NCSU ACC 200 - Ch 9 problem session exercise (8 pages)

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Ch 9 problem session exercise



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Ch 9 problem session exercise

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Pages:
8
School:
North Carolina State University
Course:
Acc 200 - Introduction to Managerial Accounting
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Ch 9 Problem Session Exercise Note The factor tables are at the back of your textbook Copies of the same tables are also available in the App C Moodle block In addition have your calculator set to 5 decimal places Problem I Indicate whether each of the following statements is true T or false F a t An advantage for a company to finance its operations through the issuance of debt rather than through the issuance of stock is the deductibility of interest expense for income tax purposes b t An advantage for a company to finance its operations through the issuance of stock rather than through the issuance of debt is the deductibility of dividend payments for income tax purposes c f Secured bonds have specific assets of the issuer the borrowing company pledged as collateral on the bonds d t A bond which can be converted into common stock at the option of the bondholder is referred to as a callable bond e t A company s times interest earned ratio being higher this year than it was last year is an indication that the company s ability to meet its interest payments as they become due has worsened over time f When the market interest rate exceeds the face interest rate on a bond the bond will be issued at a premium f g t When a bond is redeemed early and the amount paid to retire the bond exceeds the bond s carrying value a loss will result h t The account called Discount on Bond Payable is an example of a contra asset account i f The dollar difference between the Bond Payable account balance and the Discount on Bond Payable account balance is referred to as the bond s carrying value j f An increase in a company s debt to equity ratio over time is an indication of increased risk to the company s creditors and investors k t An investment fund a company uses to set aside money to pay future debts as they become due is called a sinking fund 1 Problem II On 1 1 X1 Wolfpack Inc issues 3 year bonds with a face value of 50 000 and a face stated rate of 4 compounded semi annually The market interest rate for bonds of similar risk and maturity is 5 compounded semi annually Interest is paid semi annually on June 30 and December 31 beginning on June 30 20X1 The bonds mature on 12 31 X3 A What is the issue price of the bonds on 1 1 X1 Note to student If you have trouble answering this question go to the last page of this graded assignment where you will be asked a series of questions that if answered correctly should lead you to the correct answer Answer 50000 B Were the bonds issued at face value at a discount or at a premium Answer 6700 C Using the bond issue price calculated in letter A and rounding all calculations to the nearest whole dollar fill in the remaining missing spaces gray blocks in the amortization schedule below using the effective interest method Some of the spaces are already filled in to serve as checks Date Cash Payment Interest Expense CV x market rate x time 1 1 X1 6 30 X1 12 31 X Amortization of Discount Increase in CV Carrying Value CV 1 000 1 000 2993 1 216 45000 216 4000 38454 49 060 1 6 30 X2 12 31 X 1 000 1 000 24499 1 232 28347 232 38224 49 519 2 6 30 X3 12 31 X 1 000 1 000 6483 83383 70000 28939 50000 92739 3 Total 6 000 932829 928920 D Accounting Check Within a dollar or two does the amortization schedule s carrying value at 12 31 X3 equal the face value of the bonds If your answer is not yes the issue price of the bond and or the amortization schedule is incorrect Please go back and check your work 2 E Assuming a bond is issued at a discount indicate whether each of the following statements is true T or false F t The carrying value on the issue date is equal to the bond s issue price f The carrying value increases over time t The carrying value on the maturity date is equal to the bond s face value f The cash interest payment stays the same over time t Interest expense for increases over time Problem III On 1 1 X1 Wolfpack Inc issues 3 year bonds with a face value of 50 000 and a face stated rate of 4 compounded semi annually for an issue price of 48 623 The market interest rate for bonds of similar risk and maturity is 5 compounded semi annually Interest is paid semi annually on June 30 and December 31 beginning on June 30 20X1 The bonds mature on 12 31 X3 A Prepare the journal entries in proper form for the dates noted below Explanations are not needed Date 1 1 X1 6 30 X1 12 31 X1 Debit Interest expense cash 30000 Bond issue Interest expense 45000 Bond expense Interest expense 50000 Credit 30000 45000 56000 B Accounting Check On a scrap piece of paper post the above entries to the Bond Payable and Discount on Bonds Payable T accounts and compute account balances at 12 31 X1 Does the Bond Payable account balance less the Discount on Bonds Payable account balance equal the carrying value of the bonds as of 12 31 X1 per your amortization schedule for Problem II If your answer is not yes please go back and check your work 3 Problem IV On January 1 20X1 Moreno Company issued 4 year bonds with a face value of 400 000 and a face interest rate of 6 compounded semi annually for an issue price of 429 300 This price results in an effective interest market rate of 4 compounded semi annually on the bonds Interest is payable semiannually on June 30 and December 31 of each year beginning on 6 30 X1 Moreno uses the effective interest method Required Prepare the journal entries in proper form for the dates noted below Explanations are not needed Date 1 1 X1 6 30 X1 INTEREST EXPENSE SUPPLUSE CASH INTEREST EXPENSE Debit 400000 Credit 400000 429300 429300 Problem V On 1 1 X1 Venus Corp takes out an installment note for 50 000 to purchase equipment for its manufacturing facility The loan will be repaid in equal annual installments over 3 years beginning 12 31 X1 The interest rate on the loan is 12 compounded annually A Rounded to the nearest whole dollar how much will each of the annual payments be Answer 45000 round to nearest whole dollar B What will be the total interest expense the company will incur over the entire 3 years Answer 10000 4 C Rounding all calculations to the nearest whole dollar and using the effective interest method fill in missing spaces gray blocks in the partial amortization schedule below Double check that your answer to part B matches the total interest expense amount in …


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