Brief Exercise 10-1

$30,000,000 × 6% × 6/12 = $900,000

Principal Annual Fraction of the Cash
amount rate annual period interest

Brief Exercise 10-2

Interest $2,000,000¥ × 23.11477* = $46,229,540

Principal $80,000,000 × 0.30656** = 24,524,800
Present value (price) of the bonds $70,754,340
¥[5÷2] % × $80,000,000
*Present value of an ordinary annuity of $1: n = 40, i = 3%.
**Present value of $1: n = 40, i = 3%.

Brief Exercise 10-4

Interest $2,500,000¥ × 27.35548* = $68,388,700

Principal $100,000,000 × 0.45289** = 45,289,000
Present value (price) of the bonds $113,677,700
¥[5÷2] % × $100,000,000
*Present value of an ordinary annuity of $1: n = 40, i = 2%.
**Present value of $1: n = 40, i = 2%.

Brief Exercise 10-5

Interest will be the effective rate times the outstanding balance:

4% × $82,218,585 = $3,288,743
Brief Exercise 10-10
Interest $6,000¥ × 2.72325* = $16,340
Principal $300,000 × 0.86384** = 259,152
Present value (price) of the note $275,492
¥2% × $300,000
*Present value of an ordinary annuity of $1: n = 3, i = 5%.
**Present value of $1: n = 3, i = 5%.

Equipment (price determined above) ................................ 275,492

Discount on notes payable (difference).......................... 24,508
Notes payable (principal amount)................................ 300,000
Brief Exercise 10-11
$300,000 ÷ 2.72325 = $110,163
Amount Installment
of loan n = 3, i = 5% Payment

Helpful, but not required:

Cash Effective Decrease in Outstanding

Payment Interest Balance Balance
5% × Outstanding Balance Balance Reduction
300,000
1 110,163 .05 (300,000) = 15,000 95,163 204,837
2 110,163 .05 (204,837) = 10,242 99,921 104,917
3 110,163 .05(104,917) = 5,246 104,917 0

Interest expense (5% × ($300,000—[$110,163—5% × $300,000])) 10,242

Note payable (difference) .............................................. 99,921
Cash (payment determined above)................................. 110,163

Brief Exercise 10-12

($ in millions)
Bonds payable (principal amount)............................... 60.0
Loss on early extinguishment (to balance) ................. 3.2
Discount on bonds (given) .................................... 2.0
Cash ($60,000,000 × 102%) .................................... 61.2
Brief Exercise 10-13
The issue price of bonds with detachable warrants is allocated between the two different
securities on the basis of their market values.
($ in millions)
Cash (102% × $60 million) ................................................... 61.2
Discount on bonds payable (difference) ............................... 1.8
Bonds payable (principal amount) ..................................... 60.0
Share warrants (equity)
($5 × 10 warrants × 60,000 bonds) .................................... 3.0

Brief Exercise 10-14

The debt and equity components of a convertible bond are recognised and measured separately.
($ in millions)
Cash (102% × $60 million) 61.2
Discount on bonds payable ($60 million − $58.8 million) 1.2
Bonds payable (principal amount) 60
Equity options ($61.2 million − $58.8 million) 2.4

Brief Exercise 10-15

AI will report a gain when adjusting the bonds to fair value. A decrease in the fair value of a
liability is a gain, just the opposite of a decrease in the value of an asset.

