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12 February 2012, 5 pm PROBLEM 1: Sierra has contracted with Rip-Roaring Roy Construction Company for the construction of a new office building....
PROBLEM 1: Sierra has contracted with Rip-Roaring Roy Construction Company for the construction of a new office building. Rip-Roaring Roy estimated the cost of the construction as $5,000,000; the contract price was $8,000,000. Sierra felt the contract price was too high and obtained other estimates of the cost of construction. Consequently, the contract was signed with a contract price of $6,500,000. Rip-Roaring Roy uses the percentage of completion method for accounting for revenue from construction projects.In order to be able to fund the beginning of construction, on 3/16/2011 Roy borrowed $3,000,000 from 1st Tiger National Bank on a 2 year 9 % note specifically for this project. Interest is to be paid annually with the principal being paid on the due date of 3/15/2013. Roy has the following other debt:$2,500,000 12 % 5 year, note payable. Borrowed on 4/15/2008. Monthly payments are being made; all payments have been made on a timely basis.$4,000,000 8 %, 20 year bonds issued on 5/1/2005 when the effective interest rate was 5%. The bonds pay interest semi-annually each 5/1 and 11/1.The following payments were made for the construction that started on 4/1/2011 and was completed on 6/30/2013.4/20/2011
