Quiz_1_Solutions_new

Quiz_1_Solutions_new - Solution to Quiz#1. 1. ( 6 points)...

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Solution to Quiz#1. 1. ( 6 points) During 2002, Eddy Corp, incurred the following costs in connection with the issuance of bonds; Printing and engraving $ 30,000 Legal fees $130,000 Fees paid to independent accountants for registration Information $20,000 Commissions paid to underwriter $300,000 Premium $30,000 What amount should be recorded as a deferred charge to be amortized over the term of the bonds? A. $510,000 B. $480,000 C. $300,000 D. $210,000 Answer: B APB 21states that issue costs should be reported in the balance sheet as deferred charges to be amortized over the life of the bonds. They should not be commingled with bond premium or discount. Issue costs are incurred to bring a bond to market. They include lawyers', accountants', and underwriters' fees; engraving and printing costs; registration costs; and promotion costs. In this case, they include the $30,000 of printing and engraving costs, the $130,000 of legal fees, the $20,000 of accountants' fees, and the $300,000 of underwriter's commissions, Hence, the amount that should be recorded as a deferred charge to be amortized over the term of the bonds is equal to $480,000 2. ( 6 points) On July 1,2002., Pell Co. purchased Green Corp. 10-year, 8% 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 (D) 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 $20,000 ($500,000 face amount x 8% 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 $21,800 ($20,000 + $1,800}. 1
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3. (6 points) 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,
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This note was uploaded on 09/29/2011 for the course ACCT 302 taught by Professor Staff during the Spring '11 term at S.F. State.

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Quiz_1_Solutions_new - Solution to Quiz#1. 1. ( 6 points)...

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