Accounting 220 Help Week 7- Chapter 13

week_7_chapter_13.xls

Home >Business & Finance homework help >Accounting homework help >Accounting 220 Help Week 7- Chapter 13

B-13.01

On April 1, 20X4, Rojas purchased land by giving $100,000 in cash and executing a $400,000 note payable to the former owner. The note bears interest at 10% per annum, with interest being payable annually on March 31 of each year. Rojas is also required to make a $100,000 payment toward the note's principal on every March 31.

(a)		Prepare the appropriate journal entry to record the land purchase on April 1, 20X4.

(b)		Prepare the appropriate journal entry to record the year-end interest accrual on December 31, 20X4.

(c)		Prepare the appropriate journal entry to record the payment of interest and principal on March 31, 20X5.

(d)		Prepare the appropriate journal entry to record the year-end interest accrual on December 31, 20X5.

(e)		Prepare the appropriate journal entry to record the payment of interest on March 31, 20X6.

&R&"Myriad Web Pro,Bold"&20B-13.01

B-13.01

Worksheet B-13.01

(a), (b), (c), (d), (e)
	GENERAL JOURNAL
	Date	Accounts	Debit	Credit
	04-01-X4




	12-31-X4



	03-31-X5





	12-31-X5



	03-31-X6

&L&"Myriad Web Pro,Bold"&12Name: Date: Section: &R&"Myriad Web Pro,Bold"&20B-13.01

B-13.01

B-13.02

Review the discussion on future value from the textbook, and complete the following requirements (you will find it helpful to access the future value tables hyper-linked within the online version of the textbook).
(a)	Prepare basic calculations showing how much a lump sum of $10,000 invested at 7% per year will become after 6 years. For this requirement, do not refer to the future value table.
(b)	Verify your answer to part (a) by utilizing the appropriate future value factor from the applicable table.
(c)	Construct a table of basic calculations showing how much $10,000 invested every year (as of the beginning of each year) at 7% per year will become after 6 years. For this requirement, you may refer to the future value table for $1 (but do not utilize the annuity table).
(d)	Verify your answer to part (c) by utilizing the annuity future value factor from the applicable table.

B-13.02

Worksheet B-13.02

(a) 7% interest, and 6 periods:




(b) 7% interest, and 6 periods:
	The future value factor from the table is


(c)

		Year of Investment	Future Value Factor From Table	Payment	Value of Payment at end of 6th Year
		1 (amount will be invested 6 years)		$10,000	$ - 0
		2 (amount will be invested 5 years)		$10,000	- 0
		3 (amount will be invested 4 years)		$10,000	- 0
		4 (amount will be invested 3 years)		$10,000	- 0
		5 (amount will be invested 2 years)		$10,000	- 0
		6 (amount will be invested 1 year)		$10,000	- 0
					$ - 0



(d) 7% interest, and 6 periods:
	The future value factor from the annuity table is

B-13.01

The formula in excel is: = 10000 * 1.07 ^ 6 Note the symbol (^) that is used to raise a value to a power

B-13.03

Review the discussion on present value from the textbook, and complete the following requirements (you will find it helpful to access the present value tables hyper-linked within the online version of the textbook).
(a)	Prepare basic calculations showing the current value of a $25,000 sum to be received in 4 years. You may assume that 6% is the appropriate discount rate. For this requirement, do not refer to the present value table.
(b)	Verify your answer to part (a) by utilizing the appropriate present value factor from the applicable table.
(c)	Construct a table of basic calculations showing how much an annuity of $25,000 received at the end of each year for four years is worth today. Assume a 6% discount rate. For this requirement, you may refer to the present value table for $1 (but, do not utilize the annuity table).
(d)	Verify your answer to part (c) by utilizing the annuity present value factor from the applicable table.

B-13.03

Worksheet B-13.03

(a) 6% interest, and 4 periods:




(b) 6% interest, and 4 periods:
	The present value factor from the table is


(c)


		Year	Present Value Factor From Table	Payment	Value of Payment at beginning of 1st Year
		1 (amount will be received in 1 year)		$25,000	$ - 0
		2 (amount will be received in 2 years)		$25,000	- 0
		3 (amount will be received in 3 years)		$25,000	- 0
		4 (amount will be received in 4 years)		$25,000	- 0
					$ - 0



(d) 6% interest, and 4 periods:
	The present value factor from the annuity table is

B-13.03

The formula in excel is: = 25000 * (1/1.06 ^ 4) Note the symbol (^) that is used to raise a value to a power

B-13.04

On January 1, 20X5, Juan Silvia borrowed $500,000 to purchase a new office building. The loan is to be repaid in 2 equal annual payments, beginning December 31, 20X5. The annual interest rate on the loan is 9%.

(a)		Calculate the annual payment on the loan.

(b)		Prepare the appropriate journal entries to record the loan and subsequent payments at the end of 20X5 and 20X6.

(c)		If the loan was to be repaid in 24 equal monthly payments (0.75% interest rate per month), how much would the monthly payment equal?

B-13.04

Worksheet B-13.04

(a)
	Loan Amount = Payments X Annuity Present Value Factor




(b)
	GENERAL JOURNAL
	Date	Accounts	Debit	Credit
	1-Jan	Building	500,000.00
		Note Payable		500,000.00
		To record purchase of office building for 9% note payable

	31-Dec	Interest Expense
		Note Payable
		Cash
		To record payment

	31-Dec	Interest Expense
		Note Payable
		Cash
		To record payment


(c)
	Loan Amount = Payments X Annuity Present Value Factor

B-13.04

B-13.05

The contractual conditions of specific bond issues vary. Therefore, it becomes important to understand exactly what is meant by the terminology used to describe a bond agreement. Every sentence in the following narrative contains a misstatement. Mark up and correct the narrative. The blank worksheet can be used to facilitate your answering this question.

