Slim & Lund Corporations (Bonds and warranties) !

 

 Problem 2 In 20X6, Slim Corporation began selling a new line of products that carry a two-year warranty against defects. Based upon past experience with other products, the estimated warranty costs related to dollar sales are as follows:

 

First year of warranty                         5%

 

Second year of warranty                     2%

 

            Sales and actual warranty expenditures for 20X6 and 20X7 are presented below:

 

                                                                        20X6               20X7   

 

Sales                                                             $420,000         $490,000

 

Actual warranty expenditures                      16,000             24,000

 

What is the balance of estimated warranty liability at the end of 20X6 and 20X7?

   

Problem 4 Lund Corporation issues $10,000,000 in bonds, with an annual coupon rate of 7%, pays interest semiannually and matures in ten years.  The market interest rate for this type of bond is 10% when the bonds are issued. 

 

Required:

 

a. Provide the journal entry to record the sale of bonds.

 

b. Prepare the journal entries to record the first two interest payments assuming the firm uses the straight line method of interest amortization.

 

c. Prepare the journal entries to record the first two interest payments assuming the firm uses the effective interest rate method.

 

d. Assume that the bonds were issued when the market interest rate was 6%.  Provide the journal entry to record the sale of the bonds and the first two interest payment using the effective interest rate.