CHAPTER 14

LONG-TERM LIABILITIES

MULTIPLE CHOICE—Conceptual
Answer No. Description
a 1. Liability identification.
a 2. Bond terms.
b 3. Definition of "debenture bonds."
d 4. Interest rate of the bond indenture.
d 5. Rate of interest earned by the bondholders.
b 6. Premium and interest rates.
a 7. Interest and discount amortization.
d 8. Effective interest amortization method.
d 9. Impact of effective interest method.
c 10. Recording bonds issued between interest dates.
d 11. Bonds issued at other than an interest date.
d 12. Calculating the issue price of bonds.
d 13. Calculating the issue price of bonds.
d 14. Classification of bond issuance costs.
c 15. Bond issuance costs.
b 16. Classification of treasury bonds.
d 17. Early extinguishment of bonds payable.
d 18. Gain or loss on extinguishment of debt.
d 19. Valuation of note issued in noncash transaction.
d 20. Stated interest rate of note.
c 21. Accounting for discount on notes payable.
d 22. Off-balance-sheet financing.
d 23. Required bond disclosures.
d 24. Long-term debt disclosures.
c 25. Times interest earned ratio.
c. 26. Debt to total assets ratio.
c *27. Modification of terms in debt restructure.
d *28. Gain/loss on troubled debt restructuring.
b *29. Gain/loss on troubled debt restructuring.
b *30. Interest and troubled debt restructuring.
c *31. Creditor's calculations for modification of terms.

* This topic is dealt with in an Appendix to the chapter.

14 - 2 Test Bank for Intermediate Accounting, Eleventh Edition

MULTIPLE CHOICE—Computational
Answer No. Description
a 32. Calculate the present value of bond principal.
b 33. Calculate the present value of bond interest.
a 34. Determine the issue price of bonds.
b 35. Interest expense using effective interest method.
c 36. Interest expense using effective interest method.
c 37. Calculate gain on retirement of bonds.
b 38. Calculate gain on retirement of bonds.
b 39. Calculate loss on retirement of bonds.
b 40. Bond retirement with call premium.
b 41. Calculate loss on retirement of bonds.
a 42. Interest on noninterest-bearing note.
c 43. Interest on installment note payable.
b 44. Determine balance of discount on notes payable.
d 45. Calculate times interest earned ratio.
b *46. Transfer of equipment in debt settlement.
d *47. Recognizing gain on debt restructure.
a *48. Interest and troubled debt restructuring.

MULTIPLE CHOICE—CPA Adapted

Answer No. Description
a 49. Determine proceeds from bond issue.
b 50. Determine unamortized bond premium.
a 51. Determine unamortized bond discount.
c 52. Calculate bond interest expense.
a 53. Calculate loss on retirement of bonds.
d 54. Calculate loss on retirement of bonds.
d 55. Calculate gain on retirement of bonds.
c 56. Determine carrying value of bonds to be retired.
c 57. Carrying value of bonds with call provision.
a 58. Classification of gain from debt refunding.
d *59. Classification of gain from troubled debt restructuring.

EXERCISES
Item Description
E14-60 Terms related to long-term debt.
E14-61 Amortization of discount or premium.
E14-62 Bond issue price and premium amortization.
E14-63 Entries for bonds payable.
E14-64 Retirement of bonds.
E14-65 Early extinguishment of debt.
*E14-66 Accounting for a troubled debt settlement.
*E14-67 Accounting for troubled debt restructuring.
 Long-Term Liabilities 14 - 3

*E14-68 Accounting for troubled debt.

PROBLEMS

Item Description
P14-69 Bond discount amortization.
P14-70 Bond interest and discount amortization.
P14-71 Entries for bonds payable.
P14-72 Entries for bonds payable.
*P14-73 Accounting for a troubled debt settlement.

CHAPTER LEARNING OBJECTIVES

1. Describe the formal procedures associated with issuing long-term debt.

2. Identify various types of bond issues.

3. Describe the accounting valuation for bonds at date of issuance.

4. Apply the methods of bond discount and premium amortization.

5. Describe the accounting procedures for the extinguishment of debt.

6. Explain the accounting procedures for long-term notes payable.

7. Explain the reporting of off-balance-sheet financing arrangements.

8. Indicate how long-term debt is presented and analyzed.

*9. Distinguish among and account for (1) a loss on loan impairment, (2) a troubled debt
restructuring that results in the settlement of a debt, and (3) a troubled debt restructuring
that results in a continuation of debt with modification of terms.
14 - 4 Test Bank for Intermediate Accounting, Eleventh Edition

SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS

Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Learning Objective 1
1. MC 2. MC
Learning Objective 2
3. MC
Learning Objective 3
4. MC 12. MC 32. MC 34. MC 62. E
5. MC 13. MC 33. MC 60. E 69. P
Learning Objective 4
6. MC 10. MC 16. MC 50. MC 61. E 70. P
7. MC 11. MC 35. MC 51. MC 62. E 71. P
8. MC 14. MC 36. MC 52. MC 63. E 72. P
9. MC 15. MC 49. MC 60. E 69. P
Learning Objective 5
17. MC 37. MC 40. MC 54. MC 57. MC 64. E 72. P
18. MC 38. MC 41. MC 55. MC 60. E 65. E
19. MC 39. MC 53. MC 56. MC 63. E 71. P
Learning Objective 6
19. MC 20. MC 21. MC 42. MC 43. MC 44. MC
Learning Objective 7
22. MC
Learning Objective 8
23. MC 24. MC 25. MC 26. MC 45. MC 58. MC
Learning Objective *9
27. MC 29. MC 31. MC 47. MC 59. MC 67. E 73. P
28. MC 30. MC 46. MC 48. MC 66. E 68. E

Note: MC = Multiple Choice

E = Exercise
P = Problem
 Long-Term Liabilities 14 - 5

MULTIPLE CHOICE—Conceptual
1. An example of an item which is not a liability is
a. dividends payable in stock.
b. advances from customers on contracts.
c. accrued estimated warranty costs.
d. the portion of long-term debt due within one year.

2. The covenants and other terms of the agreement between the issuer of bonds and the
lender are set forth in the
a. bond indenture.
b. bond debenture.
c. registered bond.
d. bond coupon.

