s/eet as a direct deduction from t/e face of t/e bond. b. +ate set by party issuin* t/e bonds 7/ic/ appears on t/e bond instrument. c. T/e interest paid eac/ period is t/e effective interest at date of issuance. d. +ate of interest actually earned by t/e bond/olders. e. +esults 7/en bonds are sold belo7 par. f.
+esults 7/en bonds are sold above par.
*. Bonds payable reac9uired by t/e issuin* corporation t/at /ave not been canceled. /. rice paid by issuin* corporation for its o7n bonds. i.
Book value of bonds at any *iven date.
?.
+atio of current assets to current liabilities.
k. T/e bond contract or a*reement. l.
&ndicates t/e companyHs ability to meet interest payments as t/ey come due.
,on*-Term ,iabilities
14 - 31
E' 14-11< C6ont.
m. +atio of debt to e9uity. n. (clusive ri*/t to manufacture a product. o. # document t/at pled*es title to property as security for a loan.
Soution 14-11<
1. k 2. *
3. 4.
c i
5.
b l
". %
o f
'. 1).
/ d
E' 14-11= VBond issue price and premium amorti$ation.
n anuary 1> 2)11> iper 6o. issued ten-year bonds 7it/ a face value of A1>)))>))) and a stated interest rate of 1)> payable semiannually on une 3) and December 31. T/e bonds 7ere sold to yield 12. Table values are< resent value of 1 for 1) periods at 1) .................................. .3% resent value of 1 for 1) periods at 12 .................................. .322 resent value of 1 for 2) periods at 5 .................................... .3"" resent value of 1 for 2) periods at .................................... .312 resent value of annuity for 1) periods at 1) ........................ .145 resent value of annuity for 1) periods at 12 ........................ 5.5) resent value of annuity for 2) periods at 5 .......................... 12.42 resent value of annuity for 2) periods at .......................... 11.4") Instru%tions
Ca 6alculate t/e issue price of t/e bonds. Cb Eit/out pre?udice to your solution in part Ca> assume t/at t/e issue price 7as A%%4>))). repare t/e amorti$ation table for 2)11> assumin* t/at amorti$ation is recorded on interest payment dates.
Soution 14-11=
Ca .312 N A1>)))>))) = 11.4") N A5)>))) = Cb Date 1111 3)11 123111
A312>))) 5"3>5)) A%%5>5))
6as/
(pense
#morti$ation
A5)>))) 5)>)))
A53>)4) 53>222
3>)4) 3>222
6arryin* #mount A%%4>))) %%">)4) %')>22
14 - 32
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
E' 14-11? V#morti$ation of discount or premium.
rider &ndustries> &nc. issued A>)))>))) of % debentures on May 1> 2)1) and received cas/ totalin* A5>323>5"". T/e bonds pay interest semiannually on May 1 and ;ovember 1. T/e maturity date on t/ese bonds is ;ovember 1> 2)1%. T/e firm uses t/e effective-interest met/od of amorti$in* discounts and premiums. T/e bonds 7ere sold to yield an effective-interest rate of 1). Instru%tions
6alculate t/e total dollar amount of discount or premium amorti$ation durin* t/e first year C511) t/rou*/ 43)11 t/ese bonds 7ere outstandin*. C!/o7 computations and round to t/e nearest dollar. Soution 14-11?
Date 511) 1111) 5111
&nterest (pense
6as/ &nterest
Discount #morti$ed
A2>1"' 2">4%%
A24)>))) 24)>)))
A2>1"' 2">4%% A53>"
Total
6arryin* 8alue of Bonds A5>323>5"" 5>34'>"5 5>3"">244
E' 14-12@ Vntries for Bonds ayable.
repare ?ournal entries to record t/e follo7in* transactions related to lon*-term bonds of Yuirk 6o. Ca n #pril 1> 2))'> Yuirk issued A5))>)))> ' bonds for A53">%% includin* accrued interest. &nterest is payable annually on anuary 1> and t/e bonds mature on anuary 1> 2)1'. Cb n uly 1> 2)11 Yuirk retired A15)>))) of t/e bonds at 1)2 plus accrued interest. Yuirk uses strai*/t-line amorti$ation.
