Entries for Bonds Payable, including bond redemption

The following transactions were completed by Montague Inc., whose fiscal year is the calendar year:

Year 1
July 1. Issued $55,000,000 of 10-year, 9% callable bonds dated July 1, Year 1, at a market (effective) rate of 7%, receiving cash of $62,817,040. Interest is payable semiannually on December 31 and June 30.
Dec. 31. Paid the semiannual interest on the bonds. The bond discount amortization of $390,852 is combined
with the semiannual interest payment.
31. Closed the interest expense account.
Year 2
June 30. Paid the semiannual interest on the bonds. The bond discount amortization of $390,852 is combined
with the semiannual interest payment..
Dec. 31. Paid the semiannual interest on the bonds. The bond discount amortization of $390,852 is combined with the semiannual interest payment.
31. Closed the interest expense account.
Year 3
June 30. Recorded the redemption of the bonds, which were called at 103. The balance in the bond premium
account is $6,253,632 after payment of interest and amortization of premium have been recorded.
(Record the redemption only.)

1. Journalize the entries to record the foregoing transactions. For a compound transaction, if an amount box does not require an entry, leave it blank. When required, round amounts to the nearest dollar.

Year 1 July1


Dec.31


Dec.31

Year 2 June 30


Dec.31


Dec.31

Year 3 June 30

2. Indicate the amount of the interest expense in (A) Year 1 and (B) Year 2.

a. Year 1 $
b. Year 2 $

3. Determine the carrying amount of the bonds as of December 31, Year 2.
$

Apple is planning to launch a new easy-to-use kitchen appliance with a touchscreen interface, the iToaster. Apple expects to sell 1 million and 2 million units in the first two years after launch, respectively, and then to discontinue this product. Each unit will sell for $200 in the first year after launch, and $150 in the second year. The costs of components and labor are $80 per unit, while salaries and other expenses add up to $10 million in each year the product is sold.

The factory that manufactures the iToaster requires an investment of $90 million right now and $45 million one year from now. It will take one year to complete, so production will only start in the second year, i.e. at the end of year 2 followed by one more year of production in at the end of year 3. The factory will be depreciated linearly to zero over 5 years after its completion.

To get production up and running, Apple has to buy components worth $5 million immediately before the launch of the product, and add another $2 million worth of components to its inventory exactly one year later.

The firm's marginal tax rate is 34%.

1. What is the annual depreciation (in $ million)?
2. What is the net operating profit after taxes in year 2 (in $ million)?
3. What is the net operating profit after taxes in year 3 (in $ million)?
4. What is the free cash flow (FCF) at the end of year 0 (in $ million)?
5. What is the free cash flow (FCF) at the end of year 1 (in $ million)?
6. What is the free cash flow (FCF) at the end of year 2 (in $ million)?

You are the Management Accountant of a chair manufacturing business. The business is running for 3 years. You have used marginal cost approach and FIFO (First in First Out) to value the stock in the financial statements. You are interested to know what the recorded profits would have been if absorption costing had been used instead. Using the following information, prepare a statement for each of the three years comparing both methods:

(a) Total fixed indirect production cost is £64,000 per year.

(b) Direct labour costs over each of the three years were £16 per unit.

(c) Direct material costs over each of the three years were £12 per unit.

(d) Variable expenses which vary in direct ratio to production were £20 per unit.

(e) Sales were: Year 1: 36,000 units; Year 2: 40,000 units; Year 3: 60,000 units. The selling price remained constant at £70 per unit.

(f) Production is at the rate of: Year 1: 40,000 units; Year 2: 48,000 units; Year 3: 51,000 units.

(g) Other overheads are as follows:

• Selling and Distribution overheads are: Year 1: £10,000 for each year; Year 2: £10,500, Year 3: £11,000
• Administrative overheads £15,000 for each year

(h) Interest expense: Year 1: £1,000; Year 2: £1,250; Year 3: £1,500

Required:

Prepare the income statements using marginal and absorption costs for the three years (6 income statements in total) with calculations / workings of closing stock and comment on the results.

What is the IRR of the following set of cash flows?

Year 0 Cash Flow –$10,741

Year 1 Cash Flow $5,900

Year 2 Cash Flow $4,300

Year 3 Cash Flow $6,100

Upper Division of Lower Company acquired an asset with a cost of $560,000 and a four-year life. The cash flows from the asset, considering the effects of inflation, were scheduled as follows.

The cost of the asset is expected to increase at a rate of 20 percent per year, compounded each year. Performance measures are based on beginning-of-year gross book values for the investment base. Ignore taxes.

Required:

a. What is the ROI for each year of the asset's life, using a historical cost approach?

b. What is the ROI for each year of the asset's life if both the investment base and depreciation are determined by the current cost of the asset at the start of each year?

Speedy Delivery Company purchases a delivery van for $33,600. Speedy estimates that at the end of its four-year service life, the van will be worth $5,200. During the four-year period, the company expects to drive the van 177,500 miles.

Actual miles driven each year were 46,000 miles in year 1 and 51,000 miles in year 2.

Required:

Calculate annual depreciation for the first two years of the van using each of the following methods. (Do not round your intermediate calculations.)

  
1. Straight-line.

Year Annual Depreciation

1 ?

2 ?

2. Double-declining-balance.

Year Annual Depreciation

1 ?

2 ?

   
3. Activity-based.

Year Annual Depreciation

1 ?

2 ?

A company is deciding whether to lease or purchase an asset. In this question we will evaluate the NPV of the purchase decision. The capital cost required to purchase the asset is $1,000,000 (at time zero) with a salvage value of $500,000 at the end of the 5th year. The purchased asset can be depreciated based on MACRS 5-year life depreciation with the half year convention (table A-1 at IRS (Links to an external site.)Links to an external site.) over six years (from year 0 to year 5). The asset would yield annual revenue of $350,000 for five years (from year 1 to year 5) and operating cost of $60,000 for year 1 to 5. If the income tax is 40% and the annual discount rate is 16%, calculate the NPV for the purchase decision

If the applicable discount rate is 15%, what is the NPV of the following investment? Round to the nearest cent. The project is expected to cost $81,000 immediately, and generate the following annual cash flows: Year 1: $29,000 Year 2: $35,000 Year 3: $64,000 Year 4: $21,000

You want to start an organic garlic farm. The farm costs $300,000, to be paid in full immediately. Year 1 cash flows will be $36,000, and grow at 6% a year into year 5 when you decide to sell the farm at the end of the year for $360,000. Assuming these estimates are all correct, what is the IRR of the garlic farm investment? Round to the tenth of a percent (eg 5.6%=5.6). [Hint: You'll want to solve this in Excel using Goal Seek]

a. Assuming that the expectations hypothesis is valid, compute the price of the four-year bond shown below at the end of (i) the first year; (ii) the second year; (iii) the third year; (iv) the fourth year. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. What is the rate of return of the bond in years 1, 2, 3, and 4? Conclude that the expected return equals the forward rate for each year. (Do not round intermediate calculations. Round your answers to 2 decimal places.)