Question 1 (50 marks) Read the case 'Jenny Company' and answer the questions which follow it. Jenny Company Jenny Company ('Jenny') is a well-known company with many different businesses in Hong Kong. In order to meet the long-term growth and diversification strategy under the direction of the new Chairman, the company has purchased assets and constructed a new building as its new head office in Hong Kong, as follows: 1 1 January 2018: Truck and equipment were purchased for a lump sum of $250,000 cash. The following information was gathered. Description Initial cost on seller's books Depreciation to date on seller's books Appraised value Truck $300,000 $100,000 $120,000 Equipment 250,000 70,000 180,000 Assignment File 19 2 1 March 2018: A new piece of machinery was acquired by trading in a used piece of machinery. (The exchange was without commercial substance.) Facts concerning the trade-in are as follows Cost of used machinery traded $200,000 Accumulated depreciation to date of sale 36,000 Fair value of the machinery traded 150,000 Cash payment 10,000 Fair value of new machinery acquired 180,000 3 1 January 2018: A building was constructed as the new head office of the company. Construction began on 1 January 2018 and would be completed in 15 months. The payments to the contractor in the first year (2018) were as follows. Date Payment 1 January $350,000 1 February 120,000 1 June 360,000 1 September 480,000 1 December 300,000 On 1 January 2018, Jenny Company secured a specific construction loan ($500,000) with an 8% interest rate to finance the construction of the new building. The building expenditures are qualifying assets of the construction in capitalization of interest costs and the capitalized interest costs should be included in the building. Jenny drew down on the construction loan and other outstanding debt (if required) to meet the payment schedule shown above. The other outstanding debt in the company during 2018: $1,000,000 bonds (due in year 2026), with 7% effective annual interest rate $500,000 long term note (due in 2031), with 8.5% interest rate per annum. According to the accounting standards in Hong Kong, the company will capitalize the maximum allowable interest costs for this construction. The CFO of Jenny estimated that the truck and the new machinery would be used for ten years, with an estimated residual value of $20,000 and $40,000 respectively. He also estimated that the equipment would have a useful life of eight years and a residual value of $5,000. Jenny's depreciation policy specifies the 200% declining-balance method for equipment and the straight-line method for the truck and machinery. (The building was not yet ready for use in 2018.) 20 ACT B861 Accounting for Corporations Required a For each of the above assets purchased, traded or constructed, determine the amount clearly and record the transactions by journal entries in the books of Jenny Company for the year ended 31 December 2018. Interest expense for the year has been recorded. (35 marks) b For each of the assets above (except the building), calculate Jenny Company's 2018 depreciation expense for book purposes. Assume that the monthly depreciation had not been provided before the end of the year. (11 marks) c Explain the nature and purposes of providing depreciation.(4 marks) Question 2 (20 marks) Maxwell Company acquired the following shares in the Hong Kong Stock Exchange on 20 October 2018, which it intended to sell in early 2019 to take advantage of the expected changes in the share prices: 350,000 ordinary shares of Arnold Ltd at $28.00 per share plus transaction costs of $10,500; and 760,000 ordinary shares of Bell Ltd at $16.00 per share plus transaction costs of $15,800. At its year end on 31 December 2018, the shares were quoted on the Hong Kong Stock Exchange at the following prices: Ordinary shares of Arnold Ltd: $13.00 per share; and Ordinary shares of Bell Ltd: $22.00 per share. Required Discuss and demonstrate the appropriate accounting treatment for the financial assets. Question 3 (30 marks) On 1 October 2018, Big Tiger Corporation issued six-year, $7,000,000 (face value), 10% debentures which provide an effective yield of 6%. The interest is paid semi-annually on 31 March and 30 September. The Corporation uses the effective interest rate method to calculate interest expense and amortization. Its fiscal year ends on 31 December. Required a Calculate the market value of the debentures at issuance. (3 marks) b Prepare an amortization schedule containing relevant data through the life of the debentures. (4 marks) Assignment File 21 c Determine the carrying value of the debentures for the Corporation that would be disclosed on the statement of the financial position as of 31 December 2019. (2 marks) d Prepare the required journal entries for the following dates: (6 marks) i. 1 October 2018 (to record debenture issuance) ii 31 March 2019 (to record semi-annual interest payment of the debentures) iii 31 December 2020 (to accrue year-end interest of the debentures). e Repeat (a) to (d) assuming instead that Big Tiger issued five-year, $8,000,000 (face value), 9% debentures which provide an effective yield of 10%. The interest is paid semi-annually on 31 March and 30 September. (15 marks)