This preview shows page 1. Sign up to view the full content.
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 Taccount 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 semiannually. 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 semiannually (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
semiannually (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 semiannually, 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
CB=
(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 AD=
(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 CB=
(D)
Reduction
in Balance 1
2 31,613
7,123 3
4 34,192
4,440 5
6 AD=
(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 semiannually, 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 semiannually. 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 semiannually. 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 Yieldtomaturity (market rate)(MR) 10.0% Calculate: Interest rate per period (i = MR / c) 5.0% Number of periods (n = Y * c) 6 Semiannual 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 Semiannual 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 Semiannual
Balance
Interest
Payment BC=
(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)
Semiannual 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 Semiannual
Balance
Interest
Payment 13,894
BC=
(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 Yieldtomaturity (market rate)(MR) 8.0%
4.0% Calculate: Interest rate per period (i = MR / c) 6 Number of periods (n = Y * c) 360 Semiannual 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=
CB=
F(up)D=
AD=
(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)
Semiannual 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 Semiannual
Balance
Interest
Payment 13,216
CB=
(D)
Premium
Amortized F(up)D=
(F)
Premium
Remaining AD=
(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)
Semiannual 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 Semiannual
Balance
Interest
Payment 19,770
CB=
(D)
Premium
Amortized F(up)D=
(F)
Premium
Remaining AD=
(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 semiannual coupon payment of $112; effectiveinterest 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 semiannual coupon payment of $108; effectiveinterest 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 30year, zerocoupon… 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 longterm debt What did you learn? Chapter 8 – Page 35 of 35 ...
View
Full
Document
 Fall '09
 R.AMBROSE
 Financial Accounting

Click to edit the document details