If the change in fair value is attributable to a change in the interest rate, the rate increased.
This is because as interest rates rise, the value of a fixed rate instrument—like bonds—falls, as
occurred with AI’s bonds.
AI will report the gain on the change in the fair value of the bonds in net income, if the entire
change is due to the change in general interest rates. But any change in the fair value caused by
a change in fair value due to own credit risk associated with the financial liability is reported as
other comprehensive income in the statement of comprehensive income as required by IFRS 9
Financial Instruments. The change in the fair value caused by a change in the credit risk would
be reflected as a portion of the change in the market rate of interest, the risk premium portion
added to the risk-free portion. Own credit risk is the risk that the investor in the bonds will not
receive the promised interest and maturity amounts at the times they are due as a result of the
default by the issuer. Companies can assume that any change in fair value that exceeds the
amount caused by a change in the general (risk-free) interest rate to be the result of credit risk
changes.
Exercise 10-1
The DD Ltd. bonds are appropriately priced to yield the market rate of interest. The GG Ltd.
bonds are slightly underpriced at the stated price and therefore are the most attractive. The BB
Ltd. bonds are slightly overpriced and are the least attractive. Bonds are priced to yield the market
rate, 10 percent in this case. When this rate is used to price the bonds, we get the prices shown
below. Presumably, the market rate changed since the underwriters priced two of the bond issues.
BB Ltd. bonds:
Interest $5,500,000¥ × 17.15909* = $94,374,995
Principal $100,000,000 × 0.14205** = 14,205,000
Present value (price) of the bonds $108,579,995
¥[11÷2] % × $100,000,000
*Present value of an ordinary annuity of $1: n = 40, i = 5%
**Present value of $1: n = 40, i = 5%

DD Ltd. bonds:
Interest $5,000,000¥ × 17.15909* = $85,795,450
Principal $100,000,000 × 0.14205** = 14,205,000
Present value (price) of the bonds $100,000,450
Note: The result differs from $100,000,000 only because the present value factors in any present value
table are rounded. Because the stated rate and the market rate are the same, the true present value
is $100,000,000.
¥[10÷2] % × $100,000,000
*Present value of an ordinary annuity of $1: n = 40, i = 5%
**Present value of $1: n = 40, i = 5%

GG Ltd. bonds:
Interest $4,500,000¥ × 17.15909* = $77,215,905
Principal $100,000,000 × 0.14205** = 14,205,000
Present value (price) of the bonds $91,420,905
¥[9÷2] % × $100,000,000
*Present value of an ordinary annuity of $1: n = 40, i = 5%
**Present value of $1: n = 40, i = 5%
Exercise 10-3
1. Price of the bonds at January 1, 2022

Interest $4,000,000¥ × 11.46992* = $45,879,680

Principal $80,000,000 × 0.31180** = 24,944,000
Present value (price) of the bonds $70,823,680
¥5% × $80,000,000
*Present value of an ordinary annuity of $1: n = 20, i = 6%
**Present value of $1: n = 20, i = 6%

2. January 1, 2022

Cash (price determined above) ..................................... 70,823,680

Discount on bonds (difference).................................. 9,176,320
Bonds payable (principal amount) ........................... 80,000,000

3. June 30, 2022

Interest expense (6% × $70,823,680) ............................... 4,249,421

Discount on bonds payable (difference) ................. 249,421
Cash (5% × $80,000,000) ........................................ 4,000,000

Partial amortization schedule (not required)

Cash Effective Increase in Outstanding

Interest Interest Balance Balance
5% × Principal Amount 6% × Outstanding Balance Discount Reduction
70,823,680
1 4,000,000 .06 (70,823,680) = 4,249,421 249,421 71,073,101
2 4,000,000 .06 (71,073,101) = 4,264,386 264,386 71,337,487
   
   

4. December 31, 2022

Interest expense (6% × [$70,823,680 + 249,421]) ........... 4,264,386

Discount on bonds payable (difference) ................. 264,386
Cash (5% × $80,000,000) ........................................ 4,000,000
Exercise 10-6
1. June 30, 2022

Cash (price given) ...................................................... 967,707

Bonds payable (principal amount) ........................... 900,000
Premium on bonds payable (difference) ................. 67,707

2. December 31, 2022

Interest expense (6% × $967,707) .................................... 58,062

Premium on bonds payable (difference) .................... 438
Cash (6.5% × $900,000) ......................................... 58,500

