On January 1, 2009, Clintwood Corporation issued a $1,000, ten-year, 10% bond payable (interest payable each December 31). For the three assumptions below, provide the following information assuming the accounting year ends December 31, and straight-line amortization is used: Assumption A – Bonds issued at 100 Assumption B – Bonds issued at 96 Assumption C – Bonds issued at 104

Module Seven

 

Notes:

• Complete your solutions within this template. Copy and paste tables from Excel as needed.
• Show all steps used in arriving at the final answers. Incomplete solutions will receive partial credit.

 

Problem 1

Assume the following transactions occurred during the year. The annual accounting period ends on December 31.

 

Jan. 15	Purchased and paid for merchandise for resale at an invoice cost of $15,600. A periodic inventory system is used.
Apr. 1	Borrowed $800,000 from a bank for general use, executing a one-year, 5% note payable
June 14	Received a $12,000 customer deposit for services to be performed in the future.
July 15	Performed $4,250 of the services paid for on June 14.
Dec. 15	Received an electric bill for $25,680. The bill will be paid in early January.
Dec. 31	Determined wages owed to employees to be $13,500 that will be paid on January 2.

 

Required:

1. Prepare journal entries for each of the transactions listed.
2. Prepare any required adjusting entries on December 31.

 

 

Problem 2

On January 1, a company completed the following transactions.

1. Borrowed $100,000 for six years. Interest payments of $6,200 will be due at the end of each year and the $100,000 will be repaid at the end of the sixth year.
2. Established a plant fund of $390,000 to be available at the end of year seven. A single amount will be deposited today to grow to $390,000.
3. Agreed to a buyout package for a former executive. The company will pay $80,000 at the end of the first year; $120,000 at the end of the second year; and $165,000 at the end of the third year.

 

Required (assume a 6% annual rate for all transactions and round to the nearest dollar):

1. For transaction a, determine the present value of the debt.
2. For transaction b, determine the amount that must be deposited on January 1. How much interest revenue will be earned over the six years?
3. For transaction c, determine the present value of the obligation.

 

Problem 3

A company issued a $50,000 four-year, 4% bond on January 1. Bond interest is paid each December 31. The bond was sold to yield 5%.

 

Required:

Complete a bond amortization schedule for the life of the bond using the effective interest method.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Problem 4

A company with an annual accounting year ending on December 31 issued bonds on January 1 in the amount of $500,000 maturing in 10 years with interest payable each June 30 and December 31 at a 6% annual rate. The company uses straight-line amortization for any bond discounts or premiums.

 

Required:

Provide the following amounts to be reported in the company financial statements at the end of year one under each scenario.

 

	Issued at Par	Issued at 99	Issued at 102
Interest expense
Bonds payable
Unamortized premium or discount
Net bond liability
Cash interest paid

 

 

Problem 5

A corporation was formed on January 1 and was authorized to issue 400,000 shares of common stock at $2 par value. During the first year of operations, the company earned $325,000 and the following transactions occurred:

1. Sold 150,000 shares of common stock in an initial public offering of $15 per share
2. Repurchased 35,000 shares of previously common stock at $20 to be held as treasury shares.
3. Resold 5,000 of the treasury stock at $22 per share.
4. Market price of the outstanding shares on December 31 was $25

 

Required:

Prepare the stockholders’ equity section of the balance sheet at December 31 of the first year.

 

 

 

 

Problem  6
	A company has a current ratio of 1.9 before paying off a large current liability with cash. Following this payment, the current ratio will be:
	A. Greater than 1.9 B. Less than 1.9 C. Equal to 1.9 D. Greater than 1.9 or less than 1.9 depending upon the dollar amount involved

 

Problem  7
	The following is a partial list of account balances from the books of Probst Enterprise at the end of 2009: Accounts Payable $20,500 Accounts Receivable $12,300 Accrued Vacation Liability $1,200 Cash $6,500 Deferred Revenue $1,300 Income Taxes Payable $1,900 Notes Payable (due in 2 years) $10,000 Based solely upon these balances, the amount of current liabilities appearing on Probst Enterprise's 2009 year-end balance sheet should be:
	A. $24,900 B. $24,100 C. $23,700 D. $20,500

 

Problem  8
	Which of the following would most likely cause an increase in the current ratio?
	A. A short-term borrowing of $100. B. A purchase of $100 of inventory for cash. C. A $100 payment to suppliers thereby reducing accounts payable. D. A $100 receipt of cash from a customer's accounts receivable.

 

Problem  9
	Purdum Farms borrowed $10 million by signing a five year note on January 1, 2009 and repayments of the principle are payable annually in $2 million dollar installments. Purdum Farms makes the first payment December 31, 2009 and then prepares its balance sheet. What amount will be reported as current and long-term liabilities respectively in connection with the note at December 31, 2009?
	A. $2 million in current liabilities and $8 million in long-term liabilities. B. $2 million in current liabilities and $6 million in long-term liabilities. C. Zero in current liabilities and $8 million in long-term liabilities. D. Zero in current liabilities and $10 million in long-term liabilities.

