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Question 2 (10 marks): On June 1, 2016 a 3-year bond was issued to a private investor to fund an international expansion. The bond had a face value of $800,000 and makes quarterly interest payments of $24,000 (the first payment was made on time on September 1, 2016). The bond was sold for $841,031. Also - 123 Inc.’s CEO just attended a corporate finance seminar and learned about bond yields, she would like you to calculate the yield that her company’s bonds’ offer. (Note: this may require you to reach beyond the material covered in class.) Hint: you need to show the journal entries required for the 2016 and 2017 fiscal year ends, and for each interest payment paid in 2016 and 2017. Question 3 (10 marks): In order to take advantage of a tax incentive 123 Inc. decided to buy new machinery on August 1, 2016 which had a cost of $300,000. For income tax purposes this machinery has a special CCA rate of 45% (the ½ year rule applies). 123 Inc.’s corporate tax rate is 20%. The deprecation for accounting purposes is going to be based on usage. The machinery is expected to have a useful life of 1.3 billion coffee cups produced, and has an expected net salvage value of $25,000. The expected usage is as follows: Fiscal year: 2016 2017 2018 2019 2020 # of units: 0.1B 0.2B 0.4B 0.4B 0.2B On August 1, 2016 the following entry was made: Dr. Capital assets $300,000 Cr. Accounts payable $300,000 Hint: You will need to calculate depreciation and future taxes. Remember you need to present both fiscal 2016 and fiscal 2017 calculations. UNIVERSITY OF TORONTO SCHOOL OF CONTINUING STUDIES 4 Question 4 (10 marks): On May 1, 2016 123 Inc. issued 600, ten-year 8% bonds for $1,000 each. The bonds pay interest annually on April 30. These bonds can be converted by the bondholders into common shares at a rate of 25 common shares for each bond converted (so far no bonds have been converted). Required: You have been asked to calculate what impact these bonds had on the earnings per share. Net income for 2016 was $2 million and there are 500,000 common shares (and no preference shares) outstanding. Assume a tax rate of 20%. Question 5 (10 marks): 123 acquired 25% of the outstanding common shares of another public company, Alphabet Soup Inc. on November 1, 2015. The purchase price was $2.5M for 125,000 shares. Alphabet declared and paid a $1.50 per share cash dividend on January 15, and again on August 15, 2016. Alphabet reported net income of $1,040,000 on its October 31, 2016 financial statement. The fair market value of Alphabet's shares was $20.25 per share at October 31, 2016. Required Given the complex circumstances of this acquisition it is unclear whether 123 can exercise significant influence over Alphabet. Accordingly you have been asked to prepare two sets of journal entries depending on whether 123 must use the equity method of accounting or FV-OCI. Indicate which method of accounting will result in a higher level of net income and explain why that occurred.