3. June 30, 2023

Interest expense (6% × [$967,707—438])........................ 58,036

Premium on bonds payable (difference) .................... 464
Cash (6.5% × $900,000) ......................................... 58,500
Exercise 10-9
1. Price of the bonds at January 1, 2022
Interest $18,000¥ × 6.87396* = $123,731
Principal $600,000 × 0.75941** = 455,646
Present value (price) of the bonds $579,377
¥ 3% × $600,000
*Present value of an ordinary annuity of $1: n = 8, i = 3.5%
**Present value of $1: n = 8, i = 3.5%

2. January 1, 2022

Cash (price determined above) ......................... 579,377

Discount on bonds (difference)...................... 20,623
Bonds payable (principal amount) ............... 600,000

3. Amortization schedule

Cash Effective Increase in Outstanding

Interest Interest Balance Balance
3% ×Principal 3.5% × Outstanding Balance Discount Reduction
579,377
1 18,000 .035 (579,377) = 20,278 2,278 581,655
2 18,000 .035 (581,655) = 20,358 2,358 584,013
3 18,000 .035 (584,013) = 20,440 2,440 586,453
4 18,000 .035 (586,453) = 20,526 2,526 588,979
5 18,000 .035 (588,979) = 20,614 2,614 591,593
6 18,000 .035 (591,593) = 20,706 2,706 594,299
7 18,000 .035 (594,299) = 20,800 2,800 597,099
8 18,000 .035 (597,099) = 20,901* 2,901 600,000
144,000 164,623 20,623
*rounded
Exercise 10-9 (concluded)

4. June 30, 2022

Interest expense (3.5% × $579,377) ................... 20,278
Discount on bonds payable (difference) ..... 2,278
Cash (3% × $600,000) ................................ 18,000

December 31, 2022**

Interest expense (3.5% × [$579,377 + 2,278]) ... 20,358
Discount on bonds payable (difference) ..... 2,358
Cash (3% × $600,000) ................................ 18,000

5. Liability at December 31, 2022

Bonds payable (principal amount)............................... $600,000

Less: discount ......................................................... (20,623)
Initial balance, January 1, 2022 ............................... $579,377
June 30, 2022 discount amortization ..................... 2,278
Dec. 31, 2022 discount amortization ..................... 2,358
December 31, 2022 net liability .............................. $584,013

6. Interest expense for year ended December 31, 2022

June 30, 2022 interest expense ................................ $20,278

December 31, 2022 interest expense ....................... 20,358
Interest expense for 2022 ........................................ $40,636

7. December 31, 2025

Interest expense (3.5% × 597,099) ..................... 20,901*
Discount on bonds payable (difference) ..... 2,901
Cash (3% × $600,000) ................................ 18,000

*Rounded value from amortization schedule

Bonds payable ..................................................... 600,000

Cash ....................................................... 600,000
Exercise 10-11
1. February 1, 2022

Cash (price given) .......................................... 731,364

Discount on bonds payable (difference)......... 68,636
Bonds payable (principal amount) ............... 800,000

2. July 31, 2022

Interest expense (5% × $731,364) ...................... 36,568

Discount on bonds payable (difference) ..... 568
Cash (4.5% × $800,000) ............................. 36,000

3. December 31, 2022

Interest expense (5/6 × 5% × [$731,364 + 568]) 30,497

Discount on bonds payable (difference) ..... 497
Interest payable (5/6 × 4.5% × $800,000) .... 30,000

4. January 31, 2023

Interest expense (1/6 × 5% × [$731,364 + 568]) 6,100*

Interest payable (from adjusting entry)............. 30,000
Discount on bonds payable (difference) ..... 100 Cash
(4.5% × $800,000) .......................................... 36,000
*Rounded
Exercise 10-15
Requirement 1

June 30, 2022

Interest expense (5% × $184 million) 9,200,000

Discount on bonds payable (difference) 1,200,000
Cash (4% × $200 million) 8,000,000

