INTERMEDIATE ACCT.(LL)-W/WILEYPLUS
INTERMEDIATE ACCT.(LL)-W/WILEYPLUS
17th Edition
ISBN: 9781119598572
Author: Kieso
Publisher: WILEY
Question
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Chapter 16, Problem 3ICA
To determine

Journal entry: A journal entry records the company’s financial transactions in a sequential order. This is a primary book of original entry, which records any type of business transactions or accounting adjustments. It records the date of the transaction, debited account, credited account, ledger folio number, amount for debit and credit, and narration of the transaction.

(a) To prepare: To prepare the journal for the issuance of bonds under GAAP.

To determine

(b) To prepare: To prepare the journal for the issuance of bonds under IFRS.

To determine

(c) To determine: To determine the better accounting approach.

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Mercury Corp. has no debt outstanding and a total market value of $350,000. Earnings before interest and taxes (EBIT) are projected to be $60,000 if economic conditions are normal. If there is a strong expansion in the economy, then EBIT will be 22% higher. If there is a recession, then EBIT will be 28% lower. The company is considering a $180,000 debt issue with an interest rate of 7%. The proceeds will be used to repurchase shares of stock. There are currently 9,000 shares outstanding. Ignore taxes for questions a) and b). Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant. Required: Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued.
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