2210 - Group Quiz 4 - WCNet



SOLUTION: Acct 2210 Zeigler: Group Quiz #4 - Chp 10 & 11 (30 pts + 5 pt EC)

Use the following fact pattern for questions #1 and #2

Van Tress & Li, Inc. can borrow up to $50,000 on its bank “line of credit”. The company agreed to pay

interest monthly at 2 percent above prime rate. Funds are borrowed or repaid on the first day of each month.

|Month |Amounts Borrowed or (Repaid) | Prime Rate |

| | | |

|Jan. | $15,000 |6 percent |

|Feb. |$ (5,000) |5 percent |

|March |$30,000 |4 percent |

_____ 1. The correct amount of interest expense for the month of March would be:

a. $225.00

b. $200.00 (($40,000 March balance * .06) / 12 months)

c. $133.33

d. $100.00

e. $ -0-

_____ 2. The correct journal entry to record the March interest paid (only) would include:

a. a debit to cash (no, a credit)

b. a debit to “Credit Line Payable” (no impact on principal here)

c. a credit to interest expense (no, a debit)

d. a credit to interest revenue (no, this is an expense to the company)

e. None of the above represent a correct journal entry component.

Use the information below to complete questions 3-6.

On January 1, 2015 Diver, Inc. borrowed $162,000 cash from Falcon Bank by issuing a five-

year 8% installment note. The principal and interest are to be repaid by making annual payments

beginning December 31, 2015. The annual payment required to pay off the loan, as calculated

by using a factor from a particular “Present Value” table, was determined to be $40,574.

_____ 3. The amount of principal repayment included in the December 31, 2015 payment is: 

a.  $12,960.

b.  $27,614. (40,574 payment – interest of $12,960 ($162,000 * 8%) = $27,614)

c.  $37,329.

d. $40,574.

_____ 4. The net effect of the above December 31, 2015 transaction on the borrower’s Balance Sheet would:

a. Increase Liabilities

b. Decrease Stockholder’s Equity (Interest expense will decrease net income)

c. Increase Assets

d. All of the above would occur.

_____ 5. How much of the Year 2 payment would represent interest expense?

a. $10,751 b. $12,960 c. $27,614 d. $29,823 e. $40,574

($162,000, less year one principal paid of $27,614) = $134, 386 * 8% = $10,751

6. Referring to the “Business Applications” discussion on pg 776 of our text (Appendix “F”), show the

single calculation required to determine the above $40,574 annual payment needed to fully amortize

(i.e. pay-off) this loan over five years. Which table did you use to complete this calculation?

$162,000 / 3.992710 (Table 4 Present Value annuity factor on pg 779) = $40,573.95

Use the following Trial Balance for Schock & Habeed, Inc. to answer questions 7 & 8:

Note: This material is covered specifically on pg 416 (Chp 8 intro) and on pages 492-495 (in Chp 9).

Students are responsible for these specific Chp 9 pages of our textbook.

|Schock & Habeed, Inc. |

|Trial Balance |

|December 31st |

|Cash |300 | |

|Accounts receivable |1,000 | |

|Inventory |1,300 | |

|Prepaid Rent (expires next month) |200 | |

|Office equipment, net of Acc/Depr |4,400 | |

|Land |10,000 | |

|Unearned revenue | |400 |

|Accounts payable | |500 |

|Interest payable | |100 |

|Note payable (due in 5 years) | |2,900 |

|Common stock | |13,000 |

|Retained earnings | |300 |

|Totals |17,200 |17,200 |

_____ 7. What are the company’s “Current Assets” at December 31st? (Note See pg 416 & 493)

a. $2,600 b. $2,800 c. $7,300 d. $8,200 e. $17,200

(300+1000+1300+200)

_____ 8. What is the company’s “Current Ratio” at December 31st? (Note: See Chp 9 pg 492-495 discussion)

a. 2.43 to 1 b. 2.80 to 1 c. 3.11 to 1 d. 7.20 to 1 e. 17.2 to 1

Current Assets $2,800 / Current Liabilities (400+500+100) = 2.8

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Bowerman & Pytlak, Inc. had the following Balance Sheet on January 1, 2015:

[pic]

_____ 9. On January 2, 2015, the company recorded the following single transaction:

[pic]