3. The term used for bonds that are unsecured as to principal is

a. junk bonds.
b. debenture bonds.
c. indebenture bonds.
d. callable bonds.

4. The interest rate written in the terms of the bond indenture is known as the
a. coupon rate.
b. nominal rate.
c. stated rate.
d. coupon rate, nominal rate, or stated rate.

5. The rate of interest actually earned by bondholders is called the

a. stated rate.
b. yield rate.
c. effective rate.
d. effective, yield, or market rate.

6. Stone, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years
from date of issue. If the bonds were issued at a premium, this indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.

7. If bonds are initially sold at a discount and the straight-line method of amortization is used,
interest expense in the earlier years will
a. exceed what it would have been had the effective interest method of amortization
been used.
b. be less than what it would have been had the effective interest method of amortization
been used.
c. be the same as what it would have been had the effective interest method of
amortization been used.
d. be less than the stated (nominal) rate of interest.
14 - 6 Test Bank for Intermediate Accounting, Eleventh Edition

8. Under the effective interest method of bond discount or premium amortization, the
periodic interest expense is equal to
a. the stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds.
d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.

9. When the effective interest method is used to amortize bond premium or discount, the
periodic amortization will
a. increase if the bonds were issued at a discount.
b. decrease if the bonds were issued at a premium.
c. increase if the bonds were issued at a premium.
d. increase if the bonds were issued at either a discount or a premium.

10. If bonds are issued between interest dates, the entry on the books of the issuing
corporation could include a
a. debit to Interest Payable.
b. credit to Interest Receivable.
c. credit to Interest Expense.
d. credit to Unearned Interest.

11. When the interest payment dates of a bond are May 1 and November 1, and a bond issue
is sold on June 1, the amount of cash received by the issuer will be
a. decreased by accrued interest from June 1 to November 1.
b. decreased by accrued interest from May 1 to June 1.
c. increased by accrued interest from June 1 to November 1.
d. increased by accrued interest from May 1 to June 1.

Use the following information for questions 12 and 13:

Cox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are
sold to yield 8%.

12. One step in calculating the issue price of the bonds is to multiply the principal by the table
value for
a. 10 periods and 10% from the present value of 1 table.
b. 20 periods and 5% from the present value of 1 table.
c. 10 periods and 8% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.

13. Another step in calculating the issue price of the bonds is to

a. multiply $10,000 by the table value for 10 periods and 10% from the present value of
an annuity table.
b. multiply $10,000 by the table value for 20 periods and 5% from the present value of an
annuity table.
c. multiply $10,000 by the table value for 20 periods and 4% from the present value of an
annuity table.
d. none of these.
 Long-Term Liabilities 14 - 7

14. Theoretically, the costs of issuing bonds could be

a. expensed when incurred.
b. reported as a reduction of the bond liability.
c. debited to a deferred charge account and amortized over the life of the bonds.
d. any of these.

15. The printing costs and legal fees associated with the issuance of bonds should
a. be expensed when incurred.
b. be reported as a deduction from the face amount of bonds payable.
c. be accumulated in a deferred charge account and amortized over the life of the bonds.
d. not be reported as an expense until the period the bonds mature or are retired.

16. Treasury bonds should be shown on the balance sheet as

a. an asset.
b. a deduction from bonds payable issued to arrive at net bonds payable and
outstanding.
c. a reduction of stockholders' equity.
d. both an asset and a liability.

17. An early extinguishment of bonds payable, which were originally issued at a premium, is
made by purchase of the bonds between interest dates. At the time of reacquisition
a. any costs of issuing the bonds must be amortized up to the purchase date.
b. the premium must be amortized up to the purchase date.
c. interest must be accrued from the last interest date to the purchase date.
d. all of these.

18. The generally accepted method of accounting for gains or losses from the early
extinguishment of debt treats any gain or loss as
a. an adjustment to the cost basis of the asset obtained by the debt issue.
b. an amount that should be considered a cash adjustment to the cost of any other debt
issued over the remaining life of the old debt instrument.
c. an amount received or paid to obtain a new debt instrument and, as such, should be
amortized over the life of the new debt.
d. a difference between the reacquisition price and the net carrying amount of the debt
which should be recognized in the period of redemption.

19. When a note payable is issued for property, goods, or services, the present value of the
note is measured by
a. the fair value of the property, goods, or services.
b. the market value of the note.
c. using an imputed interest rate to discount all future payments on the note.
d. any of these.

20. When a note payable is exchanged for property, goods, or services, the stated interest
rate is presumed to be fair unless
a. no interest rate is stated.
b. the stated interest rate is unreasonable.
c. the stated face amount of the note is materially different from the current cash sales
price for similar items or from current market value of the note.
d. any of these.
14 - 8 Test Bank for Intermediate Accounting, Eleventh Edition

21. Discount on Notes Payable is charged to interest expense

a. equally over the life of the note.
b. only in the year the note is issued.
c. using the effective interest method.
d. only in the year the note matures.

22. Which of the following is an example of "off-balance-sheet financing"?

1. Non-consolidated subsidiary.
2. Special purpose entity.
3. Operating leases.
a. 1
b. 2
c. 3
d. All of these are examples of "off-balance-sheet financing."

23. Which of the following must be disclosed relative to long-term debt maturities and sinking
fund requirements?
a. The present value of future payments for sinking fund requirements and long-term
debt maturities during each of the next five years.
b. The present value of scheduled interest payments on long-term debt during each of
the next five years.
c. The amount of scheduled interest payments on long-term debt during each of the next
five years.
d. The amount of future payments for sinking fund requirements and long-term debt
maturities during each of the next five years.

24. Note disclosures for long-term debt generally include all of the following except
a. assets pledged as security.
b. call provisions and conversion privileges.
c. restrictions imposed by the creditor.
d. names of specific creditors.

25. The times interest earned ratio is computed by dividing

a. net income by interest expense.
b. income before taxes by interest expense.
c. income before income taxes and interest expense by interest expense.
d. net income and interest expense by interest expense.

26. The debt to total assets ratio is computed by dividing

a. current liabilities by total assets.
b. long-term liabilities by total assets.
c. total liabilities by total assets.
d. total assets by total liabilities.

