Intermediate Accounting Questions
1) (Long-term Investments)
ABC Inc. acquired a $100,000 8% bond on January 1, 2005 that matures on December 31, 2010. The bonds that were acquired yielded 6%. It is known that the interest is paid on June 30 and December 31. The method utilized by ABC Inc. is the effective interest method in order to amortize the premiums and the discounts.
REQUIRED:
i) Write down the journal entry that is needed in order to record the acquisition of the bonds on January 1, 2005. Make sure to use the NET method.
ii) Write down the journal entries for receipt of interest and amortization of the discount or premium for the rest of 2005.
iii) Make the assumption that ABC Inc. sold 60 of the bonds at 105 on January 1, 2006. Write down the journal entry in order to record the sale that has occurred.
2) (Notes Receivable)
Apple Equipment Ltd (a small machine dealer), sold equipment which had a value of $75,000 in exchange for a 4 year note from IBM Corp (its customer) on January 1, 2005. It is deemed that with four equal payments (which includes principal and interest that are owed every December 31), the note will be paid off completely. Also, 9% is the market rate of interest. Apple Equipment Ltd is known to have a year end on December 31, and IBM is known to have a year end on September 30. The cost of the equipment was $50,000.
REQUIRED:
i) Figure out the yearly payments Apple will obtain from IBM each year.
ii) Write down the amortization table for the note.
iii) Write down the general journal entries for Apple's loan on January 1, 2005, and also the payment of interest on December 31, 2006.
3) (Asset Exchanges)
There are two companies (Collins Inc. and Indigo Ltd.), and two assets that were operational were exchanged between the two companies. The two companies initial accounts are as follows:
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Collins Inc.
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Indigo Ltd.
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Operational assets (cost)
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$12,000
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$8,000
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Accumulated amortization
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8,800
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5,000
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Collins' asset is reliably known to have a market value of $4,000, but there is no trustworthy approximation that was ascertainable for Indigo's asset. There exists a cash difference of $1000, and this amount was paid by Collins to Indigo. The asset that was purchased by Indigo needed an upgrade of $1000 in order for it to fully operate, and Indigo also had $1500 of installation costs. It is known that the costs were instantly paid after the exchange took place.
REQUIRED:
i) Write down the journal entries for Collins Inc. and Indigo Ltd. Make the assumption that the transaction is known to have commercial substance.