Swifty Company sells 8% bonds having a maturity value of $2,650,000 for $2,356,174. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1.

a. Determine the effective-interest rate.
The effective-interest rate =

b. Set up a schedule of interest expense and discount amortization under the effective-interest method.

Here are the abbreviated financial statements for Planner’s Peanuts:

a. If sales increase by 20% in 2020 and the company uses a strict percentage of sales planning model (meaning that all items on the income and balance sheet also increase by 20%), what must be the balancing item?

b. What will be the value of this balancing item?

Oriole Corporation has municipal bonds classified as a held-to-maturity at December 31, 2020. These bonds have a par value of $766,000, an amortized cost of $766,000, and a fair value of $688,000. The company believes that impairment accounting is now appropriate for these bonds.

Prepare the journal entry to recognize the impairment

What is the new cost basis of the municipal bonds?

Given that the maturity value of the bonds is $766,000, should Oriole Corporation amortize the difference between the carrying amount and the maturity value over the life of the bonds?

At December 31, 2021, the fair value of the municipal bonds is $724,000. Prepare the entry (if any) to record this information.

Q4. Exercise 14-02 Sunland Corporation was organized on January 1, 2019. During its first year, the corporation issued 1,950 shares of $50 par value preferred stock and 110,000 shares of $10 par value common stock. At December 31, the company declared the following cash dividends: 2019, $5,325; 2020, $13,800; and 2021, $28,500.

a. Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 7% and noncumulative.

b. Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 8% and cumulative.

Brenda Chan is the new accountant for a small private company called Ace Construction Limited. She has recently prepared the year-end financial statements for the company. Brenda's boss, Virginia Schwirtz, who is the chief executive officer (CEO), has asked her to make three changes to the financial statements as follows:

1. Remove an expense and its related liability that Brenda recorded for damages expected to be paid from a lawsuit due to a poorly done construction job a few months ago. Virginia believes that, although it is highly likely that Ace will have to pay for these damages, because a final agreement about the exact amount of these damages will not be agreed to until next month, nothing relating to this issue should be recorded in the financial statements or disclosed in the notes to the financial statements.

2. Just prior to the end of the year, Ace signed a contract to build a new arena for the city for a fixed fee of $80 million. As long as the company can build the facility for less than this amount, the company will make a profit. Since the value of the contract is fixed and because the city has always paid its bills on time, Virginia wants the revenue for this contract to be recorded in the current year because that was when the contract was signed.

3. The company has a chequing account that is allowed to go into an overdraft (negative) position. When the balance falls into an overdraft, the bank begins to charge interest on that amount as if it were a bank loan, which in essence it is. Since there is no due date on such a balance, Virginia would like the loan to be reported as a non-current liability.

a) What is the objective of financial reporting? Are Brenda's or Virginia's actions consistent with these objectives? Explain.

b) For each of the items covered above, determine if the proposed changes enhance or diminish the qualitative characteristics of the company's financial statements and whether the company is dealing with these items in a manner that is consistent with the definitions for elements of financial statements.

Calculating EVA

Brewster Company manufactures elderberry wine. Last year, Brewster earned operating income of $195,000 after income taxes. Capital employed equaled $2.4 million. Brewster is 45 percent equity and 55 percent 10-year bonds paying 7 percent interest. Brewster’s marginal tax rate is 40 percent. The company is considered a fairly risky investment and probably commands a 13-point premium above the 5 percent rate on long-term Treasury bonds.

Jonathan Brewster’s aunts, Abby and Martha, have just retired, and Brewster is the new CEO of Brewster Company. He would like to improve EVA for the company. Compute EVA under each of the following independent scenarios that Brewster is considering.

1. No changes are made; calculate EVA using the original data.

2. Sugar will be used to replace another natural ingredient (atomic number 33) in the elderberry wine. This should not affect costs but will begin to affect the market assessment of Brewster Company, bringing the premium above long-term Treasury bills to 11 percent the first year and 8 percent the second year. Calculate revised EVA for both years.

3. Brewster is considering expanding but needs additional capital. The company could borrow money, but it is considering selling more common stock, which would increase equity to 80 percent of total financing. Total capital employed would be $4,000,000. The new after-tax operating income would be $400,000. Using the original data, calculate EVA. Then, recalculate EVA assuming the materials substitution described in Requirement 2. New after-tax income will be $400,000, and in Year 1, the premium will be 11 percent above the long-term Treasury rate. In Year 2, it will be 8 percent above the long-term Treasury rate. (Hint: You will calculate three EVAs for this requirement.)

On May 1, Donovan Company reported the following account balances:

On May 1, Beasley paid $400,000 in stock (fair value) for all of the assets and liabilities of Donovan, which will cease to exist as a separate entity. In connection with the merger, Beasley incurred $15,000 in accounts payable for legal and accounting fees.

Beasley also agreed to pay $75,000 to the former owners of Donovan contingent on meeting certain revenue goals during the following year. Beasley estimated the present value of its probability adjusted expected payment for the contingency at $20,000. In determining its offer, Beasley noted the following:

• Donovan holds a building with a fair value $30,000 more than its book value.
• Donovan has developed unpatented technology appraised at $25,000, although is it not recorded in its financial records.
• Donovan has a research and development activity in process with an appraised fair value of $45,000. The project has not yet reached technological feasibility.
• Book values for Donovan’s current assets and liabilities approximate fair values.

What should Beasley record as total liabilities incurred or assumed in connection with the Donovan merger?

1.Nortel Networks experienced one of the most notorious Canadian bankruptcies. Eventually there was a distribution of funds obtained from selling off Nortel’s assets, including intellectual property. Former Nortel employees eligible to receive pensions made up one of the major groups seeking relief from the court. Would those entitled to pension funds have been secured or unsecured creditors in the bankruptcy?

2.Dedrisan Inc. has experienced an unusually large loss from which it is very unlikely to recover. It is in default on some debt covenants. The auditor of the company concludes that Dedrisan is no longer a going concern. Management has requested the auditor issue an auditor’s report on the financial statements for the current year. The financial statements have been prepared using the historical cost principle and do not reflect any adjustments to the assets or any disclosure of the loan defaults. The auditor informs Dedrisan that, under the current financial statement presentation, an adverse audit opinion would be issued. Without the necessary adjustments and disclosure, the financial statements taken as a whole are not in accordance with GAAP. Once issued, the adverse opinion could lead to the bankruptcy of Dedrisan Inc.

What measures, if any, can Dedrisan Inc. take to obtain an unmodified opinion from the auditor?