121_08A - Note about homework and quizzes Because this...

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Unformatted text preview: Note about homework and quizzes Because this homework set is long, the work is divided as follows: Homework 8A: Questions 1 – 9 and the quiz for those questions Homework 8B: Remaining questions and the quiz on those questions Question 1 Harrison Electronics offers a “repair or replace free” warranty on all merchandise sold. Harrison’s cost to replace or repair defective units is estimated to be 5% of sales. Record each of the following journal entries. A B C Account names Cash Sales Sales for the year, all in cash, $100,000. Debit 100,000 Credit 100,000 Warranty payable 1,800 Cash Actual warranty work performed during year, $1,800. Paid cash for parts, labor, and replacement inventory. Warranty expense (100,000 x 0.05) 5,000 Warranty payable Estimated warranty expense AJE at end of year. Post transactions to T-account below. The beginning balance in warranty payable was $1,500. Warranty payable 1,800 1,500 5,000 4,700 Warranty expense 5,000 What did you learn? Chapter 8 – Page 1 of 35 1,800 5,000 Question 2 Explain why each account increases and decreases. Warranty payable Beginning balance ACTUAL costs during period AJE ESTIMATE of future costs Ending balance Warranty expense AJE ESTIMATE of future costs Use the Intel 2002 annual report to answer the following question. The Intel annual report does not list a warranty payable account. For our purposes, assume Intel had a beginning balance in warranty payable of $824 million and an ending balance of $915 million. Warranty costs are expected to be 2% of sales. What were the actual warranty costs incurred by Intel during 2002? (All amounts are in millions, round to nearest million.) Warranty payable 824 535 915 444 What did you learn? Chapter 8 – Page 2 of 35 Question 3 Record each of the following journal entries. Account names Debit Credit 07/01/11 Cash 5,000 Note payable 5,000 Issued note payable to borrow $5,000 at 6%, due 3 months 10/01/11 Note payable 5,000 Interest expense (5,000 x 0.06 x 3/12) 75 Cash Paid note payable plus interest on due date 5,075 11/01/11 Cash 20,000 Note payable 20,000 Issued note payable to borrow $20,000 at 9%, due 6 months 12/31/11 Interest expense (20,000 x 0.09 x 2/12) 300 Interest payable 300 AJE to accrued interest expense on balance sheet date 05/01/12 Note payable 20,000 Interest payable 300 Interest expense (20,000 x 0.09 x 4/12) 600 Cash Paid note payable plus interest on due date What did you learn? Chapter 8 – Page 3 of 35 20,900 Question 4 Grant Corporation owns ten restaurants in California. Net income has consistently been about $600,000 per year. Grant has 50,000 shares outstanding. Grant plans to open five new restaurants and needs $500,000 cash for the expansion. Grant could raise $500,000 by borrowing from the bank at 9% interest or by issuing 100,000 shares of new stock. The five new restaurants are projected to generate an income of $420,000 before interest and taxes. The tax rate is 40%. Prepare a comparative analysis of net income and earnings per share with the five new restaurants under each scenario. Borrow $500,000 at 9% New restaurants income before interest, taxes Issue stock $500,000 $420,000 $420,000 45,000 None New restaurants income before income tax 375,000 420,000 Less income tax expense (40%) 150,000 168,000 New restaurants net income 225,000 252,000 Net income from existing restaurants 600,000 600,000 $825,000 $852,000 Less interest expense ($500,000 × 0.09) Total company net income Net income advantage of issuing stock $27,000 Earnings per share including new project: Plan A ($825,000 / 50,000 shares) $16.50 Plan B ($852,000 / 150,000 shares) Earnings per share advantage of borrowing What did you learn? Chapter 8 – Page 4 of 35 $5.68 $10.82 Question 5A Note: On the quiz you will be given a table format like the one below. Future Value of $1 Given present value calculate future value Caspian Corporation invested $4,000 in a savings account that earned 10% interest compounded semi-annually. At the end of three years Caspian withdrew the principal and interest. Prepare the accumulation schedule for the first six periods (3 years). Given: Present value (PV) $4,000 Interest rate per year (R) 10% Years of investment (Y) 3 Compounding periods per year (c) 2 Calculate: Interest rate per period (I = R / c) 5% Number of periods (n = Y * c) 6 Future value of $1 factor 1.340 Calculate future value using tables: $5,360 1 (A) Beginning Balance 4,000 A*R*1/c = A*i = (B) Interest 200 A+B= (C) Ending Balance 4,200 2 4,200 210 4,410 3 4,410 221 4,631 4 4,631 232 4,863 5 4,863 243 5,106 6 5,106 255 5,361 This question continues on the next page. Chapter 8 – Page 5 of 35 A. Caspian invested $4,000 in savings account. Record journal entry. Account names Debit Credit Investment in savings account 4,000 Cash 4,000 B. Caspian prepares financial statements and adjusting journal entries semi-annually (same periods as accumulation schedule). Prepare AJE to accrue interest earned during the third period. Account names Debit Credit Interest receivable 221 Interest revenue 221 C. Prepare the related sections of the income statement and the balance sheet as of the end of the third period. Income Statement For the third period Other income (expenses) Interest revenue $221 Balance Sheet End of the third period Investment in savings account Interest receivable $4,000 631 D. Prepare the journal entry to record collection of the principal and interest at the end of the sixth period. Account names Debit Credit Cash 5,361 Investment in savings account 4,000 Interest receivable (five periods AJE’s) 1,106 Interest revenue (last period) 255 E. Calculate total interest earned over six periods. Future value Present value Interest earned 5,361 − 4,000 = 1,361 What did you learn? Chapter 8 – Page 6 of 35 Question 5B Future Value of $1 Given present value calculate future value You deposited $14,000 in a savings account at a bank. The account paid interest at the rate of 16% compounded quarterly. Prepare the accumulation schedule for the first six periods (1.5 years). Given: Present value (PV) Interest rate per year (R) Years of investment (Y) Compounding periods per year (c) Calculate: Interest rate per period (I = R / c) Number of periods (n = Y * c) Future value of $1 factor Calculate future value using tables: (A) Beginning Balance A*R*1/c = A*i = (B) Interest A+B= (C) Ending Balance 1 2 582 3 4 630 5 6 17,714 What did you learn? Chapter 8 – Page 7 of 35 Question 6A Future Value of Annuity of $1 Given annuity calculate future value Baltic Corporation deposited $10,000 at the end of each six months into a savings account that earns 8% interest. How much will Baltic’s investments grow to at the end of 3 years? Given: Annuity $10,000 Interest rate per year (R) 8% Years of investment (Y) 3 Payment/compounding periods per year (c) 2 Payment at end of period Calculate: Interest rate per period (i = R / c) 4% Number of periods (n = Y * c) 6 Future value of annuity of $1 factor Period 6.633 Calculate the future value using the table A*R*1/c = (A) A*i = Beginning (B) (C) Balance Interest Payment 66,330 A+B+C= (D) Ending Balance 1 0 0 10,000 10,000 2 10,000 400 10,000 20,400 3 20,400 816 10,000 31,216 4 31,216 1,249 10,000 42,465 5 42,465 1,699 10,000 54,164 6 54,164 2,167 10,000 66,331 This question continues on the next page. Chapter 8 – Page 8 of 35 A. Record the first $10,000 annuity investment in general journal. Account names Debit Credit Investment in savings account 10,000 Cash 10,000 B. Baltic prepares financial statements and adjusting journal entries semi-annually (same periods as accumulation schedule). Prepare the JE to record the third period annuity payment. Prepare the AJE to record revenue during the third period. Account names Debit Credit Investment in