Exam 1 Acct 414 – Corporate Accounting & Reporting II Spring 2008Time Value of Money Problems (15 points each)InstructionsSOLUTIONSExam #___________Time Started: ________AMTime Ended: ________AMName: __________________________________Exam 1Acct 414 – Corporate Accounting & Reporting II Spring 2008Show any necessary computations if you want to be eligible for partial credit. Present your workin a neat, well-organized manner. When you are using a financial calculator, spell out what you put in for n, i, PMT, FV, PV, etc. You could also draw a time-line if that would explain your thinking to me. You may use abbreviations in your essay answers but I need complete thoughts.Follow the instructions and answer all parts of the question as directed.1-4. Time Value of Money (60 points total)5. Troubled debt (30 points total)6-7. Leases. (70 points total)8. Long-term contracts (20 points)9. Serial Bonds (20 points)Total points earned (max = 200)To be completed by professor:After Exam 1 - Course GradeTotal Points = __________/__________ = _________%Quiz and HW percentage = ___________%Projects percentage = ___________%Exam 1 – Acct 414 – Spring 2008 Page 2Are assets or an ownership interest transferred from debtor to creditor in settlement of debt?Is the debt settled in full?Is entity the CREDITOR?CREDITOR discounts expected future cash flows to be received under modified terms using original (historical) interest rateNoNoYesRecord ordinary gain or loss on asset. Difference between fair value of asset or equity interest and amount due on debt is ordinary gain for debtor and ordinary loss for creditorYesDifference between carrying value of receivable and present value of expected future cash flows is ordinary loss for CREDITORAre the cash flows to be made under the modified terms greater than the carrying value of the debt after transfer of any assetor equityinterest?(Debtor pays LESS than amount owed at restructuring) The difference between carrying value of debt and total future cash flows is recorded as a gain from restructuring for DEBTOR. No interest expense will be recorded in future years. No(Debtor pays MORE than amount owed at restructuring)No gain is recorded by DEBTOR. Find interest rate to set cash flow equal to carrying value of debt. Use this interest rate to amortize the restructured debt over its term. YesTROUBLED DEBT RESTRUCTURING (FASB 15, 114, 118 & 145)Prepared by T. Gordon 8-31-06Record ordinary gain or loss on asset or equity interest transferred. Difference between fair value of asset or equity interest and carrying value of debt is recognized as an ordinary gain from restructuring for debtor and an ordinary credit loss for creditor.NoYesExam 1 – Acct 414 – Spring 2008 Page 3Time Value of Money Problems (15 points each)1. Felix Corporation wants to accumulate $500,000 on December 31, Year 10 to retire preferred stock. The company deposits $100,000 in a savings account on January 1, Year 1 which will earn interest at 8% per annum simple interest, compounded quarterly. Standard Corporation wants to know what additional amount it has to deposit at the end of each quarter for 10 years to have $500,000 available at the end of Year 10. The periodic deposits will also earn interest at 8% per annum, compounded quarterly.2. Troubled debt restructuring-debtor: On January 1, 1996, a debtor owed $30,000 plus$3,000 in accrued interest on a note payable. The creditor agreed to modify the terms ofthe agreement such that the debtor will pay interest at a 9% annual rate for 5 years on a reduced principal balance of $28,000. What interest rate is implied by the modification of terms? (it could be as low as 0%)Exam 1 – Acct 414 – Spring 2008 Page 43. Lessee. The lessee has signed a 3-year lease with the first payment to be made at the inception of the lease. The lease calls for monthly payments of $25,000. The incremental borrowing rate of the lessee is 12%. The equipment has a useful life of 5 years. The lessee has an option to purchase the asset for $500 at the end of the lease. The expected value of the asset at that time is $1,500. At what value should the asset be capitalized by the lessee? 4. Fair Value Disclosures – Bonds. Sunlight Mines issued $5,000,000 in semi-annual bonds on January 1, 2000 at face value. The bonds mature on January 1, 2015. The coupon interest rate was 9% per annum (4.5% each six months). It is now early Januaryin 2008, eight years until maturity. Sunlight Mines is preparing its December 31, 2007 financial statements and, according to FASB No. 107, needs to disclose the fair value of the bonds. The bonds are not actively traded but Level 2 (FASB No. 157) information is available: the interest rate for semiannual bonds with similar bond ratings and maturities were being sold to yield 8% per annum (simple interest) as of 12/31/07. REQUIRED: What is the estimated fair value of the bonds at 12/31/07? (Hint: If the bonds were issued on 12/31/07, what would people be willing to pay to buy them?) $_____________________________Exam 1 – Acct 414 – Spring 2008 Page 55. Troubled debt restructuring (30 points). Parts R Us Inc., is one of Carlson Car Care Company’s major creditors. Carlson Car Care Company is experiencing substantial financial difficulties. Its original note with Parts R Us, Inc. was dated February 1, 2006 and has a face value of $40,000 and specifies a 10% interest rate. The interest for the period ending Feb. 1, 2008 has not been paid. On Feb. 1, 2008, Carlson Car Care Company persuaded Brakes R Us to reduce the principal from $40,000 to $30,000 and to reduce interest payments to $1,500 per year for the remaining 4-year life of the debt. The modified terms also waive payment of the accrued interest currently due.InstructionsShow any entries needed on the books of the creditor, Parts R Us, Inc., and the debtor, Carlson Car Care, at the following dates: (1) Feb 1, 2008 and (2) End of fiscal year (12/31/08)The creditor uses the cost recovery method and the debtor uses the effective interest rate method.Creditor DebtorFeb 1, 2008Dec. 31, 2008Feb 1, 2008Dec. 31, 2008Exam 1 – Acct 414 – Spring 2008 Page 66. Lease Classification (40 points). On May 1, 2008, the Amazing Studios leased scientific equipment from Rambo Electronics for use in the engineering department. The lease period is for 13 years and the estimated economiclife of the leased property is 15 years. The lease does not