Question

Exercise 4

On January 1, 2017, Park Rapids Lumber Company issued $80 million in 20-year, 10% bonds payable. Interest is payable semiannually on June 30th and December 31st. Bond discounts and premiums are amortized straight-line at each interest payment date.

a. Record the journal entry when the bonds were issued on January 1, 2017, make the necessary the journal entry to record the payment of bond interest on June 30, 2017, under each of the following assumptions:

1. The bonds were issued at 98. Round your answers to the nearest dollar.

2. The bonds were issued at 101. Round your answers to the nearest dollar.

b. Compute the net bond liability at December 31, 2017, under assumptions 1 and 2 above. Round to the nearest dollar.

c. Under which of the above assumptions, 1 or 2 would the investor’s effective rate of interest be higher? Explain.

Exercise 5

Speed World Cycles sells high-performance motorcycles and Motocross racers. One of Speed World’s most popular models is the Kazomma 900 dirt bike. During the current year, Speed World purchased eight of these cycles at the following costs:

Purchase Date                               Units Purchased      Unit Cost   Total Cost

July 1                                                                 2                  $4,950          $9,900

July 22                                                              3                    5,000           15,000

August 3                                                  3                        5,100           15,300

                                                                  ------                         ------------

                                                                      8                                             $40,200

On July 28, Speed World sold four Kazomma 900 dirt bikes to the Vince Wilson racing team. The remaining four bikes remained in inventory at September 30, the end of Speed World’s fiscal year.

Assume that Speed World uses a perpetual inventory system.

a. Compute the cost of goods sold relating to the sale on July 28 and the ending inventory of Kazomma 900 dirt bikes at September 30, using the following cost flow assumptions:

1. Average cost

2. FIFO

3. LIFO

Show the number of units and the unit costs of each layer comprising the cost of goods sold and ending inventory.

b. Using the cost figures computed in part a. answer the following questions:

1. Which of the three cost flow assumptions will result in Speed World Cycles reporting the highest net income for the current year? Would this always be the case? Explain.

2. Which of the three cost flow assumptions will minimize the income taxes owed by Speed World Cycles for the year? Would you expect this usually to be the case? Explain.

3. May Speed World Cycles use the cost flow assumption that results in the highest net income for the current year in its financial statements, but use the cost flow assumption that minimizes taxable income for the current year in its income tax return? Explain.

Answer 1

Solution:

Exercise 4

Part (a-1) Bonds were issued at 98

Date	General Journal	Debit	Credit
Jan 1, 2017	Cash (Face Value 80,000,000*98%)	$78,400,000
	Discount on Bonds Payable	$1,600,000
	Bonds Payable		$80,000,000
June.30, 2017	Interest Expense	$4,040,000
	Discount on Bonds Payable (1,600,000 / Semi Annual period to maturity 40)		$40,000
	Interest Payable (Face Value 80,000,000*Coupon Rate 10%*1/2 half yearly)		$4,000,000

Part (a-2) – Bonds were issued at 101

Date	General Journal	Debit	Credit
Jan 1, 2017	Cash (Face Value 80,000,000*101%)	$80,800,000
	Premium on Bonds Payable		$800,000
	Bonds Payable		$80,000,000
June.30, 2017	Interest Expense	$3,980,000
	Premium on Bonds Payable (800,000 / Semi Annual period to maturity 40)	$20,000
	Interest Payable (Face Value 80,000,000*Coupon Rate 10%*1/2 half yearly)		$4,000,000

Part b ---

Net Bond Liability on Dec 31, 2017 under assumptions 1 = Face Value of the bonds – Unamortized Bonds Discount on Dec 31, 2017

= 80,000,000 – (Total Discount 1,600,000 – Amortized discount on June 30 and Dec 31 i.e. 40,000*2)

= 80,000,000 – (1,600,000 – 80,000)

= 80,000,000 – 1,520,000

= $6,480,000

Net Bond Liability on Dec 31, 2017 under assumptions 2 = Face Value of the bonds + Unamortized Bonds Premium on Dec 31, 2017

= 80,000,000 + (800,000 – 20,000*2)

= 80,000,000 + 760,000

= 80,760,000

Part c – Under assumption 1, the effective rate of interest is higher since the company will pay higher return to the investor against the market interest rate.

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Pls ask separate question for remaining parts.