121. On January 1 of Year 1, Mohr Express Airways issued $3,150,000 of 5% bonds

Question

121. On January 1 of Year 1, Mohr Express Airways issued $3,150,000 of 5% bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $2,840,000 and the market rate of interest for similar bonds is 6%. The bond premium or discount is being amortized at a rate of $10,333 every six months. After accruing interest at year end, the company's December 31, Year 1 balance sheet should reflect total liabilities associated with the bond issue in the amount of:

121B. Mohr Company purchases a machine at the beginning of the year at a cost of $30,000. The machine is depreciated using the straight-line method. The machine’s useful life is estimated to be 8 years with a $4,000 salvage value. Depreciation expense in year 2 is:

121. Mohr Company purchases a machine at the beginning of the year at a cost of $64,000. The machine is depreciated using the straight-line method. The machine’s useful life is estimated to be 5 years with a $2,000 salvage value. Depreciation expense in year 4 is:

Explanation / Answer

121.

In the given case Market rate(6%) is greater than stated rate of Bond(5%) when it is issued, therefore bonds were issued at a discount.

Moreover Interest is paid at the stated rate whatever the market rate may be.

On December 31st, Total Liabilities associate with bond will reflect:

121B.

Depreciation = (Cost - Salvage Value) / No. of useful Life

= (30,000 - 4,000) / 8

= $ 3,250 each year for 8years.Thus, depreciation expense in year 2 is same as $3,250.

121.

Depreciation = (Cost - Salvage Value) / No. of useful Life

= (64,000 - 2,000) / 5

= $12,400 each year for 5 years. Therefore, it goes same for year 4 i.e. $12,400

Note: in case of any clarification, please do comment. Thank You.

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