Long-Term Debt (And The Fair Value Option) -- Accounting
UMoveIT Corporation started business on January 1, 2015. On that date, UMoveIT Corp. issues $100,000 face value of 8% annual bonds that require interest payments on December 31 of each year and that are due on January 1, 2034. The market rate of interest for bonds such as these on January 1, 2015 is 9%. UMoveIT accounts for these bonds using the effective interest method and prepares financial statements once each year on December 31.
When it does its accounting, UMoveIT does not use a separate premium or discount account, but rather just includes any premium or discount in with the bond payable account. See class notes for further details on this bookkeeping. (NOTE: I really don’t care how you do your bookkeeping – but you ought to be able to figure out either one if you were to see it. Feel free to convert the answer I have provided to the other way.)
REQUIRED:
A. What entry (or entries) does UMoveIT make related to these bonds during 2015 and 2016?
B. Assume that the market rate of interest for these bonds falls from 9% to 7% on January 1, 2017, and that UMoveIT uses fair value accounting. What entries does UMoveIT make related to these bonds during 2017? (UMoveIT’s credit quality does not change.)
C. At what amount would the bond liability appear on the balance sheets at the end of 2015, 2016, and 2017 (and also beginning of 2017). How will the income statement look for the 2015-2017 years?
D. How would the statement of cash flows – indirect method look for the 2015-2017 years?