Soution 14-12@
Ca 6as/.............................................................................................. Bonds ayable..................................................................... &nterest (pense CA5))>))) N ' N 312............................ remium on Bonds ayable................................................ Cb &nterest (pense............................................................................ remium on Bonds ayable CA2>1% N .3 N 11"....................... 6as/ CA15)>))) N ' N 12..............................................
53">%% 5))>))) 11>25) 2>1% >34) 41)
Bonds ayable............................................................................... 15)>))) remium on Bonds ayable CA2>1% N .3 N ')11"..................... >142 6as/.................................................................................... ain on +edemption of Bonds.............................................
>"5)
153>))) 3>142
,on*-Term ,iabilities
14 - 33
E' 14-121 V+etirement of bonds.
repare ?ournal entries to record t/e follo7in* retirement. C!/o7 computations and round to t/e nearest dollar. T/e December 31> 2)1) balance s/eet of Eolfe 6o. included t/e follo7in* items< ".5 bonds payable due December 31> 2)1% @namorti$ed discount on bonds payable
A1>2))>))) 4%>)))
T/e bonds 7ere issued on December 31> 2))% at '5> 7it/ interest payable on une 3) and December 31. C@se strai*/t-line amorti$ation. n #pril 1> 2)11> Eolfe retired A24)>))) of t/ese bonds at 1)1 plus accrued interest. Soution 14-121
&nterest (pense............................................................................. 6as/ CA24)>))) N ".5 N 312........................................... Discount on Bonds ayable CA4%>))) N 15 N 1% N 312....
4>%))
Bonds ayable................................................................................ 24)>))) ,oss on +edemption of Bonds........................................................ 11>")) Discount on Bonds ayable PC15 N A4%>))) Q A3))R.......... 6as/....................................................................................
4>5)) 3))
'>3)) 242>4))
E' 14-122 Varly e(tin*uis/ment of debt.
Kurst> &ncorporated sold its % bonds 7it/ a maturity value of A3>)))>))) on #u*ust 1> 2))' for A2>'4>))). #t t/e time of t/e sale t/e bonds /ad 5 years until t/ey reac/ed maturity. &nterest on t/e bonds is payable semiannually on #u*ust 1 and February 1. T/e bonds are callable at 1)4 at any time after #u*ust 1> 2)11. By ctober 1> 2)11> t/e market rate of interest /as declined and t/e market price of Kurst:s bonds /as risen to a price of 1)1. T/e firm decides to refund t/e bonds by sellin* a ne7 bond issue to mature in 5 years. Kurst be*ins to reac9uire its % bonds in t/e market and is able to purc/ase A5))>))) 7ort/ at 1)1. T/e remainder of t/e outstandin* bonds is reac9uired by e(ercisin* t/e bonds: call feature. &n t/e final analysis> /o7 muc/ 7as t/e *ain or loss e(perienced by Kurst in reac9uirin* its % bondsG C#ssume t/e firm used strai*/t-line amorti$ation. !/o7 calculations. Soution 14-122
+eac9uisition price< A5))>))) N 1.)1 = A2>5))>))) N 1.)4 = ,ess net carryin* amount< A2>'4>))) O CA54>))) N 2) = ,oss on early e(tin*uis/ment
A 5)5>))) 2>))>)))
A3>1)5>))) 2>''>4)) A 135>))
14 - 34
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
>E' 14-123 V#ccountin* for a troubled debt settlement.