Requirement 2

December 31, 2022

Interest expense (5% × [$184 million + 1.2 million]) 9,260,000
Discount on bonds payable (difference) 1,260,000
Cash (4% × $200 million) 8,000,000

Requirement 3

The interest entries increased the book value from $184,000,000 to $186,460,000. The
change is partially due to decline in general interest rate ($1,000,000) while the remaining
change of $540,000 is due to own credit risks. To increase the book value to $188,000,000,
Rapid needed the following entry:

Loss in fair value (income statement) 1,000,000

Loss in fair value (other comprehensive income) 540,000
Bond payable ($188,000,000 − 186,460,000) 1,540,000
Exercise 10-17
Requirement 1
Interest $24,000¥ × 2.40183* = $57,644
Principal $600,000 × 0.71178** = 427,068
Present value (price) of the notes $484,712
¥4% × $600,000
*Present value of an ordinary annuity of $1: n = 3, i = 12%
**Present value of $1: n = 3, i = 12%

Equipment (price determined above) ...................................... 484,712

Discount on notes payable (difference) ................................ 115,288
Notes payable (principal amount) ...................................... 600,000
Requirement 2

Cash Effective Increase in Outstanding

Interest Interest Balance Balance
4% × Principal 12% × Outstanding Balance Discount Reduction
484,712
1 24,000 .12 (484,712) = 58,165 34,165 518,877
2 24,000 .12 (518,877) = 62,265 38,265 557,142
3 24,000 .12 (557,142) = 66,858* 42,858 600,000
72,000 187,288 115,288
* rounded.

Requirement 3
Interest expense (market rate × outstanding balance) ................ 58,165
Discount on notes payable (difference) ............................ 34,165
Cash (stated rate × principal amount)................................... 24,000
Interest expense (market rate × outstanding balance) ............... 62,265
Discount on notes payable (difference) ............................ 38,265
Cash (stated rate × principal amount)................................... 24,000
Interest expense (market rate × outstanding balance)................... 66,858
Discount on notes payable (difference) ............................ 42,858
Cash (stated rate × principal amount)................................... 24,000
Notes payable ................................................................... 600,000
Cash (stated rate × principal amount)................................... 600,000
Exercise 10-18
1. January 1, 2022

Equipment ........................................................................ 4,000,000

Note payable ................................................................. 4,000,000

2. Amortization schedule

$4,000,000 ÷ 3.16987 = $1,261,881

Amount Installment
of loan n = 4, i = 10% Payment

Cash Effective Decrease in Outstanding

Dec. 31 Payment Interest Balance Balance
10% × Outstanding Balance Balance Reduction

4,000,000
2022 1,261,881 .10 (4,000,000) = 400,000 861,881 3,138,119
2023 1,261,881 .10 (3,138,119) = 313,812 948,069 2,190,050
2024 1,261,881 .10 (2,190,050) = 219,005 1,042,876 1,147,174
2025 1,261,881 .10 (1,147,174) = 114,707* 1,147,174 0
5,047,524 1,047,524 4,000,000
*Rounded.

3. December 31, 2022

Interest expense (10% × outstanding balance) ............................. 400,000

Note payable (difference) .................................................... 861,881
Cash (payment determined above) ....................................... 1,261,881

4. December 31, 2024

Interest expense (10% × outstanding balance) ............................. 219,005

Note payable (difference) .................................................... 1,042,876
Cash (payment determined above) ....................................... 1,261,881
Exercise 10-19
1. November 1, 2022

Component inventory ................................................ 24,000,000

Note payable .......................................................... 24,000,000

2. November 30, 2022

Interest expense (1% × outstanding balance) ............................... 240,000

Note payable (difference) .................................................... 1,892,370
Cash (payment determined below) ....................................... 2,132,370

Calculation of installment payment:

$24,000,000 ÷ 11.25508 = $2,132,370
Amount Installment
of loan n = 12, i = 1% Payment

