ScholarMatic: Explanation & Answer
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At the end of the last HW assignment, Mr.Speakers had been organized into a corporation and had continued making and selling a small number of headphones. In order to expand production capabilities, Mollena has decided that Mr.Speakers needs new equipment and a dedicated production facility. However, the cost of the new equipment and facilities is estimated to be $450,000, and none of you (the owners) can afford to contribute any more cash to the company at the moment. As the CFO, you believe the answer is to borrow the money by selling 5, $100,000 bonds. You work with an investment bank to create the bonds and sell the bonds privately. The cost of issuing the bonds (fees and other expenses) will be $6,400 (each bond accounts for an equal portion of the costs). At the time that the bonds are written, the prevailing interest rate for a company like yours is 5%, and therefore, 5% is the stated rate on all 5 of the bonds. Each bond is a 10-year bond, paying interest quarterly from the date of issue.
- On 2/1/16, you issue one of the bonds when the market rate of interest has increased to 6%. Record the sale of the bond.
- On 2/15/2016, you received payment on account for the two pairs of headphones sold to distributors in January.
- On 3/1/16, you issue two of the bonds when the market rate of interest has fallen to 4%. Record the sale of the bond.
- On 4/1/16, you issue the other two bonds when the market rate of interest is 5%.
- On 4/15/16, you purchase a building and land for $350,000. The fair value of the building is $300,000 on the date of the sale. The building will be depreciated using straight-line depreciation over 30 years. You have elected to take the full year of depreciation for the building in the first year.
- Also on 4/15/16, you purchase $100,000 of production equipment. The equipment will be depreciated using straight-line depreciation over a 10 year life. Expected salvage value is $20,000.
- On July 31, you decide to retire the bond you issued on 2/1/2016 because interest rates have fallen. The bond price is 116.479. You retire the bond using 1) the proceeds of a 4%, 10-year, $100,000 bond paying interest quarterly issued on July 31 and 2) cash. The market rate of interest on July 31 is 3%. Record all transactions related to the bonds on July 31. The new bond issue has associated costs of $1,000.
- Record ALL interest payments on outstanding bonds through the end of 2016, including any necessary accrual entries.
- Record any necessary depreciation/amortization entries as of December 31, 2016. (Hint: you may want to review your prior HW assignment…)
Prepare journal entries for the transactions listed above.
ScholarMatic: Explanation & Answer
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