Mann> &nc.> 7/ic/ o7es Doran 6o. A))>))) in notes payable 7it/ accrued interest of A54>)))> is in financial difficulty. To settle t/e debt> Doran a*rees to accept from Mann e9uipment 7it/ a fair value of A5")>)))> an ori*inal cost of A%4)>)))> and accumulated depreciation of A1'5>))). Instru%tions
Ca 6ompute t/e *ain or loss to Mann on t/e settlement of t/e debt. Cb 6ompute t/e *ain or loss to Mann on t/e transfer of t/e e9uipment. Cc repare t/e ?ournal entry on Mann :s books to record t/e settlement of t/is debt. Cd repare t/e ?ournal entry on Doran:s books to record t/e settlement of t/e receivable.
>Soution 14-123
Ca ;ote payable &nterest payable 6arryin* amount of debt Fair value of e9uipment ain on settlement of debt
A))>))) 54>))) 54>))) 5")>))) A %4>)))
Cb 6ost #ccumulated depreciation Book value Fair value of plant assets ,oss on disposal of e9uipment
A%4)>))) 1'5>))) 45>))) 5")>))) A "5>)))
Cc ;otes ayable............................................................................... &nterest ayable............................................................................. #ccumulated Depreciation............................................................. ,oss on Disposal of 9uipment...................................................... 9uipment.......................................................................... ain on !ettlement of Debt................................................
))>))) 54>))) 1'5>))) "5>)))
Cd 9uipment...................................................................................... #llo7ance for Doubtful #ccounts.................................................... ;otes +eceivable............................................................... &nterest +eceivable.............................................................
5")>))) %4>)))
%4)>))) %4>)))
))>))) 54>)))
>E' 14-124 V#ccountin* for a troubled debt restructurin*.
n December 31> 2))'> !/ort 6o. is in financial difficulty and cannot pay a note due t/at day. &t is a A5))>))) note 7it/ A5)>))) accrued interest payable to Bryan> &nc. Bryan a*rees to for*ive t/e accrued interest> e(tend t/e maturity date to December 31> 2)11> and reduce t/e interest rate to 4. T/e present value of t/e restructured cas/ flo7s is A42%>))).
,on*-Term ,iabilities
14 - 3:
Instru%tions
repare entries for t/e follo7in*< Ca T/e restructure on !/ortHs books. Cb T/e payment of interest on December 31> 2)1). Cc T/e restructure on BryanHs books. >Soution 14-124
Ca &nterest ayable............................................................................. ;otes ayable CA5))>))) N 4 N 2................................... ain on +estructurin*........................................................
5)>)))
Cb ;otes ayable............................................................................... 6as/...................................................................................
2)>)))
Cc #llo7ance for Doubtful #ccounts.................................................... ;otes +eceivable............................................................... &nterest +eceivable.............................................................
122>)))
4)>))) 1)>))) 2)>))) "2>))) 5)>)))
>E' 14-12: V#ccountin* for troubled debt.
Ca E/at are t/e *eneral rules for measurin* and reco*ni$in* a *ain or loss by t/e debtor on a settlement of troubled debt 7/ic/ includes t/e transfer of noncas/ assetsG Cb E/at are t/e *eneral rules for measurin* and reco*ni$in* a *ain and for recordin* future payments by t/e debtor in a troubled debt restructurin*G >Soution 14-12:
Ca &f t/e settlement of debt includes t/e transfer of noncas/ assets> a *ain is measured by t/e debtor as t/e difference bet7een t/e fair value of t/e assets transferred and t/e carryin* amount of t/e debt> includin* accrued interest. T/e debtor also reco*ni$es a *ain or loss on t/e disposal of assets as t/e difference bet7een t/e fair value of t/e assets transferred and t/eir book value. Cb &f t/e carryin* amount of t/e payable is *reater t/an t/e undiscounted total future cas/ flo7s> t/e *ain is measured by t/e debtor as t/e difference bet7een t/e carryin* amount and t/e future cas/ flo7s. Future payments reduce t/e principal no interest e(pense is recorded by t/e debtor. &f t/e carryin* amount of t/e payable is less t/an t/e future cas/ flo7s> no restructurin* *ain is reco*ni$ed by t/e debtor. # ne7 effective-interest rate is calculated t/at e9uates t/e present value of t/e future cas/ flo7s 7it/ t/e carryin* amount of t/e debt. # part of t/e future cas/ flo7s is recorded as interest e(pense by t/e debtor.
