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1
1. SALE OF BONDS at Discount a)WHAT IS THE PRICE OF A 833k Bond , 5 years @7% Interest, MKT rate 11%, interest paid yearly; Journalize the sale on 1-1-2015. What is Bond selling at “99, 98, 97, for instance?" PRESENT VALUE OF $1 FOR FIVE YEARS at 11% .59345 Present value of annuity for five years at 11% 3.6959 b) Journalize the payment of interest expense for the first three years;12-31-2015, 12-31-2016, and 12-31-2017, amortizing the premium/discount using the straight-line rate of interest. c) Journalize the payment of interest expense for the first three years;12-31- 2015, 12-31-2016, and 12-31-2017, amortizing the premium/discount using the effective rate of interest. d) ON 1-1-2018, the Bond was converted to 10k common stock shares at $16/share market value. The par value of the stock is $10/share. Journalize this transaction using the results of amortization in "b)".
2.
Transic Corporation has the following financial data for 2016 and 2017.
| 2017 | 2016 | |
| ASSETS | ||
| Current Assets: | ||
| Cash | $ 48,000 | $ 14,000 |
| Marketable Securities | 9,000 | 13,000 |
| Accounts Receivable | 35,000 | 24,000 |
| Other Current Assets | 15,000 | 18,000 |
| Total Current Assets | 107,000 | 69,000 |
| Fixed Assets (net) | 140,000 | 130,000 |
| Total Assets | $247,000 | $199,000 |
| LIABILITIES | ||
| Current Liabilities | $ 72,000 | $ 52,000 |
| Long-term Liabilities | 50,000 | 37,000 |
| Total Liabilities | $122,000 | $ 89,000 |
| Total Stockholders' Equity | $125,000 | $110,000 |
| Total Liabilities And Stockholders' Equity | $247,000 | $199,000 |
What is Transic's current ratio for 2017?
a.1.49
b.2.14
c.0.88
d.0.21
Expert Solution
1.
| a) | Annual interest =833000*7% | $58,310 | |||||||
| Market interest rate =11% | |||||||||
| Terminal cash flow at maturity | $833,000 | ||||||||
| Present Value of annual interest=3.6959*58310= | $215,508 | ||||||||
| Present Value of terminal payment=0.59345*833000 | $494,344 | ||||||||
| Price of bond =215508+494344= | $709,852 | ||||||||
| Bond Selling at =709852/833000= | 0.8522 | ||||||||
| Bond Selling at =85.22 | |||||||||
| b) | AMORTIZATION USING STRAIGHT LINE METHOD | ||||||||
| Bond Discount =833000-709852 | $123,148 | ||||||||
| Annual discount =123148/5= | $24,630 | ||||||||
| JOURNAL ENTRY | |||||||||
| Date | Account Titles | Debit | Credit | ||||||
| 12/31/2015 | Interest expense | $82,940 | |||||||
| Bond Discount | $24,630 | ||||||||
| Cash | $58,310 | ||||||||
| 12/31/2016 | Interest expense | $82,940 | |||||||
| Bond Discount | $24,630 | ||||||||
| Cash | $58,310 | ||||||||
| 12/31/2017 | Interest expense | $82,940 | |||||||
| Bond Discount | $24,630 | ||||||||
| Cash | $58,310 | ||||||||
| c | EFFECTIVE INTEREST METHOD | ||||||||
| Interest expense=11%*(Previous Book Value) | |||||||||
| Book Value in the beginning=833000-123142= | $709,852 | ||||||||
| Date | Account Titles | Debit | Credit | ||||||
| 12/31/2015 | Interest expense | $78,084 | (11%*(833000-123142) | ||||||
| Bond Discount | $19,774 | ||||||||
| Cash | $58,310 | ||||||||
| 12/31/2016 | Interest expense | $80,259 | (11%*(833000-(123142-19774)) | ||||||
| Bond Discount | $21,949 | ||||||||
| Cash | $58,310 | ||||||||
| 12/31/2017 | Interest expense | $82,673 | (11%*(833000-(123142-19774-21949)) | ||||||
| Bond Discount | $24,363 | ||||||||
| Cash | $58,310 |
2.
Current Ratio=Current Assets/Current Liabilities
In the current case, current asset in 2017 is $107,000. Current Liabilities is $72,000
Hence Current Ratio= Current Assets/Current Liabilities
=107000/72000
=1.49
Hence the correct option is A.
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