The income statement method. Kellyco wants to expand its production space. They

Question

The income statement method. Kellyco wants to expand its production space. They need to acquire approximately $25,000,000. The company wants to issue a bond to obtain the funds needed. Their Investment Banker has recommended that the bonds should have an 8% stated interest rate and be issue for a 20 year term. Kellyco issued $25,000,000 worth of bonds on 1-1-16. Interest is paid annually and is amortized using the straight line method. Assume the bonds sell at 95, make the required entries on 1/1/16 and 12/31/16 Assume the bonds sell at 163, make the required entries on 1/1/16 and 12/31/16 Meganco purchased a new cruncher on 1/1/16 for a total installed cost of $1, 250,000. It has a 15 year physical life and can be sold for $150,000 at that time. The Use Permit on the land site where the cruncher is located, will expire in 8 years at which time the cruncher will have to be dismantled and sold for $300,000. Assume that Meganco uses 200% double declining balance depreciation, make the required adjusting entries on 12/31/16 and 12/31/17

Explanation / Answer

1- cash debit             23750000

Disocunt on issue of bonds debit 1250000

credit bond payable                                     25000000

2- interest expense   debit          2000000                     

    to discount on issue of bonds                  62500

   credit cash                                                  1937500

b-

1- cash debit             40750000

credit premium on issue of bonds               15750000

credit bond payable                                     25000000

2- interest expense   debit          1212500                

    premium on issue of bonds    debit              787500

   credit cash                                                                         2000000

2- Installed cost = 1250000

    scrap value = 150000

amount to be depreciated = 1250000-150000 = 1100000

Depreciation rate = 1100000/15 = 73333.33/1100000 = .06666*2 = .13333*100 = 13.33% double declining rate

depreciation debit   146666.66

credit accumulated depreciation on equipment    146666.66

2 - 1100000-146666.66 = 953333.33*13.33% = 127111

depreciation debit   127111.11

credit accumulated depreciation on equipment   127111.11

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