Smith Company is about to issue $3,000,000 of 5-year, 10% bonds. Interest will b

Question

Smith Company is about to issue $3,000,000 of 5-year, 10% bonds. Interest will be paid -. The market interest rate for similar bond is 8%. How much can Smith expect to receive - (issuance) of these bonds (to the nearest whole dollar)?

$2,768,338

$3,243,315

$3,000,000

$3,231,660

The Smith & Smith law firm received $4,000 cash from a client for legal services that the company perform in the future. The full amount was credited to the liability account Unearned Revenue. If services of $1,000 were provided during the current accounting period and no adjusting entry was - this failure to adjust causes:

Revenues to be overstated

Liabilities to be understated

Revenues to be understated

Stockholders equity to be overstated

Flannery Company has machinery that originally cost$200,000, had an estimated expected salvage value of $ 25,000. The related Accumulated Depreciation account - $105,000 on December 31, 2014, using the straight-line method. On July 1, 2015 - sells the machinery for $100,000. The gain or loss on the date of sale is:

$22,500 gain

$30,000 gain

$5,000 gain

$75,000 loss

Explanation / Answer

1) The expected issue price of bonds = Present value of redemption amount+Present value of interest payments

As interest is paid semiannuall, the interest rate for discounting will be = 8%/2 = 4%

No. of compounding in a year = 2

No. of periods for discounting = 5 years*2 = 10

Present value of redemption amount of bond = Face value*PVF(4%,10) = $3,000,000*0.67556 = $2,026,680

Present value of interest payments = Interest payments*PVAF(4%,10) = ($3,000,000*10%/2)*8.110896

= $1,216,634

Issue price of bonds = $2,026,680+$1,216,634 = $3,243,315

The correct option is b) $3,243,315

2) The adjusting entry would increase the revenues by $1,000. But there is no adjusting entry was passed. This failure to adjust causes revenues to be understated.

3) The depreciation on straight line method = ($200,000-$25,000)/5 years = $35,000 per year

(it is assumed that life is 5 years in the absence of information)

Depreciation from 1 january 2015 to 30 June, 2015 = $35,000*1/2 = $17,500

Book value as on 1 july, 2015 = $200,000-$105,000-$17,500 = $77,500

Sale value = $100,000

Gain on sale = $100,000-$77,500 = $22,500

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