ABC purchased (cash) DEF debt for $10,800 (10,000 face, 10%, 5 year) that it int
ID: 2539484 • Letter: A
Question
ABC purchased (cash) DEF debt for $10,800 (10,000 face, 10%, 5 year) that it intends to hold until maturity. Interest is paid annually on 1/1. Market rate is 8%. Use the effective interest rate to amortize. Bond value at 12/31/15 was $10,500.
ABC purchased 15% of CDE stock for $25,000 cash. ABC is not intending to sell it anytime in the future and definitely not in 2016. The value of the stock at the 12/31/2015 was $24,000. CDE paid ABC $1,000 in dividends.
ABC purchased GHI 5 year bonds that it is not sure if it will sell or hold until maturity for $25,000 cash. Face of the note is $20,000. It pays 10% interest annually (1/1). Fair value of the bond at year-end was $24,500. Straight-line.
ABC purchases 2 widget producing machines at a total cost of $200,000 on credit. The book life of the asset is 5 years. No salvage.
During the year (2015):
ABC receives a refundable deposit for $100,000 to sell widgets to WTH Company in 2/2016
ABC purchases $40,000 (at a cost of $1.00 per unit) of inventory on credit
ABC enters into an agreement to sell 50,000 widgets to ASAP Company for $400,000. They deliver half the widgets. ABC receives $200,000 in cash during the current year and the remaining $200,000 will be paid to ABC in January of 2016. Only half the sale will have tax basis. The credit portion of the sale will not be considered revenues for tax purposes until the cash is received.
Prior to delivery, ABC purchases (credit) $40,000 of inventory - cost $2.00/unit. ABC uses LIFO.
ABC enters into an agreement to provide FYI services in November of 2015 for $500,000. The agreements are signed in February of 2015. The services are delivered in November 2015. The cash is received in November.
ABC pays in cash: a tax-non-deductible fine of $10,000; salaries of $20,000; rent of $2,000. Tax depreciation for the year is $65, 000. The tax rate is 40%. ABC DECLARES $10,000 of dividends. $5,000 each to its common stock holders and to its preferred shareholders. Payment is not until 1/2/2016.
Prepare Journal Entries (including closing entries), Income Statement and Balance Sheet (in good form) for 2015
Explanation / Answer
1.
Bond interest payment = 10%*face value of bond = 10%*10,000 = $1000
Premium = Purchase price – face value = 10800-10000 = 800
The bond premium amortization table has been constructed below:
Calculations:
864 = 8% of 10,800. Similarly interest expense for all other years have been computed.
Dsicount amortized = interest expense at 8% - cash paid at 10% of face value
For year 2 discount amortized = 864-1000 = -136. Similarly it has been computed for other years.
Premium on bond payable for year 2 = 800-136 = 664. Similarly it has been computed for other years.
Journal entries:
Date Interest Expense at 8% of Book Value Cash paid at 10% of Face Value Discount Amortized Bonds Payable Premium on Bonds Payable Carrying Value (A) (B) (C)=(A)-(B) (D) (E) (D) + (E) Year 1 10,000 800 10,800 1/1, Year 2 864 1,000 -136 10,000 664 10,664 1/1, Year 3 853 1,000 -147 10,000 517 10,517 1/1, Year 4 841 1,000 -159 10,000 358 10,358 1/1, Year 5 829 1,000 -171 10,000 187 10,187 1/1, Year 6 815 1,000 -185 10,000 2 10,002Related Questions
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