Problem 14-5 Issuer and investor; effective interest; amortization schedule; adjusting entries [LO14-2]

On February 1, 2018, Cromley Motor Products issued 10% bonds, dated February 1, with a face amount of $60 million. The bonds mature on January 31, 2022 (4 years). The market yield for bonds of similar risk and maturity was 12%. Interest is paid semiannually on July 31 and January 31. Barnwell Industries acquired $60,000 of the bonds as a long-term investment. The fiscal years of both firms end December 31. (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. Determine the price of the bonds issued on February 1, 2018.
2-a. Prepare amortization schedules that indicate Cromley’s effective interest expense for each interest period during the term to maturity.
2-b. Prepare amortization schedules that indicate Barnwell’s effective interest revenue for each interest period during the term to maturity.
3. Prepare the journal entries to record the issuance of the bonds by Cromley and Barnwell’s investment on February 1, 2018.
4. Prepare the journal entries by both firms to record all subsequent events related to the bonds through January 31, 2020.

Case-1

In 1920, there was considerable debate regarding how much the US government should intervene in the economy. US citizens, for example, were concerned about the future of an American car brand, Chevrolet, which was included in the failing General Motors. While some people wanted the government to ensure that their jobs were safe, others were concerned that the government was intervening too much. It should be noted that from World War I, the US government has considered itself a mediator regarding problems in the market while avoiding controlling aspects of the economy. For example, the US government regulated anti-competitive behaviour while avoiding running several industries. On the other hand, when the 1925 recession took place and the economy began to shrink, the government had to stimulate demand for which it started spending more and intervened significantly so that the banking sector could be saved from collapsing. Moreover, the US government had to provide businesses with aid to sustain them.

Questions: [ Student has to write answer at least 125 words for each sub-question]


i) Analyse the possible benefits of a government intervention in an economy? .






ii) Which economic system ensures complete freedom for individuals in economic activities? What are the benefits of freedom of individuals in an economy?









iii) Compare the economic system of Oman with that of USA in terms of social welfare and competitiveness.

Myth of income inequality in US

Although US is the largest economy in the world, some says it is one of the worst income inequal countries among the industrialized countries and Income inequality in US is not improving.

Q1) Does this claim have any truth in it? If so, discuss it with specific economic data. Do you think Trump tax cut actually contributed to more income inequality? Do you agree or not?(0.5 point)

Q2) Some says “ In US, the upper class is doing better, the middle class is disappearing and more people are living under poverty.”

If so, what is the social, economic and psychological consequence from growing income inequality? (0.5 point)

Q3) Some says US government should do something to reduce the gap between the poor and the rich? Do you agree or not? (0.5 point)

Q4)If so, is it a good idea to raise more tax from the wealthy and provide more welfare safety nets to the poor, or increase of minimum wage , or free higher education with Government subsidy, or universal basic income? (0.5 point)

Q5) Is any better idea of government policy over this matter? since middle class struggles with heavier consumer debt due rising rent cost, medical cost, and education cost, and job insecurity due to automation. (0.5 point)

Mexico tends to have much higher inflation rate than the United States and also much higher interest rate than the United States. Inflation and interest rates are much more volatile in Mexico than in industrialized countries. The value of the Mexican peso is typically more volatile than the currencies of industrialized countries from a US perspective; it has typically depreciated from one year to the next, but the degree of depreciation has varied substantially. The bid/ask spread tends to be wider for the peso than for currencies of industrialized countries.

1. Identify the most obvious economic reason for the persistent depreciation of the peso.

2. High interest rates are commonly expected to strengthen a country’s currency because they can encourage foreign investment in securities in that country, which results in the exchange of other currencies for that currency. Yet, the peso’s value has declined against the dollar over most years though Mexican interest rates are typically much higher than US interest rates. Thus, it appears that the high Mexican interest rates do not attract substantial US investment in Mexico’s securities. Why do you think US investors do not capitalize on the high interest rates in Mexico?