savings account 10,000 Cash 10,000 Interest receivable 816 Interest revenue 816 C. Prepare the related sections of the income statement and the balance sheet as of the end of the third period. Income Statement For the third period Other income (expenses) Interest revenue $816 Balance Sheet End of the third period Investment in savings account Interest receivable $30,000 1,216 D. Prepare the journal entry to record collection of the principal and interest at the end of the sixth period. Account names Debit Credit Cash 66,331 Investment in savings account 60,000 Interest receivable (five periods) 4,164 Interest revenue (last period) 2,167 E. Calculate total interest earned over six periods. Future value Annuity Interest earned 66,331 − (10,000 x 6) = 6,331 What did you learn? Chapter 8 – Page 9 of 35 Question 6B Future Value of Annuity of $1 Given annuity calculate future value You can deposit $100,000 at the end of each six months into a savings account that earns 14% interest. How much will your investments grow to at the end of 3 years? Given: Annuity Interest rate per year (R) Years of investment (Y) Payment/compounding periods per year (c) Payment at end of period Interest rate per period (i = R / c) Number of periods (n = Y * c) Future value of annuity of $1 factor Calculate the future value using the table Period (A) Beginning Balance A*R*1/c = A*i = (B) Interest (C) Payment A+B+C= (D) Ending Balance 1 2 7,000 3 4 22,504 5 6 40,255 What did you learn? Chapter 8 – Page 10 of 35 715,329 Question 7A Present Value of $1 Given future value calculate present value Pacific Corporation needs $100,000 at the end of six years. If Pacific could earn 14% compounded annually, how much would it need to invest today. Given: Future value $100,000 Interest rate per year (R) 14% Years of investment (Y) 6 Compounding periods per year (c) 1 Interest rate per period (i = R / c) 14% Number of periods (n = Y * c) 6 Present value of $1 factor 0.456 Calculate present value using tables: A*R*1/c = (A) A*i = Beginning (B) Period Balance Interest 45,600 A+B= (C) Ending Balance 1 45,600 6,384 51,984 2 51,984 7,278 59,262 3 59,262 8,297 67,559 4 67,559 9,458 77,017 5 77,017 10,782 87,799 6 87,799 12,292 100,091 This question continues on the next page. Chapter 8 – Page 11 of 35 A. Pacific invested $45,600 in savings account. Record journal entry. Account names Debit Credit Investment in savings account 45,600 Cash 45,600 B. Pacific prepares financial statements and adjusting journal entries annually (same periods as accumulation schedule). Prepare AJE to accrue interest earned during the third period. Account names Debit Credit Interest receivable 8,297 Interest revenue 8,297 C. Prepare the related sections of the income statement and the balance sheet as of the end of the third period. Income Statement For the third period Other income (expenses) Interest revenue $8,297 Balance Sheet End of the third period Investment in savings account Interest receivable $45,600 21,959 D. Prepare the journal entry to record collection of the principal and interest at the end of the sixth period. Account names Debit Credit Cash 100,091 Investment in savings account 45,600 Interest receivable (five periods) 42,199 Interest revenue (last period) 12,292 E. Calculate total interest earned over six periods. Future value Present value Interest earned 100,091 − 45,600 = 54,491 What did you learn? Chapter 8 – Page 12 of 35 Question 7B Present Value of $1 Given future value calculate present value Assume you want $30,000 at the end of three years. If you could earn 16% compounded semi-annually, how much would you need to invest today. Given: Future value Interest rate per year (R) Years of investment (Y) Compounding periods per year (c) Interest rate per period (i = R / c) Number of periods (n = Y * c) Present value of $1 factor Calculate present value using tables: A*R*1/c = (A) A*i = Beginning (B) Period Balance Interest A+B= (D) Ending