mid2f99 - H Sander ‘ Econ 136B Fall 1999 Midterm#2...

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Unformatted text preview: H. Sander ‘ Econ 136B Fall 1999 Midterm #2 Problem I (25 mins) rate. Due to a slow real estate market, Real Estate Inc. was unable to pay any of the i erest payable annually or any of the principal. After extensive negotiations on 12/31/2 Bank Ruptcy agreed to extend the loan until 12/31/4. Interest rates have slig in - - e uring years 1 & 2 so that loans to On 1/1/1 Real Estate Inc. borrowed $500,000 from Bank Ruptcy for a term of 2 years W ' was companies like Real Estate would bear a fair market Win/mm years 3 & 4. The new note shows 0 interest payments and a principal payment of 't 1 00, 000 on - - maturity date of 12/31/4. (A) Determine whether Real Estate records a gain or loss on 12/31/2 and joumalize any transaction necessary at 12/31/2, 3 & 4. (Show all work and assume all required payments are made in years 3 & 4.) (B) Repeat part (A) for Bank Ruptcy. .7 <(C) Repeat parts (A) & (B) prior to FAS 114. . (D) Explain why the entry for paIt (B) did or did not change in part (C) (include how the reader of the financial statement was and is affected by these rules). Problem H (25 mins) Johnson Inc. issued a bond with a 10 year term from 1/1/1 to 12/31/10. The bond was sold on 8/1/1 for 102 plus accrued interest. The bond paid interest at 7% annually and was sold to yield 6.706%. Issuance costs were $3,000 and paid for on 8/1/1 by Johnson Inc. (A) _ What is the present value of the bond on 1/1/1, 12/31/10? ”L 00’ 6X (B) Present the income statement and balance sheet results for 12/31/1 and 12/31/2 for the ‘ 1 0Q}; ' , . bond. I (i7 i C) Show the journal entries for year 1. (D) Assume the bond was repurchased on 12/31/2 for 97. Present the journal entry and comment on the interest rate changes that probably happened during years 1 & 2. Indicate the pros and cons of this decision to repurchase the bond. (E) Repeat (B) for the bond investor assuming that the investor intends on holding the bond until maturity. Problem III (25 mins) Skousen Inc. has invested in the common stock of MORE.com. MORE.com has reported a loss of $400,000 since the acquisition but its stock has increased by 10% during the holding period. The investment cost $3 00,000 plus $500 commission and represents 20% of the outstanding common stock. Dividends declared by MORE.com were $10,000 but only $5,000 were paid during this year. At the point of acquisition the book value of MORE.com was $500,000 and the only known asset that exceeded book value was a building with a 20 year life whose fair value exceeded book value by $50,000. Assume all intangibles are amortized over the longest period allowed. (A) Give the balance sheet and income statement results at the end of the year on Skousen's books assuming Skousen cannot exercise significant influence on MORE.com. (Show all work.) (B) Repeat part (A) assuming Skousen cannot exercise significant influence over MORE.com. (C) Repeat part (A) except assume this is a very short term investment that is regularly traded on a daily basis. (D) Assume for this part that the investment is sold early in the 2nd year for $325,000 less a $500 commission. Record the sale and indicate the year 2 income statement results for the assumptions in (A), (B) & (C). (E) Give the primary pro and con of the methods you used in parts (A) and (B). Problem IV (15 mins) The following selected transactions of Mattingly Company were completed during the accounting year just ended, December 31, 1991. a. Merchandise was purchased on account; a $10,000, one-year, 16% interest-bearing note, dated April 1, 1991, was given to the creditor. Assume a perpetual inventory system. Cosigned an $8,000 note payable for another party who has always paid their notes on time. On July 1, the company borrowed cash; a one-year, noninterest—bearing note with a face amount of $28,750 was signed. Assume a going rate of interest of 15%. Payroll records showed the following (assume a 2% &.5% rates for Federal and State unemployment). Employee Gross Wages Withholding FICA Union Dues $50,000 $15,000 $3,100 $500 No payroll liabilities have been paid. The company was sued for $150,000 in damages. It appears a court judgment against the company that is reasonably estimated to be $125,000 is probable. For problem purposes, assume this is an extraordinary item. On November 1, 1991, the company rented some office space in its building to Zorn Company and collected rent in advance for six months; total $2,400. Cash dividends declared but not yet paid, $14,000. Date of record is January 1, 1992. Date of payment is January 15, 1992. October—November 1991, in order to promote sales during these two months, Mattingly gave its customers 10,000 premium certificates based on cash sales. Each certificate turned in during December 1991 and January 1992 will reduce the price by 50 cents on all single items that sell above $20. A reasonable estimate is that 75% of the certificates will be redeemed. By December 31, 1991, 60% of those issued had been redeemed and the fair value of each certificate is estimated to be 40 cents. Reguired Show your current liability section of your balance sheet at 12/31/91. Problem V Short Answer (5 mins) Explain how an accountant treats a note that is due within 1 year of the balance sheet but is paid for through the issuance of stock before the issuance of the financial statement. Explain why. "We ...
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