3. Why do think the bid/ask spread is higher for pesos than for currencies of industrialized countries? How does this affect a US firm that does substantial business in Mexico?

Determine the pressure in ?? at the tropopause for the US Standard Atmosphere ( surface temperature ??℃ ). Assuming that the temperature is isothermal at −??℃ from the tropopause, determine the pressure at a height of ??? ??. ( ? = ??? ??−??? −? , ? = ? ∙ ?? ?? −? , ?? = ???? ??, ? = ? ∙ ?℃ ??−? ).

Q5) What are non-tariff trade barriers? Provide a few examples using food products that are imported or exported from the US.

Analyse how imported tariff by US on imported steel , almiuum and ather product from chine affected china and DOMESTIC INDUSTRIES

Excessive executive compensation in the financial services industry ranks high among examples of failed corporate governance. Corporate government at the government-sponsored mortgage giants Fannie Mae and Freddie Mac were particularly weak. The politically appointed board at both enterprises failed to understand the risks of sub-prime loan strategies being employed, did not adequately monitor the decisions of the CEO, did not exercise effective oversight of the accounting principles being employed (which led to inflated earnings), and approved executive compensation systems that allowed management to manipulate earnings to receive lucrative performance bonuses. The audit and compensation committees at Fannie Mae were particularly ineffective in protecting shareholder interest., with the audit committee allowing the company’s financial officers to audit report prepared under their direction and used to determine performance bonuses. Fannie Mae’s audit committee also was aware of management’s use of questionable accounting practices that reduced losses and recorded one-time gains to achieve financial targets linked to bonuses. In addition, the audit committee failed to investigate formal charges of accounting improprieties filed by a manager in the Office of the Controller.

Fannie Mae’s compensation committee was equally ineffective. The committee allowed the company’s CEO, Franklin Raines to select the consultant employed to design the mortgage firm’s executive compensation plan and agreed to a tiered bonus plan that would permit Raines and other senior managers to receive maximum bonus without great difficulty. The compensation plan allowed Raines to earn performance-based bonuses of $52 million and a total compensation of $90 million between 1999 and 2004. Raines was forced to resign in November 2004 when the Office of Federal Housing Enterprise Oversight found that Fannie Mae’s executives had fraudulently inflated earnings to receive bonuses linked to financial performance. Securities and Exchange Commission investigators also found evidence of improper accounting at Fannie Mae and required the company to restate its earnings between 2002 to 2004 by $6.3 billion.

Poor governance at Freddie Mac allowed its CEO and senior management to manipulate its financial data to receive performance-based compensation as well. Freddie Mac’s CEO Richard Syron received 2007 compensation of $19.8 million while the mortgage company’s share price declined from a high of $70 in 2005 to $25 at year end 2007. During Syron’s tenure as CEO, the company became embroiled in a multibillion-dollar accounting scandal, and Syron’s personally disregarded internal reports dating to 2004 that cautioned of an impending financial crisis at the company. Forewarnings within Freddie Mac and by Federal Regulators and outside industry observers proved to be correct, with loan underwriting policies at Freddie Mac and Fannie Mae leading to combined losses at the two firms in 2008 of more than $100 billion. The price of Freddie Mac’s shares had fallen to below $1 by the time of Syron’s resignation in September 2008.

Both organisations were placed into a conservatorship under the direction of the U.S. Government in September 2008 and were provided bailout funds of more than $160 billion by early 2011. The U.S. Federal Housing Finance Agency estimated that the bailout of Fannie Mae and Freddie Mac would potentially reach $200 billion to $300 billion by 2013.

