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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