Intermediate Accounting II (ACCT 342/542) Winter, 2014 Exam 2 Solutions

Transcription

1 Intermediate Accounting II (ACCT 342/542) Winter, 2014 Exam 2 Solutions Question 1 (1) The proceeds from issuing $5,000,000 of bonds on January 1, 2014, with annual cash interest payments (first payment due December 31, 2014) and due in 10 years (December 31, 2023). The bonds have a yield rate 6% and a coupon rate of 8%. PV? = 5,747,896 FV 5,000,000 (maturity value) N 40 = 10*4 I 1.5 = 6/4 pmt 100,000 = 5,000,000*.08*3/12 type end PV? = 5,736,009 FV 5,000,000 (maturity value) N 10 I 6 pmt 400,000 = 5,000,000*.08 type end (2) The proceeds from issuing $900,000 of serial bonds on January 1, 2014 with annual cash interest payments (first payment due on December 31, 2014). The bonds have a yield rate 9% and a coupon rate of 7%. $300,000 of the bonds mature on December 31, 2017, four years from the date of issue. Another $300,000 of the bonds mature on December 31, 2018, five years from the date of issue. The final $300,000 of the bonds mature on December 31, 2019, six years from the date of issue. PV? = 280,562 PV? = 276,662 PV? = 273, ,562 FV 300,000 FV 300,000 FV 300, ,662 N 4 N 5 N ,084 I 9 I 9 I 9 830,308 pmt 21,000 pmt 21,000 pmt 21,000 type end type end type end (3) The maturity value of a six year bond issue. The bonds call for semi-annual interest payments of $400,000. When the bonds were issued on January 1, 2014, the yield rate was 10%. The coupon rate is 8%. cash interest payment = maturity value * coupon rate 400,000 = maturity value *.08 * 6/12 400,000 = maturity value * ,000 /.04 = maturity value = 10,000,000

2 Question 2 On January 1, 2014, Alex, Inc., issued 7% coupon bonds with a total maturity value of $600,000 for $651,954. Interest is payable annually on December 31, and the bonds are issued to yield 5%. These are five year bonds, with a maturity date of December 31, Prepare a bond amortization table. Proceeds 651,954 Maturity 600,000 Total # pmts 5 Yield rate 0.05 Coupon rate 0.07 Payment 42,000 Date Tot Pmt Interest Amort Balance 01/01/14 651,954 12/31/14 42,000 32,598 9, ,552 12/31/15 42,000 32,128 9, ,680 12/31/16 42,000 31,634 10, ,314 12/31/17 42,000 31,116 10, ,430 12/31/18 42,000 30,570 11, , Prepare journal entries for 2014 (year 1) and 2015 (year 2). 1/1/14 Cash 651,954 Bonds payable 651,954 12/31/14 Interest expense 32,598 Bonds payable 9,402 Cash 42,000 12/31/15 Interest expense 32,128 Bonds payable 9,872 Cash 42,000 Total Current Long-term Operating Non-op Operating Investing Financing Liability Liability Liability Income Income Activities Activities Activities ,552 40, , ,598 42, , ,680 40, , ,128 42, ,314 40, , ,634 42, , , ,116 42, ,570 42, ,000

3 Computations: 2014 TL 642,552 = 12/31/14 loan balance 2014 CL 40,000 = PV of 2015 cash interest payment of 42, LtL 602,552 = TL! CL 2014 Op Inc = 0, because interest expense goes in non op income 2014 NonOp Inc = Interest expense 2014 OA = cash interest payment 40,000 (negative because it is a payment out) 2014 FI = amount borrowed +651,954 (positive because it is a receipt of cash) Question 3 Bonds issued with assistance of investment banker The Cesar Company issues bonds on January 1, 2014, priced to yield 9%. The bonds have a maturity value of $5,000,000, and call for annual interest payments of 10% on December 31 of each year, starting on December 31, These are five year bonds, maturing on December 31, After selling the bonds to the investing public, the investment banker withholds 17% of the gross proceeds as its fee (forwarding 83% of the proceeds to Cesar). 1. Compute the net proceeds to Cesar (after deducting investment banker fee) from the bond issue. 2 Prepare Cesar s bond amortization table that will assist in the accounting for the bond issue. Be sure to designate which interest rate is used for which purpose. Round all amounts to dollars. Bond proceeds (PV) 5,194, ,062 4,311,421 <--Corp proceeds Maturity value (FV) 5,000,000 IB fee 5,000,000 Years 5 5 Periods / year 1 1 Total periods (N) 5 5 Yield rate (I) % % <--new rate Coupon rate % % Payment (FV*coup rate) 500, Bond Pay Date Cash pmt Interest Amort. Balance 01/01/14 4,311,421 12/31/14 500, , ,145 4,415,566 12/31/15 500, , ,738 4,534,304 12/31/16 500, , ,376 4,669,680 12/31/17 500, , ,346 4,824,026 12/31/18 500, , ,974 5,000,000

