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. ANALYZE the effects of the above transactions on the specific accounts in the Accounting Equation or RECORD the above transactions (Choose either analysis or recording). (Hint: a total of 10 transactions regarding sales, inventory, warranty liabilities, payroll paid until December 22, 4 transactions related to bonds payable).
2. Make any necessary adjustments for accrued bond interest expense and payroll-related liabilities at 12/31/2020. Specifically
   1. Moon should accrue interests on the $1,000,000 par value bonds because the interests will not be paid in cash until January 1, 2021.
   2. Moon has to adjust for the unpaid salaries for employees from December 23 to December 31. The total salaries for employees is $29,500 for this period and will be paid on January 5, 2021. Withholdings from the employees' salaries include FICA Social Security taxes at the rate of 6.2% and FICA Medicare taxes at the rate of 1.45% for all employee earnings during this period; $8,604 of federal income taxes, and $1,750 of medical insurance deductions.
   3. Moon has to adjust for payroll-related taxes to state and federal governments. State unemployment tax rate is 3% with a total of $885. The federal unemployment tax rate is 0.8% with a total of $236.
3. Show the effects of all the above transactions on Moon’s Balance Sheet as of 12/31/2020 and Income Statement of 2020 (Hint: the key is to understand how the financial statements will be affected by what accounts in the above requirements 1 and 2. Thus, there is no need to prepare the complete financial statements.)
4. Please provide a brief explanation on how market interest rate affects the accounting and reporting of Moon’s bonds payable.