14 - 3;
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
PROBLEMS Pr' 14-12; VBond discount amorti$ation.
n une 1> 2))'> verly Bottle 6ompany sold A4))>))) in lon*-term bonds for A351>)4). T/e bonds 7ill mature in 1) years and /ave a stated interest rate of % and a yield rate of 1). T/e bonds pay interest annually on May 31 of eac/ year. T/e bonds are to be accounted for under t/e effective-interest met/od. Instru%tions
Ca 6onstruct a bond amorti$ation table for t/is problem to indicate t/e amount of interest e(pense and discount amorti$ation at eac/ May 31. &nclude only t/e first four years. Make sure all columns and ro7s are properly labeled. C+ound to t/e nearest dollar. Cb T/e sales price of A351>)4) 7as determined from present value tables. !pecifically e(plain /o7 one 7ould determine t/e price usin* present value tables. Cc #ssumin* t/at interest and discount amorti$ation are recorded eac/ May 31> prepare t/e ad?ustin* entry to be made on December 31> 2)11. C+ound to t/e nearest dollar. Soution 14-12;
Ca Date 1)' 5311) 53111 53112 53113
6redit 6as/
Debit &nterest (pense
6redit Bond Discount
A32>))) 32>))) 32>))) 32>)))
A35>1)4 35>414 35>"5 3>131
A3>1)4 3>414 3>"5 4>131
Cb
C1 C2
Cc
&nterest (pense.......................................................................... &nterest ayable................................................................ Discount on Bonds ayable..............................................
6arryin* #mount of Bonds A351>)4) 354>144 35">55% 31>314 35>445
Find t/e present value of A4))>))) due in 1) years at 1). Find t/e present value of 1) annual payments of A32>))) at 1). #dd C1 and C2 to obtain t/e present value of t/e principal and t/e interest payments. 2)>%5%0 1%>"00 2>1'1
0"12 × A35>"5 Cfrom Table = A2)>%5% 00"12 × % × A4))>))) = A1%>"
Pr' 14-12< VBond interest and discount amorti$ation.
rove 6orporation issued A%))>))) of % bonds on ctober 1> 2)1)> due on ctober 1> 2)15. T/e interest is to be paid t7ice a year on #pril 1 and ctober 1. T/e bonds 7ere sold to yield 1) effective annual interest. rove 6orporation closes its books annually on December 31.
,on*-Term ,iabilities
14 - 3<
Instru%tions
Ca 6omplete t/e follo7in* amorti$ation sc/edule for t/e dates indicated. C+ound all ans7ers to t/e nearest dollar. @se t/e effective-interest met/od. 6redit 6as/
Debit &nterest (pense
6redit Bond Discount
ctober 1> 2)1) #pril 1> 2)11 ctober 1> 2)11
6arryin* #mount of Bonds A"3%>224
Cb repare t/e ad?ustin* entry for December 31> 2)11. @se t/e effective-interest met/od. Cc 6ompute t/e interest e(pense to be reported in t/e income statement for t/e year ended December 31> 2)11. Soution 14-12<
Ca 6redit 6as/ ctober 1> 2)1) #pril 1> 2)11 ctober 1> 2)11
A32>))) 32>)))
Debit &nterest (pense A3>'11 3">15"
6redit Bond Discount A4>'11 5>15"
Cb &nterest (pense CA"4%>2'2 N 1) N 312..................................... &nterest ayable C12 N A32>))) ......................................... Discount on Bonds ayable CA1%>")" Q A1>))) ............... Cc
A1%>45 3">15" 1%>")" A"4>32)
6arryin* #mount of Bonds A"3%>224 "43>135 "4%>2'2
1%>")" 1>))) 2>")"
C12 of A3>'11
Pr' 14-12= Vntries for bonds payable.