3. December 31, 2022

November (1% × $24,000,000) $240,000

December (1% × [$24,000,000 − 1,892,370]) 221,076
2022 interest expense $461,076

Journal entry (not required):

Interest expense (1% × [$24,000,000 − 1,892,370]) .................... 221,076

Note payable (difference) .................................................... 1,911,294
Cash (payment determined above) ....................................... 2,132,370
Exercise 10-20
Bonds payable (principal amount)............................... 90,000,000
Loss on early extinguishment (to balance) ................. 4,800,000
Discount on bonds (given) .................................... 3,000,000
Cash ($90,000,000 × 102%) .................................... 91,800,000
Exercise 10-21
Requirement 1

January 1, 2022

Gless (Issuer)

Cash (101% × $12 million) 12,120,000

Discount on bonds payable ($12 − 11.88 million) 120,000
Bonds payable (principal amount) 12,000,000
Equity options (difference) 240,000

Requirement 2

Effective Increase in Outstanding

Date Cash Interest Interest Balance Balance
4.575%* ×
4.5% × Outstanding Amortized
Principal Balance discount
4.575% 11,880,000
Jun-22 540,000 543,510.00 3,510.00 11,883,510
Dec-22 540,000 543,670.58 3,670.58 11,887,181
Jun-23 540,000 543,838.51 3,838.51 11,891,019
Dec-23 540,000 544,014.12 4,014.12 11,895,033
Jun-24 540,000 544,197.77 4,197.77 11,899,231
Dec-24 540,000 544,389.82 4,389.82 11,903,621
Jun-25 540,000 544,590.65 4,590.65 11,908,211
Dec-25 540,000 544,800.67 4,800.67 11,913,012
Jun-26 540,000 545,020.30 5,020.30 11,918,032

*9.15 percent per annum divided by 2 to arrive at rate per semi-annual period.

Requirement 3

Gless (Issuer)

June 30, 2026

Interest expense (market rate × outstanding balance) 545,020
Discount on bond payable (difference) 5,020
Cash (stated rate × principal amount) 540,000

Requirement 4

July 1, 2026

Gless (Issuer)
Bonds payable (10% × $12,000,000) 1,200,000
Equity options (10% × $240,000) 24,000
Discount on bonds payable (1,200,000 − 1,191,803**) 8,197
Ordinary shares 1,215,803

**10% of the unamortized balance of $11,918,032

Exercise 10-23
Requirement 1

The warrants are derivative instruments and Interstate should account for them at fair
value through profit or loss. Interstate should recognize detachable warrants separately at
fair value on initial recognition (date of purchase) and subsequently at each reporting date.

Requirement 2
($ in millions)
Limbaugh (Issuer)
Cash (104% × $30 million) ................................................... 31.2
Discount on bonds payable (difference) ............................... 3.6
Bonds payable (principal amount) ..................................... 30.0
Share warrants outstanding
($8 × 20 warrants × [$30,000,000 ÷ $1,000]) ....................... 4.8

Interstate (Investor)
Investment in share warrants ($4.8 million × 20%) ............... 0.96
Investment in bonds (20% × $30 million) ............................. 6.00
Discount on bonds (difference) ........................................ 0.72
Cash (104% × $30 million × 20%) ..................................... 6.24

Requirement 3

Prior to July 31, 2032, Interstate would have recognized changes in the fair value of
the warrants.
($ in millions)
Original investment………………………………………… 0.96
Increase in fair value……………………………………….. 0.48*
Investment in warrants at fair value on July 31, 2032……… 1.44
*($12 − $8) ×20% × 20 warrants × [$30,000,000 ÷ $1,000]

Interstate (Investor)
Investment in shares (to balance) ......................................... 8.64
Investment in share warrants ......................................... 1.44
Cash (20% × 30,000 × 20 warrants × $60)........................... 7.20
Exercise 10-23 (concluded)

