Question

For each situation, present the accounts and dollar amounts that would appear on comparative balance sheets and income statements for the ears ending 12/31/16 and 12/31/15.

Prepare an amortization table

List all accounts and dollar amounts. Round dollar amounts to the nearest dollar. You do not need to include cash.

For the Classification {Class:} column of the Balance Sheet use:

• A for Asset

• L for Liability

• E for Equity

For the Classification {Class:} column of the Income Statement use:

• R for Revenue

• E for Expense

The following information relates to R-U Ready Company, a publicly traded company:

1. R. U. Ready acquired Machine B on 1/1/13 by signing a 9% installment note to be paid in 5 equal installments of $65,000. Each payment is due on 12/31, with the first payment due 12/31/13. The useful life of Machine B is 8 years with no residual value. Assume double declining balance depreciation.
2. On 1/1/10, R-U Ready issued $100,000, 6.5%, 10-year bonds at an effective rate of 4.75%. Interest is paid annually on 12/31 of each year.
3. R-U Ready acquired land with a FMV of $220,000 on 1/1/14 by issuing a 3-year non-interest-bearing note due 12/13/16. Assume 8% as the effective rate of interest. (You are not provided the face value of the note, but have enough information to determine it.)

Please answer question number 2 and 3.

Answer 1

Case-1

The cost or present value of the machine can be calculated uisng the PV of ordinary annuity formula,

where, the equal annuities = 65000

at the interest rate r=9%

& no.of payments= 5

So, the cost of the machine is:

Cost/PV=65000*(1-1.09^-5)/0.09=

252827

The amortisation table for the above Installment Note will be:
Date	Annuity	Tow.Int.	Tow.Prin.	Prin. Bal.
1	2	3=Prev.5*9%	4=2-3	5=Prev.5-4
1/1/2013				252827
12/31/2013	65000	22754	42246	210581
12/31/2014	65000	18952	46048	164534
12/31/2015	65000	14808	50192	114342
12/31/2016	65000	10291	54709	59633
12/31/2017	65000	5367	59633	-1
Total	325000	72172	252828

Depreciation under DDB method

Depreciable value=the carrying value

Depreciation under DDB =2*St.line rate of depn.

ie. 2*(1/8 yrs.)= 25%

So, drawing up the annual depn. schedule

for the 8 yr. useful life of the machine,

Date/Yr. ending	Depn. For the Year(25%*Previous carrying value)	Carrying Value
1/1/2013		252827
12/31/2013	63207	189620
12/31/2014	47405	142215
12/31/2015	35554	106661
12/31/2016	26665	79996
12/31/2017	19999	59997
12/31/2018	14999	44998
12/31/2019	11249	33748
12/31/2020	8437	25311

Income Statement(Partial)
	12/31/2016	12/31/2015
(E)Depreciation	26665	35554
(E)Interest on Installment note	10291	14808
Balance Sheet(Partial)
Liabilities	12/31/2016	12/31/2015	Assets	12/31/2016	12/31/2015
(L)9% Installment Note	59633	114342	(A) Machinery-Gross	252827	252827
			Less: Acc. Depn.	172831	146166
			Machinery, Net	79996	106661
(E)Shareholders' Equity	-36956	-50362
(Depn.+Int.)

Case-2

The PV of the bond/issue price of the bond Is calculated using the PV of annuity formula as above,

where,

the Face value of the bond= 100000

Annual coupon amt.=100000* 6.5%=6500

Effective rate of interest = 4.75% p.a.

no.of coupon payments= 10

so, the PV or issue value of the bond=

Pv of the bond=PV of all its future coupons+PV of fcae value to be received at maturity

(6500*(1-1.0475^-10)/0.0475)+(100000/1.0475^10)=

113679

So, the bond is issued at a premium of 113679-100000=13679

Now the effective interest rate amortisation table of the bond over the 10 yrs.Will be
A	B	C	D	E	F	G
Date	Coupon int.(6.5%*FV)	Interest expense(4.75%*Prev. BV in G)	Premium amortised(C-B)	Bal.in Bond Premium a/c	Bond payable	BV of bonds(F+E)
	Cr. Cash	Dr. Int. exp.	Dr. Bond Premium
1/1/2010				13679	100000	113679
12/31/2011	6500	5400	-1100	12579	100000	112579
12/31/2012	6500	5347	-1153	11426	100000	111426
12/31/2013	6500	5293	-1207	10219	100000	110219
12/31/2014	6500	5235	-1265	8954	100000	108954
12/31/2015	6500	5175	-1325	7630	100000	107630
12/31/2016	6500	5112	-1388	6242	100000	106242
12/31/2017	6500	5047	-1453	4789	100000	104789
12/31/2018	6500	4977	-1523	3266	100000	103266
12/31/2019	6500	4905	-1595	1671	100000	101671
12/31/2020	6500	4829	-1671	1	100000	100001

Income Statement(Partial)
	12/31/2016	12/31/2015
(E)Interest expense	5112	5175
Balance Sheet(Partial)
	12/31/2016	12/31/2015
(L)6.5% 10-Yr. Bonds payable	100000	100000
Unamortised Bond premium	6242	7630
	106242	107630
(E)Shareholders' Equity	-5112	-5175
(Int.exp.)

Case-3
The Face Value of the note =220000*1.08^3=
277137
Date	Interest exp./ payable	Total balance
1/1/2014		220000
12/31/2014	17600	237600
12/31/2015	19008	256608
12/31/2016	20529	277137

Income Statement(Partial)
	12/31/2016	12/31/2015
(E)Interest expense	20529	19008
Balance Sheet(Partial)
Liabilities	12/31/2016	12/31/2015	Assets	12/31/2016	12/31/2015
(L)3-Yr. Note		220000	Land	220000	220000
(L)Interest payable		36608
	0	256608
(E)Shareholders' Equity	-20529	-19008
(Int.exp.)