final_exam_f2005_solution

final_exam_f2005_solution - University of Waterloo Final...

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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. Marking Scheme: 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) 5 (8 marks) 10 (35 marks) Total score: 115 marks University of Waterloo Final Examination

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AFM 101 Page 2 of 25 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
Page 3 of 25 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

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This note was uploaded on 01/18/2012 for the course AFM 101 taught by Professor Kennedy during the Fall '08 term at Waterloo.

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final_exam_f2005_solution - University of Waterloo Final...

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