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

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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 A. $16,800 B. $18,200 C. $20,000 D. $21,800 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. A. The same as the face amount of the bond B. The same as the face amount of the bond plus ccrued interest. C. More than the face amount of the bond D. Less than the face amount of the bond. Answer (C) is correct.
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2 4. Webb Co. has outstanding a 7%, 10-year bond with a $100,000 face amount. The bond was originally sold to yield 6% annual interest. Webb uses the effective-interest method to amortize bond premium. On June 30, 2001, the carrying amount of the outstanding bond was $105,000. What amount of unamortized premium on the bond should Wei report in its June 30, 2002 balance sheet? A. $1,050 B. $3,950 C. $4,300 D. $4,500 Answer: C DISCUSSION: Under the interest method, interest expense is the carrying amount of the bonds at the beginning of the interest period times the market (yield) rate of interest. Assuming interest is paid annually on June 30, interest expense for the year ended 6/30/02 is $6,300 (6% * $105,000 carrying amount), and the periodic Interest payment is $7,000 (7% x $100,000), the difference ($7,000-$6,300 = $700) is the amount of premium amortized, The unamortized premium is therefore $4,300 ($5,000 -$700). 5. During Year 6, Wall
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solution, reading, exam - Solution to Midterm Exam #1. Part...

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