Financial Accounting Mini Case 6 Current and Long-term Liabilities

Purpose

The purpose of this mini case is to examine transactions related to liabilities and the effects of the bond/credit/debit market on a companys financial reporting.

Instructions

Moon Co. sells food blenders. During 2020, Moon made 37,000 blenders at an average cost of $80. It sold out 25,000 food blenders at an average price of $130. Moon provides a 2-year warranty for each blender sold and estimates 9% of blenders will be returned for warranty with an estimated cost of $36 each. By the end of 2020, Moon has spent $44,000 servicing the warranty repairs. All the above transactions have been settled in cash.

During 2020, Moon has 50 employees who work 5-day per week and get paid each other Friday. Salaries of $324,000 and payroll tax expense of $37,000 have been paid until December 22.

Since the business grows quickly, Moon needs cash to expand. By the end of 2019, the Board of Directors authorized the management to issue 10-year bonds with a par value of $3,000,000, annual contract interest rate of 8% and semi-annual interest payments. Moon chose to use the straight-line method to amortize discount or premium on its bonds.

1. On January 1, 2020, management issued the above authorized 10-year bonds with a par value of $2,000,000. Interests on these bonds will be paid semiannually on June 30 and December 3 On the issuance day, the annual market rate was 10% and the bonds were sold for 86.4112.

2. On June 30, Moon made the first interest payment for the $2,000,000, 8% bonds.

3. On July 1, Moon issued the rest of the above authorized 10-year bonds with a par value of $1,000,000. Interests on these bonds will be paid semiannually on July 1 and January 1. Since the annual market rate on the issuance date was 5%, the bonds were sold for 122.39.

4. On December 31, Moon made the second interest payment for the $2,000,000, 8% bonds.

Requirements:

1. Please provide a brief detailed 6-7 sentence explanation on how market interest rate affects the accounting and reporting of Moons bonds payable.