*27. In a troubled debt restructuring in which the debt is continued with modified terms and the
carrying amount of the debt is less than the total future cash flows,
a. a loss should be recognized by the debtor.
b. a gain should be recognized by the debtor.
c. a new effective interest rate must be computed.
d. no interest expense or revenue should be recognized in the future.
 Long-Term Liabilities 14 - 9

*28. A troubled debt restructuring will generally result in a

a. loss by the debtor and a gain by the creditor.
b. loss by both the debtor and the creditor.
c. gain by both the debtor and the creditor.
d. gain by the debtor and a loss by the creditor.

*29. In a troubled debt restructuring in which the debt is settled by a transfer of assets with a
fair market value less than the carrying amount of the debt, the debtor would recognize
a. no gain or loss on the settlement.
b. a gain on the settlement.
c. a loss on the settlement.
d. none of these.

*30. In a troubled debt restructuring in which the debt is continued with modified terms, a gain
should be recognized at the date of restructure, but no interest expense should be
recognized over the remaining life of the debt, whenever the
a. carrying amount of the pre-restructure debt is less than the total future cash flows.
b. carrying amount of the pre-restructure debt is greater than the total future cash flows.
c. present value of the pre-restructure debt is less than the present value of the future
cash flows.
d. present value of the pre-restructure debt is greater than the present value of the future
cash flows.

*31. In a troubled debt restructuring in which the debt is continued with modified terms and the
carrying amount of the debt is less than the total future cash flows, the creditor should
a. compute a new effective interest rate.
b. not recognize a loss.
c. calculate its loss using the historical effective rate of the loan.
d. calculate its loss using the current effective rate of the loan.

Multiple Choice Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. a 6. b 11. d 16. b 21. c 26. c *31. c
2. a 7. a 12. d 17. d 22. d *27. c
3. b 8. d 13. d 18. d 23. d *28. d
4. d 9. d 14. d 19. d 24. d *29. b
5. d 10. c 15. c 20. d 25. c *30. b

Solutions to those Multiple Choice questions for which the answer is “none of these.”
13. multiply $5,000 by the table value for 20 periods and 4% from the present value of an
annuity table.
14 - 10 Test Bank for Intermediate Accounting, Eleventh Edition

MULTIPLE CHOICE—Computational
Use the following information for questions 32 through 34:
On January 1, 2004, Bleeker Co. issued eight-year bonds with a face value of $2,000,000 and a
stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were
sold to yield 8%. Table values are:
Present value of 1 for 8 periods at 6% .......................................... .627
Present value of 1 for 8 periods at 8% .......................................... .540
Present value of 1 for 16 periods at 3% ......................................... .623
Present value of 1 for 16 periods at 4% ......................................... .534
Present value of annuity for 8 periods at 6% ................................. 6.210
Present value of annuity for 8 periods at 8% ................................. 5.747
Present value of annuity for 16 periods at 3% ............................... 12.561
Present value of annuity for 16 periods at 4% ............................... 11.652

32. The present value of the principal is

a. $1,068,000.
b. $1,080,000.
c. $1,246,000.
d. $1,254,000.

33. The present value of the interest is

a. $689,640.
b. $699,120.
c. $745,200.
d. $753,660.

34. The issue price of the bonds is

a. $1,767,120.
b. $1,769,640.
c. $1,779,120.
d. $1,999,200.

35. On January 1, 2004, Foley Co. sold 12% bonds with a face value of $1,000,000. The
bonds mature in five years, and interest is paid semiannually on June 30 and December
31. The bonds were sold for $1,077,000 to yield 10%. Using the effective interest method
of amortization, interest expense for 2004 is
a. $100,000.
b. $107,392.
c. $107,700.
d. $120,000.

36. On January 2, 2004, a calendar-year corporation sold 8% bonds with a face value of
$1,500,000. These bonds mature in five years, and interest is paid semiannually on June
30 and December 31. The bonds were sold for $1,384,000 to yield 10%. Using the
effective interest method of computing interest, how much should be charged to interest
expense in 2004?
a. $120,000.
b. $138,400.
c. $138,860.
 Long-Term Liabilities 14 - 11

d. $150,000.
37. The December 31, 2004, balance sheet of Dodge Corporation includes the following
items:
9% bonds payable due December 31, 2013 $1,400,000
Unamortized premium on bonds payable 37,800
The bonds were issued on December 31, 2003, at 103, with interest payable on July 1
and December 31 of each year. Dodge uses straight-line amortization.
On March 1, 2005, Dodge retired $560,000 of these bonds at 98 plus accrued interest.
What should Dodge record as a gain on retirement of these bonds? Ignore taxes.
a. $26,320.
b. $15,120.
c. $26,040.
d. $28,000.

38. On January 1, 1998, Rodriquez Corporation issued $1,800,000 of 10% ten-year bonds at
103. The bonds are callable at the option of Rodriquez at 105. Rodriquez has recorded
amortization of the bond premium on the straight-line method (which was not materially
different from the effective interest method).
On December 31, 2004, when the fair market value of the bonds was 96, Rodriquez
repurchased $400,000 of the bonds in the open market at 96. Rodriquez has recorded
interest and amortization for 2004. Ignoring income taxes and assuming that the gain is
material, Rodriquez should report this reacquisition as
a. a loss of $19,600.
b. a gain of $19,600.
c. a loss of $24,400.
d. a gain of $24,400.

39. The 10% bonds payable of Jacobs Company had a net carrying amount of $1,140,000 on
December 31, 2004. The bonds, which had a face value of $1,200,000, were issued at a
discount to yield 12%. The amortization of the bond discount was recorded under the
effective interest method. Interest was paid on January 1 and July 1 of each year. On July
2, 2005, several years before their maturity, Jacobs retired the bonds at 102. The interest
payment on July 1, 2005 was made as scheduled. What is the loss that Jacobs should
record on the early retirement of the bonds on July 2, 2005? Ignore taxes.
a. $24,000.
b. $75,600.
c. $67,200.
d. $84,000.

