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ACCT+2101+Quiz+6+V2+SOLUTION

ACCT+2101+Quiz+6+V2+SOLUTION - ACCT 2101 Quiz#6 — Version...

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Unformatted text preview: ACCT 2101 Quiz #6 — Version 2 Solution Spring Semester, 2009 Name K69 _.. (Ajg‘Hg %" radii“? guideline. Section (please print clearly) Pledge: On my honor, I have neither given nor received any unauthorized help on this quiz. (signed) Instructions: 1. You may not ask questions during the quiz. However, all notes you write to the instructor will be read and considered during the grading process. 2. Please use your time wisely. Remember: Perfect answers are not required to get most of the points. 3. Only the approved calculators may be used during the quiz. 4. You must write legibly or your answers will not be graded. 5. Do NOT pull this quiz apart under any circumstances. 6. Make sure you have 7 numbered pages plus the two present value tables (without page numbers). 7 . @Ck! J dew varggm g; M Bolatiaeea mac—”0"” Point Allocation: Problem 1: 3.6 Problem 2: 2.0 Problem 3: 1.4 Problem 4: 19 TOTAL POINTS 2 Q points ACCTZIO/ Quiz; 6—2 Solution. I 0f8 V “Wm-m Cl pm~t$ €13 MN PROBLEM 1. 0.1-) PM Mum/j On January 1, 2009, Hanson Corporation had the following stockholders’ agility accounts: Common Stock ($1 par value, 80,000 shares issued and outstanding) $ 80,000 Paid-in Capital in Excess of Par Value 1,500,000 Retained Earnings 1,620,000 REQUIRED: For each of the following events, record the necessary journal entry. Show your calculations for potential partial credit Jan. 15 Declared a $0.80 cash dividend per share to stockholders of record on January 31, payable February 15. Retained Earnings 64,000 Dividends Payable 64,000 ($0.80 * 80,000 shares = $64,000) Feb. 15 Paid the dividend declared in January. Dividends Payable 64,000 Cash 64,000 Apr. 15 Declared a 10% stock dividend to stockholders of record on April 30, distributable May 15. On April 15, the market price of the stock was $19 per share. Retained Earnings 152,000 Common Stock (Dividend) Distributable 8,000 Paid in Capital — Stock Dividend 144,000 (80, 000* 1000: 8, 000 shares * $19: $152, 000) May 15 Issued the shares for the stock dividend declared on April 15. Common Stock (Dividend) Distributable 8,000 Common Stock 8,000 NOTE: Shares outstanding now = 80,000 + 8,000 = 88,000 ACCTZIO] Quiz 6—2 Solution 2 0f8 June 15 Declared a 40% stock dividend to stockholders of record on June 30, distributable July 15. On June 15, the market price of the stock was $18 per share. Retained Earnings 35,200 Common Stock (Dividend) Distributable 35,200 (88,000 * 40% = 35,200 shares * $1 par = $35,200) July 15 Issued the shares for the stock dividend declared on June 15. Common Stock (Dividend) Distributable 35,200 Common Stock 35,200 NOTE: Shares outstanding now = 88,000 + 35,200 = 123,200 Aug. 15 Reacquired 3,000 shares of its own $1 par value stock, previously issued at $10, paying $25 per share in the market. Treasury Stock (3,000 * $25) 75,000 Cash 75,000 NOTE: Shares outstanding now = 123,200 — 3,000 = 120,200 Sept. 15 Reissued 1,000 of the shares purchased on August 15 receiving $28 per share. Cash (1,000 * $28) 28,000 Treasury Stock 25,000 Paid~in Capital - Treasury Stock Trans 3,000 NOTE: Shares outstanding now = 120,200 + 1,000 = 121,200 Dec. 1 Declared a $0.70 per share cash dividend to stockholders of record on December 15, payable January 10, 2010. Retained Earnings (121,200 * $0.70) 84,840 Dividends Payable 84,840 ACCT 2101 Quiz 6—2 Solution 3 of8 PROBLEM 2. On January 2, 2009, the Turner Company issued $400,000 of 15—year bonds payable. The bonds carry a contract rate of interest of 18% paid semiannually. The market interest rate was 16% on the date of issuance. REQUIRED: (a) Compute the market price of the bonds on the date of issuance. Show all work. Present Value of Principal: $400,000 * PV (i=8%, n=30) = $400,000 * 0.09938 = $ 39,752 1 P4 Present Value of Interest ($400,000 * 18% * 1/2 = $36,000): $36,000 * PVA (i=8%, n=30) = $36,000 * 11.25778 = 405280 Price of Bond (Premium = $45,032) $ 445,032 (b) Prepare the journal entry required on January 2, 2009, to record the bond issuance. Cash 445,032 .. Bonds Payable 400,000 0‘ 9‘63 97+“ Premium on Bonds Payable 45,032 (c) Prepare the journal entry required on June 30, 2009, to record the first interest payment assuming straight—line amortization of any premium or discount. Bond Interest Expense ** 34,498.92 0,”? 53 pi” Premium on Bonds Payable * 1,501.08 Cash 36,000 * $45,032 / (15 * 12) = $250.18 per month amortization * 6 months = $1,501.08 ** $36,000 - $1,501.08 = $34,498.92 ACCT 2101 Quiz 6—2 Solution 4 of8 PROBLEM 3. Answer each of the following questions using complete sentences (8!) 09) (subject and predicate). What impact does a bond’s credit rating and its term-to—maturity have on its yield? Explain why. A bond’s credit rating determines the default risk component of the yield. That is, a better credit rating reduces the interest rate demanded by the market, and a lower credit rating increases the interest rate demanded by the market. A bond’s term-to-maturity also effects the default risk component of the yield. The longer the term, the greater the chance of default. Therefore, bonds with longer maturity dates have higher interest rates required by the market. The interest rate required in the marketplace (for example, the bond yield) is comprised of three components. Identify and describe those three components. The interest rate demanded in the market is comprised of three components: (1) Risk~free rate: the simple rent