Balance 1 2 1,633 3 4 1,905 5 6 2,222 What did you learn? Chapter 8 – Page 13 of 35 29,993 Question 8A Present Value of Annuity of $1 Given annuity calculate present value If Atlantic Corporation could paid $2,500 at the end of each year for six years, and the interest rate was 7% compounded annually, how much could Atlantic borrow? Given: Payment $2,500 Interest rate per year (R) 7% Length of loan in years (Y) 6 Payment/compounding period per year (c) 1 Payment at end of period Interest rate per period (i = R / c) 7% Number of periods (n = Y * c) 6 Present value of annuity of $1 factor 4.767 Calculate beginning loan balance (PV) using table C-B= (D) (C) Reduction Payment in Balance 11,918 (A) Beginning Balance A*R*1/c = A*i = (B) Interest 1 11,918 834 2,500 1,666 10,252 2 10,252 718 2,500 1,782 8,470 3 8,470 593 2,500 1,907 6,563 4 6,563 459 2,500 2,041 4,522 5 4,522 317 2,500 2,183 2,339 6 2,339 164 2,500 2,336 3 This question continues on the next page. Chapter 8 – Page 14 of 35 A-D= (E) Ending Balance A. Atlantic borrowed $11,918. Record journal entry. Account names Debit Cash 11,918 Notes payable Credit 11,918 B. Atlantic prepares financial statements and adjusting journal entries annually (same periods as accumulation schedule). Prepare the journal entry for the third period. Account names Debit Credit Interest expense 593 Note payable 1,907 Cash 2,500 C. Prepare the related sections of the income statement and the balance sheet as of the end of the third period. Income Statement For the third period Other income (expenses): Interest expense $593 Balance Sheet End of the third period Liabilities: Note payable $6,563 D. Prepare the journal entry to record the final payment. Account names Debit Interest expense 164 Note payable 2,336 Cash E. Calculate total interest over six periods. Annuity Present value (2,500 x 6) − 11,918 What did you learn? Chapter 8 – Page 15 of 35 Credit Interest = 3,082 2,500 Question 8B Present Value of Annuity of $1 Given annuity calculate present value If you could pay $40,000 at the end of each quarter for 1.5 years, and the interest rate on your loan was 16% compounded quarterly, how much could you afford to borrow? Payment Interest rate per year (R) Length of loan in years (Y) Payment/compounding period per year (c) Payment at end of period Interest rate per period (i = R / c) Number of periods (n = Y * c) Present value of annuity of $1 factor Calculate beginning loan balance (PV) using table (A) Beginning Balance A*R*1/c = A*i = (B) Interest (C) Payment C-B= (D) Reduction in Balance 1 2 31,613 7,123 3 4 34,192 4,440 5 6 A-D= (E) Ending Balance 36,982 1,538 What did you learn? Chapter 8 – Page 16 of 35 -6 Question 9 Note: On the exam you will not be given a table format. Your exam questions will be like the ones below. A. You deposited $6,000 in a savings account that pays 16% interest compounded quarterly. Calculate the amount your account will grow to in five years. [13,146] Interest rate per period Number of periods Present value FV of $1 6,000 x 2.191 i = 16% / 4 = 4% n = 5 x 4 = 20 Future value = 13,146 B. You can deposit $3,000 at the end of each 3 months into a savings account that earns 20% interest compounded quarterly. How much will your investments grow to at the end of 4 years? [70,971] Interest rate per period Number of periods Annuity FV of annuity of $1 3,000 x 23.657 i = 20% / 4 = 5% n = 4 x 4 = 16 Future value = 70,971 C. Assume you want $100,000 at the end of 10 years. If you could earn 14% interest compounded semi-annually, how much would you need to invest today? [25,800] Interest rate per period Number of periods Future value PV of $1 100,000 x 0.258 i = 14% / 2 = 7% n = 10 x 2 = 20 Present value = 25,800 D. If you could pay $3,000 at the end of each 6 months for 5 years, and the interest rate on your loan was 8% compounded semiannually, how much could you afford to borrow today? [24,333] Interest rate per period Number of periods