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kksavage36
kksavage36
18.03.2021 • 
Business

UMoveIT Corporation started business on January 1, 2020. On that date, UMoveIT Corp. issues $100,000 face value of 8% annual bonds that require interest payments on December 31 of each year and that are due in 20 years. The market rate of interest for bonds such as these on January 1, 2020 is 9%. UMoveIT accounts for these bonds using the effective interest method and prepares financial statements once each year on December 31. When it does its accounting, UMoveIT does not use a separate premium or discount account, but rather just includes any premium or discount in with the bond payable account. See class notes for further details on this bookkeeping. Assume a tax rate of 30%. Assume historical cost accounting is the tax treatment for bonds and interest (which it is).

The present value of bonds at issuance is PV (pmt = 8000, FV = 100,000, i = 9%, N = 20) = 90,871.
The following are the two present values of the bond at Jan. 1, 2017 at the two different interest rates are as follows:
PV(pmt = 8000, FV = 100,000, i = 9%, N = 18) = 91,244
PV(pmt = 8000, FV = 100,000, i = 7%, N = 18) = 110,059.

Required:
a. What entry (or entries) does UMoveIT make related to these bonds during 2020 and 2021, including any deferred tax entries?
b. Assume that the market rate of interest for these bonds falls from 9% to 7% on January 1, 2017, and that UMoveIT uses fair value accounting. What entries does UMoveIT make related to these bonds during 2017, including any deferred tax entries?
c. At what amount would the bond liability and any deferred taxes appear on the balance sheets at end of 2020, 2021, and 2022 (also do beginning of 2022). How will the income statement look for the 2019-2020 years? Assume income is $100,000 (excluding any interest or fair value gains and losses). Assume all of this income is currently taxable.
d. How would the statement of cash flows – direct method look for the 2019-2020 years? Assume taxes are paid in the year following (i.e., 2020 taxes are paid in 2021, etc.).

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