CHAPTER 12
NONCURRENT (LONG-TERM) LIABILITIES
SOLUTIONS
1. B is correct. The company receives €1 million in cash from investors at the time the bonds are issued, which is recorded as a financing activity.
2. B is correct. The effective interest rate is greater than the coupon rate and the bonds will be issued at a discount.
3. A is correct. Under U.S. GAAP, expenses incurred when issuing bonds are generally recorded as an asset and amortized to the related expense (legal, etc.) over the life of the bonds. Under IFRS, they are included in the measurement of the liability. The related cash flows are financing activities.
4. B is correct. The bonds will be issued at a discount because the market interest rate is higher than the stated rate. Discounting the future payments to their present value indicates that at the time of issue, the company will record £978,938 as both a liability and a cash inflow from financing activities. Interest expense in 2009 is £58,736 (£978,938 times 6.0 percent). During the year, the company will pay cash of £55,000 related to the interest payment, but interest expense on the income statement will also reflect £3,736 related to amortization of the initial discount (£58,736 interest expense less the £55,000 interest payment). Thus, the value of the liability at 31 December 2010 will reflect the initial value (£978,938) plus the amortized discount (£3,736), for a total of £982,674. The cash outflow of £55,000 may be presented as either an operating or ...
