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Mgmt_200_Fall_2007_Exam_Final_Solution(4,17)

# Mgmt_200_Fall_2007_Exam_Final_Solution(4,17) - Name PUID...

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Name: ________________________ PUID: ________________________ Purdue University Krannert School of Management MGMT 200 – Introductory Financial Accounting Fall 2007 Final Exam – December 11, 2007 – SOLUTION OUTLINE This exam consists of 4 questions on 11 pages (excluding this cover page and the present value table page) for a total of 100 points. Time allowed: 90 minutes. Answer all questions. To ensure full credit and to maximize partial credit, clearly show all supporting calculations. The exam is closed book. A calculator is permitted. Present value tables are provided on the last page. GOOD LUCK . Question 1 (25 points) ________ Question 2 (25 points) ________ Question 3 (25 points) ________ Question 4 (25 points) ________ TOTAL (100 points) ________

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Question 1. Bonds Payable (25 points) Jim Corporation borrowed the majority of the funds needed for the purchase of new factory equipment that cost \$440,000. Jim Corporation raised the funds with the issuance of the following loan on January 1, 2006: \$600,000 face value, 4% coupon (interest payable annually on December 31), twenty-year bonds. The market rate of interest on January 1, 2006 was 7%. Required: a. At what price (where par = 100) would these bonds be issued? = 24,000 (PVA, n=20, i=7%) + 600,000 (PV, n=20, i=7%) = 409,296 Price = 409,296 / 600,000 = 68.22 b. Prepare the journal entry to record the sale of the 4% coupon bonds on January 1, 2006. Cash 409,296 Discount on bonds payable 190,704 Bonds payable 600,000 c. Prepare the journal entry to record interest expense and the interest payment on the 4% coupon bonds on December 31, 2006, assuming the straight-line amortization method is used. Interest expense 33,535.20 Discount on bonds payable 9,535.20* Cash 24,000.00 * = 190,704 / 20 = 9,535.20 Question 1 continued over . . . Mgmt 200 – Final Exam – Fall 2007 – page 1
Question 1 continued. d. Prepare the journal entry to record interest expense and the interest payment on the 4% coupon bonds on December 31, 2006, assuming the effective interest rate method is used. Interest expense 28,650.72* Discount on bonds payable 4,650.72 Cash 24,000.00 * = 409,296 x .07 = 28,650.72 e. Prepare the journal entry to record interest expense and the interest payment on the 4% coupon bonds on December 31, 2007, assuming the effective interest rate method is used.

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Mgmt_200_Fall_2007_Exam_Final_Solution(4,17) - Name PUID...

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