Question 1: Lime Co. sells $6,000,000 of 9% bonds on April 1, 2014. The bonds pa

ID: 2427565 • Letter: Q

Question

Question 1: Lime Co. sells $6,000,000 of 9% bonds on April 1, 2014. The bonds pay interest on October 1 and April 1. The due date of the bonds is October 1, 2018. The bonds yield 8%. Issuance costs were $70,000, and all were incurred on April 1, 2014. The company uses the effective interest method of accounting for bond premiums and discounts. It records bond interest costs as a deferred charge and amortizes them on a straight-line basis. Round all amounts to the nearest dollar.

a) Determine the bond price, i.e., what it will sell for. Show all computations.

b) Prepare an amortization table for the life of the bonds in good form.

c) Prepare journal entries for the following dates in proper form, including explanations. • April 1, 2014 • October 1, 2014 • December 31, 2014 year–end adjusting entries.

d) Provide income statement and classified balance sheet excerpts for the bonds as of and for the year ended December 31, 2014. Include a proper heading for each. Only show the categories (i.e., current assets, noncurrent liabilities, etc.) and line items and amounts that apply to this question. Do not show the cash account on these excerpts. (Do include cash if it is relevant to journal entries.) e) Prepare journal entries for April 1, 2015 in proper form, including explanations. Assume the company does NOT make reversing entries.

Question 2: Locate Accounting Standards Update (ASU) No. 2015-03, issued April 2015, in the Accounting Standards Codification, and answer the following questions in complete sentences restating the questions. Do not copy and paste your answers. This may be done in Word or Excel. a) What is the title and subtitle of this ASU? b) What are the main provisions (requirements) of this ASU? c) What is its effective date? d) How does this question affect (change your answers) to question 1 of this APP?

Explanation / Answer

Coupon Interest C = 60,00000*4.5%

C = 270000

I = 4%

N = 9 Periods

Maturity Value = 60,000,00

Bond Price = 270000*(1-1/(1+0.04)^9)) / 0.04 + 60000000/(1+0.04)^9

270000*(1-0.7025)/0.04)+ 6000000/1.4233

270000*7.4351+4215520

62,23,021

Amortisartion Table

Date

Interest Accrued

Interest Paid

Principle Paid

Total Repayment

1-Apr-14

1-Oct-14

270000

(6000000*4.5%)

1-Apr-15

270000

1-Oct-15

270000

1-Apr-16

270000

1-Oct-16

270000

1-Apr-17

270000

1-Oct-17

270000

1-Apr-18

270000

1-Oct-18

270000

6000000

6270000

Total Repayment

2430000

6000000

8430000

1-Apr-14

Bank a/c ----- Dr

6,000,000

To Bonds 9%

6,000,000

(Being 9% of 6,000,000 bonds issued )

1-Apr-14

Issue expenses of Bond -- Dr

70,000

To Bank

70,000

(Being Bond issue expenses incurred )

1-Oct-14

Interest on Bonds - Dr

270000

To Bank

270000

(Being six months Bond interest paid )

31-Dec-14

Interest on Bonds -- Dr

135000

To Bond Interest Payable a/c

135000

(Being Three months Bond interest accrued )

31-Dec-14

Discount on Bonds -- Dr

11666

To Issue expenses of Bond

11666

(Being Bonds Issue expenses for current year 9 month period charges to P & L A/c. )

1-Apr-15

Interest on Bonds - Dr

135,000

Bond Interest Payable -- Dr

135,000

To Bank

270000

(Being six months Bond interest paid with reversing 2014 year 3 months Interest)

Balance Sheet as at 31st December 2014

Current Assets

Bank

5,660,000

Miscelleneous Assets

Issue Expenses of Bond

58,334

Non Current Liabilities

Bond @ 9 %

6,000,000

Current Liabilities

Interest Accrued on bonds

135,000

Interest—Imputation of Interest (Subtopic 835-30)

Simplifying the Presentation of Debt Issuance Costs

The Board is issuing this Update as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The Board received feedback that having different balance sheet presentation requirements for debt issuance costs and debt discount and premium creates unnecessary complexity. Recognizing debt issuance costs as a deferred charge (that is, an asset) also is different from the guidance in International Financial Reporting Standards (IFRS), which requires that transaction costs be deducted from the carrying value of the financial liability and not recorded as separate assets. Additionally, the requirement to recognize debt issuance costs as deferred charges conflicts with the guidance in FASB Concepts Statement No. 6, Elements of Financial Statements, which states that debt issuance costs are similar to debt discounts and in effect reduce the proceeds of borrowing, thereby increasing the effective interest rate. Concepts Statement 6 further states that debt issuance costs cannot be an asset because they provide no future economic benefit. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update

The Board decided that public business entities would be required to apply the change in annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Nonpublic entities would apply the change in annual periods beginning after December 15, 2015 and interim periods beginning after December 15, 2016. The Board decided to allow all entities the option of early application.

d) How does this question affect (change your answers) to question 1 of this APP?

In the Present question based on the above updates

The total bond value shown in the Balance sheet after deducting the issue expenses of $ 70000.

Coupon Interest C = 60,00000*4.5%

C = 270000

I = 4%

N = 9 Periods

Maturity Value = 60,000,00

Bond Price = 270000*(1-1/(1+0.04)^9)) / 0.04 + 60000000/(1+0.04)^9

270000*(1-0.7025)/0.04)+ 6000000/1.4233

270000*7.4351+4215520

62,23,021

Amortisartion Table

Date

Interest Accrued

Interest Paid

Principle Paid

Total Repayment

1-Apr-14

1-Oct-14

270000

(6000000*4.5%)

1-Apr-15

270000

1-Oct-15

270000

1-Apr-16

270000

1-Oct-16

270000

1-Apr-17

270000

1-Oct-17

270000

1-Apr-18

270000

1-Oct-18

270000

6000000

6270000

Total Repayment

2430000

6000000

8430000

1-Apr-14

Bank a/c ----- Dr

6,000,000

To Bonds 9%

6,000,000

(Being 9% of 6,000,000 bonds issued )

1-Apr-14

Issue expenses of Bond -- Dr

70,000

To Bank

70,000

(Being Bond issue expenses incurred )

1-Oct-14

Interest on Bonds - Dr

270000

To Bank

270000

(Being six months Bond interest paid )

31-Dec-14

Interest on Bonds -- Dr

135000

To Bond Interest Payable a/c

135000

(Being Three months Bond interest accrued )

31-Dec-14

Discount on Bonds -- Dr

11666

To Issue expenses of Bond

11666

(Being Bonds Issue expenses for current year 9 month period charges to P & L A/c. )

1-Apr-15

Interest on Bonds - Dr

135,000

Bond Interest Payable -- Dr

135,000

To Bank

270000

(Being six months Bond interest paid with reversing 2014 year 3 months Interest)

Balance Sheet as at 31st December 2014

Current Assets

Bank

5,660,000

Miscelleneous Assets

Issue Expenses of Bond

58,334

Non Current Liabilities

Bond @ 9 %

6,000,000

Current Liabilities

Interest Accrued on bonds

135,000

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Question 1: Lime Co. sells $6,000,000 of 9% bonds on April 1, 2014. The bonds pa

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