Reference no: EM132840535
Problem 1 - Lump Sum Purchase and Cost Allocation - On July 1, 2019, PJ's Lighting purchased a new location. The purchase included the following assets: land, a building, equipment (shelving units), and equipment (manufacturing machine). An appraiser estimated the fair market value of the land, building, shelves, and machine to be $100,000, $600,000, $150,000 and $550,000, respectively. The purchase price was $1,200,000 plus 4% commission to the real estate agent for assisting in the purchase of all assets, $13,000 in back taxes on the building, and $3,500 in attorney's fees. In addition to the previous amounts paid for in cash, PJ's Lighting assumed a mortgage of $100,000 on the land.
Required - Record the journal entry on July 1, 2019 to record the purchase of the assets.
Problem 2 - Interest Capitalization - Immediately after completing the purchase on July 1, 2019, PJ's Lighting began the construction of a 3-level parking garage. They paid the following invoices on the dates listed.
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Invoice Date
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Payment Date
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Payment Amount
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7/1/2019
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7/31/2019
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$3,000,000
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9/15/2019
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9/30/2019
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$1,200,000
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11/1/2019
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12/1/2019
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$750,000
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To support these payments, PJ's Lighting took out a construction loan on July 1, 2019 of $900,000. The loan has an interest rate of 9%. In addition to this loan, the S-Mart had three other loans outstanding during the year, as follows:
Loan Start Date Loan End Date Principal Interest Rate
1/1/1990 12/31/2022 $1,000,000 6%
6/30/1997 1/1/2025 $3,500,000 12%
8/15/1999 8/14/2029 $300,000 10%
Assume all bonds pay interest on paid on June 30 and December 31. Assume there is no bond discount or premium on any bonds. Assume the parking garage was put into service on December 31, 2019.
Required - Record the journal entry(ies) on December 31, 2019 for the TOTAL interest paid on all loans for the six months ended December 31, 2019, including any interest that needs to be capitalized.
Problem 3 - Bond Issuance, Effective Interest, Extinguishment of Debt - Omnidebt Corp. issued $15,000,000 of 4%, 20-year bonds on February 1, 2000. The bonds are callable at 102 at any time. At the time of issuance, the market rate for similar bonds was 6%. Interest is paid each June 30 and December 31. Leveraged, Inc employs the effective interest method on its bonds.
Required -
1: Record the issuance of the bonds on February 1, 2000.
2: Record the interest payment on June 30, 2000.
3: Record the interest payment on December 31, 2000.
4: On January 1, 2001, Leveraged, Inc repurchased the bonds at the call price. Record the journal entry to extinguish the debt.
5: Pretend D did not happen. What would be the journal entry on January 1, 2001 if Leveraged, Inc decided to adjust the value of the bond using the Fair Market Value method and the market interest rate on that date was 8%?
Problem 4 - Comprehensive Problem - 1: On January 1, 2000, Stay Indoors Corp purchased a computer server from Remote Working Warehouse (RWW). They paid for the server by issuing RWW a $70,000 note payable which matures on December 31, 2019 (20-year term). The note pays interest at 14% and the market rate for bonds of equivalent risk is 4%. ABC also paid $8,000 (cash) to a third party for installation of the server. Record the January 1, 2000 journal entry for ABC Corp.
2: Record the journal entry for Stay Indoors' interest payment on June 30, 2000 using the effective interest method.
3: On July 1, 2000, Stay Indoors and RWW agreed to a settlement of the note payable. Stay Indoors paid RWW $50,000 cash and gave RWW a piece equipment in exchange for full settlement of the note. The equipment was on Stay Indoors books for $70,000 with accumulated depreciation of $60,000. RWW gave Stay Indoors $15,000 in fair value for the equipment. Record Stay Indoor's journal entry for the settlement of the note payable.