QUESTION 1: On 1 July 2018 Bombo Ltd issues $ 2 million in six – year debentures that pay interest each six months at a coupon rate of 8 per cent. At the time of issuing the securities, the market requires a rate of return of 6 per cent, interest expense is determined using the effective-interest method.
a)Determine the issue price
b)Provide the journal entries at + 1 July 2018,+ 30 June 2019
Question 2: Wastewater Ltd acquired an item of plant on 1July 2016 for $3,660,000. When the item of plant was acquired, it was initially assessed as having a life of 10,000 hours. During the reporting period ending 30 June 2017 the plant was operated for 3000 hours.
At 1 July 2017 the plant had a remaining useful life of 7000 hours. On 1 July 2017 the plant underwent a major upgrade costing $234 600. Management believes that this upgrade will add a further 2000 hours of operating time to the plant’s life. During the reporting period ended 30 June 2018 the plant was operated for 4000 hours.
On 1 July 2018 the plant underwent a further major upgrade , the cost of which amounted to $344,900 and this added a further 3100 hours’ operating time to its life. During the reporting period ending 30 June 2019 the plant was operated for 3800 hours.
Prepare all the journal entries that Wastewater Ltd would prepare for the years ending 30 June 2017, 30 June 2018 to account for the acquisition, subsequent expenditure and depreciation on the asset.
Question 3: Superbank Ltd acquired some machinery at a cost of $2,000,000. As at 30 June 2018 the machinery had accumulated depreciation of $400,000 and an expected remaining useful life of four years.
On 30 June 2018 it was determined that the machinery could be sold at a price of $1,200,000 and that the costs associated with making the sale would be $50,000. Alternatively, the machinery is expected to be useful for another four years and it is expected that the net cash flows to be generated from the machine would be $390,000 over each of the next four years.
It is assessed that at 30 june 2018 the market would require a rate of return of 6 per cent on this type of machinery.
Required:Determine whether any impairment loss needs to be recognised in relation to the machinery and, if so, provide the appropriate journal entry at 30 June 2018. Also, provide the journal entry to account for depreciation in 2019.