Page 1 of 11 Name: __________________________ Student Number: _____________ TA: (circle one) Brady Section Time: ______________ 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 A. Bond payments for interest decline over time. B. Bond is backed by collateral. Convertible bonds C. Requires lessee to recognize an asset and liability. D. Bond can be converted to common stock. E. Bond is not backed by collateral. Unsecured bond F. Issuer makes installment payments to a fund. G. Does not require lessee to recognize an asset and liability. Capital lease H. Borrower can pay off bond early. CH 9 OTHER VERSION F = Sinking fund bond F = Sinking fund bond D = Convertible bond D = Convertible bond E = Unsecured bond B = Secured bond C = Capital lease 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 Cash payment Interest expense Change in carrying value Carrying value Issuance 9,653.49 End of Year 1 500.00 579.21 79.21 9,732.70 End of Year 2 500.00 583.96 83.96 9,816.66 End of Year 3 500.00 589.00 89.00 9,905.66 End of Year 4 500.00 594.34 94.34 10,000.00 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 9,905.66 Cash 9,800.00 Gain on retirement 105.66 5. (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 5,400 Cash 5,400 OTHER VERSION (the payment is $4,500)Page 4 of 11 6. (2 pts) Dynamo Company reported the following income statement: Sales $520,000 Cost of goods sold $340,000 Gross profit $180,000 Depreciation expense $ 18,000 Wage expense $100,000 Interest expense $ 4,000 Rent expense $ 2,000 Operating income $ 56,000 Income tax expense $ 3,000 Net income $ 53,000 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) 300 (200 x ($10 x .15) Dividend payable 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