# Exam3 - Exam#3 SOLUTIONS Multiple Choice(120 points 3 points each Calculations and explanations(Computed intermediate numbers are underlined and

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Exam #3 Liabilities and Shareholders’ Equity 1 Exam #3 SOLUTIONS Multiple Choice (120 points; 3 points each) Calculations and explanations: (Computed intermediate numbers are underlined and the final answer is in bold.) 1. A. Four months of interest on this seven-month note payable will relate to the current year and three months will relate to the year the note is paid. \$56,000 x .09 x 3/12 = \$1,260 interest expense in the year the note is paid. 2. D. This is the typical reporting of a long-term liability and its accrued interest. Principal payable on August 31, 2007 is a long-term liability and interest payable on August 31, 2006 is a current liability (the interest payable on August 31, 2007 will not be accrued until December 31, 2006). 3. B. \$500,000 is management’s estimate and the loss is probable so the liability is a contingent liability and it is recorded. 4. C. On December 31, 2005, the firm will pay \$1,000 in interest (10% x \$10,000 x 12/12) and 1/10 x \$10,000 = \$1,000 of the principal (reducing the Note Payable). 5. E. For proper accrual accounting, the warranty expense would be recognized when the cars are sold and an Estimated Warranty Liability is established, so e. is the best answer. Later, when the cars are repaired, the debit would be made to this liability account. 6. D. Using the present value factors for 7% for 20 periods: [(\$300,000 principal x .2584 = \$77,520) + (\$15,000 interest x 10.5940 = \$158,910)] = \$236,430 total cash received. 7. C. \$900,000 cash interest payment + \$143,000 of discount amortized = \$1,043,000 of interest expense; \$1,043,000 interest expense = \$14,900,000 carrying amount of the bonds x the market interest rate x time (6/12); therefore, the market interest rate = 14%. 8. B. Using the present value factors for 6% for 15 periods: [(\$1,000,000 principal x .4173 = \$417,300) + (\$70,000 interest x 9.7123 = \$679,861)] = \$1,097,161 cash received. This is the carrying amount of the bonds for the first interest date, so we have: \$1,097,161 x 6% = \$65,830 interest expense at the first interest date. 9. C. Because the bonds were dated January 1 but were issued on June 1, there is 5 months of accrued interest included. \$200,000 x .09 x 5/12 = \$7,500 of accrued interest included in the cash received; \$209,500 \$7,500 = \$202,000; so, there was a \$2,000 premium (and this agrees with the fact that the bonds were sold to yield less than 9%).

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Exam #3 Liabilities and Shareholders’ Equity 2 10. A. Interest expense for the year will include two interest payments: The cash interest payment for each = \$2,000,000 x 12% x 6/12 = \$120,000 . Interest expense for June 30 = \$2,216,736 x 10% x 6/12 = \$110,837 expense \$120,000 cash payment means that \$9,163 of premium is amortized; for December 31 = \$2,216,736 \$9,163 premium that was amortized = \$2,207,573 new carrying amount x 10% x 6/12 = \$110,379 interest expense + the \$110,837 interest expense from the June 30 interest payment = \$221,216 total interest expense. 11.
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## This note was uploaded on 06/11/2008 for the course ACC 471 taught by Professor Winkle during the Winter '08 term at University of Michigan.

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Exam3 - Exam#3 SOLUTIONS Multiple Choice(120 points 3 points each Calculations and explanations(Computed intermediate numbers are underlined and

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