on money. This is the rate the federal government pays because there is no default risk on their securities. (2) Risk premium (also called the credit risk or default risk): the additional amount of interest required because of the potential for default. (3) Inflation premium: the additional amount of interest required because of inflation expectations in the future. One of the disadvantages of the corporate form is that corporate earnings are subject to three types of federal income taxation. Identify those three types of taxation. There are three types of federal income taxation on corporate earnings: (1) Corporate tax: this is the tax on the earnings reported by the corporation. (2) Dividends tax: this is the tax paid by the shareholders when the corporation distributes cash dividends to them. (3) Capital gains tax: this is the tax paid by shareholders when they sell their shares at a gain. Gains are often the result of corporate earnings so this is a third type of tax. ACCT 2101 Quiz 6—2 Solution 5 of8 (d) Describe two reasons that corporations reacquire their own outstanding common stock. Four reasons that corporations reacquire their own outstanding common stock were identified in class (name two): (1) For issuance to employees: As a result of the pre—emptive right attached to most stock, companies must repurchase their own shares in the market to fund employee stock ownership plans or to distribute to executives as part of their compensation. (2) To reissue the stock later at a higher price: If the company believes their stock is trading at a price lower than its true value, they can repurchase their shares and reissue them later. If they sell at a higher price later, then the company's value is increased through the additional paid-in capital. (3) To reduce the number of shares outstanding: Decreasing the number of shares outstanding will increase the earnings per share (EPS) of the remaining shareholders. In addition, share reduction generally increases the market value of the remaining shares as a result of the increase in EPS. (4) To avoid an outside takeover: If the company repurchases shares from disgruntled shareholders rather than allowing them to sell their shares to another company, they may be able to avoid an unwelcome (hostile) takeover by another company. ACCT2101 Quiz 6—2 Solution 6 0f8 PROBLEM 4. REQUIRED: Use the comparative balance sheets and other information for the Bobo Company to prepare a Statement of Cash Flows using the indirect method. BOBO COMPANY Comparative Balance Sheets December 31 Assets: _2_0_0§ 2007 Change Cash $ 50,000 $ 57,000 (7,000) Accounts receivable 77,000 94,000 (17,000) Inventory 192,000 120,000 72,000 Prepaid expenses 12,140 6,540 5,600 Land 100,000 150,000 (50,000) Building 250,000 250,000 -0— Accumulated deprec—building (70,000) (50,000) 20,000 Equipment 215,000 175,000 40,000 Accumulated deprec w equipment (70,000) (42,000) 28,000 Total $756,140 ~$ 760,540 Liabilities & Stockholders’ Equity: Accounts payable $ 43,000 $ 25,000 18,000 Salaries payable 15,000 20,000 (5,000) Bonds payable 225,000 265,000 (40,000) Common stock, $1 par 290,000 250,000 40,000 Retained earnings 183,140 200,540 (17,400) Total $ 760,540 Additional information: 1. Land was sold for cash at a gain of $32,000. Cash dividends of $69,290 were paid. Equipment was purchased for $80,000 cash. In addition, equipment costing $40,000 with a book value of $23,000 was sold for $10,000 cash. 4. Bonds with a face value by of $40,000 were redeemed for cash. 3”!” ACCT 2101 Quiz 6—2 Solution 7 0f8 PLEASE NOTE: The direction of each item (cash inflow versus cash outflow) is very important. Please clearly mark cash outflows with either parentheses or bracketsl! BOBO COMPANY Statement of Cash Flows For the Year Ended December 31, 2008 Cash flows from operating activities Net income ............................................................ Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense .................................... Gain on sale of land ...................................... Loss on sale of equipment ............................. Decrease in accounts receivable ................... Increase in inventory ...................................... Increase in prepaid expenses ........................ increase in accounts payable ......................... Decrease in salaries payable ........................ Net cash provided by operating activities ..................................................... Cash flows from investing activities Sale of land ............................................................ Purchase of equipment .......................................... Sale of equipment .................................................. Net cash provided by investing activities ........ Cash flows from financing activities Redemption of bonds ............................................. issuance of common stock ................................... Payment of cash dividends .................................... Net cash used by financing activities ............. Net decrease in cash ..................................................... Cash at beginning of period ........................................... Cash at end of period .................................................... $ 51,890 ft $ 65,000 f?» (32,000) 13,000 17,000 g R (72,000) -‘ m (5,600) 18,000 (5,000) (1,600) $ 50,290 f" 82,000? 7» (80,000) g» 10,000 5):: 12,000 fi-i (40,000) E) ”Q 40,000 7.2. (69,290) {‘0’ (69,290) .l (7,000) W 57,000 Note 1 Lfllmfifiiam: Cemfsieieitj wrung, ACCT 2101 Quiz 6—2 Solution 8of8 ...
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