Question 1:

On 1 July 20X8, Sun Company purchased $4,000,000 of Moon Corp. 6.2% bonds, classified as an AC investment. The bonds pay semi-annual interest each 30 June and 31 December. The market interest rate was 6% on the date of purchase. The bonds mature on 30 June 20X13.

1. Calculate the price paid by Sun Company.

2. Construct a table that shows interest revenue reported by Sun, and the carrying value of the investment, for each interest period for four interest periods. Use the effective-interest method.

Period Cash Payment Interest Revenue Amortization Bond Carrying Value

1

2

3

...

3. Prepare the entries for the first two interest periods based on your calculations in requirement 2.

4. How much interest revenue would be reported for the year ended 31 December 20X9?

5. What would the balance of the investment account for the year ended 31 December 20X9?

Question 2:

Consumer Corp. sells dishwashers and washing machines that come with a two-year unlimited warranty on parts and labour for repairs. The warranty is intended to assure customers that the appliances will operate as advertised. The warranty is expected to cost 2% of sales in the first year and 4% of sales in the second year, for a total of 6%. The provision for warranty has a credit balance of $145,000 at the beginning of 20X5. The following events and decisions relate to the warranty:

 

20X5

  

Sales revenue of $4,600,000 was generated from products covered by the warranty. Both the sale and the warranty provision must be recorded.

 

 

20X5

  

Warranty work consumed parts inventory with a cost of $9,000, and labour of $22,000.

 

 

20X6

  

Sales revenue from products covered by the warranty were $6,100,000. Both the sale and the warranty provision must be recorded.

 

20X6

  

Sales revenue of $6,100,000 was generated from products covered by the warranty. Warranty work consumed parts inventory with a cost of $126,000, and labour of $289,000

1. Prepare journal entries for the events listed above. Because of uncertainty of estimates, no discounting is to be applied. Assume all sales are in cash.

2. Calculate the balance of the provision for warranty at 31 December 20X5 and 20X6.

Question 3:

Mathieson Co. issues a $14,500,000, 8.5 % bond on 1 October 20X4. At this time, market interest rates are in the range of 8%. The bond had a 10-year life from 1 October 20X4, and paid interest semi-annually on 31 March and 30 September. 

1.Calculate the proceeds that would be raised on bond issuance.

2. Prepare amortization table using the effective interest method of amortization. Complete the first four payments only.

Period Cash Payment Interest Revenue Amortization Bond Carrying Value

1

2

3

...

3. Prepare journal entries for 20X4 and 20X5, using the effective interest method. Matieson has a 31 December fiscal year-end.