repare t/e necessary ?ournal entries to record t/e follo7in* transactions relatin* to t/e lon*-term issuance of bonds of itts 6o.< Marc/ 1 &ssued A%))>))) face value itts 6o. second mort*a*e> % bonds for A%"2>1)> includin* accrued interest. &nterest is payable semiannually on December 1 and une 1 7it/ t/e bonds maturin* 1) years from t/is past December 1. T/e bonds are callable at 1)2. une 1 aid semiannual interest on itts 6o. bonds. C@se strai*/t-line amorti$ation of any premium or discount. December 1 aid semiannual interest on itts 6o. bonds and purc/ased A4))>))) face value bonds at t/e call price in accordance 7it/ t/e provisions of t/e bond indenture.
14 - 3=
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
Soution 14-12=
Marc/ 1< 6as/.................................................................................... %"2>1) Bonds ayable......................................................... remium on Bonds ayable..................................... &nterest (pense CA%))>))) N % N 312................ une 1< &nterest (pense.................................................................. remium on Bonds ayable CA5>1) N 311".................... 6as/.........................................................................
3)>5) 1>44)
Dec. 1< &nterest (pense.................................................................. remium on Bonds ayable CA5>1) N 11".................... 6as/.........................................................................
2'>12) 2>%%)
Bonds ayable..................................................................... remium on Bonds ayable0............................................... ain on +edemption of Bonds................................. 6as/.........................................................................
4))>))) 25>'2)
%))>))) 5>1) 1>)))
32>)))
32>)))
1">'2) 4)%>)))
012 N CA5>1) Q A1>44) Q A2>%%) = A25>'2).
Pr' 14-12? Vntries for bonds payable.
repare ?ournal entries to record t/e follo7in* transactions relatin* to lon*-term bonds of Lirby> &nc. C!/o7 computations. Ca n une 1> 2))'> Lirby> &nc. issued A))>)))> bonds for A5%">4)> 7/ic/ includes accrued interest. &nterest is payable semiannually on February 1 and #u*ust 1 7it/ t/e bonds maturin* on February 1> 2)1'. T/e bonds are callable at 1)2. Cb n #u*ust 1> 2))'> Lirby paid interest on t/e bonds and recorded amorti$ation. Lirby uses strai*/t-line amorti$ation. Cc n February 1> 2)11> Lirby paid interest and recorded amorti$ation on all of t/e bonds> and purc/ased A3)>))) of t/e bonds at t/e call price. #ssume t/at a reversin* entry 7as made on anuary 1> 2)11. Soution 14-12?
Ca 6as/.............................................................................................. Discount on Bonds ayable........................................................... Bonds ayable................................................................... &nterest (pense CA))>))) N N 412..........................
5%">4) 24>3)
Cb &nterest (pense CA))>))) N N 12 O A42).......................... 6as/................................................................................... Discount on Bonds ayable CA24>3) N 211...................
1%>42)
))>))) 12>))) 1%>))) 42)
,on*-Term ,iabilities
14 - 3?
Soution 14-12? C6ont.
Cc &nterest (pense CA1%>))) O A1>2)............................................. 6as/................................................................................... Discount on Bonds ayable CA24>3) N 11..................
1'>2) 1%>))) 1>2)
Bonds ayable............................................................................... 3)>))) ,oss on Bond +edemption............................................................. 1'>2' Discount on Bonds ayable P. N CA24>3) Q A4>2))R ...... 6as/...................................................................................
12>)' 3">2))
>Pr' 14-13@ V#ccountin* for a troubled debt settlement.
