Question 1: Canal Street Financing Corporation needs to borrow long term funds but would prefer not to show more than $ 100 million in face amount of debt outstanding. It also prefers to pay an annual coupon, in the European style, of not more than 6% per annum. Canal’s banker states that the cost of money in the economy for an enterprise with its weak credit is much higher than this. It quotes Canal a 7 % per annum cost of funds for three year money.
A. Estimate the net proceeds Canal will be able to borrow on a three year $ 100 million face amount borrowing carrying a coupon of 6 % p.a. in an economy where the cost of three year funds should be 7 % p.a.
B. Prepare an amortization table designed to assist you in recognizing annual interest expense using the “effective interest method.” C. Show the annual Debit and Credit entries for this borrowing beginning with the receipt of net proceeds at the start of the borrowing and ending with the full repayment of the face amount of the debt in three years.
Question 2: General Perptual Inventory Corp purchases the following inventory lots across its most recent two fiscal quarters.
January 100 units $ 10 per unit
February 100 units $ 12 per unit
March 100 units $ 13 per unit
April 100 units $ 14 per unit
May 100 units $ 15 per unit
June 100 units $ 16 per unit
For each question indicate which inventory method should be preferred.
a. If the CFO wishes to show the highest Cost of Sales, which inventory method should he elect ?
b. If the CEO wishes the Income Statement to be as accurate as possible, which inventory method should he select ?
c. If the CFO wishes to show the least investment in Working Capital which inventory method should he select?
d. If the CEO and the CFO each which to boost Earnings, which inventory method would assist them to reach their goal ?
e. Which inventory method produces the most reliable measure of ending inventory on the balance sheet?