4 Question 4 Bond year fiscal year. On October 1, 2014, Devon issued five year bonds with a maturity value of $6,000,000 for $5,753,988. The bonds pay 6% interest each October 1 (starting October 1, 2015), and were sold to yield 7%. Devon s fiscal year ends on December Prepare a bond amortization table. Date Cash Interest Exp Amortization Balance of BP 10/1/2014 5,753,988 10/1/ , ,779 42,779 5,796,767 10/1/ , ,774 45,774 5,842,541 10/1/ , ,978 48,978 5,891,519 10/1/ , ,406 52,406 5,943,925 10/1/ , ,075 56,075 6,000, Prepare journal entries for the following dates: 10/1/14 Cash 5,753,988 Bonds payable 5,753,988 12/31/14 Interest expense 100,695 Bonds payable 10,695 Interest payable 90,000 10/1/15 Interest payable 90,000 Interest expense 302,084 Bonds payable 32,084 Cash 360,000 12/31/15 Interest expense 101,444 Bonds payable 11,444 Interest payable 90,000 10/1/16 Interest payable 90,000 Interest expense 304,330 Bonds payable 34,330 Cash 360,000

5 3. How will the bonds will be reported on the financial statements for the years ended December 31, 2014 December 31, 2015 December 31, 2016 December 31, 2017 Total Current Total Current Long-term Liability Liability Liability Liability Liability Oct 1 Oct 1 Dec 31 Dec 31 Dec ,753, ,449 5,854, ,337 5,512, ,796, ,449 5,898, ,337 5,555, ,842, ,449 5,944, ,337 5,602, ,891, ,419 5,994, ,337 5,652,284 Operating Non-op Operating Investing Financing Income Income Activities Activities Activities , ,753, , , , , , , ,779 3/12 100,695 9/12 302, ,774 3/12 101,444 9/12 304, ,978 3/12 102,245 9/12 306, ,406 3/12 103, , , , ,835

6 Question 5 Assignment of Accounts Receivable. Specific customer accounts receivable totaling $3,000,000 were assigned to Ethan Finance Company by Scott Retail, Inc. as collateral for a $2,000,000 loan. Customers continue to pay Scott Retail, and Scott Retail pays the finance company for charges, interest and loan paydown. At the time of the loan, the Ethan Finance disburses to Scott Retail loan amount less a four percent finance charge on the amount of the loan. The journal entry or entries at the time of the loan for assigning the accounts receivable and the transfer of cash. Beg 1 st mo Cash 1,920,000 Finance expense 80,000 Notes payable 2,000,000 During the first month, Scott Retail collected $500,000 on the assigned accounts. This amount is remitted to the finance company for payment of one month s interest (1.5% interest on the unpaid loan balance from the start of the month) and principal paydown. The journal entry or entries at the end of the first month recording Scott Retail s cash collection and the transfer of cash to Ethan Finance. End 1 st mo Cash 500,000 Accounts receivable 500,000 Notes payable 470,000 Interest expense 30,000 Cash 500,000 During the second month, Scott Retail collected $900,000 on the assigned accounts. This amount (could be less if not all if needed to repay the remaining loan balance) is remitted to the finance company for payment of one month s interest (1.5% interest on the unpaid loan balance from the start of the month) and principal paydown. The journal entry or entries at the end of the second month recording Scott Retail s cash collection and the transfer of cash (if needed) to Ethan Finance. End 2 nd mo Cash 900,000 Accounts receivable 900,000 Notes payable 877,050 Interest expense 22,950 Cash 900,000

7 During the third month, Scott Retail collected $800,000 on the assigned accounts. This amount (could be less, could be all if needed to repay the remaining loan balance) is remitted to the finance company for payment of one month s interest (1.5% interest on the unpaid loan balance from the start of the month) and principal paydown. The journal entry or entries at the end of the third month recording Scott Retail s cash collection and the transfer of cash (if needed) to Ethan Finance. End 3 rd mo Cash 800,000 Accounts receivable 800,000 Notes payable 652,950 Interest expense 9,794 Cash 662,744 During the fourth month, Scott Retail collected $800,000 on the assigned accounts. This amount (could be less, could be all if needed to repay the remaining loan balance) is remitted to the finance company for payment of one month s interest (1.5% interest on the unpaid loan balance from the start of the month) and principal paydown. The journal entry or entries at the end of the fourth month recording Scott Retail s cash collection and the transfer of cash (if needed) to Ethan Finance. End 4 th mo Cash 800,000 Accounts receivable 800,000

8 Question 6 Factoring Accounts Receivable. On June 1, 2014, the Reggie Company factors (sells) $300,000 of accounts receivable to a finance company on a with recourse basis. Reggie s customers are instructed to make payments to the finance company. The finance pays 82% of the accounts receivable to Reggie. However, Reggie agrees to recompense the finance company in the future for any uncollectible accounts, up to a maximum of $9,000. It is likely that Reggie will have to pay all $9, Compute the amount of gain or loss that Reggie must recognize on the sale of the receivables. Proceeds 246,000 Future payout 9,000 Net proceeds 237,000 less Book Value 300,000 loss 63, Write the journal entry that records for the sale of the receivables. Cash 246,000 Loss 63,000 Due to factor 9,000 Accounts receivable 300, Write the journal entry for two months later when Reggie makes good on its recourse promise and pays $9,000 to the finance company. Due to factor 9,000 Cash 9,000