In order to expand production capabilities, Mollena has decidedthat Mr.Speakers needs new equipment and a dedicated productionfacility. However, the cost of the new equipment and facilities isestimated to be $450,000, and none of you (the owners) can affordto contribute any more cash to the company at the moment. As theCFO, you believe the answer is to borrow the money by selling 5,$100,000 bonds. You work with an investment bank to create thebonds and sell the bonds privately. The cost of issuing the bonds(fees and other expenses) will be $6,400 (each bond accounts for anequal portion of the costs). At the time that the bonds arewritten, the prevailing interest rate for a company like yours is5%, and therefore, 5% is the stated rate on all 5 of the bonds.Each bond is a 10-year bond, paying interest quarterly from thedate of issue.
On 2/1/16, you issue one of the bonds when the market rate ofinterest has increased to 6%. Record the sale of the bond.
On 2/15/2016, you received payment on account for the two pairsof headphones sold to distributors in January.
On 3/1/16, you issue two of the bonds when the market rate ofinterest has fallen to 4%. Record the sale of the bond.
On 4/1/16, you issue the other two bonds when the market rate ofinterest is 5%.
On 4/15/16, you purchase a building and land for $350,000. Thefair value of the building is $300,000 on the date of the sale. Thebuilding will be depreciated using straight-line depreciation over30 years. You have elected to take the full year of depreciationfor the building in the first year.
Also on 4/15/16, you purchase $100,000 of production equipment.The equipment will be depreciated using straight-line depreciationover a 10 year life. Expected salvage value is $20,000.
On July 31, you decide to retire the bond you issued on 2/1/2016because interest rates have fallen. The bond price is 116.479. Youretire the bond using 1) the proceeds of a 4%, 10-year, $100,000bond paying interest quarterly issued on July 31 and 2) cash. Themarket rate of interest onw July 31 is 3%. Record all transactionsrelated to the bonds on July 31. The new bond issue has associatedcosts of $1,000.
Record ALL interest payments on outstanding bonds through theend of 2016, including any necessary accrual entries.
Record any necessary depreciation/amortization entries as ofDecember 31, 2016
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