Reference no: EM133021646
Question - Thompson Limited, a private company with no published credit rating, completed several transactions during 2020. In January, the company bought under contract a machine at a total price of $1.22 million. It is payable over five years with installments of $244,000 per year, with the first payment due January 1, 2020. The seller considered the transaction to be an installment sale with the title transferring to Thompson at the time of the final payment. If the company had paid cash for the machine at the time of the sale, the machine would have cost $1,070,000. The company could have borrowed from the bank to buy the machine at an interest rate of 7%. It is expected that the machine will last 10 years.
On July 1, 2020, Thompson issued $10.20 million of bonds priced at 99 with a coupon of 10% payable July 1 and January 1 of each of the next 10 years to a small group of large institutional investors. As a result, the bonds are closely held. The July 1 interest was paid and on December 30 the company transferred $510,000 to the trustee, Holly Trust Limited, for payment of the January 1, 2021 interest.
Thompson purchased $510,000 (face value) of its 6% convertible bonds for $464,100. It expects to resell the bonds at a later date to a small group of private investors.
Finally, due to economic conditions, Thompson obtained some government financing to help buy some updated technology to be used in the plant. The government provided a $510,000 loan with an interest rate of 1% on December 31, 2020. The company must repay $510,000 in five years: December 31, 2025. Interest payments of $5,100 are due for the next five years, starting on December 31, 2021. The company could have borrowed a similar amount of funds for an interest rate of 6% on December 31, 2020.
As Thompson's accountant, using (1) factor tables, (2) a financial calculator, or (3) Excel function PV, calculate the value of the note and prepare journal entries for the machine purchase and the government loan transactions described above.
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