40. A corporation called an outstanding bond obligation four years before maturity. At that
time there was an unamortized discount of $600,000. To extinguish this debt, the
company had to pay a call premium of $200,000. Ignoring income tax considerations, how
should these amounts be treated for accounting purposes?
a. Amortize $800,000 over four years.
b. Charge $800,000 to a loss in the year of extinguishment.
c. Charge $200,000 to a loss in the year of extinguishment and amortize $600,000 over
four years.
d. Either amortize $800,000 over four years or charge $800,000 to a loss immediately,
whichever management selects.
14 - 12 Test Bank for Intermediate Accounting, Eleventh Edition

41. The 12% bonds payable of Lynn Co. had a carrying amount of $936,000 on December 31,
2004. The bonds, which had a face value of $900,000, were issued at a premium to yield
10%. Lynn uses the effective interest method of amortization. Interest is paid on June 30
and December 31. On June 30, 2005, several years before their maturity, Lynn retired the
bonds at 104 plus accrued interest. The loss on retirement, ignoring taxes, is
a. $0.
b. $7,200.
c. $11,160.
d. $36,000.

42. On January 1, 2004, Ann Stine loaned $37,565 to Joe Grant. A zero-interest-bearing note
(face amount, $50,000) was exchanged solely for cash; no other rights or privileges were
exchanged. The note is to be repaid on December 31, 2006. The prevailing rate of interest
for a loan of this type is 10%. The present value of $50,000 at 10% for three years is
$37,565. What amount of interest income should Ms. Stine recognize in 2004?
a. $3,757.
b. $5,000.
c. $15,000.
d. $11,270.

43. On January 1, 2004, Foster Company sold property to Agler Company which originally
cost Foster $570,000. There was no established exchange price for this property. Agler
gave Foster a $900,000 zero-interest-bearing note payable in three equal annual
installments of $300,000 with the first payment due December 31, 2004. The note has no
ready market. The prevailing rate of interest for a note of this type is 10%. The present
value of a $900,000 note payable in three equal annual installments of $300,000 at a 10%
rate of interest is $746,100. What is the amount of interest income that should be
recognized by Foster in 2004, using the effective interest method?
a. $0.
b. $30,000.
c. $74,610.
d. $90,000.

44. On January 1, 2004, Glenn Company sold property to Jefrey Company. There was no
established exchange price for the property, and Jefrey gave Glenn a $1,000,000 zero-
interest-bearing note payable in 5 equal annual installments of $200,000, with the first
payment due December 31, 2004. The prevailing rate of interest for a note of this type is
9%. The present value of the note at 9% was $721,000 at January 1, 2004. What should
be the balance of the Discount on Notes Payable account on the books of Jefrey at
December 31, 2004 after adjusting entries are made, assuming that the effective interest
method is used?
a. $0
b. $214,110
c. $223,200
d. $279,000
 Long-Term Liabilities 14 - 13

45. Mantle Company’s 2004 financial statements contain the following selected data:
Income taxes $40,000
Interest expense 10,000
Net income 60,000
Mantle’s times interest earned for 2004 is
a. 6 times
b. 9 times.
c. 10 times.
d. 11 times.

Use the following information for questions *46 through *48:

On December 31, 2003, Queen Co. is in financial difficulty and cannot pay a note due that day. It
is a $1,200,000 note with $120,000 accrued interest payable to Trear, Inc. Trear agrees to accept
from Queen equipment that has a fair value of $580,000, an original cost of $960,000, and
accumulated depreciation of $460,000. Trear also forgives the accrued interest, extends the
maturity date to December 31, 2006, reduces the face amount of the note to $500,000, and
reduces the interest rate to 6%, with interest payable at the end of each year.

*46. Queen should recognize a gain or loss on the transfer of the equipment of
a. $0.
b. $80,000 gain.
c. $120,000 gain.
d. $380,000 loss.

*47. Queen should recognize a gain on the partial settlement and restructure of the debt of
a. $0.
b. $30,000.
c. $110,000.
d. $150,000.

*48. Queen should record interest expense for 2006 of

a. $0.
b. $30,000.
c. $60,000.
d. $90,000.

Multiple Choice Answers—Computational

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
32. a 35. b 38. b 41. b 44. b *47. d
33. b 36. c 39. b 42. a 45. d *48. a
34. a 37. c 40. b 43. c *46. b
14 - 14 Test Bank for Intermediate Accounting, Eleventh Edition

MULTIPLE CHOICE—CPA Adapted

49. On July 1, 2004, Risen Co. issued 500 of its 10%, $1,000 bonds at 99 plus accrued
interest. The bonds are dated April 1, 2004 and mature on April 1, 2014. Interest is
payable semiannually on April 1 and October 1. What amount did Risen receive from the
bond issuance?
a. $507,500
b. $500,000
c. $495,000
d. $482,500

50. On January 1, 2004, Lopez Co. issued its 10% bonds in the face amount of $2,000,000,
which mature on January 1, 2014. The bonds were issued for $2,270,000 to yield 8%,
resulting in bond premium of $270,000. Lopez uses the effective interest method of
amortizing bond premium. Interest is payable annually on December 31. At December 31,
2004, Lopez's adjusted unamortized bond premium should be
a. $270,000.
b. $251,600.
c. $243,000.
d. $203,000.

51. On July 1, 2002, Moon, Inc. issued 9% bonds in the face amount of $2,000,000, which
mature on July 1, 2012. The bonds were issued for $1,878,000 to yield 10%, resulting in a
bond discount of $122,000. Moon uses the effective interest method of amortizing bond
discount. Interest is payable annually on June 30. At June 30, 2004, Moon's unamortized
bond discount should be
a. $105,620.
b. $102,000.
c. $97,600.
d. $86,000.

