Question

Oz Company was started when it issued bonds with a $170,000 face value on January 1, 2016. The bonds were issued for cash at 99. Oz uses the straight-line method of amortization. They had a 20-year term to maturity and an 5 percent annual interest rate. Interest was payable on December 31 of each year. Oz Company immediately purchased land with the proceeds (cash received) from the bond issue. Oz leased the land for $10,625 cash per year. On January 1, 2019, the company sold the land for $169,300 cash. Immediately after the sale of the land, Oz redeemed the bonds at 100. Assume that no other accounting events occurred during 2019.

Required
Prepare an income statement, statement of changes in equity, balance sheet, and statement of cash flows for the 2016, 2017, 2018, and 2019 accounting periods. Assume that the company closes its books on December 31 of each year. Prepare the statements using a vertical statements format. (Hint: Record each year’s transactions in T-accounts prior to preparing the financial statements.) (Amounts to be deducted should be indicated with minus sign.)
	OZ COMPANY Income Statements For the Year Ended December 31 2016 2017 2018 2019 Lease revenue $10,625 $10,625 $10,625 $0 Interest expense Operating income $10,625 $10,625 $10,625 Non-Operating income/expense Loss on bond redemption Gain on sale of land Net income(loss) $10,625 $10,625 $10,625 $0
	OZ COMPANY Statement of Changes in Stockholders’ Equity For the Year Ended December 31 2016 2017 2018 2019 Common stock Net income(loss) Total stockholders’ equity
	OZ COMPANY Balance Sheets As of December 31 2016 2017 2018 2019 Assets Total Assets Liabilities Total Liabilities Stockholders’ equity Total liabilities and stockholders’ equity
	OZ COMPANY Statements of Cash Flows For the Year Ended December 31 2016 2017 2018 2019 Cash flows from operating activities: Net cash flow from operating activities: Cash flow from investing activities: Net cash flow from investing activities Cash flow from financing acttivities Net cash flow from financing activities Net change in cash Ending cash balance

Answer 1

Face Value of bond issued = $ 170,000

Amount received on issue of bond = $ 168,300 (170,000*99%)

Discount on issue of bond =$ 1700 (170,000 – 1,68,300)

Period of Bond = 20 years ; Method of amortisation = Straight line method

Value to be amortised each year = $85 (1700/20)

Interest each year@ 5% = 8500

Interest expense for the period = $ 8,585 (8500+85)

As proceeds from issue of bonds used for the purchase of land, the price of land is $ 1,68,300

1. OZ Company Income statement

	2016	2017	2018	2019
Lease Revenue	$ 10,625	$ 10,625	$ 10,625	0
Operating expense		-	-	-
Operating Income	$ 10,625	$ 10,625	$ 10,625	-
Non-Operating Income/expense
Gain on sale of land				$ 1,000
Loss on redemption of Bond	-	-	-	($ 1,445)
Interest expense	$ 8,585	$ 8,585	$ 8,585	-
Net Income/ (loss)	$ 2,040	$ 2,040	$ 2,040	($ 445)

1. Statement of Changes in Stockholder’s Equity

	2016	2017	2018	2019
Common Stock	-	-	-	-
Net Income	$ 2,040	$ 2,040	$ 2,040	($ 445)
Retained Earnings	-	$ 2,040	$ 4,080	$ 6120
Total Stockholder’s Equity	$ 2,040	$ 4,080	$ 6120	$ 5,675

1. OZ Company Balance Sheet

	2016	2017	2018	2019
Assets
Land	$ 168,300	$ 168,300	$ 168,300	-
Cash	$ 2,125	$ 4,250	$ 6,375	$ 5,675
Total Assets	$ 170,425	$ 172,550	$174,675	$ 5675
Liabilities
Long term liabilities:
Bonds	$ 170,000	$ 170,000	$ 170,000	-
Discount on Bonds payable (Unamortised discount )	($ 1,615)	($ 1,530)	($ 1,445)
Stakeholder’s Equity	$ 2040	$ 4,080	$ 6120	$ 5,675
Totally Liability and stakeholder’s equity	$ 170,425	$ 172,550	$174,675	$ 5675

1. Cash Flow statement   

	2016	2017	2018	2019
Cash flow from operating activities
Lease income	10,625	10,625	10,625	-
Net cash flow from financing activities (A)	10,625	10,625	10,625	-
Cash flow from investing activities
Purchase of land	(168,300)	-	-
Sale of land	-	-	-	169,300
Net cash flow from financing activities (B)	(168,300)	-	-	169,300
Cash flow from financing activities
Issue of Bonds	168,300	-	-	-
Interest paid	(8500)	(8500)	(8500)	-
Redemption of bonds				(170,000)
Net cash flow from financing activities (C)	159800	(8500)	(8500)	(170,000)
Opening Cash Balance (D)	-	2,125	4250	6,375
Closing Cash Balance (A+B+C+D)	2,125	4,250	6,375	5,675