 

Problem  10
	Which of the following is an advantage of issuing bonds versus issuing stock to finance expansion?
	A. Stockholders remain in control as bondholders cannot vote or share in the company's earnings. B. Interest expense is tax deductible but dividends are not. C. Money can usually be borrowed at a lower rate and then invested to earn a higher return on assets. D. All answers are advantages.

 

Problem  11
	Halverson's times interest earned ratio was 2.98 in 2009, 2.79 in 2008, and 2.31 in 2007. Which of the following statements about their ratio is correct?
	A. Their increasing ratio indicates decreasing levels of debt on which interest is incurred. B. Their increasing ratio indicates their strategy of pursuing growth by investment in other companies which has increased debt but their profits have not yet increased from those investments. C. The higher ratio was adversely affected by the net loss they reported in 2007. D. Their increasing ratio would be considered by creditors to be an indicator of higher risk.

 

Problem  12
	Gammell Company issued $50,000 bonds payable, 9% annual interest, maturity in ten years. The bonds were issued at $48,000. Gammel Company uses straight-line amortization. The amount of interest expense each full year would be:
	A. $4,700 B. $4,300 C. $4,500 D. $4,680

 

Problem  13
	On January 1, 2009, Dorley Corporation issued $1 million of bonds for $1,073,613 when the market rate of interest was 6%. They are 10-year bonds paying 8% interest annually. If Dorley Corporation is using the straight-line amortization method, interest expense on December 31, 2009 will be:
	A. $80,000 B. $60,000 C. $87,361 D. $72,639

 

	Problem  14
	On January 1, 2009, Clintwood Corporation issued a $1,000, ten-year, 10% bond payable (interest payable each December 31). For the three assumptions below, provide the following information assuming the accounting year ends December 31, and straight-line amortization is used: Assumption A – Bonds issued at 100 Assumption B – Bonds issued at 96 Assumption C – Bonds issued at 104 @100 @96 @104 Cash Received at Issuance Interest Expense for 2009 Net bond carrying value on December 31, 2010

 

Problem  15
	On January 1, 2009, Schultz Corporation issued $100,000 of its ten-year, 6% bonds payable at $98,000. The bonds were dated January 1, 2009, and interest is paid each December 31. A. Give the entry for the sale of the bonds. B. Give the entry to record the first interest payment. Assume straight-line amortization.

 

 

Problem 16

A company starts with $40,000 cash and receives 2,000 shares of common stock. The first year of operations ended on December 31^st, with additional financial items given below. No dividends were declared or paid during the year. Complete the balance sheet as of the end of the year. Then determine the amount of net income.

                Cash: $22,100

                Amount due from customers: $8,000

                Office supplies and equipment: $25,000

                Amounts owed: $7,000

                One-year note payable to bank: $1,000

	Balance Sheet
	At December 31st
Assets			Liabilities
Cash			Accounts payable
Accounts receivable			Note payable
Office supplies & equipment			Interest payable	70
			Total Liabilities
			Stockholders’ Equity
			Contributed Capital
			Retained Earnings	7,030
			Total stockholders’ equity
Total Assets			Total liabilities & stockholders’ equity

 

 

Problem  17

Compute the missing amounts in the table below.

Company	Total Revenue	Total Expenses	Net Income	Total Assets	Total Liabilities	Stockholder's Equity
1	$122,740	$145,200		$217,200	$84,200
2		144,810	47,950	401,000		67,500
3	24,770		7,840		159,170	45,000

Problem  18

The end of the first year financial data for a company is shown below.  Construct a summarized income statement for the year, a statement of retained earnings for the year, and a balance sheet at December 31^st of that year.

Cash	$34,300
Receivables from customers	15,120
Inventory	113,400
Equipment owned, at cost less used portion	56,980
Accounts payable	64,596
Salary payable for the year	2,520
Revenue from sales	176,400
Expenses (excluding income taxes)	112,280
30% Income tax expense
Contributed capital	121,800
Dividends declared	14,000

Problem  19

Given the following, calculate the income and cash inflow.

(a)    $27,000 for services performed for customers; $9,000 remained uncollected at the end of the quarter

(b)   Cash borrowed from a bank, $42,500 (one-year note)

(c)    Wages earned by employees, $15,000, of which one-third remained unpaid at the end of the quarter

(d)   $5,000 worth of equipment purchased at the end of the quarter to be used starting next year

(e)   Other operating expenses, $21,000, of which $4,500 remains unpaid at the end of the quarter

 

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