52. On January 1, 2004, Nott Co. sold $2,000,000 of its 10% bonds for $1,770,592 to yield
12%. Interest is payable semiannually on January 1 and July 1. What amount should Nott
report as interest expense for the six months ended June 30, 2004?
a. $88,532
b. $100,000
c. $106,236
d. $120,000

53. On January 1, 2004, Harry Co. redeemed its 15-year bonds of $1,500,000 par value for
102. They were originally issued on January 1, 1992 at 98 with a maturity date of January
1, 2007. The bond issue costs relating to this transaction were $90,000. Harry amortizes
discounts, premiums, and bond issue costs using the straight-line method. What amount
of loss should Harry recognize on the redemption of these bonds (ignore taxes)?
a. $54,000
b. $36,000
c. $30,000
d. $0
 Long-Term Liabilities 14 - 15

54. On its December 31, 2004 balance sheet, Knorr Corp. reported bonds payable of
$3,600,000 and related unamortized bond issue costs of $192,000. The bonds had been
issued at par. On January 2, 2005, Knorr retired $1,800,000 of the outstanding bonds at
par plus a call premium of $42,000. What amount should Knorr report in its 2005 income
statement as loss on extinguishment of debt (ignore taxes)?
a. $0
b. $42,000
c. $96,000
d. $138,000

55. On January 1, 2000, Orear Corp. issued 3,000 of its 10%, $1,000 bonds for $3,120,000.
These bonds were to mature on January 1, 2010 but were callable at 101 any time after
December 31, 2003. Interest was payable semiannually on July 1 and January 1. On July
1, 2005, Orear called all of the bonds and retired them. Bond premium was amortized on
a straight-line basis. Before income taxes, Orear's gain or loss in 2005 on this early
extinguishment of debt was
a. $90,000 gain.
b. $36,000 gain.
c. $30,000 loss.
d. $24,000 gain.

56. On June 30, 2004, Parks Co. had outstanding 8%, $2,000,000 face amount, 15-year
bonds maturing on June 30, 2014. Interest is payable on June 30 and December 31. The
unamortized balances in the bond discount and deferred bond issue costs accounts on
June 30, 2004 were $70,000 and $20,000, respectively. On June 30, 2004, Parks
acquired all of these bonds at 94 and retired them. What net carrying amount should be
used in computing gain or loss on this early extinguishment of debt?
a. $1,980,000.
b. $1,930,000.
c. $1,910,000.
d. $1,880,000.

57. A ten-year bond was issued in 2002 at a discount with a call provision to retire the bonds.
When the bond issuer exercised the call provision on an interest date in 2004, the carrying
amount of the bond was less than the call price. The amount of bond liability removed
from the accounts in 2004 should have equaled the
a. call price.
b. call price less unamortized discount.
c. face amount less unamortized discount.
d. face amount plus unamortized discount.

58. Starr Co. took advantage of market conditions to refund debt. This was the fourth
refunding operation carried out by Starr within the last three years. The excess of the
carrying amount of the old debt over the amount paid to extinguish it should be reported
as a
a. gain, net of income taxes.
b. loss, net of income taxes.
c. part of continuing operations.
d. deferred credit to be amortized over the life of the new debt.
14 - 16 Test Bank for Intermediate Accounting, Eleventh Edition

*59. Brye Co. is indebted to Dole under a $900,000, 12%, three-year note dated December 31,
2002. Because of Brye's financial difficulties developing in 2004, Brye owed accrued
interest of $108,000 on the note at December 31, 2004. Under a troubled debt
restructuring, on December 31, 2004, Dole agreed to settle the note and accrued interest
for a tract of land having a fair value of $810,000. Brye's acquisition cost of the land is
$650,000. Ignoring income taxes, on its 2004 income statement Brye should report as a
result of the troubled debt restructuring
Gain on Disposal Restructuring Gain
a. $358,000 $0
b. $250,000 $0
c. $160,000 $90,000
d. $160,000 $198,000

Multiple Choice Answers—CPA Adapted

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
49. a 51. a 53. a 55. d 57. c *59. d
50. b 52. c 54. d 56. c 58. a

DERIVATIONS — Computational
No. Answer Derivation
32. a $2,000,000 × .534 = $1,068,000.

33. b ($2,000,000 × .03) × 11.652 = $699,120.

34. a $1,068,000 + $699,120 = $1,767,120.

35. b $1,077,000 × .05 = $ 53,850

[$1,077,000 – ($60,000 – $53,850)] × .05 = 53,542
$107,392

36. c $1,384,000 × .05 = $ 69,200

[$1,384,000 + ($69,200 – $60,000)] × .05 = 69,660
$138,860

37. c [$1,437,800 – ( $37,800

———— × — )] × .4 = $574,840 (CV of retired bonds)
18
2
6

$574,840 – ($560,000 × .98) = $26,040.

38. b [$1,800,000 × 1.0310– ($54,000

———— × 7)] × 2/9 = $403,600 (CV of retired bonds)

$403,600 – ($400,000  .96) = $19,600.

39. b $1,140,000 + [($1,140,000 × .06) – ($1,200,000 × .05)] =

$1,148,400 (CV of bonds)
$1,148,400 – ($1,200,000 × 1.02) = $75,600.
 Long-Term Liabilities 14 - 17

40. b $600,000 + $200,000 = $800,000.

41. b $936,000 – [($900,000 × .06) – ($936,000 × .05)] = $928,800 (CV of bonds)

($900,000 × 1.04) – $928,800 = $7,200.

42. a $37,565 × .10 = $3,757.

43. c $746,100 × .10 = $74,610.

44. b $1,000,000 – $721,000 – ($721,000 × .09) = $214,110.

$60,000 + $40,000 + $10,000

45. d ————————————— = 11 times.
$10,000

*46. b $580,000 – ($960,000 – $460,000) = $80,000.

*47. d ($1,200,000 + $120,000) – [$580,000 + $500,000 + ($500,000 × 06 × 3)] =

$150,000.

*48. a 0. The effective interest rate is 0%.

DERIVATIONS — CPA Adapted

No. Answer Derivation
49. a ($500,000 × .99) + ($500,000 × .10 × 3/12) = $507,500.

50. b $270,000 – [($2,000,000 × .10) – ($2,270,000 × .08)] = $251,600.

51. a 2002-2003: $1,878,000 + [($1,878,000 × .1) – ($2,000,000 × .09)]

= $1,885,800.
2003-2004: $1,885,800 + ($188,580 – $180,000) = $1,894,380
$2,000,000 – $1,894,380 = $105,620.

52. c $1,770,592 × .06 = $106,236.

53. a [ (
$120,000
($1,500,000 × 1.02) – $1,380,000 + ————— × 12
15
)] = $54,000.
54. d ($1,800,000 + $42,000) – [($3,600,000 – $192,000) × 1/2] = $138,000.

55. d [$3,120,000 – ( $120,000

———— × 11)] – ($3,000,000 × 1.01) = $24,000.
20

56. c $2,000,000 – ($70,000 + $20,000) = $1,910,000.

57. c Conceptual.

