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Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 14-1
CHAPTER 14
Non-Current Liabilities
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1.
Non-current liability;
classification; definitions.
1, 10, 11,
19, 20, 22,
23, 24
1, 2
10
1, 2, 3
2.
Issuance of bonds; types
of bonds.
2, 3, 4,
9, 17
1, 2, 3, 4,
5, 6, 7
3, 4, 5, 6,
7, 8, 9, 10
1, 2, 3,
7, 8, 9,
10, 14
1, 3, 6
3.
Premium and discount;
amortization schedules.
5, 6, 7, 8,
10, 17
3, 4, 6, 7, 8
4, 5, 6, 7, 8,
9, 10, 15
1, 2, 3, 4,
7, 8, 9,
10, 14
1, 2, 3, 4
4.
Retirement and refunding
of debt.
18, 21
13
14, 15, 16
2, 7, 8, 9,
10, 14
3, 4, 5
5.
Imputation of interest on
notes.
11, 12, 13,
14, 15
9, 10,
11, 12
11, 12, 13
5, 6
6.
Disclosures of non-
current obligations.
24, 25, 26
17
22
14
1, 3, 5
7.
Debt extinguishment.
16, 19, 20,
27
14, 15
11, 17, 18,
19, 20
12, 13
11
8.
Fair value option.
22, 23
16
21
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14-2 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1, 2, 3, 4,
5, 6, 7, 8
1, 2, 3, 4, 5,
6, 7, 8, 9, 10,
14, 15, 16
1, 2, 3, 4, 7,
8, 9, 10, 14
1, 2, 3, 4,
6
9, 10, 11, 12
11, 12, 13
5, 6
13, 14, 15
14, 15, 16,
17, 18, 19, 20
2, 7, 8, 9,
10, 11, 12,
13, 14
3, 4
16, 17
21, 22
7, 14
1, 2, 3, 4,
5
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Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 14-3
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E14.1
Classification of liabilities.
Simple
1520
E14.2
Classification.
Simple
1520
E14.3
Entries for bond transactions.
Simple
1520
E14.4
Entries for bond transactions.
Simple
1520
E14.5
Entries for bond transactions.
Simple
1520
E14.6
Amortization schedule.
Simple
1520
E14.7
Determine proper amounts in account balances.
Moderate
1520
E14.8
Entries and questions for bond transactions.
Moderate
2030
E14.9
Entries for bond transactions.
Moderate
1520
E14.10
Information related to various bond issues.
Simple
2030
E14.11
Entries for zero-interest-bearing notes.
Simple
1520
E14.12
Imputation of interest.
Simple
1520
E14.13
Imputation of interest with right.
Moderate
1520
E14.14
Entry for retirement of bond; bond issue costs.
Simple
2025
E14.15
Entries for retirement and issuance of bonds.
Simple
1216
E14.16
Entries for retirement and issuance of bonds.
Simple
1015
E14.17
Settlement of debt.
Moderate
1520
E14.18
Loan modification.
Moderate
2030
E14.19
Loan modification.
Moderate
2530
E14.20
Entries for settlement of debt.
Moderate
2025
E14.21
Fair value option.
Moderate
2025
E14.22
Long-term debt disclosure.
Simple
1015
P14.1
Analysis of amortization schedule and interest entries.
Simple
1520
P14.2
Issuance and retirement of bonds.
Moderate
2530
P14.3
Negative amortization.
Moderate
2030
P14.4
Effective-interest method.
Moderate
4050
P14.5
Entries for zero-interest-bearing note.
Simple
1525
P14.6
Entries for zero-interest-bearing note; payable
in installments.
Moderate
2025
P14.7
Issuance and retirement of bonds; income statement
presentation.
Simple
1520
P14.8
Comprehensive bond problem.
Moderate
5065
P14.9
Issuance of bonds between interest dates, retirement.
Moderate
2025
P14.10
Entries for life cycle of bonds.
Moderate
2025
P14.11
Modification of debt.
Moderate
1520
P14.12
Modification of note under different circumstances.
Moderate
2535
P14.13
Debtor/creditor entries for continuation of debt with new
effective interest.
Moderate
2030
P14.14
Comprehensive problem; issuance, classification,
reporting.
Moderate
2025
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14-4 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item
Description
Level of
Difficulty
Time
(minutes)
CA14.1
Bond theory: statement of financial position
presentations, interest rate, premium.
Moderate
2530
CA14.2
Various non-current liability conceptual issues.
Moderate
1015
CA14.3
Bond theory: price, presentation, and retirement.
Moderate
1525
CA14.4
Bond theory: amortization and gain or loss recognition.
Simple
2025
CA14.5
Off-balance-sheet financing.
Moderate
2030
CA14.6
Bond issue (ethics.)
Moderate
2330
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Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 14-5
ANSWERS TO QUESTIONS
1. (a) Funds might be obtained through long-term debt from the issuance of bonds, and from the
signing of long-term notes and mortgages.
(b) A bond indenture is a contractual agreement (signed by the issuer of bonds) between the
bond issuer and the bondholders. The bond indenture contains covenants or restrictions for
the protection of the bondholders.