Sources: Chris Isidore, “Fannie, Freddie Bailout: $153 Billion…and counting,” CNNMoney, February 11, 2011;” Adding up the government’s Total Bailout Tab, “ New York Times Online, February 4, 2009; Eric Dash, “Fannie Mae to restate results by $6.3 Billion because of Accounting,” New York Times Online, www.nytimes.com, December 7, 2006; Annys Shin, “Fannie Mae sets executive salaries,” Washington Post, February 9,2006,p.D4; and Scott DeCarlo, Eric Weiss, Mark Jickling, and James R.Cristie, Fannie Mae and Freddie Mac: Scandal in U.S. Housing (Nova Publishers,2006), pp. 266-286.

QUESTION 1

A) Fannie Mae and Freddie Mac are two examples of poor execution of corporate governance in mortgage financial institutions. Identify and discuss the corporate governance issues in this case study.

ACCOUNTING FOR DEPRECIABLE ASSETS CHALLENGE #6

INSTRUCTIONS: USING THE INFORMATON PROVIDED BELOW

1. CALCULATE THE ANNUAL DERECIATION FOR THE DEPRECIABLE ASSETS IN 2017

2. PREPARE THE JOURNAL ENTRIES (USING CORRECT DATES AND EXPLANATIONS) THAT ARE NECESSARY TO RECORD THE FOLLOWING:

THE PURCHASE OF THE ASSETS BOUGHT IN 2017

THE DEPRECIATION FOR EACH OF THE DEPRECIABLE ASSETS FOR THE YEAR ENDED DEC. 31, 2017

THE POTENTIAL SALE OF THE TRUCK ON DECEMBER 31, 2020 USING THE INFORMATION PROVIDED

3. ENTER THE POST REFERENCES IN THE JOURNAL FOR JOURNAL ENTRIES PERPARED IN STEP 2.

(NOTE: ONLY INCLUDE POST REFERENCES FOR THE ENTRIES ACTUALLY POSTED).

4. COMPLETE THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017.

(NOTE: CURRENT PORTION OF NOTE PAYABLE IS $52,800)

5. ANSWER QUESTIONS A-D.

IN 2016 AND 2017, FISH & BAIT COMPANY HAD IN THE FOLLOWING TRANSACTIONS FOR FIXED ASSETS:

PURCHASE DATE TRANSACTION DEPRECIATION METHOD LIFE COST SALVAGE VALUE

1/1/2016 PURCHASED LAND N/A N/A $124,225 N/A

6/30/2016 PURCHASE MACHINERY UNITS-OF-PROD. 24,000 HR $132,000 12,000

1/5/2017 PURCHASE TRUCK DD BALANCE 5 YEARS $65,000 6,000

10/1/2017 PURCHASE STORE EQUIP. STRAIGHT-LINE 8 YEARS $80,000 8,000

ADDITIONAL INFORMATION:

THE COMPANY PAID $5,000 CASH FOR THE TRUCK AND SIGNED A LOAN FOR THE REMAINDER OF THE PURCHASE.

THE COMPANY PAID CASH FOR THE STORE EQUIPMENT.

THE MACHINERY WAS ACTUALLY USED FOR THE FOLLOWING NUMBER OF HOURS:

2016 2,900 HOURS

2017 4,100 HOURS

1. CALCULATE DEPRECIATION

use the space provided below to calculate the 2017 depreciation for the machinery:

complete the table below to calculate the annual depreciation for the truck:

YEAR BOOK VALUE AT BEGINNING OF YEAR DEPREC, RATE ANNUAL DEPREC. EXPENSE   

2017

2018

2019

2020

2021

(AT THE END OF THE YEAR)

YEAR ACCUM. DEPREC. BOOK VALUE

2017

2018

2019

2020

2021

use the space provided below to calculate the 2017 depreciation for the store equipment:

2. PREPARE JOURNAL ENTRIES

FISH & BAIT COMPANY

GENERAL JOURNAL

DATE( 2017) DESCRIPTION DEBIT CREDIT

ASSUME ON DECEMBER 31, 2020, THE COMPANY SELLS THE TRUCK FOR CASH OF $8,000

PREPARE THE JOURNAL ENTRY TO RECORD THE SALE OF THE TRUCK