This assignment is part of the instructor designated points. A hardcopy must be submitted at the
beginning of your class. Late submissions will not be accepted. The assignment is late (1) after the
assignment is collected, (2) your professor asks if there are any more submissions, and (3) no one
offers a submission. No assignment will be accepted by email or any electronic method. This
assignment is due on Wednesday (April 2, 2014). Circle the letter of the best answer. This assignment
is worth eight (8) points. GIVING OR RECEIVING ANY ASSISTANCE ON THIS ASSIGNMENT IS CHEATING.
1.
DMG Manufacturing Company is a manufacturing company. DMG issued a $1,000,000 bond
with a stated rate of interest of 10% and a 10-year life. The market rate of interest on the date
of issuance was 12%. The bonds sold for $887,020. What is the net bond payable balance
(carrying value of the bonds) at the end of year 3? (Hint: See Bond Discount Amortization
Schedule on page 471.)
a.
$1,000,000.
b.
$ 908,759.22.
c.
$ 91,240.78.
d.
$ 900,677.90.
The correct answer is B. See table below.
See example on page 471 in your textbook
Bond Discount Amortization Schedule: Effective-Interest Method
Journal Entry Components
Balance Sheet Accounts
(A)
(B)
(C) = (A) – (B)
(D)
(E)
(F) (=D – E)
Period
Cash
Interest
Amortized
Bonds
Discount on
Carrying
Ended
Paid
Expense
Discount
Payable
Bonds
Value
Payable
01/01/Year 1
---------------------------- $1,000,000 $112,980.00 $887,020.00
12/31/Year 1
$100,000 $106,442.40
$6,442.40 $1,000,000 $106,537.60 $893,462.40
12/31/Year 2
$100,000 $107,215.48
$7,215.48 $1,000,000 $99,322.12 $900,677.90
12/31/Year 3
$100,000 $108,081.34
$8,081.34 $1,000,000 $91,240.78 $908,759.22
2.
Which of the following best describes how to handle contingent liabilities?
a.
If the contingent liability is both probable and can be estimated a liability and estimated
loss must be recorded. If the contingent liability is probable but cannot be estimated
then it should be described in a footnote (note). If the contingent liability is possible it
should be described in a footnote (note). If the contingent liability is remote no
requirement to mention it exists.
b.
If the contingent liability is both probable and can be estimated a liability and estimated
loss must be recorded. If the contingent liability is probable but cannot be estimated
then it should be described in a footnote (note). If the contingent liability is possible no
requirement to mention it exists. If the contingent liability is remote no requirement to
mention it exists.
c.
If the contingent liability is both probable and can be estimated a liability and estimated
loss must be recorded. If the contingent liability is probable but cannot be estimated
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d.
then it should be described in a footnote (note). If the contingent liability is possible
and can be estimated a liability and estimated loss must be recorded. If the contingent
liability is remote no requirement to mention it exists.
If the contingent liability is both probable and can be estimated an expense and
estimated loss must be recorded. If the contingent liability is probable but cannot be
estimated then it should be described in a footnote (note). If the contingent liability is
possible it should be described in a footnote (note). If the contingent liability is remote
no requirement to mention it exists.
Answer is A. See Exhibit 10.9 on page 463.
3.
DMG Company has a gross payroll of $150,000 and withholds the following from its employees:
federal income taxes of $15,000, FICA of $9,000, and voluntary retirement contributions of
$12,000. In addition, DMG Company records its employer liability for FICA. None of the
withholding or FICA is paid by DMG Company. What is the effect on assets and liabilities from
these transactions?
a.
Assets decrease by $114,000 and liabilities increase by $45,000.
b.
Assets decrease by $159,000 and liabilities increase by $45,000.
c.
Assets decrease by $114,000 and net income decrease by $114,000.
d.
Assets decrease by $150,000 and net income decreases by $159,000.
e.
Assets decrease by $150,000 and liabilities increase by $36,000.
A is correct.
