Q1 14-2 Five years ago a company issued a $500,000 bond

with 5% interest payable at the end of each fiscal year

which ends on December 31. The bond sold at 100 or
par when issued on January 1, 20X1.
The bond matures on December 31, 20X10.
On January 1, 20X6 the company was undergoing
financial difficulty and met with the bondholders to
seek some changes to the terms of the bond. An agreement
was signed that did the following:
Reduced the par value of the bond to: 480,000
Reduced the stated interest on the bond to: 4%
This means that payments are based on new rate and new
par value. The market interest rate is now (January 1, 20X6): 4%

Original
stated 5%
n 5
market 5%
future v (500,000)
payment (25,000)
present v 500,000

a If the company uses ASPE, record the entries if any that the
company should make during 20X5:

Jan. 1/6 No Entry

Dec. 31/6 Before recording interest, we must impute a new interest stated 4%
rate. n 5
future v (480,000)
payment (19,200)
present v 500,000
inputed rate 3.0879%
Dr. Interest expense 15,440
Dr. Bond payable 3,760
Cr. Cash 19,200

b If the company uses IFRS, record the entries if any, that the
company should make during 20X5:

Jan. 1/6 Dr. Bond discount 20,781

Dr. Bond payable 20,000
Cr. Gain on restructuring 40,781
Dec. 31/6 Dr. Interest expense 22,961
Cr. Bond discount 3,761
Cr. Cash 19,200

Q2 Use the same information in the question above but this

time assume that the maturity amount has been reduced
to $430,000. Record the entry that the company will make
on January 1, 20X5 (answer is the same under IFRS and ASPE). Original
stated 5%
n 5
market 5%
payment (25,000)
future v (500,000)
present v 500,000

Jan. 1/5 Dr. Old bond payable 500,000

Cr. New bond payable 430,000
Cr. Gain on restructuring 70,000

Q3 A company issues a two-year serial bond on January 1, 20X1.

This type of bond is usually non-interest bearing but pays out
the principal borrowed in instalments at the end of periods.
In this case the par value of the bond is $200,000 but $100,000
is returned to the bond investors at the end of each year.
The market interest rate when the bond was issued was 5%.

a Calculate the present value of the bond when it is issued: N 2

market rate 5%
future v -
payment (100,000)
present v 185,941
discount 14,059
b Record journal entries for the bond on the following dates:

Jan. 1/1 Dr. Cash 185,941

Dr. Discount on bond payable 14,059
Cr. Bond payable 200,000

Dec. 31/1 Dr. Interest expense 9,297

Dr. Bond payable 100,000
 Cr. Cash 100,000
Cr. Bond discount 9,297

Dec. 31/2 Dr. Interest expense 4,762

Dr. Bond pyabale 100,000
Cr. Bond discount 4,762
Cr. Cash 100,000
Notice that when the bond is issued, 100,000 to be paid that year means that there is at that time a current portion of the bon

Q4 A company bought inventory on July 1, 20X1 and paid for it by

issuing a non-interest bearing note for $82,000. At that time the
market interest rate was 4%. The company also offered to
provide services to the inventory supplier. The
note is due on December 31, 20X2 and the service will be
performed on December 31, 20X2. If the company was to buy the
inventory with cash on January 1, 20X1, the company would
pay $86,000 for the inventory. The company reports under
ASPE and amortizes discounts and premiums on a straight-line
basis. It has a December 31, year end.

a Record all journal entries relating to the note.

n 1.5
rate 4%
fv (82,000)
pmt -
pv 77,315
discount 4,685

Jul.1/1 Dr. Inventory 86,000

Dr. Discount on note payable 4,685
Cr. Note payable 82,000
Cr. Deferred revenue 8,685

Dec. 31/1 Dr. Interest expense 1,562

Cr. Dsicount on note payable 1,562

Dec. 31/2 Dr. Interest expense 3,123

Dr. Deferred revenue 8,685
Dr. Notes payable 82,000
Cr. Service revenue 8,685
Cr. Discount on note payable 3,123
 Cr. Cash 82,000

b Now assume that the company is providing no service and is not

able to determine the market interest rate. Also assume that the
company reports under IFRS and therefore must use the
effective interest rate method. Because the service is not
offered the company is buying less inventory valued at $70,000.
Record all entries relating to this note.

Jul. 1/1 Dr. Inventory 70,000

Dr. Discount on note payable 12,000
Cr. Notes payable 82,000

Dec. 31/1 n 1.5

fv (82,000)
pmt 0
pv 70,000
rate 11.12%
Change in PV
Dr. Interest expense 3,791
Cr. Discount on note payable 3,791

Dec. 31/2 Dr. Interest expense 8,209

Dr. Note payable 82,000
Cr. Discount on note payable 8,209
Cr. Cash 82,000
Old Market
New Terms
4%
5
5% The rate will not change even though the question state the new value is 4%
(480,000)
(19,200)
459,219 PV has fallen by less than 10% so this is not a substantial reduction -
cannot treat the modifications like the retirement of an old bond
and the issue of a new with a gain recorded.

Old Market Rate

New Terms
stated 4% 4%
n 5 4
market 5% 5%
 future v (480,000) (480,000)
payment (19,200) (19,200)
present v 459,219 462,979
3,761

Old Market
New Terms
4% 4%
5 5
5% 4%
(17,200) (17,200)
(430,000) (430,000)
411,383 430,000
Change exceeds 10% so treat this as if the
old bond was retired and new one issuing
using today's market rate.

Net liability Int at 5% Payment Principal Net liability

185,941 9,297 100,000 90,703 95,238
 95,238 4,762 100,000 95,238 -
14,059

is at that time a current portion of the bond payable

Note 77,315 + Service = 86,000 value of inventory

 1.0 0.0
(82,000) (82,000)
0 0
73,791 82,000

3,791 8,209