Page 1 of 11 Name Student Number TA circle one Section Time Brady Kim Sara Code of Conduct By signing below you acknowledge that you are a member of a learning community at the Foster School of Business that is committed to the highest academic standards and that you adhered to these standards while completing this exam Specific to this exam by signing below you acknowledge that you did not receive or give help to others nor did you witness others receiving or giving help to others during the exam Signature Date A215 Winter 2013 Exam III KEY There were two version of Exam 3 If a question was the same across versions I only list one answer in red If a question differed across versions I list the answer to both versions one in red and one in blue You have one hour and fifty minutes to complete this exam For problems that require calculations show your work Provide your answers in the space provided not on a separate answer sheet Please check to see that you have 11 pages they are numbered plus a present value table Page 2 of 11 If required round your answers to the nearest cent two decimal places I will be careful to NOT penalize you for rounding errors 1 4 pts Match each term with its most relevant definition by placing the appropriate letter next to the term Sinking fund bond Convertible bonds Unsecured bond Capital lease CH 9 F Sinking fund bond D Convertible bond E Unsecured bond C Capital lease A Bond payments for interest decline over time B Bond is backed by collateral C Requires lessee to recognize an asset and liability D Bond can be converted to common stock E Bond is not backed by collateral F Issuer makes installment payments to a fund G Does not require lessee to recognize an asset and liability H Borrower can pay off bond early OTHER VERSION F Sinking fund bond D Convertible bond B Secured bond C Capital lease 2 1 pt Fire Company issues bonds with a 4 year life and a stated interest rate of 5 The market rate of interest at the time of issuance is also 5 The bonds pay interest quarterly Did Fire Company issue the bonds at face a discount or a premium circle one FACE DISCOUNT PREMIUM CH 9 Face 3 3 pts On January 1 2013 Rapids Company signs a note to borrow 400 000 cash for 3 years The note has an annual interest rate of 12 Rapid makes cash payments of 13 285 72 at the end of every month for 3 years Provide the journal entry that Rapids will record when it makes its second payment on February 28 2013 JANUARY 31 2013 not required shown so you can see where 9 285 72 comes from Interest expense 4 000 00 400 000 x 12 x 1 12 Note payable 9 285 72 difference Cash 13 285 72 cash payment FEBRUARY 28 2013 CH 9 Interest expense 3 907 14 400 000 9 285 72 x 12 x 1 12 Note payable 9 378 58 difference Cash 13 285 72 cash payment Page 3 of 11 4 3 pt United Company issues 4 year bonds and produces the following amortization schedule Date Issuance End of Year 1 End of Year 2 End of Year 3 End of Year 4 Cash payment Interest expense Change in carrying value 500 00 500 00 500 00 500 00 10 000 00 579 21 583 96 589 00 594 34 79 21 83 96 89 00 94 34 Carrying value 9 653 49 9 732 70 9 816 66 9 905 66 10 000 00 0 After making the interest payment at the end of Year 3 United decides to retire the bonds by paying investors 9 800 Provide the journal entry United will record to retire the bonds at the end of Year 3 CH 9 Bond payable Cash Gain on retirement 5 9 905 66 9 800 00 105 66 2 pts Galaxy Company leases a telescope by signing an operating lease on January 1 2013 The lease requires Galaxy to make monthly payments of 5 400 cash There is no lump sum payment due at the end of the lease The market rate of interest at the time Galaxy signs the lease is 12 Provide the journal entry Galaxy will record when it makes its first lease payment on January 31 2013 JANUARY 31 2013 CH 9 Rent or lease expense Cash 5 400 5 400 OTHER VERSION the payment is 4 500 Page 4 of 11 6 2 pts Dynamo Company reported the following income statement Sales Cost of goods sold Gross profit 520 000 340 000 180 000 Depreciation expense Wage expense Interest expense Rent expense Operating income 18 000 100 000 4 000 2 000 56 000 Income tax expense Net income 53 000 3 000 What is Dynamo s times interest earned ratio CH 9 53 000 4 000 3 000 60 000 4 000 15 OTHER VERSION interest expense 5 000 so ratio 12 7 2 pts At the beginning of fiscal 2012 Timbers Company issues 200 shares of 10 par value preferred stock for 2 400 The preferred shares are cumulative and pay a dividend equal to 15 of par value Timbers declared and paid a dividend at the end of fiscal 2012 Timbers declared a dividend at the end of fiscal 2013 but will not pay the dividend until early 2014 Provide the journal entry that Timbers will record at the end of fiscal 2013 when it declares the dividend CH 10 Dividends R E Dividend payable 300 200 x 10 x 15 300 8 2 pt One of the advantages of incorporating is lack of mutual agency In 25 words or less describe what lack of mutual agency means CH 10 Lack of mutual agency means that shareholders do not have the power to bind the company to a contract Page 5 of 11 9 1 pt At the end of fiscal 2012 Revolution Company reports the following number of common shares 4 500 000 authorized 1 800 000 issued and 1 750 000 outstanding How many shares of treasury stock if any is Revolution holding CH 10 50 000 1 800 000 1 750 000 10 6 pts Earthquake Company s common stock is currently trading at 200 per share The common stock has a 2 par value Earthquake would like to reduce its stock price and is thinking of carrying out either a 200 stock dividend or a 3 1 stock split Complete the following chart comparing the effects of a 200 stock dividend versus a 3 1 stock split Common stock Additional paid in capital Retained earnings Shares outstanding Before After 200 stock dividend 2 000 100 000 200 000 1 000 After 3 1 stock split CH 10 Common stock Additional paid in capital Retained earnings Shares outstanding Before After 200 stock dividend After 3 1 stock split 2 000 6 000 2 000 100 000 100 000 100 000 200 000 196 000 200 000 1 000 …