Requirement 4
($ in millions)
Limbaugh (Issuer)
Cash (20% × 30,000 bonds × 20 warrants × $60) ..................... 7.20
Share warrants outstanding
($4.8 million × 20%) ...................................................... 0.96
Share capital .................................................................. 8.16

The issuer does not have to “mark-to-market” the warrants as these are equity
instruments issued. Hence, the share capital issued is the sum of the new proceeds
received (at $60 per share) and the original cost of the warrants (at $8 per warrant).
Exercise 10-28
Land ($450,000 − 325,000) ......................................... 125,000
Gain on disposition of assets ............................... 125,000

Note payable (principal amount) ................................. 600,000

Accrued interest payable (11% × $600,000) ............... 66,000
Gain on debt settlement (difference) ...................... 216,000
Land (fair value) .................................................... 450,000
Exercise 10-29

Requirement 1

Present value
factor Present value
Existing debt
Interest (2022–2024) 1,200,000 2.486851991 2,984,222
Principal repayment 12,000,000 0.751314801 9,015,778
12,000,000
Accrued interest payable
immediately 1,200,000 1 1,200,000
Fair value of debt and accrued
interest 13,200,000

Present value
factor Present value
Modified debt
Interest payable 31-
December-23 1,000,000 0.826446281 826,446
31-
December-24 1,000,000 0.751314801 751,315
Principal repayment 11,000,000 8,264,463
9,842,224
Difference in present value of existing and
modified debt (3,357,776.11)
Difference as a percentage of the present value of existing debt −25.44%
Exercise 10-29 (concluded)

Requirement 2

(a) January 1, 2022

($ in millions)
Note payable 1
Interest payable 1.2
Gain on debt restructuring 2.2

(b) December 31, 2023

($ in millions)
Interest expense 1
Cash (revised interest amount) 1

(c) December 31, 2024

($ in millions)
Note payable (revised principal amount) 11
Interest expense 1
Cash 12
Exercise 10-30
Requirement 1

Present value Present

factor value
Existing debt
Interest payable

31-Dec-22 24,000 0.909090909 21,818

31-Dec-23 24,000 0.826446281 19,835

Principal repayment on 31-Dec-2023 240,000 0.826446281 198,347

240,000
Accrued interest payable
immediately 24,000 1 24,000.00
Fair value of debt and accrued
interest 264,000

Present value Present

factor value
Modified debt

Interest payable 31-Dec-23 11,555 0.826446281 9,550

31-Dec-23 11,555 0.826446281 9,550

31-Dec-23 11,555 0.826446281 9,550

Principal repayment 240,000 0.826446281 198,347

274,665 226,996
Difference in present value of existing and
modified debt (37,004.13)
Difference as a percentage of the present value of existing debt −14.02%
Exercise 10-30 (concluded)

Requirement 2

(a) January 1, 2022

Interest payable ($24,000 − $11,555) 12,445
Gain on debt restructuring 12,445

(b) December 31, 2022

Interest expense 11,555
Interest payable (revised interest amount) 11,555

(c) December 31, 2023

Note payable 240,000
Cash 240,000

Interest expense 11,555

Interest payable 23,110
Cash 34,665
Problem 10-1
Requirement 1

Interest $2,500,000¥ × 15.04630* = $37,615,750

Principal $50,000,000 × 0.09722** = 4,861,000
Present value (price) of the bond s $42,476,750
¥5% × $50,000,000
*Present value of an ordinary annuity of $1: n = 40, i = 6%
**Present value of $1: n = 40, i = 6%

Cash (price determined above) ..................................... 42,476,750

Discount on bonds (difference).................................. 7,523,250
Bonds payable (principal amount) ........................... 50,000,000

Requirement 2
Interest $2,500,000 × 18.40158* = $46,003,950
Principal $50,000,000 × 0.17193** = 8,596,500
Present value (price) of the bonds $54,600,450
*Present value of an ordinary annuity of $1: n = 40, i = 4.5%
**Present value of $1: n = 40, i = 4.5%

