PA10-7 (Supplement 10B) Recording Bond Issue, Interest Payments (Effective-Interest Amortization), and Early Bond Retirement [LO 10-S2]
On January 1, 2018, Surreal Manufacturing issued 520 bonds, each with a face value of $1,000, a stated interest rate of 3 percent paid annually on December 31, and a maturity date of December 31, 2020. On the issue date, the market interest rate was 4 percent, so the total proceeds from the bond issue were $505,572. Surreal uses the effective-interest bond amortization method and adjusts for any rounding errors when recording interest in the final year.
Required:
1. Prepare a bond amortization schedule.
2-5. Prepare the journal entries to record the bond issue, the interest payments on December 31, 2018 and 2019, the interest and face value payment on December 31, 2020 and the bond retirement. Assume the bonds are retired on January 1, 2020, at a price of 101.
In: Accounting
The controller of Trenshaw Company wants to improve the company’s control system by preparing a month-by-month cash budget. The following information is for the month ending July 31, 2020.
Prepare cash budget for a month.
| June 30, 2020, cash balance | $45,000 |
| Dividends to be declared on July 15* | 12,000 |
| Cash expenditures to be paid in July for operating expenses | 40,800 |
| Amortization expense in July | 4,500 |
| Cash collections to be received in July | 90,000 |
| Merchandise purchases to be paid in cash in July | 56,200 |
| Equipment to be purchased for cash in July | 20,000 |
|
*Dividends are payable 30 days after declaration to shareholders of record on the declaration date. |
|
Trenshaw Company wants to keep a minimum cash balance of $25,000.
Instructions
a. Prepare a cash budget for the month ended July 31, 2020, and indicate how much money, if any, Trenshaw Company will need to borrow to meet its minimum cash requirement.
b. Explain how cash budgeting can reduce the cost of short-term borrowing.
(CGA adapted)
In: Accounting
For this problem, use an annual interest rate of 4%.
On 1/1/2020, you buy a perpetuity paying you $10,000 at the beginning of each year, commencing on 1/1/2020. (Recall that a perpetuity is an annuity that does not end.)
(a) Calculate the present value of the perpetuity as of 1/1/2020.
(b) After receiving exactly ten payments, you exchange the perpetuity on 1/1/2030 for an annuity paying $x at the beginning of each year for 20 years, commencing on 1/1/2030. (Note: Since you have received exactly ten payments, you exchange your perpetuity on 1/1/2030 before receiving the payment of $10,000 on that day.)
What is the present value of your perpetuity on 1/1/2030 when you exchange it?
(c) Without any calculations, conclude whether $x is greater than, equal to, or less than $10,000. Explain.
(Note: A correct answer without a correct explanation earns no credit.)
(d) Calculate $x.
In: Accounting
Selected financial statement information and additional data for Jasmine Co. is presented below. Prepare a statement of cash flows for the year ending December 31, 2020
December 31
2020 2019
Cash $65,000 $42,000
Accounts receivable (net) 144,200 84,000
Inventory 206,600 168,000
Land 21,000 58,800
Equipment…………………………………. 789,600 504,000
A/D- Eqp………....................................... 115,600 84,000
Accounts payable 86,000 50,400
Notes payable - short-term 29,400 67,200
Notes payable - long-term 302,400 168,000
Common stock 487,200 420,000
Retained earnings 205,800 67,200
*change in inventory is an operating activity*
Additional data for 2020:
1. Net income was $220,200.
2. Depreciation was $?
3. Land was sold at its original cost.
4. Dividends of $81,600 were paid.
5. Equipment was purchased for $84,000 cash.
6. A long-term note for $134,400 issued for equipment purchase.
7. New owners invested in company by purchasing 100 shares of Common stock for cash.
In: Accounting
Sage Corporation has pretax financial income (or loss) from 2015
through 2021 as follows.
|
Income (Loss) |
Tax Rate |
|||||
| 2015 | $56,640 | 25 | % | |||
| 2016 | (177,000 |
) |
20 | % | ||
| 2017 | 106,200 | 20 | % | |||
| 2018 | 35,400 | 20 | % | |||
| 2019 | 123,900 | 20 | % | |||
| 2020 | (70,800 |
) |
25 | % | ||
| 2021 | 70,800 | 25 | % | |||
Pretax financial income (loss) and taxable income (loss) were the
same for all years since Sage has been in business. In recording
the benefits of a loss carryforward, assume that it is more likely
than not that the related benefits will be realized.
|
Indicate what the income tax expense portion of the income statement for 2016 should look like. Assume all income (loss) relates to continuing operations.
How should the income tax expense section of the income statement for 2017 appear?
What entry for income taxes should be recorded in 2020
How should the income tax expense section of the income statement for 2020 appear?
In: Accounting
The following information is taken from Smith Corporation's financial statements:
December 31
2020 2019
|
Cash |
$100,000 |
$ 27,000 |
|
Accounts receivable |
95,000 |
80,000 |
|
Allowance for doubtful accounts |
(4,500) |
(3,100) |
|
Inventory |
145,000 |
175,000 |
|
Prepaid expenses |
7,500 |
6,800 |
|
Land |
100,000 |
60,000 |
|
Buildings |
287,000 |
244,000 |
|
Accumulated depreciation |
(35,000) |
(13,000) |
|
Patents |
20,000 ———————— $715,000 |
35,000 ———————— $611,700 |
|
Accounts payable |
$ 90,000 |
$ 84,000 |
|
Accrued liabilities |
54,000 |
63,000 |
|
Bonds payable |
135,000 |
60,000 |
|
Common stock |
100,000 |
100,000 |
|
Retained earnings——appropriated |
80,000 |
10,000 |
|
Retained earnings——unappropriated |
271,000 |
302,700 |
|
Treasury stock, at cost |
(15,000) ---——— $715,000 |
(8,000) -———— $611,700 |
For 2020 Year
—————————————
Net income $63,300
Depreciation expense 22,000
Amortization of patents 5,000
Cash dividends declared and paid 25,000
Gain or loss on sale of patents none
INSTRUCTIONS
Prepare a statement of cash flows for Smith Corporation for the year 2020. (Use the indirect method.)
