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solution, reading, exam - Solution to Midterm Exam#1 Part 1...

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1 Solution to Midterm Exam #1. Part 1: Multiple-choice questions 1. Eddy Co. is indebted to Cole under a $400,000, 12%, three-year note dated December 31, 2009. Because of Eddy's financial difficulties developing in 2011, Eddy owed accrued interest of $48,000 on the note at December 31, 2011. Under a troubled debt restructuring, on December 31, 2011, Cole agreed to settle the note and accrued interest for a tract of land having a fair value of $360,000. Eddy's acquisition cost of the land is $290,000. Ignoring income taxes, on its 2011 income statement Eddy should report as a result of the troubled debt restructuring Gain on Disposal Restructuring Gain a. $158,000 $0 b. $110,000 $0 c. $70,000 $40,000 d. $70,000 $88,000 d $360,000 – $290,000 = $70,000 ($400,000 + $48,000) – $360,000 = $88,000. 2. On July 1, 2002., Pell Co. purchased Green Corp. 10-year, 6% bonds with a face amount of $500,000 for $420,000. The bonds mature on June 30, 2012 and pay interest semiannually on June 30 end December 31. Using the effective interest method, Pall recorded bond discount amortization of $1,800 for the 6 months ended December 31, 2002. From this long-term investment, Pell should report 2002 revenue of Answer (A) Interest income for a bond issued at a discount is equal to the sum of the periodic cash flows and the amount of bond discount amortized during the interest period. The periodic cash flows ,are equal to $15,000 ($500,000 face amount x 6% coupon rate x 1/2 year), The, discount amortization is given as $1,800, Thus, revenue for the 6-month period from July 1 to December 31, 2002 is $16,800 ($15,000 + $1,800}. 3. An investor purchased a bond as a long-term investment between interest dates at a premium. At the purchase date, the cash paid to the seller is Choose one answer. Answer (C) is correct.
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