Annuity PV of annuity of $1 3,000 x 8.111 Chapter 8 – Page 17 of 35 i = 8% / 2 = 4% n = 5 x 2 = 10 Present value = 24,333 E. If you could pay $5,000 at the end of each quarter for 4 years, and the interest rate on your loan was 16% compounded quarterly, how much could you afford to borrow today? [58,260] Interest rate per period Number of periods Annuity PV of annuity of $1 5,000 x 11.652 i = 16% / 4 = 4% n = 4 x 4 = 16 Present value = 58,260 F. You can deposit $2,000 at the end of each 6 months into a savings account that earns 12% interest compounded semi-annually. How much will your investments grow to at the end of 9 years? [61,812] Interest rate per period Number of periods Annuity FV of annuity of $1 2,000 x 30.906 i = 12% / 2 = 6% n = 9 x 2 = 18 Future value = 61,812 G. Assume you want $1,000,000 at the end of 20 years. If you could earn 12% interest compounded annually, how much would you need to invest today? [104,000] Interest rate per period Number of periods Future value PV of $1 1,000,000 x 0.104 i = 12% / 1 = 12% n = 20 x 1 = 20 Present value = 104,000 H. Today you deposited $10,000 in a savings account that pays 18% interest compounded semi-annually. Calculate the value of your account in ten years. [56,040] Interest rate per period Number of periods Present value FV of $1 10,000 x 5.604 What did you learn? Chapter 8 – Page 18 of 35 i = 18% / 2 = 9% n = 10 x 2 = 20 Future value = 56,040 Question 10A Bond Discount Amortization Schedule Given: Face value of bond issue (FV) $5,000 7.0% Bond coupon rate (CR) Life of bond in years (Y) 3 Compounding periods per year (c) 2 Yield-to-maturity (market rate)(MR) 10.0% Calculate: Interest rate per period (i = MR / c) 5.0% Number of periods (n = Y * c) 6 Semi-annual payment (I = FV*CR*1/c) 175 Present value of $1 factor (PV$1) 0.746 Present value annuity of $1 factor (PVAnn$1) 5.076 Calculate: Present value of face value of bond (FV * PV$1) Present value of annuity (Annuity * PVAnn$1) 888 Market value of bond issue (add two lines above) Original issue discount (FV - PV) 4,618 382 Price of bond (Market value / Face value) * 100 A*MR*1/2= 3,730 92.36 B−C= F(up)−D= A+D= (A) (B) (C) (D) (F) (G) Beginning Effective Annuity Discount Discount Ending Balance Interest Payment Amortized Remaining Balance 382 4,618 0 1 4,618 231 175 56 326 4,674 2 4,674 234 175 59 267 4,733 3 4,733 237 175 62 205 4,795 4 4,795 240 175 65 140 4,860 5 4,860 243 175 68 72 4,928 6 4,928 246 175 72 0 5,000 Chapter 8 – Page 19 of 35 A. Record the journal entry to issue to the bonds. Account names Debit Cash 4,618 Discount on bonds payable 382 Bonds payable B. Record the journal entry for the first annuity payment. Account names Debit Interest expense 231 Cash Discount on bonds payable Credit 5,000 Credit 175 56 C. Record the journal entry for the second annuity payment. Account names Debit Credit Interest expense 234 Cash 175 Discount on bonds payable 59 D. Prepare the related sections of the income statement and the balance sheet as of the end of the third period. Income Statement For the third period Other income (expenses): Interest expense $237 Balance Sheet End of the third period Bonds payable Discount on bonds payable Net bonds payable E. Calculate total interest expense over six periods. Future value Present value Annuity 5,000 − 4,618 + (175 x 6) What did you learn? Chapter 8 – Page 20 of 35 $5,000 205 4,795 Interest exp. = 1,432 Question 10B Given Calc Bond Discount Amortization Schedule Face value of bond issue (FV) Bond coupon rate (CR) Life of bond in years (Y) Compounding periods per year (c) Yield to maturity (market rate)(MR) $10,000 5.0% 3 2 8.0% Interest rate per period (i = MR / c) 4% Number of periods (n = Y * c) 6 Semi-annual payment (I=FV*CR*1/c) 250 Present value of $1 factor Present value annuity of $1 factor Present value of face value of bond 7,900 1,311 Market value of bond issue (present value) Period 5.242 Present value of bond annuity Calc 0.790 