Journal entry for the first two interest payments

Reference no: EM133609284

Stealth Sky Views (SSV) is a private company that operates tourist rides from St John ' s, Newfoundland. Tourists pay for a one-hour ride that takes them to Signal Hill and up the coast. Sam, the owner, has noticed a significant increase in his rider base and is now looking at expanding by purchasing a new plane. Sam is considering several finance options (Exhibit I ) and would like you, his accountant, to assist him.

Required
Provide Sam with a report that calculates each of the three financing options he has laid out, along with journal entries where requested. He would ideally like to minimize the amount of cash that he is required to repay over the next three years in order to cover operating costs. He would also like you to comment on the advantages and disadvantages of the various options. You may assume that the receipt of any cash and the purchase of the plane take place on January 1 and that SSV has a December 31 year end.

Exhibit I

Seaplane Financing Options
The plane Sam wants to buy is expected to cost $500,000. The freight charges to deliver the plane will amount to $5,000 and the plane is
expected to last 15 years with proper maintenance and will have a salvage value of $20,000. Sam depreciates his assets on a straight-line basis. Sam would like you to provide the initial recording of the asset. You may assume that payment will be some form of loan for this portion and that the $5,000 delivery will be paid in cash; in other words, it will not be part of the ? nancing. Sam would also like you to prepare the journal entry to record depreciation for the ? rst year.

Financing Option #1
Obtain a $500,000 loan from the Royal Bank of Ryan. The loan would be repayable in ? ve equal principal payments plus interest on December 31 of each year. The loan would carry an interest rate of 6%. Sam would like to see the entry for the receipt of the loan and
the recording of the journal entries on December 31.

Financing Option #2
Issue $500,000 of bonds. The bond issue would be developed with a stated rate of 6% and would be a 10-year bond with interest paid semi-annually on June 30 and December 31. The current market rate for a similar bond is 4%. Sam would like the journal entry for the bond issue and the journal entry for the ? rst two interest payments. SSV would use the effective interest rate to amortize any bond dis-count or premium.

Financing Option #3
Issue 50,000 common shares at $10 per share to private investors. Sam currently has 100,000 common shares outstanding, with his wife holding half and Sam holding half. He also has 5,000 preferred shares outstanding. They are all owned by his father and are cumulative, paying a dividend of $4 per share. For the ? rst time, no dividends were paid last year. It would be expected that a $100,000 dividend would be declared on November 1 of this year with a payment date of February 1. Sam would like the journal entry for the issuance of the shares and any dividend entries for this year under the assumption the dividend does get declared.

Required:

Question 3
Financing Option #2

Sam would like the journal entry for the bond issue and the journal entry for the first two interest payments.

Reference no: EM133609284

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