Question
1. On January 1, Year 1, Blaze Mining Enterprises purchases an existing coal mine. Blaze expects to operate the min for four years, after which
1. On January 1, Year 1, Blaze Mining Enterprises purchases an existing coal mine. Blaze expects to operate the min for four years, after which it is legally required to dismantle the mine. Blaze estimates that it will pay $500,000 at the beginning of Year 5 to dismantle the mine. What would be the balance of the Asset Retirement Obligation (ARO) at the end of Year 2? Blaze Mining has an incremental borrowing rate of 7%.
2. On January 1, 2017, Gary Co. sold to Casey Corp. $800,000 of its 10% bonds for $708,236 to yield 12%. Interest is payable semiannually on January 1 and July 1. What will be the cash outlay for interest 2018? What will be the interest expense for the year ended 12/31/2018?
3. On January 1, 2017, Casey Co. sold property to Larry Co. There was no established exchange price for the property, and Larry gave Casey a $4,000,000 zero-interest bearing note payable in 5 equal annual installments of $800,000 with the first payment due December 31, 2017. The prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was $2,884,000 at January 1, 2017. Assuming that Larry has a calendar year end fiscal year, how much interest expense should Larry Co. report for the year ended December 31, 2018 related to this note?
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