Recording this one transaction would: (Note: See Chp 9 pg 492-495 discussion)

a. Decrease the current ratio to “2 to 1” (or 2.0)

b. Maintain the current ratio of “3 to 1” (or 3.0)

c. Increase the current ratio to “4 to 1” (or 4.0)

d. Increase the current ratio to “5 to 1” (or 5.0) (New C/R = $10,000 / current liab of $2,000)

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

____ 10. Hopkirk (H) Company and Shaffer (S) Company each began operations on January 1, 2015. They are competitors in the same industry and each began operations with identical assets, liabilities, and stockholder’s equity. During the year, each earned the same amount of revenue and incurred the same expenses, other than depreciation expense. Shaffer uses the straight-line depreciation method and Hopkirk uses the Double-Declining Balance method for all long-term assets. Due to the differing depreciation methods, which of the following statements is correct for the year?

a. Hopkirk's “Current Ratio” will be higher than Shaffer's at year-end. No impact on Short-term

b. Hopkirk will report a higher net income than Shaffer for the year. The opposite is true

c. Shaffer’s balance sheet at year-end will report higher total net assets than Hopkirk.

____ 11. If a bond sells at a “discount”, which of the following is true?

a. The market interest rate at the time of issue is less than the stated interest rate on the bond.

b. The market interest rate at the time of issue is the same as the stated interest rate on the bond.

c. The market interest rate at the time of issue is greater than the stated interest rate on the bond.

* The following information pertains to questions 12-17 *

On January 1, 2015, the firm of Barber & Shale, Inc. issued a $5,000 face value bond that sold at “90”. The bond had a five-year term, with a contract rate of 10 percent annual interest. The company used all of the cash proceeds from this bond issue to buy a parcel of non-depreciable land. The land was then sold at the end of the 5th year for $4,800 cash. Note: Review page 554 of our text. Further, no “market” interest rate is needed to address these questions.

____12. At issuance, the Carrying Value of the bond liability on January 1, 2015, would be:

a. $4,600.

b. $4,500.

c. $5,000.

d. $4,000.

____13.The amount of the cash interest payment required each year over the life of the bond would be:

a. $400.

b. $450.

c. $500.

d. $600.

____14. Assuming use of the “Effective Interest” Amortization method, the amount of interest expense reported on the income statement each year, over the life of the bond, would:

a. Be the same b. Not be the same

BECAUSE: The carry value (present value) of the bonds changes each year due to, in the case of a discount, the addition of the amortized discount(extra interest) recognized each period (year).

____15. On the firms books, the amount of the “Carrying Value” (aka: Present Value) associated with this bond issue liability would:

a. increase each year as a result of the amortization of the discount.

b. decrease each year as a result of the amortization of the discount.

c. remain the same each year.

d. always be equal to the face value of the bond payable.

____16. The carrying value of the bond liability on December 31, 2019 (just prior to bond payoff) would be:

a. $4,500.

b. $5,000.

c. $4,900.

d. $4,600.

____17. The cash sale of the land (this has nothing to do with the bond itself) on December 31, 2019, would:

a. increase net assets by $300. ($4,800 Sales price - $4,500 Purchase price = $300 Gain on sale)

b. increase stockholder’s equity by $4,800.

c. reduce net income by $300.

d. have no effect on retained earnings.

____18. The following information is from the accounting records of Wood & Devaudrevil, Inc:

2015 2014

Interest Expense $ 660,000 $ 480,000

EBIT (what does this term mean? – see pg 558) $3,300,000 $1,920,000

Based on the information provided, the company’s Times-Interest-Earned (TIE) ratio:

a. increased from 4 times to 5 times (EBIT / Interest Expense – see pg 557-559)

b. decreased from 5 times to 4 times

c. increased from .25 times to .20 times

d. decreased from .25 times to .20 times

____19. XYZ, Inc. experienced an accounting event that affected its financial statements as shown below:

| |Assets |= |Liab. |+ |Equity | |

| |Carry value (Present |Cash Interest |Interest |Current Period |Unamortized |Carry value (Present|

|Period |value) |Payment |Expense |Amortization |(unallocated) Premium |Value) |

| |at beginning of period |(at contract rate 7 |(at market rate of 6%) |(C vs D) |or |at end of |

