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2005 Solutions

# 2005 Solutions - University of Waterloo Final Examination...

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University of Waterloo Final Examination Term: Fall Year: 2005 Student Name Solution UW Student ID Number Course Abbreviation and Number AFM 101 Course Title Core Concepts of Accounting Information Section(s) 001, 002, 003, 004 Instructor Duane Kennedy Date of Exam Wednesday, December 14, 2005 Time Period Start time: 4:00 pm End time: 6:30 pm Duration of Exam 2.5 hours Number of Exam Pages 25 (including this cover sheet) Exam Type Special Materials Additional Materials Allowed Cordless calculators may be used. The calculator must be standalone with no communication or data storage features. Both the examination paper and multiple choice card must submitted. M ARKING S CHEME : Question Score Question Score 1 (14 marks) 6 (8 marks) 2 (10 marks) 7 (8 marks) 3 (8 marks) 8 (12 marks) 4 (4 marks) 9 (8 marks)

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5 (8 marks) 10 (35 marks) Total score: 115 marks 2
Question 1 (14 Marks) Required: Answer the following independent questions. A) King Limited issued \$1,000,000, 10 percent, 10 year bonds dated July 1, 2005. Interest is paid semi-annually on June 30 and December 31. The issue price was \$1,135,903 based on a market interest rate of 8 percent. The company uses the effective interest rate method of amortization. Complete the following table: Date Interest Payment Interest Expense Amortization of Discount or Premium Book Value July 1, 2005 --- --- --- \$1,135,903 Dec. 31, 2005 \$50,000 \$45,436.12 \$4,563.88 \$1,131,339.12 Interest Payment = \$1,000,000 * 10% / 2 = \$50,000 Interest Expense = \$1,135,903 * 4% = \$45,436.12 Amortization of Premium = \$50,000 -45,436.12 = \$4,563.88 Book Value = \$1,135,903 - 4,563.88 = \$1,131,339.12 B) Columbia Corporation issued 3,000, 10 year bonds at 103 on November 1, 2005, which results in an effective interest rate of 8%. The bonds have a \$1,000 face value and a 9% stated interest rate. Interest is payable annually on October 31. The company uses the straight-line amortization method. Record the payment of interest on October 31, 2006. Issue price = 3,000 * \$1,000 * 1.03% = \$3,090,000 Total premium = \$3,090,000 – 3,000,000 = \$90,000 Amortization = \$90,000 / 10 years = \$9,000 / year Interest Expense \$261,000 Premium on Bonds Payable 9,000 Cash (\$3,000,000 * 9%) \$270,000

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C) Weber Company issued \$5,000,000, 8 percent, 10 year bonds dated May 1, 2005. Interest is paid semi-annually on October 31 and April 30. The market rate of interest was 6 percent. Record the sale of the bonds on May 1, 2005. Present value of principal = \$5,000,000 * PV(n=20, i=3%) = \$5,000,000 * 0.554 = \$2,771,000 Present value of interest = \$5,000,000 * 4% * PV(annuity, n=20, i=3%) = \$200,000 * 14.877 = \$2,975,400 Issue price = \$2,771,000 + 2,975,400 = \$5,745,400 Cash \$5,745,400 Premium on Bonds Payable \$745,400 Bonds Payable \$5,000,000 Note: if a financial calculator or formulas are used: Present value of principal \$2,768,378.77 Present value of interest \$2,975,494.97 Issue price \$5,743,873.74
Question 2 (10 Marks) The records of Shorter Company reflected the following for the month of February: Date Transaction Number of Units Unit Cost Feb. 1 Beginning inventory 600 \$3 Feb. 2 Purchase 500 \$4 Feb. 5 Sale (selling price \$12/unit) 700 Feb. 12 Purchase 600 \$5 Feb. 15 Sale (selling price \$13/unit) 700 Feb. 23 Purchase 900 \$6 Feb.28 Ending inventory ? Shorter Company uses a periodic inventory system. Required: Complete the following table for February: Inventory Method Number of Units FIFO LIFO Weighted Average Revenue 1,400 \$17,500 \$17,500 \$17,500 Cost of Goods Sold 1,400 5,300 7,900 6,569 Gross Margin 1,400 12,200 9,600 10,931 Cost of Ending Inventory 1,200 6,900 4,300 5,631 Cost of goods available for sale = 600 * \$3 + 500 * \$4 + 600 * 5 + 900 * \$6 = \$12,200 Number of units available for sale = 2,600 units Revenue = 700 * \$12 + 700 * \$13 = \$17,500 COGS

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