Exam 7: Non-Current Liabilities

On January 1, 2021, Golf Corporation issued $ 900,000, 8%, 5-year bonds dated January 1, 2021, to yield 9%. The bonds pay semi-annual interest on January 1 and July 1. The company has a December 31 year end. Instructions a) Calculate the selling price of the bond (round final answer to the nearest $ 1,000). b) Prepare all the journal entries that Golf Corporation would make related to this bond issue from issue date through to January 1, 2022.

Kemba Corporation has acquired equipment with a fair market value of $ 145,000 on January 1, 2021 by engaging in a 5-year lease transaction that requires annual lease payments of $ 24,000 beginning January 1, 2021. The leased asset will revert back to the lessor after the lease term. Kemba has the option to purchase the equipment at the end of the lease term at the equipment's fair market value at that time. The economic life of the asset is 8 years and the present value of the minimum lease payments is $ 100,077. Instructions Analyze the details of this transaction and determine whether it should be classified as an operating or a finance lease in accordance with IFRS.

On January 1, 2021, Kramer International Inc. issued $ 200,000, 9%, 5-year bonds for $ 192,278. The bonds were sold to yield an effective interest rate of 10%. Interest is paid semi-annually on June 30 and December 31. The company uses the effective-interest method of amortization. Instructions a) Prepare a bond discount amortization schedule that shows the amortization of the discount for the first two interest payment dates. (Round to the nearest dollar.) b) Prepare the journal entries that Kramer International would make on January 1, June 30, and December 31, 2021, related to the bond issue.

Chanti Limited issued $ 200,000, 6%, 10-year bonds on December 31, 2021, for $ 190,000. Interest is payable semi-annually on June 30 and December 31. Chanti has a December 31 year end. Amortization for the first semi-annual interest period is $ 360. Instructions Prepare the appropriate journal entries on a) December 31, 2021. b) June 30, 2022.

Lalapalooza Corporation issues a $ 600,000, 5%, 5-year note payable on January 1, 2021. The terms provide for semi-annual blended payments of $ 68,555 on July 1 and January 1. Instructions a) Prepare the journal entries to record the note on January 1, 2021, and the first instalment payment. b) Assuming Erving has a December 31 year end, prepare the 2021 year-end adjusting entry to account for accrued interest on the note payable. Round your answer to the nearest dollar. c) Prepare a partial balance sheet at December 31, 2021 for Lalapalooza Corporation displaying all amounts related to the note payable.

Windemere Merchandising Corp., a public company, provides automobiles for its sales agents. The typical automobile has a retail value of $ 40,000 and in the past Windemere has purchased the automobiles, paying 10% on the financing. Now Windemere is considering leasing the automobiles instead, and has been offered one of two alternative lease arrangements. The lease arrangements would begin on June 1, 2021. Alternative 1: The automobile is leased for $ 320 per month on a one-year term, with renewal possible for a second year on similar terms. Each month's lease payment is due at the beginning of the month. Alternative 2: The automobile is leased for 5 years (60 months) with a $ 5,000 down payment and monthly payments of $ 675 due on the last day of each month. At the end of the 60 months, Windemere would have the option of purchasing the automobile for $ 1. Instructions a) For Alternative 1, indicate whether the lease is operating or finance and explain why. Record any entry required on June 1, 2021. b) For Alternative 2, indicate whether the lease is operating or finance and explain why. Record any entry required on June 1, 2021.

On January 1, 2021, Duck Work Corporation issued $ 900,000, 8%, 10-year bonds at face value. Interest is payable semi-annually on July 1 and January 1. Duck Work Corporation has a calendar year end. Instructions Prepare all entries related to the bond issue for 2021.

Presented below are two independent situations: a) On December 31, 2021, Legault Corporation had $ 1,000,000, 8% bonds payable issued. The bonds pay interest on January 1 and June 1 of each year, and mature on January 1, 2021. On January 2, 2022, Legault redeemed 60% of these bonds at 101. The amortized cost of the entire bond issue on the retirement date was $ 1,026,000. The interest payment due on January 1, 2022, has been made and recorded. b) Antonio Inc. redeemed $ 500,000 of its bonds at 98 on December 31, 2021. The amortized cost of the bonds on the retirement date was $ 497,500. The bonds pay semi-annual interest and the interest payment due on December 31, 2021, has been made and recorded. Instructions For each of the independent situations, prepare the journal entry to record the retirement of the bonds.

Southern Merchandising Inc. is considering new financing to pay out $ 2,500,000 of existing 10% bonds payable at the beginning of the next fiscal year. The company wants to maximize ROE in the new year. They are considering three alternatives of dealing with the matter: 1. Do not pay out the existing bonds; 2. Issue a 5% bond payable at face value of $ 2,500,000, or issue 250,000 common shares at $ 10. Other information about Southern: -Southern's tax rate is 25%. -Southern currently has $ 4,000,000 in shareholders' equity prior to any new share issue. -Southern's average profit before financing costs and taxes is $ 800,000. -A one-time penalty of $ 150,000 will be incurred to pay out the 10% bonds early, which is fully tax deductible. Instructions Calculate the following amounts for Southern, compare all three alternatives, and make a recommendation, assuming the goal is to maximize return on equity for the next year.

