THE EFFECTIVE INTEREST METHOD IS USED TO AMORTIZE ANYPREMIUM OR DISCOUNT.
Long-term LiabilitiesProblem 3On January 1, 2014 P&P purchased the $1,000,000 face value, 5 year, 8% bonds of DeltaProducts, a wholly owned subsidiary of P&P, on the open market for $960,000. The bonds aredated and were issued by Delta Products, on January 1, 2010. The bonds pay interestsemiannually each January 1 and July 1. The effective interest method is used to amortize anypremium or discount. The market rate is 10%. Make any necessary entries for Delta ProductsProblem 4Assume that P&P wants to build a new warehouse. The CEO has stated that the building willcost $1.5 million. She has asked you to determine the dollar amount of bonds that P&P wouldhave to issue to cover this cost, assuming that the bonds would have a stated interest rate of8%, a 10-year term and the market rate is currently 6%. Deferred TaxesProblem 2During 2014 P&P purchased $20,000 of computer equipment with an estimated life of 5 yearsand no salvage value. P&P uses the straight-line method to depreciate its computer equipmentfor book purposes and uses the MACRS depreciation for tax purposes. This creates a $5,000difference in depreciation. P&P erroneously recorded the computers as equipment expense.P&P tax rate is 40%. Make the correcting entryCalculate the differed tax effect due to the depreciation of equipmentProblem 3In 2012 P&P had a net income of $10,000, and in 2013 a net operating loss of $50,000, and in2014 reported a net income of $70,000. Assume a tax rate of 20% for all years presented. Prepare the entry that P&P should make in 2013Prepare an entry for 2014 to record the effect of the net operating loss from 2013Problem 4Income before taxes $900,000 Income before taxes included the followingInterest income of $80,000 (from municipal bonds)Rental income was collected in advance in 2013 and earned in 2014 – $20,000Depreciation per books – $40,000 and per income taxes – $100,000Warranty expense in 2014 was $20,000 but for tax purpose only $5,000 was deductibleAssume that at the beginning of 2014 the deferred tax asset balance = $8,000 due to the rentincome. Tax rate for 2014 and the foreseeable future is 40% Calculate taxable incomeMake the necessary tax entry, make sure to include the amount for tax expense anddeferred taxes.