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Practice Final Solution

Practice Final Solution - First name_Last name_PUID Purdue...

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First name: ___________Last name: ______________PUID: _____________________ Purdue University Krannert School of Management MGMT 200 – Introductory Financial Accounting Final Exam – SOLUTION This exam consists of 4 questions on 14 pages (excluding this cover page and the present value table page) for a total of 100 points. Time allowed: 90 minutes. Answer all questions. To ensure full credit and to maximize partial credit, clearly show all supporting calculations. The exam is closed book. A calculator is permitted. GOOD LUCK . Question 1 (25 points) ________ Question 2 (25 points) ________ Question 3 (25 points) ________ Question 4 (25 points) ________ TOTAL (100 points) ________
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Question 1: Bonds Payable (25 points) Simpson Corporation plans to acquire new piece of factory equipment that will increase the efficiency of its manufacturing processes on January 1, 2011. Simpson Corporation has the option to either purchase the equipment for $665,000 or to lease the equipment from Indiana Leasing Corporation. The equipment has an estimated economic life of 10 years and a zero residual value. If the asset is leased it would be a ten-year non-cancelable lease with annual payments of $99,105. The first lease payment would be due December 31, 2011. At the end of the lease term the equipment will belong to Indiana Leasing Corporation. If the asset is purchased Simpson Corporation has two financing options: 1. Issue 3% coupon bonds on January 1, 2011: $1,000,000 face value, 3% coupon (interest payable annually on December 31), ten-year bonds. 2. Issue 15% coupon bonds on January 1, 2011: $452,500 face value, 15% coupon (interest payable annually on December 31), ten-year bonds. The market rate of interest for Simpson Corporation is 8%. Required: PART A: Assume the 3% bonds are issued: a. Prepare the journal entry to record the issuance of the 3% coupon bonds on January 1, 2011. Proceeds: = 30,000 (PVA, n=10, i=8%) + 1,000,000 (PV, n=10, i=8%) = 30,000 (6.7101) + 1,000,000 (0.4632) = 664,503 Cash 664,503 Discount on bonds payable 335,497 Bonds payable 1,000,000 Question 1 continued over . . .
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Question 1 continued. b. Prepare the journal entry to record interest expense and the interest payment on the 3% coupon bonds on December 31, 2011, using the effective interest rate method. Interest expense 53,160* Discount on bonds payable 23,160 Cash 30,000 * = 664,503 x .08 = 53,160 c. What is the total amount of interest expense Simpson Corporation will record on the 3% bond over its ten-year life? = 10 years at $30,000 = 300,000 Plus discount = 335,497 TOTAL: = 635,497 Question 1 continued over . . .
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Question 1 continued. PART B: Assume the 15% bonds are issued: d. Prepare the journal entry to record the issuance of the 15% coupon bonds on January 1, 2011. Proceeds: = 67,875 (PVA, n=10, i=8%) + 452,500 (PV, n=10, i=8%) = 67,875 (6.7101) + 452,500 (0.4632) = 665,046 Cash 665,046 Premium on bonds payable 212,546 Bonds payable 452,500 e. Prepare the journal entry to record interest expense and the interest payment on the 15% coupon bonds on December 31, 2011, using the effective interest rate method.
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