9,211 Original issue discount (FV - PV) A*MR*1/2= (A) (B) (C) Beginning Effective Semi-annual Balance Interest Payment B-C= (D) Discount Amortized F(up)-D= (F) Discount Remaining 789 A+D= (G) Ending Balance 0 1 2 118 373 3 4 128 383 5 6 139 394 Chapter 8 – Page 21 of 35 9,996 Question 10C Given Calc Bond Discount Amortization Schedule Face value of bond issue (FV) Bond coupon rate (CR) Life of bond in years (Y) Compounding periods per year (c) Yield to maturity (market rate)(MR) $15,000 9.0% 3 2 12.0% Interest rate per period (i = MR / c) Number of periods (n = Y * c) Semi-annual payment (I=FV*CR*1/c) Present value of $1 factor Present value annuity of $1 factor Calc Present value of face value of bond Present value of bond annuity Market value of bond issue (present value) Period Original issue discount (FV - PV) A*MR*1/2= (A) (B) (C) Beginning Effective Semi-annual Balance Interest Payment 13,894 B-C= (D) Discount Amortized F(up)-D= (F) Discount Remaining A+D= (G) Ending Balance 0 1 2 159 843 3 4 178 864 5 6 200 887 Chapter 8 – Page 22 of 35 15,000 Question 11A Bond Premium Amortization Schedule Face value of bond issue (FV) $6,000 Bond coupon rate (CR) Given: 12.0% Life of bond in years (Y) 3 Compounding periods per year (c) 2 Yield-to-maturity (market rate)(MR) 8.0% 4.0% Calculate: Interest rate per period (i = MR / c) 6 Number of periods (n = Y * c) 360 Semi-annual payment (I=FV*CR*1/c) Present value of $1 factor (PV$1) 0.790 Present value annuity of $1 factor (PVAnn$1) 5.242 4,740 Calculate: Present value of face value of bond (FV * PV$1) Present value of annuity (Annuity * PVAnn$1) 1,887 Market value of bond issue (add two lines above) 6,627 627 Original issue premium (PV - FV) 110.45 Price of bond (Market value / Face value) * 100 A*MR*1/2= C-B= F(up)-D= A-D= (A) (B) (C) (D) (F) (G) SemiEffective Premium Ending Beginning annual Premium Balance Interest Payment Amortized Remaining Balance 0 627 6,627 1 6,627 265 360 95 532 6,532 2 6,532 261 360 99 433 6,433 3 6,433 257 360 103 330 6,330 4 6,330 253 360 107 223 6,223 5 6,223 249 360 111 112 6,112 6 6,112 244 360 112 0 6,000 Chapter 8 – Page 23 of 35 A. Record the journal entry to issue to the bonds. Account names Debit Cash 6,627 Premium on bonds payable Bonds payable B. Record the journal entry for the first annuity payment. Account names Debit Interest expense 265 Premium on bonds payable 95 Cash Credit 627 6,000 Credit 360 C. Record the journal entry for the second annuity payment. Account names Debit Credit Interest expense 261 Premium on bonds payable 99 Cash 360 D. Prepare the related sections of the income statement and the balance sheet as of the end of the third period. Income Statement For the third period Other income (expenses) Interest expense $257 Balance Sheet End of third period Bonds payable Premium on bonds payable Net bonds payable E. Calculate total interest expense over six periods. Future value Present value Annuity 6,000 − 6,627 + (360 x 6) What did you learn? Chapter 8 – Page 24 of 35 $6,000 330 6,330 Interest exp. = 1,533 Question 11B Given Calc Bond Premium Amortization Schedule Face value of bond issue (FV) Bond coupon rate (CR) Life of bond in years (Y) Compounding periods per year (c) Yield to maturity (market rate)(MR) $12,000 14.0% 3 2 10.0% Interest rate per period (i = MR / c) Number of periods (n = Y * c) Semi-annual payment (I=FV*CR*1/c) Present value of $1 factor Present value annuity of $1 factor Calc Present value of face value of bond Present value of bond annuity Market value of bond issue (present value) Period Original issue premium (PV - FV) A*MR*1/2= (A) (B) (C) Beginning Effective Semi-annual Balance Interest Payment 13,216 C-B= (D) Premium Amortized F(up)-D= (F) Premium Remaining A-D= (G) Ending Balance 0 1 2 13,037 652 3 4 12,651 633 5 6 611 Chapter 8 – Page 25 of 35 11,997 Question 11C Given Calc Bond Premium Amortization Schedule Face value of bond issue (FV) Bond coupon rate (CR) Life