chapter14solutionB - 1 Chapter 14(B) Homework Solution P...

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1 Chapter 14(B) Homework Solution P 14-9 Notes exchanged for non-cash assets Note that I changed the wording of this problem slightly on Homework Manager. 1. Stated rate = market rate, this is a typical interest-bearing note and the note will be issued at the face value. On 1/1/2007 Land . ............................................ 600,000 Notes payable. ........................ 600,000 On 12/31/2007 : Interest expense. ........................... 72,000 (=600,000 x 12%) Cash. ....................................... 72,000 2. With the market value of the equipment $94,643, the implied interest rate can be found by: Future value = $100,000 face + $100,000 x 6% interest = $106,000 $94,643 = $106,000 x PV factor (Table 2, i=?% n=1) PV factor = $94,643 ÷ $106,000 = 0.89286 and corresponds to 12% (from n=1 row) The stated rate of 6% is unrealistic! The note must be recorded at the fair market value of the equipment and interest must be calculated based on the implied market or effective rate. On 1/1/2007 Office equipment . ........................ 94,643 Discount on notes payable ( plug in ) 5,357 Notes payable. ........................ 100,000 On 12/31/2007 : Interest expense. ........................... 11,357 (=$94,643 x effective rate 12%) Discount on notes payable ( plug in ) 5,357 Cash. ....................................... 6,000 ($100,000 face x stated rate 6%) (Note that this entry is similar to the interest payment entry for bonds payable.) Notes payable. .............................. 100,000 Cash. ....................................... 100,000 3. This is an installment note. Present value of the payments = $1,000,000 x PV factor (Table 4, i=12%, n=3) = $1,000,000 x 2.40183 = $2,401,830 On 1/1/2007 Building. ....................................... 2,401,830 Notes payable. ........................ 2,401,830 On 12/31/2007 : Interest expense. ........................... 288,220 (=$2,401,830 x 12%) Notes payable ( plug in )................ 711,780 Cash. ....................................... 1,000,000
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2 E 14-24 Troubled debt restructuring, Debt settled The fair market value of the asset used to settle the debt how much the debtor used to settle the debt. We need first to bring up the asset value from book value to market value: Land . ............................................ 125,000 Gain on disposition of assets. . 125,000 (=$450,000 FV - $325,000 cost) Note that the land has $325,000 + 125,000 = $450,000 on the book now.\ Then we record the settlement: Notes payable ( face ) .................... 600,000 Interest payable . .......................... 66,000 (missed interest =$600,000 x 11%) Land . ...................................... 450,000 Gain on troubled debt restructuring 216,000 ( plug-in ) E 14-24 Troubled debt restructuring, Modification of terms Note that I changed this question on Homework Manager. (1) debt restructuring:
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This note was uploaded on 11/28/2009 for the course BUSINESS acct 3212 taught by Professor Nike during the Spring '09 term at Calhoun Community College.

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chapter14solutionB - 1 Chapter 14(B) Homework Solution P...

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