1. On January 1, 2006, Jamona Corp. purchased 12% bonds, having a maturity value of $300,000, for $322,744.44. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2006, and mature January 1, 2011, with interest receivable December 31 of each year. The company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified as available-for-sale. The fair value of the bonds at December 31 of each year is as follows:
- 2006 - $320,500
- 2007 - $309,000
- 2008 - $308,000
- 2009 - $310,000
- 2010 - $300,000
Prepare the amortization table on the investment in bond. Prepare the entries on the investment in bond on 1/1/06, the interest revenue and the amortization of the premium on 12/31/07, and the adjustment of the investment position to fair value on 12/31/07.
2. On January 1, 2007, Jamona Corp. signed a 5-year, noncancelable lease for a machine. The terms of the lease called for Jamona to make annual payments of $8,668 at the beginning of each year, starting January 1, 2007. The machine has an estimated useful life of 6 years and a $5,000 unguaranteed residual value. The machine reverts to the lessor at the end of the lease term. Jamona uses the straight-line method of depreciation for all of its plant assets. Jamona's incremental borrowing rate is 10%, and the lessor's implicit rate is unknown.
- Determine how this lease would qualify as a capital lease.
- Prepare the amortization table for the lease and the entries for signing the lease on 1/1/07, the lease payment on 1/1/07, the interest recognition and lease payment for 12/31/07, and the depreciation entry for 12/31/07.
- Prepare appropriate note disclosure.
3. Your company is in financial trouble and is in the process of reorganization. Your manager wants to know how you will report on restructuring the debt. Use the following information to help with this assignment.
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ASSETS
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CURRENT ASSETS
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Cash and cash equivalents
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$ 108,340
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Trade accounts receivable, net of allowances
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2,866,260
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Other receivables
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62,150
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Operating supplies, at lower of average
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cost or market
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58,630
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Prepaid expenses
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446,050
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Total Current Assets
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3,541,430
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PROPERTY, PLANT AND EQUIPMENT (at cost)
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Land
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1,950,000
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Buildings and improvements
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2,327,410
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Equipment
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5,015,660
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Other equipment and leasehold improvements
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1,645,580
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total
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10,938,650
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Accumulated depreciation and amortization
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(7,644,430)
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Net Property, Plant, and Equipment
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3,294,220
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OTHER ASSETS
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Deposits and other assets
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1,000,080
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TOTAL ASSETS
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$ 7,835,730
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LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
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CURRENT LIABILITIES
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Accounts payable
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$ 972,160
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Accrued liabilities
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2,071,270
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Accrued claims costs
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793,620
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Federal and other income taxes
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19,710
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Deferred income taxes
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500
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Current maturities of long-term debt and
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capital lease obligations
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50,610
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Short-term borrowings
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249,250
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Total Current Liabilities
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4,157,120
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LONG-TERM LIABILITIES
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Capital lease obligation
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54,580
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Note Outstanding
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3,000,000
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Mortgage Outstanding
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608,030
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Other liabilities
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95,860
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Total Long-term Liabilities
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3,758,470
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Total Liabilities
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7,915,590
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SHAREHOLDERS' EQUITY (DEFICIT)
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Common stock, $.01 par value; authorized
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500,000 shares; issued 231,000 shares
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2,310
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Additional paid-in capital
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731,090
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Accumulated other comprehensive loss
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(113,500)
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Retained earnings (deficit)
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(639,180)
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Treasury stock
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(60,580)
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Total Shareholders' Equity (Deficit)
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(79,860)
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
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$ 7,835,730
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- As stipulated, your company is having financial difficulty and has asked the bank to restructure its $3 million note outstanding. The present note has 3 years remaining and pays a current interest rate of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value. The bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of $1,950,000 and a fair value of $2,400,000.
Prepare the journal entry on the settlement of the note.
4. The company provides the following information related to its post employment benefits for the year 2007:
- Accumulated postretirement benefit obligation at January 1, 2007 $810,000
- Actual and expected return on plan assets $34,000
- Unrecognized prior service cost amortization $21,000
- Discount rate 10%
- Service cost $88,000
To satisfy various benefit issues that have arisen as a result of the restructuring, new post employment benefits have been created. The company currently has a defined benefits plan and is considering switching to a defined contribution plan to save costs. Compute the costs associated with keeping the current plan versus the costs of a defined contribution plan where the employer pays 3% of payroll. Should the company switch to a defined contribution plan? (To make decision on this, you need to calculate the INDIFFERENCE POINT of payroll amount at which the pension cost would be the same between the current defined benefit plan and the proposed defined contribution plan.