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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 sevenmonth 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 longterm liability and its accrued interest. Principal
payable on August 31, 2007 is a longterm 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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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.
 Winter '08
 Winkle

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