First Midterm Review-Spring Summer 2005

First Midterm Review-Spring Summer 2005 - Problem 1...

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Problem 1 – Multiple Choice First Midterm Spring 2006 11. On November 30, 2004, Bend Corp. Issued $300,000 maturity value, 6% bonds for $300,000 cash. The bonds were dated October 31, 2004. Interest will be paid semiannually. How much cash did they receive? a. $300,000 b. 301,500 c. $303,000 d. $309,000 Answer : $300,000 * 6% * 1/12 = $1,500 + $300,000 = $301,500 13. The cash proceeds of issuing $1,000,000 of 7%, 10-year bonds on January 1 that pay interest on June 30 and December 31 when the market rate of interest is 8% would be: a. $932,051 b. $932,896 c. $938,852 d. $1,000,000 Answer : n = 20, I = 4%, PMT = 1,000,000 * 7% / 2 = $35,000 PV = 1,000,000 * 0.4564 = $456,400, PVn = $35,000 * 13,5903 = $475,661 + $456,400 = $932,061 17. A lease requires interest payments at the beginning of each year for 10 years. If the interest rate is 8% and the asset value is $500,000, the annual lease payment would be: a. $50,000 b. $68,995 c. $74,515 d. $90,000 Answer : PMT = PV / Factor = $500,000 / 7.2469 = $68,995 18. On January 1, 2006 James Company leased a machine for 10 years that could have been purchased for $100,000. The lessor used an implicit interest rate of 10% in determining the lease payments of $14,795, the first of which was made when the lease was signed. If James is aware of the lessor’s implicit interest rate, during 2006, he should record a. An asset for $100,000 b. an asset for $85,205 c. Interest expense of $10,000 d. rent expense of $14,795 Answer : n = 10, I = 10%, PMT = $14,795 PVn = $14,795 * 6.7590 = $100,000 PV-MLP is same as the purchase price. So it is capital lease. It should record as asset at $100,000 value. 19. Assuming that an asset of $100,000 should be recorded in the previous question, how much interest expense would be reported in 2006? a . $8,521 b. $10,000 c. $14,795 d. $20,000 Answer : ($100,000 - $14,795) * 10% = $8,521 20. In question 19, if James is not aware of the lessor’s implicit interest rate and his incremental borrowing rate is 14%, during 2006 he should record: a. An asset for $100,000 b. An asset for $85,205 c.Interest expense of $10,000 d . Rent expense of $14,795 Answer : PVn = $14,795 * 5.9464 = $87,977 / $100,000 = 88%. Less than 90% percent 24. During 2006, Hull Co. experienced financial difficulties and could not pay a $500,000 note or the 10% interest for 2006 due on December 31, 2006. The lender agreed to accept land that had a fair market value of $450,000. Hull’s acquisition cost of the land was $360,000. Hull’s 2006 income statement should report a gain on debt restructuring of a. $50,000 b. $100,000 c. $140,000 d. $190,000 Answer : $550,000 - $450,000 = $100,000 1
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Problem 2 (12 points) 1. Anderson, Inc. needs to pay back a $10,000,000 bond in 7 years. Will they have enough if they invest $300, 000 a quarter in a fund that pays 8% interest compounded quarterly? How much will they be over or short? Answer
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This note was uploaded on 11/28/2009 for the course BUSINESS acct 3211 taught by Professor Lin during the Winter '09 term at Calhoun Community College.

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First Midterm Review-Spring Summer 2005 - Problem 1...

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