Question

ABC Inc. decided to issue a bond on January 1^st, 2019 with a market interest rate of 6%. However, ABC Inc. decided to pay a coupon rate of 8%. The "face-value" of the bond was 10,000 dollars. This bond will be due on December 31^st, 2020 and will be paid semi-annually on June 30^th, and December 31^st. ABC Inc. uses the effective interest method.

On April 1^st, 2019, ABC Inc. also found out that the $14,000 value of Goodwill in Clearwater Inc. is actually worth $25,000 as ClearWater's brand popularity has increased a lot.

On Apr 30th, 2019, ABC Inc. receives a notice from a real estate agent that the market value of the land that it bought from ClearWater Inc. for $10,000 is now worth $25,000 even after all the usage and wear and tear that happened on the land for the 4 months since Jan 1st, 2019. The land is expected to be used for 25 more months.

On May 15^th, 2019 ABC Inc. gets hit with a major lawsuit from Hang Hau Inc. that accuses it of copying its patent for making screwdrivers. ABC Inc. believes that it has a 45% chance of losing the case and would end up paying $15,000 if it lost. The case will end December 31^st, 2019.

On May 31^st, 2019 ABC Inc. gets hit with a major lawsuit from Mong Kok Lawyers Inc. because of injuries caused to its workers who used the screwdrivers. ABC Inc. believes that it has a 51% chance of losing the case and would end up paying $10,000 if it lost. The case will end December 31^st, 2019.

Record all journal entries between January 1^st, 2019 and December 31^st, 2020. Please create the Extracted part of balance sheet, income statement, and cash flow statement of ABC Inc. as of June 30^th, 2019, only when any items affect them. (18 points)

ABC Inc. hires a new accountant who believes that the effective interest method is "ineffective" and straight-up tells the CFO that she believes that ABC Inc. needs to use the straight-line method. (10 points total)

1)   By how much would the net-income of ABC Inc. change under this new method for the time period of January 1^st, 2019 through December 31^st, 2019 relative to the effective interest method? (2 points)

2)   By how much would the net-income of ABC Inc. change under this new method for the time period of January 1^st, 2020 through December 31^st, 2020 relative to the effective interest method? (2 points)

3)   By how much would the cash flow from operations of ABC Inc. change under this new method for the time period of January 1^st, 2019 through December 31^st, 2019 relative to the effective interest method? (2 points)

4)   By how much would the total liabilities of ABC Inc. change under this new method for the time period as of December 31^st, 2019 relative to the effective interest method? (2 points)

5)   By how much would the total liabilities of ABC Inc. change under this new method as of December 31^st, 2020 relative to the effective interest method? (2 points)

Answer 1

DATE	ACCOUNT	DEBIT	CREDIT
JAN 1,2019	CASH	10000
	BONDS PAYABLE		9581.64
	PREMIUM ON BONDS PAYABLE		418.36
APRIL 1,2019	FAIR VALUE OF ASSETS	25000
	GOOD WILL		14000
	GAIN ON IMPAIRMENT		11000
APRIL 30,2019	LAND	15000
	REVALUATION RESERVE		15000
MAY 15, 2019	THERE IS NO NEED OF RECORDING BECAUSE THE PROBABILITY IS LESS THAN 50%
MAY 30, 2019	LAWSUIT LOSS	10000
	LAWSUIT LIABILITY		10000
JUN 30,2019	INTEREST EXPENSE	300
	PREMIUM ON BONDS PAYABLE	100
	CASH		400
DEC 31,2019	INTEREST EXPENSE	297
	PREMIUM ON BONDS PAYABLE	103
	CASH		400
JUN 30,2020	INTEREST EXPENSE	293.91
	PREMIUM ON BONDS PAYABLE	106.09
	CASH		400
DEC 31, 2020	INTEREST EXPENSE	290.73
	PREMIUM ON BONDS PAYABLE	109.27
	CASH		400

THIS IS THE IMPACT THESE TRANSACTIONS WILL HAVE ON THE REPORTS IN 2019

BALANCE SHEET			INCOME STATEMENT
			INCOME:
CASH	11200		GAIN ON IMPAIRMENT		11000
LAND	15000		PREMIUM ON BONDS PAYABLE		418.36
GOODWILL	14000		EXPENSE:
			INTEREST EXPENSE		597
LIABITLITES
BONDS PAYABLE	9581.64
LAWSUIT LIABILITY	-10000		CASH FLOW STATEMENT
			FROMINVESTING:
EQUITY
REVALUATION RESERVE	15000		INCREASE ON FAIR VALUE OF ASSETS	11000
			FINANCING
			BONDS PAYABLE		9581.64
			INEREST PAID ON BONDS		597
			PREMIUM ON BONDS		418.36

TIME WASN´T ENOUGH O DO THE REST, I DO APOLOGIZE