of bond in years (Y) Compounding periods per year (c) Yield to maturity (market rate)(MR) $18,000 16.0% 3 2 12.0% Interest rate per period (i = MR / c) Number of periods (n = Y * c) Semi-annual payment (I=FV*CR*1/c) Present value of $1 factor Present value annuity of $1 factor Calc Present value of face value of bond Present value of bond annuity Market value of bond issue (present value) Period Original issue premium (PV - FV) A*MR*1/2= (A) (B) (C) Beginning Effective Semi-annual Balance Interest Payment 19,770 C-B= (D) Premium Amortized F(up)-D= (F) Premium Remaining A-D= (G) Ending Balance 0 1 2 254 1,171 3 4 19,247 285 1,138 5 6 1,100 Chapter 8 – Page 26 of 35 18,000 Question 12 Each bond had a face value of $50,000. Calculate the market value of each bond, and the total cash received from all five bonds. Price = (Market value / Face value of bond) * 100 Market value = (Price/100) * Face value of bond Price 100 (1.00) 92 (0.92) 106 (1.06) 94 ½ (0.945) 101 ¼ (1.0125) Total Face value x 50,000 x 50,000 x 50,000 x 50,000 x 50,000 250,000 What did you learn? Chapter 8 – Page 27 of 35 Issue price (Cash received) = 50,000 = 46,000 = 53,000 = 47,250 = 50,625 246,875 Question 13 Bonds with a face value of $25,000 had a coupon rate of 9%, a market rate of 10%, and a life of ten years. A. Calculate the cash received when the bonds were sold. Future value PV of $1 Present value 25,000 x 0.377 = 9,425 Annuity PV of annuity of $1 Present value (25,000 x 0.09 x ½) X 12.462 = 14,020 PV of bond issue = 23,445 B. Prepare the amortization schedule for the first two periods. Beginning Effective Discount Discount Ending Balance Interest Payment Amortized Remaining Balance 0 1,555 23,445 1 23,445 1,172 1,125 47 1,508 23,492 2 23,492 1,175 1,125 50 1,458 23,542 C. Record the journal entry to issue to the bonds. Account names Debit Cash 23,445 Discount on bonds payable 1,555 Bonds payable Credit 25,000 D. Record the journal entry for the second annuity payment. Account names Debit Credit Interest expense 1,175 Cash 1,125 Discount on bonds payable 50 E. Prepare the balance sheet as of the end of the second period. Balance Sheet Bonds payable $25,000 Discount on bonds payable 1,458 Net bonds payable 23,542 What did you learn? Chapter 8 – Page 28 of 35 Question 14 Bonds with a face value of $18,000 had a coupon rate of 12%, a market rate of 10%, and life of ten years. A. Calculate the cash received when the bonds were sold. Future value PV of $1 Present value 18,000 x 0.377 = 6,786 Annuity PV of annuity of $1 Present value (12,000 x 0.08 x ½) X 12.462 = 13,459 PV of bond issue = 20,245 B. Prepare the amortization schedule for the first two periods. Beginning Effective Premium Premium Ending Balance Interest Payment Amortized Remaining Balance 0 2,245 20,245 1 20,245 1,012 1,080 68 2,177 20,177 2 20,177 1,009 1,080 71 2,106 20,106 C. Record the journal entry to issue to the bonds. Account names Debit Cash 20,245 Premium on bonds payable Bonds payable Credit 2,245 18,000 D. Record the journal entry for the second annuity payment. Account names Debit Credit Interest expense 1,009 Premium on bonds payable 71 Cash 1,080 E. Prepare the balance sheet as of the end of the second period. Balance Sheet Bonds payable $18,000 Premium on bonds payable 2,106 Net bonds payable 20,106 What did you learn? Chapter 8 – Page 29 of 35 Question 15 Bonds with a face value of $7,000 sold for $5,396. The bonds had a coupon rate of 8%, a market rate of 12%, and a life of ten years. A. Prepare the amortization schedule for the first two periods. Beginning Effective Discount Discount Ending Balance Interest Payment Amortized Remaining Balance 0 1,604 5,396 1 5,396 324 280 44 1,560 5,440 2 5,440 326 280 46 1,514 5,486 B. Record the journal entry to issue to the bonds. Account names Debit Cash 5,396 Discount on bonds payable 1,604 Bonds payable Credit 7,000 C. Record the journal entry for the second annuity payment. Account names Debit