,ud7i*> &nc.> 7/ic/ o7es iffin 6o. A%))>))) in notes payable> is in financial difficulty. To eliminate t/e debt> iffin a*rees to accept from ,ud7i* land /avin* a fair market value of A1)>))) and a recorded cost of A45)>))). Instru%tions
Ca 6ompute t/e amount of *ain or loss to ,ud7i*> &nc. on t/e transfer Cdisposition of t/e land. Cb 6ompute t/e amount of *ain or loss to ,ud7i*> &nc. on t/e settlement of t/e debt. Cc repare t/e ?ournal entry on ,ud7i* :s books to record t/e settlement of t/is debt. Cd 6ompute t/e *ain or loss to iffin 6o. from settlement of its receivable from ,ud7i*. Ce repare t/e ?ournal entry on iffin:s books to record t/e settlement of t/is receivable. >Soution 14-13@
Ca
Fair market value of t/e land 6ost of t/e land to ,ud7i*> &nc. ain on disposition of land
A1)>))) 45)>))) A1)>)))
Cb
6arryin* amount of debt Fair market value of t/e land *iven ain on settlement of debt
A%))>))) 1)>))) A1')>)))
Cc
;otes ayable.............................................................................. ,and.................................................................................. ain on Disposition of ,and.............................................. ain on !ettlement of Debt...............................................
Cd
6arryin* amount of receivable ,and received in settlement ,oss on settled debt
Ce
,and............................................................................................. #llo7ance for Doubtful #ccounts.................................................. ;otes +eceivable..............................................................
%))>))) 45)>))) 1)>))) 1')>)))
A%))>))) 1)>))) A1')>))) 1)>))) 1')>))) %))>)))
14 - 4@
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
IFRS 8(ESTIONS TrueFase
1. !imilar to @.!. practice> i## re9uires t/at companies present current and noncurrent liabilities on t/e face of t/e balance s/eet> 7it/ current liabilities *enerally presented in order of li9uidity. 2. !imilar to @.!. practice> i## re9uires t/at companies present current and noncurrent liabilities on t/e face of t/e balance s/eet> 7it/ current liabilities *enerally presented in order of ma*nitude. 3. Bot/ i## and @.!. ## pro/ibit t/e reco*nition of liabilities for future losses. 4. i## and @.!. ## are similar in t/e treatment of asset retirement obli*ations. 5. T/e reco*nition criteria for an asset retirement obli*ation C#+ are more strin*ent under i##. . i## and @.!. ## are dissimilar in t/eir treatment of contin*encies. ". T/e criteria for reco*ni$in* contin*ent assets are more strin*ent under @.!. ##. %. @nder i##> t/e measurement of a provision related to a contin*ency is based on an avera*e estimate of t/e e(penditure re9uired to settle t/e obli*ation. '. @.!. ## permits reco*nition of a restructurin* liability> once a company /as committed to a restructurin* plan. 1). T/e reco*nition criteria for an #+ are more strin*ent under @.!. ##< T/e #+ is not reco*ni$ed unless t/ere is a present le*al obli*ation and t/e fair value of t/e obli*ation can be reasonably estimated. Ans*ers to TrueFase
1. True 2. False 3. True 4. True 5. False . False ". False %. False '. False 1). True Muti&e C"oi%e 8uestions
1. T/e primary i## related to reportin* and reco*nition of liabilities is found in a. ! 1) and ! 3'. b. ! 1" and ! 23. c. ! 1 and ! 3". d. ! 2" and ! 32.