In: Accounting
Assume that in March of 2019 you buy a bond issued by a corporation that has a face of $10,000 and a coupon rate of 5%. The bond will mature in March of 2022. Assume that you pay $10,500 for the bond.
2.a (3 points) Given that you paid $10,500 for the bond, what does this tell you about the market interest rate (the yield to maturity) on the coupon bond when you bought it?
2.b (4 points) Assume that you plan on selling the bond in March of 2020. Use a bond- pricing equation to illustrate the price that you will be able to sell the bond for in March of 2020. You do not have to solve the equation.
2.c (4 points) Assume that the corporation defaults in March of 2020 and pays you $9000 rather than the promised future cash flows. Briefly discuss the concept of the actual return earned on a debt instrument and how the corporation’s default has affected your actual return on the bond that you bought in 2019.
In: Finance
3) Between February 2008 and Summer 2009, the Fed supplemented its open market operations with a greatly expanded program of direct lending (both overnight and short term 28 and 84 day loans) to commercial banks, investment banks, brokerage and primary dealer units of bank holding companies. It also agreed to accept a wider range of short-term securities (instead of accepting only T-Bills) as collateral on these loans and even initiated a program to buy commercial paper from money market funds. Explain why the Fed created all these extraordinary direct lending facilities instead of simply relying on traditional open market purchases of Treasury securities. 4 pts
4) As conditions in short term financial markets improved by summer of 2009 the Fed closed down its lending under these programs mentioned in Q3 above. However, throughout the next 4 years the Fed increased substantially its purchases of longer term mortgage backed securities and Treasury notes from banks in a series of 3 “Quantitative Easing” (QE) Programs.
A) Assume that both lender & borrower confidence levels start to return to normal and financial and physical investment levels start to rise much more strongly in the next 12 months than in the last few years. What potential problems will the extraordinary growth in banks’ reserve deposits and in the size of the Fed’s portfolio of longer term Treasury and Mortgage backed bonds that has resulted from 3 rounds of Quantitative Easing create then for the Fed? 4pts
B) What relatively untested policy tools will help the Fed deal with this problem? Explain. ( Hint: you may wish to look at www.federalreserve.gov then click monetary policy…then Policy Normalization: principles and Plans) 4pts.
In: Economics
Andretti Company has a single product called a Dak. The company normally produces and sells 87,000 Daks each year at a selling price of $58 per unit. The company’s unit costs at this level of activity are given below:
| Direct materials | $ | 8.50 | |
| Direct labor | 11.00 | ||
| Variable manufacturing overhead | 2.10 | ||
| Fixed manufacturing overhead | 4.00 | ($348,000 total) | |
| Variable selling expenses | 3.70 | ||
| Fixed selling expenses | 4.00 | ($348,000 total) | |
| Total cost per unit | $ | 33.30 | |
A number of questions relating to the production and sale of Daks follow. Each question is independent.
3. The company has 600 Daks on hand that have some irregularities and are therefore considered to be "seconds." Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What is the unit cost figure that is relevant for setting a minimum selling price?
4. Due to a strike in its supplier’s plant, Andretti Company is unable to purchase more material for the production of Daks. The strike is expected to last for two months. Andretti Company has enough material on hand to operate at 25% of normal levels for the two-month period. As an alternative, Andretti could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing overhead costs would continue at 35% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20% during the two-month period.
a. How much total contribution margin will Andretti forgo if it closes the plant for two months?
b. How much total fixed cost will the company avoid if it closes the plant for two months?
c. What is the financial advantage (disadvantage) of closing the plant for the two-month period?
d. Should Andretti close the plant for two months?
In: Accounting
Andretti Company has a single product called a Dak. The company normally produces and sells 83,000 Daks each year at a selling price of $60 per unit. The company’s unit costs at this level of activity are given below:
Direct materials $ 9.50
Direct labor 9.00
Variable manufacturing overhead 2.30
Fixed manufacturing overhead 9.00 ($747,000 total)
Variable selling expenses 2.70
Fixed selling expenses 3.50 ($290,500 total)
Total cost per unit $ 36.00
1-a. Assume that Andretti Company has sufficient capacity to produce 103,750 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 83,000 units each year if it were willing to increase the fixed selling expenses by $100,000. What is the financial advantage (disadvantage) of investing an additional $100,000 in fixed selling expenses?
1-b. Would the additional investment be justified?
4. Due to a strike in its supplier’s plant, Andretti Company is unable to purchase more material for the production of Daks. The strike is expected to last for two months. Andretti Company has enough material on hand to operate at 25% of normal levels for the two-month period. As an alternative, Andretti could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing overhead costs would continue at 35% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20% during the two-month period.
b. How much total fixed cost will the company avoid if it closes the plant for two months?
c. What is the financial advantage (disadvantage) of closing the plant for the two-month period?
In: Accounting