58. a Conceptual.
14 - 18 Test Bank for Intermediate Accounting, Eleventh Edition

*59. d $810,000 – $650,000 = $160,000

($900,000 + $108,000) – $810,000 = $198,000.

EXERCISES

Ex. 14-60—Terms related to long-term debt.

Place the letter of the best matching phrase before each word.

_____ 1. Indenture _____ 6. Times Interest Earned Ratio

_____ 2. Treasury Bonds _____ 7. Mortgage

_____ 3. Bonds Issued at Par _____ 8. Premium on Bonds

_____ 4. Carrying Value _____ 9. Reacquisition Price

_____ 5. Nominal Rate _____ 10. Market Rate

a. Requires that bond discount be reported in the balance sheet as a direct deduction from the
face of the bond.
b. Rate set by party issuing the bonds which appears on the bond instrument.
c. The interest paid each period is the effective interest at date of issuance.
d. Rate of interest actually earned by the bondholders.
e. Results when bonds are sold below par.
f. Results when bonds are sold above par.
g. Bonds payable reacquired by the issuing corporation that have not been canceled.
h. Price paid by issuing corporation for its own bonds.
i. Book value of bonds at any given date.
j. Ratio of current assets to current liabilities.
k. The bond contract or agreement.
l. Indicates the company’s ability to meet interest payments as they come due.
m. Ratio of debt to equity.
n. Exclusive right to manufacture a product.
o. A document that pledges title to property as security for a loan.

Solution 14-60
1. k 3. c 5. b 7. o 9. h
2. g 4. i 6 l 8 f 10. d
Long-Term Liabilities 14 - 19
14 - 20 Test Bank for Intermediate Accounting, Eleventh Edition

Ex. 14-61—Amortization of discount or premium.

Benson Industries, Inc. issued $5,000,000 of 8% debentures on May 1, 2004 and received cash
totaling $4,436,315. The bonds pay interest semiannually on May 1 and November 1. The maturity
date on these bonds is November 1, 2012. The firm uses the effective interest method of amortizing
discounts and premiums. The bonds were sold to yield an effective interest rate of 10%.
Instructions
Calculate the total dollar amount of discount or premium amortization during the first year (5/1/04
through 4/30/05) these bonds were outstanding. (Show computations and round to the nearest
dollar.)

Solution 14-61
Interest Cash Discount Carrying
Date Expense Interest Amortized Value of Bonds
5/1/04 $4,436,315
11/1/04 $221,815 $200,000 $21,815 4,458,130
5/1/05 222,907 200,000 22,907 4,481,037
Total $44,722

Ex. 14-62—Bond issue price and premium amortization.

On January 1, 2004, Lowry Co. issued ten-year bonds with a face value of $2,000,000 and a
stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were
sold to yield 12%. Table values are:
Present value of 1 for 10 periods at 10% .................................. .386
Present value of 1 for 10 periods at 12% .................................. .322
Present value of 1 for 20 periods at 5% .................................... .377
Present value of 1 for 20 periods at 6% .................................... .312
Present value of annuity for 10 periods at 10% ........................ 6.145
Present value of annuity for 10 periods at 12% ........................ 5.650
Present value of annuity for 20 periods at 5% .......................... 12.462
Present value of annuity for 20 periods at 6% .......................... 11.470

Instructions
(a) Calculate the issue price of the bonds.
(b) Without prejudice to your solution in part (a), assume that the issue price was $1,768,000.
Prepare the amortization table for 2004, assuming that amortization is recorded on interest
payment dates.

Solution 14-62
(a) .312 × $2,000,000 = $ 624,000
11.470 × $100,000 = 1,147,000
$1,771,000
(b) Date Cash Expense Amortization Carrying Amount
1/1/04 $1,768,000
6/30/04 $100,000 $106,080 $6,080 1,774,080
12/31/04 100,000 106,444 6,444 1,780,524
 Long-Term Liabilities 14 - 21

Ex. 14-63—Entries for Bonds Payable.

Prepare journal entries to record the following transactions related to long-term bonds of Renn
Co.
(a) On April 1, 2004, Renn issued $900,000, 9% bonds for $968,163 including accrued interest.
Interest is payable annually on January 1, and the bonds mature on January 1, 2014.
(b) On July 1, 2006 Renn retired $270,000 of the bonds at 102 plus accrued interest. Renn uses
straight-line amortization.

Solution 14-63
(a) Cash ............................................................................................ 968,163
Bonds Payable .................................................................... 900,000
Interest Expense ($900,000 × 9% × 3/12) ........................... 20,250
Premium on Bonds Payable ............................................... 47,913

(b) Interest Expense ............................................................................ 11,413

Premium on Bonds Payable ($47,913 × .3 × 6/117) ....................... 737
Cash ($270,000 × 9% × 6/12).............................................. 12,150

Bonds Payable ............................................................................... 270,000

Premium on Bonds Payable ($47,913 × .3 × 90/117) ..................... 11,057
Cash ................................................................................... 275,400
Gain on Redemption of Bonds (Extraordinary) ................... 5,657

Ex. 14-64—Retirement of bonds.

Prepare journal entries to record the following retirement. (Show computations and round to the
nearest dollar.)
The December 31, 2004 balance sheet of Marin Co. included the following items:
7.5% bonds payable due December 31, 2012 $800,000
Unamortized discount on bonds payable 32,000

The bonds were issued on December 31, 2002 at 95, with interest payable on June 30 and
December 31. (Use straight-line amortization.)

On April 1, 2005, Marin retired $160,000 of these bonds at 101 plus accrued interest.

Solution 14-64
Interest Expense............................................................................. 3,200
Cash ($160,000 × 7.5% × 3/12)........................................... 3,000
Discount on Bonds Payable ($32,000 × 1/5 × 1/8 × 3/12).... 200

Bonds Payable................................................................................ 160,000

Loss on Redemption of Bonds........................................................ 7,800
Discount on Bonds Payable [(1/5 × $32,000) – $200] ......... 6,200
Cash ................................................................................... 161,600
14 - 22 Test Bank for Intermediate Accounting, Eleventh Edition

Ex. 14-65—Early extinguishment of debt.

