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Chapter 13 – Exercises & Cases

Multiple Choice Questions​

  1. Long-term liabilities are due: a) Within 6 months b) Within 1 year c) Beyond 1 year d) Never Answer: c) Long-term liabilities are due beyond one year.

  2. The effective-interest method calculates interest based on: a) Face value b) Carrying value c) Market value d) Original cost Answer: b) Effective-interest method uses carrying value.

  3. Which PCN account is used for long-term loans? a) 400000 b) 120000 c) 430000 d) 510000

    Answer: b) 120000 is Long-Term Loans (Emprunts).

Questions​

  1. Explain the difference between face value and present value for long-term liabilities.

  2. How does the effective-interest method work? Why is it preferred?

  3. What are the journal entries for bond issuance, interest payment, and maturity?

  4. What PCN accounts are used for long-term debt in Luxembourg?

  5. Why is proper loan accounting important?

Problems Set A​

Problem A-1: Loan Accounting

A business borrows €50,000 at 5% interest, 5-year term, with annual payments of €11,548.74. Record: a) Loan receipt b) First year payment (calculate interest and principal) c) Second year payment

Problem A-2: Effective-Interest Method

Loan: €100,000, 6% interest, annual payment €23,739.64. Prepare: a) Complete amortization schedule (all 5 years) b) Journal entries for Years 1 and 2 c) Show loan balance after Year 2

Problem A-3: Current Portion of Long-Term Debt

A business has a €200,000 loan with annual payments of €25,000 principal. At year end, €25,000 is due next year. Record the reclassification.

Problem A-4: Bond Issuance

Record issuance of €500,000 bonds at face value, 5% interest, semi-annual payments.

Problem A-5: Interest Accrual

Loan balance: €80,000, interest rate 6%, interest accrues monthly. Calculate and record monthly interest accrual.

Problems Set B​

Problem B-1: Complete Loan Amortization

Business borrows €150,000 at 4% interest, 10-year term. Annual payment: €18,465.62. a) Prepare complete amortization schedule b) Record journal entries for Years 1-3 c) Calculate total interest over loan life d) Show loan balance after 5 years

Problem B-2: Loan with Different Terms

Compare two loan options:

  • Option A: €100,000, 5% interest, 5 years
  • Option B: €100,000, 6% interest, 7 years

Calculate annual payments and total interest for each. Which is better?

Problem B-3: Bond Accounting

Issue €1,000,000 bonds, 5% interest, 10-year term, semi-annual payments. a) Record issuance at face value b) Record first interest payment c) Record interest payment at maturity d) Record bond repayment

Problem B-4: Lease Obligations

Business enters into finance lease:

  • Present value: €50,000
  • Annual payment: €12,000
  • Interest rate: 6%

Record lease inception and first payment.

Comprehensive Problem​

Comprehensive Problem 13: Complete Long-Term Liability Accounting

Mode Luxembourg SARL needs financing for expansion. The business:

January 1, 2024:

  • Borrows €300,000 from bank at 5% interest
  • Term: 10 years
  • Annual payment: €38,882.76

Additional Information:

  • Current portion due in 2025: €23,882.76
  • Interest accrues annually
  • Payments due December 31 each year

Required:

  1. Record loan receipt on January 1, 2024.

  2. Prepare complete amortization schedule for all 10 years.

  3. Record journal entries for: a) 2024 payment b) 2025 payment c) Interest accrual at year end 2024

  4. Reclassify current portion at December 31, 2024.

  5. Show long-term liabilities on balance sheet: a) December 31, 2024 b) December 31, 2025

  6. Calculate: a) Total interest expense over loan life b) Interest expense for 2024 c) Principal reduction in 2024

  7. Explain Luxembourg requirements: a) PCN Class 1 account classifications b) Interest expense tax treatment c) Documentation requirements d) Disclosure requirements

Cases​

Case 13-1: Loan Decision

Marie is considering a loan to expand her restaurant. She has two options:

  • Option A: €200,000 at 5% interest, 10-year term
  • Option B: €200,000 at 6% interest, 7-year term

Questions for Analysis:

  1. Calculate annual payments for each option.

  2. Calculate total interest for each option.

  3. What are the advantages and disadvantages of each?

  4. Which option would you recommend? Why?

  5. How should the loan be accounted for?

  6. What are the cash flow implications?

Case 13-2: Long-Term Debt Management

A Luxembourg SME has multiple long-term loans and is struggling with cash flow due to loan payments.

Questions for Analysis:

  1. How can the business better manage long-term debt?

  2. What are the implications of long-term debt on financial statements?

  3. How does debt affect financial ratios?

  4. What options does the business have?

  5. How should debt be monitored and managed?

  6. What are the Luxembourg requirements?

Solutions are published in supplementary/instructor/solutions/chapter_13_solutions.md.