| | |%) | | |Discount |period |

|@Issue |********** |********* |*********** |*********** |$84,247 | $2,084,247 |

|2016 |$2,084,247 |$140,000 |$125,055 |$ -14945 |$69,302 |$2,069,302 |

|2017 |$2,069,302 |$140,000 |$124,158 |$ -15842 |$53,460 |$2,053,460 |

|2018 |$2,053,460 |$140,000 |$123,208 |$ -16792 |$36,668 |$2,036,668 |

|2019 |$2,036,668 |$140,000 |$122,200 |$ -17800 |$18,868 |$2,018,868 |

|2020 |$2,018,868 |$140,000 |$121,132 |$ -18868 |- 0 - |$2,000,000 |

|Totals |xxxxxxxxxxx |$700,000 |$615,753 |$ -84,247 |xxxxxxxxxxx |xxxxxxxxxxx |

c) Prepare all necessary Journal Entries for Bee Gee Movie for the years 2016 & 2017.

|2016 Journal Entries (2 entries required): |2017 Journal Entry (Only 1 Entry): |

|Cash 2,084,247 | |

|Premium on Bonds Payable 84,247 | |

|Bonds Payable 2,000,000 | |

| | |

|Interest Expense 125,055 |Interest Expense 124,158 |

|Premium on Bonds Payable 14,945 |Premium on Bonds Payable 15,842 |

|Cash 140,000 |Cash 140,000 |

| | |

| | |

GQ#4 - BONUS 2PT EC Question: If, on January 1, 2019 (i.e. beg of period 4), the market rate is now 8%, what should the Bee Gee bonds sell for should you (an investor) wish to buy them all?

2-PT PRICING ANSWER HERE = $_1,964,335

Principal: 2,000,000*.857339 = 1,714,678

Table II, Single Sum, 2 years (periods) to go @ 8%

Interest: 2,000,000*.07 = $140,000 (per contract)* 1.783265 = 249,657

Table IV, Annuity, 2 years (periods) to go @ 8%

Total: 1,714,678 + 249,657 = $1,964,335 NOW Selling at a Discount

EXTRA ANALYSIS BELOW: REVIEW TO CONFIRM UNDERSTANDING

2-pt Bonus Question Amortization Table – FOR THE INVESTOR OF BONDS (YOU):

| | |A |B |C | |D |

|Period |Carry value (Present |Cash Interest Received (at|Interest INCOME (at market|Current Period |Unamortized |Carry value (Present |

| |value) at beginning of |contract rate of 7%) |rate of 8%) |amortization (C vs |(unallocated) Premium|value) at end of period |

| |period | | |D) |or Discount | |

| Remember, the selling price of a bond is the sum of all remaining cash flows (interest and principal), discounted (interest stripped away) at the current market |

|rate required by the investor for the cash flows being “purchased”. |

|. |

| |2 years to go | | | | | |

|2019 |$1,964,335 |$140,000 |$157,147 |$17,147 |$35,665 |$1,981,482 |

|2020 |$1,981,482 |$140,000 |$158,518 |$18,518 |$18,518 |$2,000,000 |

|Totals |xxxxxxxxxxx |$280,000 |$315,665 |$-$35,665 | |xxxxxxxxxxx |

Bee Gee Movie, Inc. will not have ANY of the journal entries below as they are OUT of the picture here. You bought the bonds from the original investor in the secondary (not primary) marketplace.

All Bee Gee Movie needs to do is change the name/address on where the interest checks go and where the principal will be repaid at maturity (i.e. to you, the new investor). Bee Gee’s journal entries will continue based upon the original amortization table and related journal entries (see previous page).

The journal entries below are YOUR journal entries as an Investor earning 8%:

|2019 Journal Entries: |2020 Journal Entries: |

|(You bought the bonds) | |

|1/1/19 Investment in Bonds 2,000,000 |12/31/20 Cash 140,000 |

|Discount on Investment 35,665 |Discount on Investment 18,518 |

|Cash 1,964,335 |Interest (Investment) Income 158,518 |

| | |

|12/31/19 Cash 140,000 | |

|Discount on Investment 17,147 |At 12/31/20 Bond Redemption – Bee Gee pays you): |

| |Cash 2,000,000 |

|Interest (Investment) Income 157,147 |Investment in Bonds 2,000,000 |

See me or our GA support team with any questions.

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