,on*-Term ,iabilities
14 - 41
2. !imilar to @.!. practice> i## re9uires t/at companies present current and noncurrent liabilities on t/e face of t/e balance s/eet 7it/ current liabilities a. *enerally presented in order of ma*nitude. b. presented in alp/abetic order. c. presented in order of li9uidity. d. presented in t/e order in 7/ic/ t/ey 7ere incurred. 3. @nder i##> t/e measurement of a provision related to a contin*ency is based on a. t/e best estimate of t/e e(penditure re9uired to settle t/e obli*ation. b. t/e minimum amount from amon* a number of alternative estimates. c. an avera*e from amon* a number of alternative estimates. d. 7/atever mana*ement feels t/at s/are/olders 7ould be 7illin* to accept because of t/e impact on current earnin*s. 4. Bot/ @.!. ## and i## pro/ibit a. t/e reco*nition of a restructurin* liability> once a company /as committed to a restructurin* plan. b. t/e reco*nition of liabilities for future losses. c. communicatin* information on a restructurin* plan to employees> before a liability can be establis/ed. d. all of t/e above. 5. i## and @.!. ## are a. similar in t/e treatment of asset retirement obli*ations C#+s. b. si*nificantly different 7/en it comes to t/e treatment of asset retirement obli*ations C#+s. c. continuin* to evolve in t/e area of asset retirement obli*ations C#+s. d. in conflict 7it/ respect to t/e accountin* for and presentation of asset retirement obli*ations C#+s. . Bot/ i## and @.!. ## permit valuation of lon*-term debt and ot/er liabilities at a. present value discounted at t/e firm:s cost of capital. b. current market values of t/e obli*ations> based on c/an*es in t/e discount rate 7it/ unreali$ed *ains and losses reflected in a separate account in stock/olders: e9uity. c. fair value 7it/ *ains and losses on c/an*es in fair value recorded in income in certain situations. d. /istoric costs 7it/out reflectin* c/an*es in valuation as obli*ations 7ill be retired at t/eir maturity date. ". #s t/ere is no comparable institution to t/e !6 in international securities markets> many international companies Ct/ose not re*istered 7it/ t/e !6 a. voluntarily ad/ere to !6 criteria in providin* information related to contractual obli*ations. b. are not re9uired to provide disclosures suc/ as t/ose related to contractual obli*ations. c. follo7 t/e re9uirements establis/ed for contractual obli*ations put fort/ by t/e !B. d. follo7 t/e re9uirements establis/ed for contractual obli*ations put fort/ by t/e F#!B.
14 - 42
Test Ban, $or Intere#iate A%%ountin./ T"irteent" E#ition
%. @nder @.!. ##> contin*ent assets for insurance recoveries are reco*ni$ed if XXXXXXXXXX i## re9uires t/e recovery be XXXXXXXXXXX before reco*nition of an asset is permitted. a. probable and virtually certain b. possible and very likely c. possible and definite d. certain and probable '. i## rules for establis/in* restructurin* liabilities could be used as an earnin*s mana*ement tool because i## rules are a. more-strin*ent t/at @.!. ##. b. less-strin*ent t/at @.!. ##. c. virtually t/e same as @.!. ##. d. totally different t/an @.!. ##. 1). # concern 7it/ i## is t/at its less-strin*ent rules for establis/in* restructurin* liabilities could be used as a. a more appropriate met/od t/an t/at employed under @.!. ##. b. an appropriate met/od> but comple( and difficult to e(plain to s/are/olders. c. a met/od readily employed to make t/e understandin* of financial information more compre/ensible to s/are/olders. d. an earinin*s mana*ement tool. Ans*ers to uti&e %"oi%e
1. c 2. c 3. a 4. b 5. a . c ". b %. a '. b 1). d IFRS S"ort Ans*er
1. Briefly describe some of t/e similarities and differences bet7een @.!. ## and i## 7it/ respect to t/e accountin* for liabilities. 1. #mon* t/e similarities are< C1 i## re9uires t/at companies present current and noncurrent liabilities on t/e face of t/e balance s/eet> 7it/ current liabilities *enerally presented in order of li9uidity> C2 Bot/ ##s pro/ibit t/e reco*nition of liabilities for future losses C3 i## and @.!. ## are similar in t/e treatment of asset retirement obli*ations C#+s> and C4 i## and @.!. ## are similar in t/eir treatment of contin*encies. #lt/ou*/ t/e t7o ##s are similar 7it/ respect to t/e above topics> t/ere are differences> includin*< C1 @nder i##> t/e measurement of a provision related to a contin*ency is based on t/e best estimate of t/e e(penditure re9uired to settle t/e obli*ation. &f a ran*e of estimates is predicted and no amount in t/e ran*e is more likely t/an any ot/er amount in t/e ran*e> t/e Zmid-pointH of t/e ran*e is used to measure t/e liability. &n @.!. ##> t/e minimum