(c) A mortgage is a document, which describes the security for a loan, indicates the conditions
under which the mortgage becomes effective (that is, conditions of default), and describes
the rights of the mortgagee under default relative to the security. The mortgage accom-
panies a formal promissory note and becomes effective only upon default of the note.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
2. If the entire bond matures on a single date, the bonds are referred to as term bonds. Mortgage
bonds are secured by real estate. Collateral trust bonds are secured by the securities of other
corporations. Debenture bonds are unsecured. The interest payments for income bonds depend on
the existence of operating income for the issuing company. Callable bonds may be called and
retired by the issuer prior to maturity. Registered bonds are issued in the name of the owner and
require surrender of the certificate and issuance of a new certificate to complete the sale. A
bearer or coupon bond is not recorded in the name of the owner and may be transferred from one
investor to another by mere delivery. Convertible bonds can be converted into other securities of the
issuing corporation for a specified time after issuance. Commodity-backed bonds (also called asset-
linked bonds) are redeemable in measures of a commodity. Deep-discount bonds (also called
zero-interest bonds) are sold at a discount which provides the buyer’s total interest payoff at
maturity.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
3. (a) Yield ratethe rate of interest actually earned by the bondholders; it is synonymous with the
effective and market rates.
(b) Nominal ratethe rate set by the party issuing the bonds and expressed as a percentage of
the par value; it is synonymous with the stated rate.
(c) Stated ratesynonymous with nominal rate.
(d) Market ratesynonymous with yield rate and effective rate.
(e) Effective ratesynonymous with market rate and yield rate.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
4. (a) Maturity valuethe face value of the bonds; the amount which is payable upon maturity.
(b) Face valuesynonymous with par value and maturity value.
(c) Market (fair) valuethe amount realizable upon sale.
(d) Par valuesynonymous with maturity and face value.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
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14-6 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
Questions Chapter 14 (Continued)
5. A discount on bonds payable results when investors demand a rate of interest higher than the rate
stated on the bonds. The investors are not satisfied with the nominal interest rate because they
can earn a greater rate on alternative investments of equal risk. They refuse to pay par for the
bonds and cannot change the nominal rate. However, by lowering the amount paid for the bonds,
investors can alter the effective rate of interest. A premium on bonds payable results from the
opposite conditions. That is, when investors are satisfied with a rate of interest lower than the rate
stated on the bonds, they are willing to pay more than the face value of the bonds in order to
acquire them, thus reducing their effective rate of interest below the stated rate.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
6. The amortization of a bond premium decreases interest expense while the amortization of a bond
discount increases interest expense over the life of a bond.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
7. Bond discount and bond premium are amortized on an effective-interest basis. The effective-
interest method results in an increasing or decreasing amount of interest each period. This is
because interest is based on the carrying amount of the bond issuance at the beginning of each
period. The effective-interest method results in an increasing or decreasing dollar amount of
interest and a constant rate of interest over the life of the bonds. The difference between the
interest expense and the interest paid is the amount of discount or premium amortized each
period.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
8. The annual interest expense will decrease each period throughout the life of the bonds. Under the
effective-interest method the interest expense each period is equal to the effective or yield interest
rate times the book value of the bonds at the beginning of each interest period. When bonds are
sold at a premium, their book value declines to face value over their life; therefore, the interest
expense declines also.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
9. Bond issuance costs should be recorded as a reduction to the issue amount of the bond payable
and amortized into expense over the life of the bond, through an adjustment to the effective-
interest rate.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
10. Amortization of bond discount will increase interest expense. A discount on bonds payable results
when investors demand a rate of interest higher than the rate stated on the bonds. The investors
are not satisfied with the nominal interest rate because they can earn a greater rate on alternative
investments of equal risk. They refuse to pay par for the bonds and cannot change the nominal
rate. However, by lowering the amount paid for the bonds, investors can increase the effective
rate of interest.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
11. The entire arrangement must be evaluated and an appropriate interest rate imputed. This is done
by (1) determining the fair value of the property, goods, or services exchanged or (2) determining
the fair value of the note, whichever is more clearly determinable.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
12. If a note is issued for cash, the present value is assumed to be the cash proceeds. If a note is
issued for noncash consideration, the present value of the note should be measured by the fair
value of the property, goods, or services or by an amount that reasonably approximates the fair
value of the note (whichever is more clearly determinable).
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
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Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 14-7
Questions Chapter 14 (Continued)
13. When a debt instrument is exchanged in a bargained transaction entered into at arm’s length, the
stated interest rate is presumed to be fair unless: (1) no interest rate is stated, or (2) the stated
interest rate is unreasonable, or (3) the stated face amount of the debt instrument is materially
different from the current sales price for the same or similar items or from the current fair value of
the debt instrument.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
14. Imputed interest is the interest factor (a rate or amount) assumed or assigned which is different
from the stated interest factor. It is necessary to impute an interest rate when the stated interest
rate is presumed to be unreasonable. The imputed interest rate is used to establish the present
value of the debt instrument by discounting, at that imputed rate, all future payments on the debt
instrument.
In imputing interest, the objective is to approximate the rate which would have resulted if an
independent borrower and an independent lender had negotiated a similar transaction under
comparable terms and conditions with the option to pay the cash price upon purchase or to give a
note for the amount of the purchase which bears the prevailing rate of interest to maturity. In order
to accomplish that objective, consideration must be given to (1) the credit standing of the issuer,
(2) restrictive covenants, (3) collateral, (4) payment and other items pertaining to the debt, (5) the
existing prime interest rate, and (6) the prevailing rates for similar instruments of issuers with
similar credit ratings.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
15. A fixed-rate mortgage is a