Risen, Incorporated sold its 8% bonds with a maturity value of $2,000,000 on August 1, 2002 for
$1,964,000. At the time of the sale the bonds had 5 years until they reached maturity. Interest on
the bonds is payable semiannually on August 1 and February 1. The bonds are callable at 104 at
any time after August 1, 2004. By October 1, 2004, the market rate of interest has declined and
the market price of Risen's bonds has risen to a price of 102. The firm decides to refund the
bonds by selling a new 6% bond issue to mature in 5 years. Risen begins to reacquire its 8%
bonds in the market and is able to purchase $300,000 worth at 102. The remainder of the
outstanding bonds is reacquired by exercising the bonds' call feature. In the final analysis, how
much was the gain or loss experienced by Risen in reacquiring its 8% bonds? (Assume the firm
used straight-line amortization.) Show calculations.

Solution 14-65
Reacquisition price:
$300,000 × 1.02 = $ 306,000
$1,700,000 × 1.04 = 1,768,000 $2,074,000
Less net carrying amount:
$1,964,000 + ($36,000 × 26/60) = 1,979,600
Loss on early extinguishment $ 94,400

*Ex. 14-66—Accounting for a troubled debt settlement.

Bates, Inc., which owes Glenn Co. $400,000 in notes payable with accrued interest of $36,000, is
in financial difficulty. To settle the debt, Glenn agrees to accept from Bates equipment with a fair
value of $380,000, an original cost of $560,000, and accumulated depreciation of $130,000.

Instructions
(a) Compute the gain or loss to Bates on the settlement of the debt.
(b) Compute the gain or loss to Bates on the transfer of the equipment.
(c) Prepare the journal entry on Bates' books to record the settlement of this debt.
(d) Prepare the journal entry on Glenn's books to record the settlement of the receivable.

*Solution 14-66
(a) Note payable $400,000
Interest payable 36,000
Carrying amount of debt 436,000
Fair value of equipment 380,000
Gain on settlement of debt $ 56,000

(b) Cost $560,000

Accumulated depreciation 130,000
Book value 430,000
Fair value of plant assets 380,000
Loss on disposal of equipment $ 50,000
 Long-Term Liabilities 14 - 23

*Solution 14-66 (cont.)

(c) Notes Payable ............................................................................... 400,000
Interest Payable ............................................................................ 36,000
Accumulated Depreciation ............................................................ 130,000
Loss on Disposal of Equipment ..................................................... 50,000
Equipment ......................................................................... 560,000
Gain on Settlement of Debt ............................................... 56,000

(d) Equipment ..................................................................................... 380,000

Allowance for Doubtful Accounts ................................................... 56,000
Notes Receivable .............................................................. 400,000
Interest Receivable ............................................................ 36,000

*Ex. 14-67—Accounting for a troubled debt restructuring.

On December 31, 2003, Poore Co. is in financial difficulty and cannot pay a note due that day. It
is a $400,000 note with $40,000 accrued interest payable to Dark, Inc. Dark agrees to forgive the
accrued interest, extend the maturity date to December 31, 2005, and reduce the interest rate to
4%. The present value of the restructured cash flows is $342,000.

Instructions
Prepare entries for the following:
(a) The restructure on Poore's books.
(b) The payment of interest on December 31, 2004.
(c) The restructure on Dark’s books.

*Solution 14-67
(a) Interest Payable ............................................................................ 40,000
Notes Payable ($400,000 × 4% × 2) .................................. 32,000
Gain on Restructuring ....................................................... 8,000

(b) Notes Payable ............................................................................... 16,000

Cash .................................................................................. 16,000

(c) Allowance for Doubtful Accounts ................................................... 98,000

Notes Receivable .............................................................. 58,000
Interest Receivable............................................................. 40,000

*Ex. 14-68—Accounting for troubled debt.

(a) What are the general rules for measuring and recognizing a gain or loss by the debtor on a
settlement of troubled debt which includes the transfer of noncash assets?

(b) What are the general rules for measuring and recognizing a gain and for recording future
payments by the debtor in a troubled debt restructuring?
14 - 24 Test Bank for Intermediate Accounting, Eleventh Edition

*Solution 14-68
(a) If the settlement of debt includes the transfer of noncash assets, a gain is measured by the
debtor as the difference between the fair value of the assets transferred and the carrying
amount of the debt, including accrued interest. The debtor also recognizes a gain or loss on
the disposal of assets as the difference between the fair value of the assets transferred and
their book value.

(b) If the carrying amount of the payable is greater than the undiscounted total future cash flows,
the gain is measured by the debtor as the difference between the carrying amount and the
future cash flows. Future payments reduce the principal; no interest expense is recorded by
the debtor.
If the carrying amount of the payable is less than the future cash flows, no restructuring gain
is recognized by the debtor. A new effective interest rate is calculated that equates the
present value of the future cash flows with the carrying amount of the debt. A part of the
future cash flows is recorded as interest expense by the debtor.

PROBLEMS

Pr. 14-69—Bond discount amortization.

On June 1, 2004, Janson Bottle Company sold $1,000,000 in long-term bonds for $877,600. The
bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The
bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under
the effective interest method.

Instructions
(a) Construct a bond amortization table for this problem to indicate the amount of interest
expense and discount amortization at each May 31. Include only the first four years. Make
sure all columns and rows are properly labeled. (Round to the nearest dollar.)
(b) The sales price of $877,600 was determined from present value tables. Specifically explain
how one would determine the price using present value tables.
(c) Assuming that interest and discount amortization are recorded each May 31, prepare the
adjusting entry to be made on December 31, 2006. (Round to the nearest dollar.)

Solution 14-69
(a) Debit Credit Carrying Amount
Date Credit Cash Interest Expense Bond Discount of Bonds
6/1/04 $877,600
5/31/05 $80,000 $87,760 $7,760 885,360
5/31/06 80,000 88,536 8,536 893,896
5/31/07 80,000 89,390 9,390 903,286
5/31/08 80,000 90,328 10,328 913,614

(b) (1) Find the present value of $1,000,000 due in 10 years at 10%.
(2) Find the present value of 10 annual payments of $80,000 at 10%.
Add (1) and (2) to obtain the present value of the principal and the interest payments.
 Long-Term Liabilities 14 - 25

Solution 14-69 (cont.)

(c) Interest Expense .......................................................................... 52,144*
Interest Payable ............................................................... 46,666**
Discount on Bonds Payable ............................................. 5,478

*7/12  $89,390 (from Table) = $52,144

**7/12  8%  $1,000,000 = $46,666

Pr. 14-70—Bond interest and discount amortization.