Credit Interest expense 326 Cash 280 Discount on bonds payable 46 D. Prepare the balance sheet as of the end of the second period. Balance Sheet Bonds payable $7,000 Discount on bonds payable 1,514 Net bonds payable 5,486 What did you learn? Chapter 8 – Page 30 of 35 Question 16 Bonds with a face value of $9,000 sold for $9,950. The bonds had a coupon rate of 16%, a market rate of 14%, and life of ten years. A. Prepare the amortization schedule for the first two periods. Beginning Effective Premium Premium Ending Balance Interest Payment Amortized Remaining Balance 0 950 9,950 1 9,950 697 720 23 927 9,927 2 9,927 695 720 25 902 9,902 B. Record the journal entry to issue to the bonds. Account names Debit Cash 9,950 Premium on bonds payable Bonds payable Credit 950 9,000 C. Record the journal entry for the second annuity payment. Account names Debit Credit Interest expense 695 Premium on bonds payable 25 Cash 720 D. Prepare the balance sheet as of the end of the third period. Balance Sheet Bonds payable $9,000 Premium on bonds payable 902 Net bonds payable 9,902 What did you learn? Chapter 8 – Page 31 of 35 Question 17 Explain why each account increases and decreases. Bonds payable Face value of bonds paid Beginning balance Face value of bonds issued Ending balance Discount on bonds payable Beginning balance Add. int. exp. over life of bond Additional int. exp. for the period Ending balance Premium on bonds payable Beginning balance Excess int. exp. for the period Excess int. exp. over life of bond Ending balance What did you learn? Question 18 Calculate all ratios for Amgen using the Excel spreadsheet you created for chapter 13. Use stock price of $22 per share. Print one copy of spreadsheet with numbers (no formulas). Submit your work in the following order: Memo, spreadsheets, work papers. Answer the business memo question. Chapter 8 – Page 32 of 35 Question 19 Record each transaction as a journal entry and show how the transaction effects the balance sheet equation and the statement of cash flows. General journal A B C D E Balance sheet A L SE Cash flows Op Inv Fin Account names Debit Credit Cash 10,000 Sales 10,000 Sold computers and printers and collected cash, $10,000 Warranty expense 300 Warranty payable 300 AJE estimate or “repair or replace free” warranty costs to be 3% of sales Warranty payable 200 Cash 200 Actual cost of warranty work performed during year, parts and labor, $200, paid in cash Cash 5,000 Note payable 5,000 Borrowed $5,000 on note payable, 8% interest, due in 90 days. Note payable 5,000 Interest expense 100 Cash 5,100 Paid note and interest on due date. Calculate the total in each column 9,700 100 9,600 9,700 0 Chapter 8 – Page 33 of 35 0 General journal Balance sheet A L SE Cash flows Op Inv Fin Account names Debit Credit F Cash 2,345 Discount on bonds payable 155 Bonds payable 2,500 Issued bond with a face value of $2,500; received $2,344 in cash. G Interest expense 117 Cash 112 Discount on bonds payable 5 Made semi-annual coupon payment of $112; effective-interest was $117 H Cash 2,025 Premium on bonds payable 225 Bonds payable 1,800 Issued bond with a face value of $1,800; received $2,025 in cash. I Interest expense 101 Premium on bonds payable 7 Cash 108 Made semi-annual coupon payment of $108; effective-interest was $101 Calculate the total in each column 4,150 4,368 (218) (220) What did you learn? Chapter 8 – Page 34 of 35 0 4,370 Question 20 Use annual report PDF file on my web site to answer this question. Use Debt note to complete the following sentences. The 30-year, zero-coupon… Amgen The gross proceeds… The original issue discount... Holders of the Convertible... Under the $500 Million Shelf the Company had… The Company had $100 million of… The Company has a commercial paper… These borrowings had... Debt due in 2005 Debt due in 2007 Total long-term debt What did you learn? Chapter 8 – Page 35 of 35 ...
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