Swan Diver Inc. issued $ 400,000 of 20-year, 5% bonds payable on July 1, 2021 providing an effective-interest rate of 4.75%, for proceeds of $ 412,820. Interest is payable semi-annually on December 31 and June 30. Swan Diver's year end is June 30 and the effective-interest method is used in accounting for bonds payable. Instructions a) Record the issuing of the bonds on July 1, 2021. b) Prepare an amortization table for the first year (two payments). c) Record the payments on December 31, 2021 and June 30, 2022. d) Show how the bond payable would be presented on Swan Diver's June 30, 2022 balance sheet.

On January 1, 2021, Dino Corporation issued $ 300,000, 5%, 10-year bonds dated January 1, 2021, to yield 4%. The bonds pay semi-annual interest on January 1 and July 1. Instructions Calculate the selling price of the bonds and prepare the journal entry to record the issue of the bonds.

Hanna Manufacturing Limited receives $ 240,000 on January 1, 2021 when it issues a 6%, 3-year note payable to finance the purchase of equipment. The terms provide for annual payments each December 31. The first payment is due December 31, 2021. Instructions Prepare the journal entries to record the note and the first two instalment payments assuming: a) the payment is a fixed principal payment of $ 80,000. b) the payment is a blended payment of $ 89,786.76.

The board of directors of Bobcat Corporation is considering two plans for financing the purchase of new plant equipment. Plan #1 would require the issue of $ 4,000,000, 6%, 20-year bonds at face value. Plan #2 would require the issue of 200,000 common shares for $ 20 per share. Bobcat Corporation currently has 100,000 common shares issued at a book value of $ 20 each and retained earnings of $ 750,000. The income tax rate is expected to be 30%. Assume that income before interest and income taxes is expected to be $ 800,000 if the new factory equipment is purchased. Assume that the debt or equity will be issued at the beginning of the year. Instructions a) Prepare a schedule that shows the expected profit, earnings per share, and return on equity (using year-end balances) under each of the plans that the board of directors is considering. b) If the board of directors' stated goal is to maximize the common shareholders' return, which alternative is preferable? If the board's stated goal is to maximize solvency, which alternative is preferable?

On January 1, 2021, Wallgrub Wholesale Ltd. issued $ 500,000 of 10-year, 6% bonds payable at 99. Interest is payable semi-annually on June 30 and December 31. Semi-annual amortization for this bond is $ 250. Instructions a) Record all entries required for this bond during 2021. b) Show how the bonds would be reported on Wallgrub's December 31, 2021 balance sheet.

On June 30, 2021, Gorgeous Inc. sold $ 1,200,000 (face value) of bonds. The bonds are dated June 30, 2021, pay interest semi-annually on December 31 and June 30, and will mature on June 30, 2024. The following schedule was prepared by the accountant for 2021: Instructions On the basis of the above information, answer the following questions. (Round your answer to the nearest dollar or percent.) a) What is the contractual rate of interest for this bond issue? b) What is the market rate of interest for this bond issue? c) What was the selling price of the bonds as a percentage of the face value? d) Prepare the journal entry to record the sale of the bond issue on June 30, 2021. e) Prepare the journal entry to record the payment of interest and amortization on December 31, 2021.

On July 1, 2021, Gismo Distributors Inc. finances the purchase of a new pickup truck by making a cash down payment of $ 5,000 and issuing a $ 30,000 two-year, 10% note payable for the balance. The note is payable in four equal semi-annual blended payments of $ 8,460 due on December 31, and June 30 of each year. Instructions a) Record the purchase of the truck. b) Prepare the amortization table for the note payable. c) Record the first and last payments made on the note.

Excerpts from Chung Corporation's income statement and balance sheet for 2021 are presented below: Instructions a) Calculate the interest coverage ratio. b) Calculate the debt to total assets ratio. c) What do the two ratios tell you?

Jashanpreet Industries Limited (JIL) issued $ 1,800,000, 8%, 20-year bonds on January 1, 2021 and received proceeds of $ 2,200,000. Interest is payable semi-annually on July 1 and January 1. JIL's year-end is December 31. Assume the market rate for similar bonds is 6%. Instructions a) Prepare all necessary journal entries for JIL during 2021. b) Prepare a partial balance sheet for TIL on December 31, 2021, showing all areas affected by this bond transaction.

United Health is considering two alternatives for the financing of some high technology medical equipment. These two alternatives are:

United Holdings Inc. requires $ 5,000,000 in new financing in order to expand its operations. The management team is in discussion about the best way to finance the expansion and has asked you, their accountant, for assistance. In order to provide them with the information they need, you analyze the following two options: 1. Issue 1,000,000 common shares at $ 5, which is the current market price of United's 2,000,000 issued common shares. 2. Issue $ 5,000,000 of 10-year, 4% bonds at par. United currently has no bonds payable issued. The financing would be required at the beginning of the next fiscal year. United's tax rate is 30%. The management team projects profit of $ 1,750,000 before financing costs and taxes. They are interested in comparing the net income after tax, the earnings per share, and the return on equity under each alternative. The management team's goal is to maximize return on equity in the first year. United's shareholders' equity is currently $ 17,500,000. Instructions Calculate the amounts requested by the management team and present the two alternatives in comparative format. Recommend which alternative should be chosen.