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Fall 2009 Final Exam Review Solutions

# Fall 2009 Final Exam Review Solutions - MGMT 200 SI Final...

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MGMT 200 SI Final Exam Review Question 1. Bonds Payable PART A: Purdue Corporation issues 20% coupon bonds on January 1, 2008. The bonds have a face value of \$500,000, interest is payable annually on December 31, and have a term of fifteen years. The market rate of interest on January 1, 2007 is 11%. Required: a. At what price (where par = 100) would the 20% bonds be issued? Proceeds = 100,000 (PVA, n=15, i=11%) + 500,000 (PV, n=15, i=11%) = 10,000 (7.1909) + 500,000 (.2090) = 823,590 Price = 823,590 / 500,000 = 164.72 b. Prepare the journal entry to record the issuance of the 20% coupon bonds on January 1, 2008. Cash 823,590 Premium on bonds payable 323,590 Bonds payable 500,000 c. Prepare the journal entry to record interest expense and the interest payment on the 20% coupon bonds on December 31, 2008, using the effective interest rate method. Interest expense = 823,590 x .11 = 90,595 Interest expense 90,595 Premium on bonds payable 9,405 Cash 100,000 d. Prepare the journal entry to record interest expense and the interest payment on the 20% coupon bonds on December 31, 2008, using the straight-line amortization method. Premium amortization = 323,590 / 15 = 21,573 Interest expense 78,427 Premium on bonds payable 21,573 Cash 100,000

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PART B: Rowdy Corporation issues bonds on January 1, 2008 at a price of 79.87. The bonds have a face value of \$1,000,000, interest is payable annually on December 31, have a coupon rate of 5%, and a market yield of 8%. Required:
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Fall 2009 Final Exam Review Solutions - MGMT 200 SI Final...

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