Question

In: Accounting

On 1 April 2018, Shen Ltd acquired specialised equipment by issuing $2,700,000 of face value, 9%...

On 1 April 2018, Shen Ltd acquired specialised equipment by issuing $2,700,000 of face value, 9% ten-year bonds to the equipment’s manufacturer. No cash changed hands. The bonds will pay interest semi-annually, beginning with the first payment due on 1 October 2018. The market interest rate on the issue date was 10%. The equipment, which was available for use immediately, will be depreciated under the declining balance method at 30%. The estimated residual value is $200,000. Ignore GST. Round to two decimal places.

Required:

  1. Prepare the journal entry for equipment purchase/bond issuance on 1 April 2018.
  2. Shen Ltd adjusts and closes its books annually on 31 July. Prepare Shen Ltd’s two required adjusting journal entries on that date. For depreciation purposes, you may use a cost figure of $2,500,000.
  3. Prepare the journal entry for the first payment due on 1 October 2018.
  4. On 1 April 2019, after the interest was paid, Shen Ltd and the equipment’s manufacturer agreed that the bonds would be redeemed at a market price of 93.
  1. Prepare the journal entry to record the redemption. (Assume that Shen Ltd’s carrying value for the bonds on the redemption date was $2,542,491.)
  2. At a market price of 93, was the market interest rate on the date of redemption greater than, less than, or equal to 9%? Explain your answer.
  1. Assume the redemption resulted in a gain for Shen Ltd. You have been asked to help assess the immediate impact of the redemption on Shen Ltd’s return on asset ratio. In your answer, first identify the numerator and denominator of the ratio; then explain the impact, if any, on the numerator; finally, explain the impact, if any, on the denominator. Then conclude as to the overall effect.
  2. Ignore d) above and assume Shen Ltd will redeem the bonds at maturity.
    1. How much interest expense will be recognised over the life of the bonds?
    2. Why isn’t the total amount of interest expense shown as a liability on 1 April 2018, given that it is highly probable that Shen Ltd will pay (relevance) and the amount can be measured without error (faithful representation)?

Solutions

Expert Solution


Related Solutions

On 1 April 2018, Shen Ltd acquired specialized equipment by issuing $2,700,000 of face value, 9%...
On 1 April 2018, Shen Ltd acquired specialized equipment by issuing $2,700,000 of face value, 9% ten-year bonds to the equipment’s manufacturer. No cash changed hands. The bonds will pay interest semi-annually, beginning with the first payment due on 1 October 2018. The market interest rate on the issue date was 10%. The equipment, which was available for use immediately, will be depreciated under the declining balance method at 30%. The estimated residual value is $200,000. Ignore GST. Round to...
On 1 July 2018 Fraser Ltd acquired an item of equipment with an acquisition cost of...
On 1 July 2018 Fraser Ltd acquired an item of equipment with an acquisition cost of $400,000. The equipment can be used for 8 years. On 30 June 2019, the end of financial year, the fair value of the equipment was $357,000. The equipment was sold for $330,000 on 1 January 2020. Non-current asset is depreciated evenly over the useful life and has no residual value. The company uses the revaluation model to record non-current asset. The income tax rate...
At January 1, 2018, Brant Cargo acquired equipment by issuing a four-year, $200,000 (payable at maturity),...
At January 1, 2018, Brant Cargo acquired equipment by issuing a four-year, $200,000 (payable at maturity), 5% note. The market rate of interest for notes of similar risk is 11%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. to 3. Prepare the necessary journal entries for Brant Cargo. (If no entry is required for a transaction/event, select "No journal entry...
At January 1, 2018, Brant Cargo acquired equipment by issuing a six-year, $200,000 (payable at maturity),...
At January 1, 2018, Brant Cargo acquired equipment by issuing a six-year, $200,000 (payable at maturity), 5% note. The market rate of interest for notes of similar risk is 10%. Prepare necessary journal entries: 1. On Jan 1, 2018 2. On Dec 31, 2018 3. On Dec 31, 2019
1] On 1 January 2018 Panorama Ltd acquired equipment for $22 000, net of GST. The...
1] On 1 January 2018 Panorama Ltd acquired equipment for $22 000, net of GST. The estimated residual value for the equipment is zero. Depreciation is calculated at 10% p.a) on the diminishing-balance basis. The depreciation expense for the year ended 31 December 2020 is: a $1604. b $1782. c $1980. d $2200. 2] The correct entry to record the purchase of a motor vehicle for $40 000 cash, plus 10% GST is which of the following? a DR Motor...
Dark Ltd acquired a taxi business on 1 January 2018 for $1,600,000. The value of the...
Dark Ltd acquired a taxi business on 1 January 2018 for $1,600,000. The value of the assets of the business at that date, based on fair value less cost to disposal, were as follows: Office building 1,000,000 Taxi vehicles 480,000 Taxi license 120,000 Trade receivables (net) 40,000 Cash 20,000 Trade payables 80,000 The taxi business was considered to be a cash-generating unit after the acquisition. The estimated useful life of all taxi vehicles was 5 years and that of the...
On January 1, 2018, Kelly Corporation acquired bonds with a face value of $500,000 for $483,841.79,...
On January 1, 2018, Kelly Corporation acquired bonds with a face value of $500,000 for $483,841.79, a price that yields a 10% effective annual interest rate, pay interest on June 30 and December 31, and are due December 31, 2021, and are being held to maturity. Required: Prepare journal entries to record the purchase of the bonds and the first two interest receipts using the: 1.) straight line method of amortization 2.) effective interest method of amortization
on April 1 2018, company sold 10,000 bonds ($1,000 face value) at 11% semi-annually. they are...
on April 1 2018, company sold 10,000 bonds ($1,000 face value) at 11% semi-annually. they are due April 1 2028. proceeds from the bonds were 9,156,946 and their coupon dates are april 1 and october 1 on april 1 2020 , the company bough back 6,000 bonds for 5,331,000 cash. - prepare journal entries for the bonds from sale (april 1, 2018 to the end of year 2020 (12/31/20) - what are the 12/31/20 balances in the related bonds, discount,...
At the beginning of 2018, VHF Industries acquired a equipment with a fair value of $9,947,400...
At the beginning of 2018, VHF Industries acquired a equipment with a fair value of $9,947,400 by issuing a three-year, noninterest-bearing note in the face amount of $12 million. The note is payable in three annual installments of $4 million at the end of each year. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. What is the effective rate of...
At the beginning of 2018, VHF Industries acquired a equipment with a fair value of $7,209,560...
At the beginning of 2018, VHF Industries acquired a equipment with a fair value of $7,209,560 by issuing a five-year, noninterest-bearing note in the face amount of $10 million. The note is payable in five annual installments of $2 million at the end of each year. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. What is the effective rate of...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT