Question

On August 1, 2019 X company purchased furniture at $13,000. The salvage value is $1,000 and the useful life is 5 years. X uses the double straight-line method. The depreciation expense for 2019 is ------.

Select one:

a. $833.

b. $1,333.

c. $2,167.

d. $1,000.

Clear my choice

On January 1, 2021, X Co. issued ten-year bonds with a face value of $5,000,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. The bonds will be issued at

Select one:

a. Premium.

b. Par value.

c. Face value.

d. Discount.

Answer 1

Correct Option is C) $2,167

Explanation:

Double Straight line depreciation = 2 * Straight line depreciattion percent * Book Value of asset

Straight Line Depreciation Percent(SLDP) = 100 / No. of useful life of asset.

Here , SLDP = 100 / 5 = 20%

Therefore , Double Straight Line Depreciation = 2 * 20% * $13,000

= $5,200

This year the asset was put in use from August 1,2019 , so only for that period the depreciation expense will be recorded = $5,200 * (5/12) = $2,166.66

Therefore Depreciation expense for 2019 is $2,167

Correct Option is D) Discount.

Explanation:

Isuue Price :

Present Value of 1 :

Ten year bond face value = $5,000,000

Semi-annual bond , period is 10 years but will be taken as 20 (10*2) . Therefore n = 20 years Interest rate (market) = 12% per annum . So per period rate = 6% (12/2). Thereofre i = 6%

Present Value of Interest factor,PVIF (20,6%) = 0.3118

So Present value of 1 = $5,000,000 * 0.3118

= $1,559,000

[ NOTE: The PVIF can also be rounded to 0.312, a slight amount will be changed in that case. I have taken upto 4 decimal places(0.3118) for more accurate calculations]

Now, Present Value of Annuity :

Total Interest = $5,000,000 * 10% * (6/12)

= $250,000

Present value of annuity,PVAF (20,6%) = 11.470

So, Present value of annuity = $250,000 * 11.470

= $2,867,500

TOTAL ISSUE PRICE OF BOND = $1,559,000 + $2,867,500 = $4,426,500

Therefore we can see that the bond was issued at less than the face value , which means it was issued at DISCOUNT