ACCT2013 Principles of Accounting II Assignment II
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2022-2023 Semester Two
ACCT2013 Principles of Accounting II
Assignment II
Question 1 (Total 20 marks)
Part A (14 marks)
Nowicki Ltd issued 10% bonds with a total par value amount of $300,000 on January 1, 2021. A total cash amount of $289,603.65 was received by the company. The bonds will mature on 31 Dec 2022 (2-year bond). The market interest rate at issuance was 12%. Interest is paid semiannually on June 30 and December 31.
Required:
a) Prepare a complete amortization table using the effective interest method in the following format (rounded the nearest two decimal place): (8 marks)
|
Semiannual Interest Period-end Date |
(A) Cash Interest Paid |
(B) Bond Interest Expense |
(C) Discount Amortization |
(D) Unamortized Discount |
(E) Carrying Amount |
b) Prepare the journal entries to record the issuance of bonds by Nowicki Limited on January 1, 2021. (Narratives are not required) (2 marks)
c) Prepare the journal entries to record interest payment on June 30,
2021 using the effective interest method. (2 marks)
d) On January 1, 2022, the bonds were converted to 1,000 ordinary shares. The company’s ordinary shares had no par value at the conversion date. Prepare the journal entries to record conversion of bonds to ordinary shares on January 1, 2022. (2 marks)
PART B (6 marks)
On January 1, a company borrowed $70,000 cash by signing a 9% installment note that is to be repaid with 4 annual year-end payments of $21,607. While the amount borrowed equals $70,000, the total payments on this note amount to $86,428.
Required:
a) What is the difference between the amount borrowed and the total payments on the note amount? (1 mark)
b) Describe how we record the difference throughout the life of installment note? (5 marks)
Question 2 (Total 20 marks)
Part A (10 marks)
Cardinal Machinery acquired 10% of the 200,000 ordinary shares of Ordinal Tools at a total cost of $13 per share on March 18, 2022. On June 30, Ordinal Tools declared and paid $75,000 cash dividends to all shareholders. On December 31, Ordinal Tools reported net profits of $122,000 for the year, and the market price of Ordinal Tools was $15 per share.
On January 6, 2023, Cardinal Machinery sold all the shares of Ordinal Tools. The net proceeds were $330,000.
Required:
Prepare the journal entries from March 18, 2022 to January 7, 2023 to record the transactions for Cardinal Machinery. (Narratives are required)
Part B (10 marks)
Yang Limited is a manufacturing company. It held the debt securities of ABC Limited in year 2020. The year-end unamortized cost and fair values for ABC debt securities are as follows:
Debt Securities of ABC Limited
|
|
Unamortized Cost |
Fair Value |
|
December 31, 2021 |
394,500 |
$389,900 |
|
December 31, 2022 |
406,400 |
$412,600 |
The business model of the debt investment is to collect the contractual cash flows and to sell before maturity from time to time . The contractual cash flows of the investment are solely payments of principal and interest on the principal outstanding.
All the debt securities were sold for $450,000 on January 1, 2023.
Required:
a) Provide at least two risks associated with debt investment from the perspective of an investor. (2 marks)
b) Advise the measurement classification for investment in debt securities of ABC Limited? (1 mark)
c) Describe how we record the difference between amortized cost and fair value at the year-end of 2021 and 2022.(You are required to write complete sentences for the description. Journal entries are not required) (5 marks)
q) After the sale of the debt investment of ABC Limited, the director of Yang Limited decided to recycle the fair value gain of the debt investment out of OCI to profit or loss. Explain briefly why the director intended to do the recycling. (2 marks)
2023-03-30