The journal entries would be:
Salary Expense
Federal income taxes withheld payable
FICA Payable
Retirement Contributions Payable
Cash
Salary Expense
FICA Payable
150,000
15,000
9,000
12,000
114,000
9,000
9,000
Cash is the only asset affected and it goes down by $114,000. Liabilities go up by $45,000
(15,000 + 9,000 + 12,000 + 9,000 = $45,000).
Expenses go up $159,000. Therefore net income would go down by $159,000.
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4.
DMG Company issued $1,000,000 of 8% bonds for $1,178,170 on January 1, 2014. DMG
Company correctly recorded interest expense on December 31, 2014 as $70,690.20. What is the
market rate of interest on the bonds (calculate to the nearest 2 decimal points).
a.
6% or .06.
b.
8% or .08.
c.
10% or .10.
d.
12% or .12.
A is correct.
Interest Expense is calculated as follows:
Carrying Value at the beginning X Effective (Market)
Of the Interest Period
Annual Interest Rate
X Time = Interest Expense
PLUG IN THE AMOUNTS GIVEN:
$1,178,170 X ???????? X 12/12 = $70,690.20
$1,178,170 X ???????? = $70,690.20
$70,690.20/$1,178,170 = .06 or 6%.
5.
DMG Company issued 15-year bonds with a face value of $1,000,000 and a stated rate of
interest of 10%, payable annually on December 31. The bonds were sold on January 1, 2014
when the market rate of interest was 12%. Selected table values are:
Present Value of 1 for 15 periods at 10%
Present Value of 1 for 15 periods at 12%
Present Value of an Annuity for 15 periods at 10%
Present Value of an Annuity for 15 periods at 12%
0.23939
0.18270
7.60608
6.81086
The issue price of the bonds is
a.
$1,152,119.60.
b.
$ 999,600.00.
c.
$ 889,560.00.
d.
$ 863,786.00.
D is correct.
Interest paid each year is $100,000 (Face value X Stated Rate of Interest X Time = $1,000,000 X
0.10 X 12/12 = $100,000).
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Present value of an annuity for 15 periods at 12% is:
$100,000 X 6.81086 = $681,086
Present value of a single amount for 15 periods at 12% is:
$1,000,000 X 0.1827 = $182,700
$182,700 + $681,086 = $863,786.
6.
DMG Company prepared the following journal entry to record its annual interest expense on a
bond:
Interest Expense
Bonds Payable, Net
Cash
XXXX
XXXX
XXXX
Which of the following statements correctly describes the effect of this journal entry on the
financial statements?
a.
b.
c.
d.
The bonds payable, net amount increases (carrying value of the bonds payable
increases).
The market rate of interest is more than the stated rate of interest on the bond.
Net income increases by the amount of the debit to interest expense.
The actual interest expense reported during the year for the bond is less than the total
cash interest payment for that year.
D is correct.
7.
Which of the following statements is not correct?
a.
The bond principal (face value) is the amount due at the maturity date of the bond.
b.
The stated interest rate is used to determine the cash interest payments.
c.
The bond principal (face value) is used to determine the cash interest payments.
d.
The market rate of interest is used to determine the cash interest payments.
D is not true. Therefore it is the answer.
8.
On January 1, 2014 DMG Company borrows $2,000,000 for five years at 10% interest and has to
repay $400,000 of principal at the end of each year. Interest is paid on June 30 and December
31 of each year. How would this information be reported on the balance sheet at March 31,
2014?
a.
$50,000 as interest expense and $2,000,000 as long-term debt.
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b.
c.
d.
$50,000 as interest payable, $400,000 as current portion of long-term debt under
current liabilities, and $1,600,000 under long-term debt.
$200,000 as interest payable, $400,000 as current portion of long-term debt under
current liabilities an $1,600,000 under long-term debt.
$50,000 as interest payable under current liabilities and $2,000,000 under long-term
debt.
B is correct.
On March 31, 2013 the $400,000 payment on December 31, 2014 is within a year of payment
and is therefore classified as current. The other four payments (December 31, 2015;
December 31, 2016; December 31, 2017; and December 31, 2018) are more than a year away
and are therefore long-term liabilities. Interest payable on March 31, 2014 is $50,000
($2,000,000 X 0.10 X 3/12 = $50,000). It would be classified as a current liability.
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