Cash (price determined above) ..................................... 54,600,450

Premium on bonds (difference) .............................. 4,600,450
Bonds payable (principal amount) ........................... 50,000,000

Requirement 3
Investment in bonds (principal amount)........................... 50,000,000
Premium on bond investment ................................. 4,600,450
Cash (price calculated above) ................................... 54,600,450
Problem 10-2
1. Liabilities at September 30, 2022

Bonds payable (principal amount)............................... $160,000,000

Less: discount ......................................................... 20,000,000
Initial balance, January 1, 2022 ............................... $140,000,000
June 30, 2022 discount amortization ....................... 400,000*
Sept. 30, 2022 discount amortization ...................... 212,000**
Sept. 30, 2022 net bonds payable ............................ $140,612,000

Interest payable ** .................................................. $4,000,000

2. Interest expense for year ended September 30, 2022

June 30, 2022 interest expense ................................ $8,400,000*

September 30, 2022 interest expense ...................... 4,212,000**
Interest expense for financial year 2022 .................. $12,612,000

3. Statement of cash flows for year ended September 30, 2022

Baddour would report the cash inflow of $140,000,000*** from the sale of the bonds as a
cash flow from financing activities in its statement of cash flows.

The $8,000,000* cash interest paid is a cash outflow from operating activities because
interest is an income statement (operating) item.
Problem 10-4
Requirement 1
$8,000,000 (outstanding balance at maturity)

Requirement 2
$6,627,273 (outstanding balance at sale date)

Requirement 3
20 years (40 semiannual periods)

Requirement 4
At the effective interest rate

Requirement 5
8% [($320,000 ÷ $8,000,000) × 2]

Requirement 6
10% [($331,364 ÷ $6,627,273) × 2]

Requirement 7
$12,800,000 ($320,000 × 40)

Requirement 8
$14,172,727 ($12,800,000* + [$8,000,000 − 6,627,273])
(Total cash interest plus the discount)

*$320,000 × 40
Problem 10-9
Requirement 1

Cash (price given) ................................................. 5,795,518

Discount on bonds payable (difference)................ 12,204,482
Bonds payable (principal amount) ...................... 18,000,000

Requirement 2

The discount rate that “equates” the present value of the debt ($5,795,518) and its future
value ($18,000,000) is the effective rate of interest:

$5,795,518 ÷ $18,000,000 = .32197 – n = 10, i = ?

Using a financial calculator, EXCEL (RATE function) or present value tables, i = 12%. So, this is
the effective interest rate. A financial calculator will produce the same rate.

Requirement 3

Interest expense (12% × $5,795,518) ......................... 695,462

Discount on bonds payable ............................ 695,462

Requirement 4

Interest expense (12% × [$5,795,518 + $695,462]) ... 778,918

Discount on bonds payable ............................ 778,918

Requirement 5

Bonds payable.................................................... 18,000,000

Cash .............................................................. 18,000,000
Problem 10-10
Requirement 1
Interest $32,000 × 17.15909 = $549,091
Principal $800,000 × 0.14205 = 113,640
$662,731
4% × $800,000 = $32,000

January 1
Cash 662,731
Discount on bonds payable 137,269
Bonds payable 800,000

Requirement 2

June 30
Interest expense (5% × $662,731) 33,137
Discount on bonds payable (difference) 1,137
Cash (4% × $800,000) 32,000

Requirement 3

December 31
Interest expense (5% × [$662,731 + 1,137]) 33,193
Discount on bonds payable (difference) 1,193
Cash (4% × $800,000) 32,000

Requirement 4

The interest entries increased the book value from $662,731 to $665,061. To increase the
book value to $668,000, NFB needed the following entry:

Loss in fair value (Other comprehensive income) 2,939

Bond payable ($668,000 − 665,061) 2,939

Since general risk-free rates did not change, the change in interest rate is due to own credit
risk and the loss in fair value has to be taken to other comprehensive income as required by
IFRS 9.