Logan Corporation issued $600,000 of 8% bonds on October 1, 2004, due on October 1, 2009.
The interest is to be paid twice a year on April 1 and October 1. The bonds were sold to yield
10% effective annual interest. Logan Corporation closes its books annually on December 31.

Instructions
(a) Complete the following amortization schedule for the dates indicated. (Round all answers to
the nearest dollar.) Use the effective interest method.
Debit Credit Carrying Amount
Credit Cash Interest Expense Bond Discount of Bonds
October 1, 2004 $553,668
April 1, 2005
October 1, 2005

(b) Prepare the adjusting entry for December 31, 2005. Use the effective interest method.

(c) Compute the interest expense to be reported in the income statement for the year ended
December 31, 2005.

Solution 14-70
(a) Debit Credit Carrying Amount
Credit Cash Interest Expense Bond Discount of Bonds
October 1, 2004 $553,668
April 1, 2005 $24,000 $27,684 $3,684 557,352
October 1, 2005 24,000 27,868 3,868 561,220

(b) Interest Expense ($561,220 × 10% × 3/12)..................................... 14,031

Interest Payable (1/2 × $24,000) ......................................... 12,000
Discount on Bonds Payable ($14,031 – $12,000) ............... 2,031

(c) $13,842 (1/2 of $27,684)

27,868
14,031
$55,741
14 - 26 Test Bank for Intermediate Accounting, Eleventh Edition

Pr. 14-71—Entries for bonds payable.

Prepare the necessary journal entries to record the following transactions relating to the long-term
issuance of bonds of Sloan Co.:

March 1
Issued $600,000 face value Sloan Co. second mortgage, 8% bonds for $654,120, including
accrued interest. Interest is payable semiannually on December 1 and June 1 with the bonds
maturing 10 years from this past December 1. The bonds are callable at 102.

June 1
Paid semiannual interest on Sloan Co. bonds. (Use straight-line amortization of any premium or
discount.)

December 1
Paid semiannual interest on Sloan Co. bonds and purchased $300,000 face value bonds at the
call price in accordance with the provisions of the bond indenture.

Solution 14-71
March 1: Cash ................................................................................. 654,120
Bonds Payable ........................................................ 600,000
Premium on Bonds Payable .................................... 42,120
Interest Expense ($600,000 × 8% × 3/12) ............... 12,000

June 1: Interest Expense ................................................................. 22,920

Premium on Bonds Payable ($42,120 × 3/117) .................. 1,080
Cash ........................................................................ 24,000

Dec. 1: Interest Expense ................................................................. 21,840

Premium on Bonds Payable ($42,120 × 6/117) .................. 2,160
Cash ........................................................................ 24,000

Bonds Payable .................................................................... 300,000

Premium on Bonds Payable* .............................................. 19,440
Gain on Redemption of Bonds ................................ 13,440
Cash ........................................................................ 306,000

*1/2 × ($42,120 – $1,080 – $2,160) = $19,440.

Pr. 14-72—Entries for bonds payable.

Prepare journal entries to record the following transactions relating to long-term bonds of Flynn,
Inc. (Show computations.)

(a) On June 1, 2004, Flynn, Inc. issued $800,000, 6% bonds for $783,520, which includes
accrued interest. Interest is payable semiannually on February 1 and August 1 with the bonds
maturing on February 1, 2014. The bonds are callable at 102.
 Long-Term Liabilities 14 - 27

Pr. 14-72 (cont.)

(b) On August 1, 2004, Flynn paid interest on the bonds and recorded amortization. Flynn uses
straight-line amortization.
(c) On February 1, 2006, Flynn paid interest and recorded amortization on all of the bonds, and
purchased $480,000 of the bonds at the call price. Assume that a reversing entry was made
on January 1, 2006.

Solution 14-72
(a) Cash ........................................................................................... 783,520
Discount on Bonds Payable .......................................................... 32,480
Bonds Payable .................................................................. 800,000
Interest Expense ($800,000 × 6% × 4/12) ......................... 16,000

(b) Interest Expense ($800,000 × 6% × 6/12) + $560.......................... 24,560

Cash .................................................................................. 24,000
Discount on Bonds Payable ($32,480 × 2/116) ................. 560

(c) Interest Expense ($24,000 + $1,680)............................................. 25,680

Cash .................................................................................. 24,000
Discount on Bonds Payable ($32,480 × 6/116)................. 1,680

Bonds Payable .............................................................................. 480,000

Loss on Bond Redemption............................................................. 25,728
Discount on Bonds Payable [.6 × ($32,480 – $5,600)] ...... 16,128
Cash .................................................................................. 489,600

*Pr. 14-73—Accounting for a troubled debt settlement.

Elton, Inc., which owes Boston Co. $900,000 in notes payable, is in financial difficulty. To
eliminate the debt, Boston agrees to accept from Elton land having a fair market value of
$680,000 and a recorded cost of $510,000.

Instructions
(a) Compute the amount of gain or loss to Elton, Inc. on the transfer (disposition) of the land.
(b) Compute the amount of gain or loss to Elton, Inc. on the settlement of the debt.
(c) Prepare the journal entry on Elton's books to record the settlement of this debt.
(d) Compute the gain or loss to Boston Co. from settlement of its receivable from Elton.
(e) Prepare the journal entry on Boston's books to record the settlement of this receivable.
14 - 28 Test Bank for Intermediate Accounting, Eleventh Edition

*Solution 14-73
(a) Fair market value of the land $680,000
Cost of the land to Elton, Inc. 510,000
Gain on disposition of land $170,000

(b) Carrying amount of debt $900,000

Fair market value of the land given 680,000
Gain on settlement of debt $220,000

(c) Notes Payable ............................................................................. 900,000

Land ................................................................................. 510,000
Gain on Disposition of Land ............................................. 170,000
Gain on Settlement of Debt .............................................. 220,000

(d) Carrying amount of receivable $900,000

Land received in settlement 680,000
Loss on settled debt $220,000

(e) Land ............................................................................................ 680,000

Allowance for Doubtful Accounts.................................................. 220,000
Notes Receivable ............................................................. 900,000