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Mgmt_200_Spring_2008_Exam_Final_solution(4,29)

# Mgmt_200_Spring_2008_Exam_Final_solution(4,29) - Name PUID...

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Name: ________________________ PUID: ________________________ Purdue University Krannert School of Management MGMT 200 – Introductory Financial Accounting Spring 2008 Final Exam – April 28, 2008 – SOLUTION OUTLINE This exam consists of 4 questions on 12 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) PART A: Simpson Corporation issues 18% coupon bonds on January 1, 2007. The bonds have a face value of \$3,600,000, interest is payable annually on December 31, and have a term of twelve years. The market rate of interest on January 1, 2007 is 9%. Required: a. At what price (where par = 100) would the 18% bonds be issued? = 648,000 (PVA, n=12, i=9%) + 3,600,000 (PV, n=12, i=9%) = 5,919,933.60 Price = 5,919,933.60 / 3,600,000 = 164.44 b. Prepare the journal entry to record the issuance of the 18% coupon bonds on January 1, 2007. Cash 5,919,934 Premium on bonds payable 2,319,934 Bonds payable 3,600,000 c. Prepare the journal entry to record interest expense and the interest payment on the 18% coupon bonds on December 31, 2007, using the effective interest rate method. Interest expense 532,794* Premium on bonds payable 115,206 Cash 648,000 * = 5,919,934 x .09 = 532,794 d. Prepare the journal entry to record interest expense and the interest payment on the 18% coupon bonds on December 31, 2008, using the effective interest rate method. Interest expense 522,426* Premium on bonds payable 125,574 Cash 648,000 * = (5,919,934 – 115,206) x .09 = 522,426 Question 1 continued over . . . Mgmt 200 – Final Exam solution – Spring 2007 – page 1
Question 1 continued. e. What is the total amount of interest expense Simpson Corporation will record on this loan over its twelve-year life? = Cash interest – issue premium = 12 (648,000) – 2,319,934 = \$5,456,066 PART B: Tandem Corporation issues bonds on January 1, 2007 at a price of 83.65. The bonds have a face value of \$5,000,000, interest is payable annually on December 31, have a coupon rate of 6%, and a market yield of 10%. Required: a. Prepare the journal entry to record the issuance of these bonds on January 1, 2007. 5,000,000 x .8365 = 4,182,500 Cash 4,182,500 Discount on bonds payable 817,500 Bonds payable 5,000,000 b. Prepare the journal entry to record interest expense and the interest payment on these bonds on December 31, 2007, using the effective interest rate method.

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Mgmt_200_Spring_2008_Exam_Final_solution(4,29) - Name PUID...

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