Intermediate Accounting II (ACCT 342/542)
Winter, 2014
Exam 2 Solutions
Question 1
(1)
(2)
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
FV
N
I
pmt
type
? = 5,747,896
5,000,000 (maturity value)
40 = 10*4
1.5 = 6/4
100,000 = 5,000,000*.08*3/12
end
PV
FV
N
I
pmt
type
? = 5,736,009
5,000,000 (maturity value)
10
6
400,000 = 5,000,000*.08
end
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
FV
N
I
pmt
type
(3)
? = 280,562
300,000
4
9
21,000
end
PV
FV
N
I
pmt
type
? = 276,662
300,000
5
9
21,000
end
PV
FV
N
I
pmt
type
? = 273,084
300,000
6
9
21,000
end
280,562
+ 276,662
+ 273,084
830,308
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 *.04
400,000 / .04 = maturity value = 10,000,000
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, 2018.
1.
2.
Prepare a bond amortization table.
Proceeds
Maturity
Total # pmts
Yield rate
Coupon rate
Payment
651,954
600,000
5
0.05
0.07
42,000
Date
01/01/14
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
Tot Pmt
Interest
Amort
42,000
42,000
42,000
42,000
42,000
32,598
32,128
31,634
31,116
30,570
9,402
9,872
10,366
10,884
11,430
Balance
651,954
642,552
632,680
622,314
611,430
600,000
Prepare journal entries for 2014 (year 1) and 2015 (year 2).
1/1/14
Cash
651,954
Bonds payable
12/31/14
12/31/15
651,954
Interest expense
Bonds payable
Cash
32,598
9,402
Interest expense
Bonds payable
Cash
32,128
9,872
42,000
42,000
Total
Liability
Current
Liability
Long-term Operating
Liability Income
Non-op Operating
Income Activities
Investing
Activities
Financing
Activities
2014
642,552
40,000
602,552
0
–32,598
–42,000
0
651,954
2015
632,680
40,000
592,680
0
–32,128
–42,000
0
2016
622,314
40,000
582,314
0
–31,634
–42,000
0
2017
611,430
611,430
0
0
–31,116
–42,000
0
2018
0
0
0
0
–30,570
–42,000
0
–600,000
Computations:
2014 TL 642,552
2014 CL 40,000
2014 LtL 602,552
2014 Op Inc
2014 NonOp Inc
2014 OA
2014 FI
= 12/31/14 loan balance
= PV of 2015 cash interest payment of 42,000
= TL ! CL
= 0, because interest expense goes in non op income
= Interest expense
= cash interest payment –40,000 (negative because it is a payment out)
= 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, 2014. These are five
year bonds, maturing on December 31, 2018. 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)
Maturity value (FV)
Years
Periods / year
Total periods (N)
Yield rate (I)
Coupon rate
Payment (FV*coup rate)
Date
01/01/14
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
5,194,483
5,000,000
5
1
5
9.000000%
10.000000%
500,000
883,062
IB fee
4,311,421
5,000,000
5
1
5
14.012655%
10.000000%
500000
Cash pmt
Interest
Amort.
500,000
500,000
500,000
500,000
500,000
604,145
618,738
635,376
654,346
675,974
104,145
118,738
135,376
154,346
175,974
<--Corp proceeds
<--new rate
Bond Pay
Balance
4,311,421
4,415,566
4,534,304
4,669,680
4,824,026
5,000,000
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 31.
1.
Prepare a bond amortization table.
Date
10/1/2014
10/1/2015
10/1/2016
10/1/2017
10/1/2018
10/1/2019
2.
Cash
Interest Exp
Amortization
360,000
360,000
360,000
360,000
360,000
402,779
405,774
408,978
412,406
416,075
42,779
45,774
48,978
52,406
56,075
Prepare journal entries for the following dates:
10/1/14
Cash
Bonds payable
12/31/14
10/1/15
12/31/15
10/1/16
5,753,988
5,753,988
Interest expense
Bonds payable
Interest payable
100,695
Interest payable
Interest expense
Bonds payable
Cash
90,000
302,084
Interest expense
Bonds payable
Interest payable
101,444
Interest payable
Interest expense
Bonds payable
Cash
90,000
304,330
10,695
90,000
32,084
360,000
11,444
90,000
34,330
360,000
Balance of BP
5,753,988
5,796,767
5,842,541
5,891,519
5,943,925
6,000,000
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
Liability
Oct 1
Current
Liability
Oct 1
Total
Liability
Dec 31
Current
Liability
Dec 31
Long-term
Liability
Dec 31
2014
5,753,988
336,449
5,854,683
342,337
5,512,346
2015
5,796,767
336,449
5,898,210
342,337
5,555,873
2016
5,842,541
336,449
5,944,785
342,337
5,602,445
2017
5,891,519
336,419
5,994,621
342,337
5,652,284
Operating
Income
Non-op
Income
Operating Investing
Activities Activities
2014
0
100,695
0
0
+5,753,988
2015
0
403,528
–360,000
0
0
2016
0
406,579
–360,000
0
0
2017
0
409,835
–360,000
0
0
402,779
2014
3/12 100,695
405,774
2015
9/12 302,084
3/12 101,444
408,978
2016
Financing
Activities
2017
9/12 304,330
3/12 102,245
412,406
9/12 306,733
3/12 103,102
105,695
403,528
406,579
409,835
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 1st mo Cash
Finance expense
Notes payable
1,920,000
80,000
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 1st mo Cash
500,000
Accounts receivable
Notes payable
Interest expense
Cash
500,000
470,000
30,000
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 2nd mo
Cash
Accounts receivable
Notes payable
Interest expense
Cash
900,000
900,000
877,050
22,950
900,000
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 3rd mo Cash
800,000
Accounts receivable
Notes payable
Interest expense
Cash
800,000
652,950
9,794
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 4th mo Cash
800,000
Accounts receivable
800,000
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 $9,000.
1.
Compute the amount of gain or loss that Reggie must recognize on the sale of the receivables.
Proceeds
Future payout
Net proceeds
less Book Value
loss
2.
246,000
–9,000
237,000
–300,000
–63,000
Write the journal entry that records for the sale of the receivables.
Cash
Loss
246,000
63,000
Due to factor
Accounts receivable
3.
9,000
300,000
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
Cash
9,000
9,000