The specific terms of a bond issue are specified in a bond debenture. Secured bonds are backed up only by the general faith and credit of the issuer. Computerization has resulted in the virtual elimination of registered bonds. Serial bonds must be matched with funds set aside in a fund to provide for the eventual retirement of the issue. Callable bonds can be exchanged for common stock of the issuer. Low-yield bonds of distressed firms are frequently called junk bonds. Bonds will sell at a premium when the effective rate is above the stated rate.

B-13.05

Worksheet B-13.05

B-13.05

B-13.06

Ace Brick company issued $100,000 of 5-year bonds. The bonds were issued at par on January 1, 20X1, and bear interest at a rate of 8% per annum, payable semiannually.
(a)	Prepare the journal entry to record the bond issue on January, 20X1.
(b)	Prepare the journal entry that Ace would record on each interest date.
(c)	Prepare the journal entry that Ace would record at maturity of the bonds.
(d)	How much cash flowed "in" and "out" on this bond issued, and how does the difference compare to total interest expense that was recognized?

B-13.06

Worksheet B-13.06

(a)(b)(c)
	GENERAL JOURNAL
	Date	Accounts	Debit	Credit
	Issue



	Interest



	Maturity




(d)

B-13.06

B-13.07

Horton Micro Chip Company issued $100,000 of face amount of 6-year bonds on January 1, 20X1. The bonds were issed at 103, and bear interest at a stated rate of 8% per annum, payable semiannually. The premium is amortized by the straight-line method.
(a)	Prepare the journal entry to record the initial issue on January, 20X1.
(b)	Prepare the journal entry that Horton would record on each interest date.
(c)	Prepare the journal entry that Horton would record at maturity of the bonds.
(d)	How much cash flowed "in" and "out" on this bond issue, and how does the difference compare to total interest expense that was recognized?

B-13.07

Worksheet B-13.07

(a)(b)(c)
	GENERAL JOURNAL
	Date	Accounts	Debit	Credit
	Issue




	Interest




	Maturity





(d)

B-13.07

B-13.08

Erik Food Supply Company issued $100,000 of face amount of 4-year bonds on January 1, 20X1. The bonds were issued at 98, and bear interest at a stated rate of 8% per annum, payable semiannually. The discount is amortized by the straight-line method.
(a)	Prepare the journal entry to record the initial issuance on January, 20X1.
(b)	Prepare the journal entry that Erik would record on each interest date.
(c)	Prepare the journal entry that Erik would record at maturity of the bonds.
(d)	How much cash flowed "in" and "out" on this bond issue, and how does the difference compare to total interest expense that was recognized?

B-13.08

Worksheet B-13.08

(a)(b)(c)
	GENERAL JOURNAL
	Date	Accounts	Debit	Credit
	Issue




	Interest




	Maturity





(d)

B-13.08

B-13.09

Standard Atlantic Shipping issued $5,000,000, face amount, of 7% bonds on January 1, 20X3. The bonds are 5-year bonds, and Interest is payable every 6 months. At the time of issue, the market rate of interest was only 6%, so the bonds were issued at a premium.
(a)	Prepare calculations showing that issue price was approximately $5,213,235.
(b)	Use the effective-interest method of amortization, and prepare the journal entries that Standard Atlantic Shipping would record on January 1, 20X3, June 30, 20X3, and December 31, 20X3.
(c)	Show how the bonds would appear on Standard Atlantic Shipping's December 31, 20X3 balance sheet.

B-13.09

Worksheet B-13.09

(a)






(b)
	GENERAL JOURNAL
	Date	Accounts	Debit	Credit
	1-Jan




	30-Jun




	31-Dec






(c)	Bonds payable
	Plus: Premium on bonds payable

B-13.09

B-13.10

Standard Pacific Shipping issued $5,000,000, face amount, of 5% bonds on January 1, 20X3. The bonds are 5-year bonds, and Interest is payable every 6 months. At the time of issue, the market rate of interest was 6%, so the bonds were issued at a discount.
(a)	Prepare calculations showing that issue price was approximately $4,786,725.
(b)	Use the effective-interest method of amortization, and prepare the journal entries that Standard Pacific Shipping would record on January 1, 20X3, June 30, 20X3, and December 31, 20X3.
(c)	Show how the bonds would appear on Standard Pacific Shipping's December 31, 20X3 balance sheet.

B-13.10

Worksheet B-13.10

(a)






(b)
	GENERAL JOURNAL
	Date	Accounts	Debit	Credit
	1-Jan




	30-Jun




	31-Dec






(c)	Bonds payable
	Less: Discount on bonds payable

B-13.10

B-13.11

My Chase is devoted to tracking the performance of amateur athletes. The company issued $1,000,000 face amount of 9% bonds. The bonds were dated January 1, 20X4, and pay interest on June 30 and December 31 of each year. The initial bond offering was delayed until March 1, 20X4, and the issue price was 100 plus accrued interest.
(a)	Prepare the journal entry to record the bond issue on March 1, 20X4.
(b)	Prepare the journal entry that My Chase would record on June 30, 20X4.
(c)	Prepare the journal entry that My Chase would record on December 31, 20X4.

B-13.11

Worksheet B-13.11

(a)(b)(c)
	GENERAL JOURNAL
	Date	Accounts	Debit	Credit
	1-Mar




	30-Jun




	31-Dec

B-13.11

B-13.12

Clear Water Coffee issued $100,000 of 7% bonds on January 1, 20X1. The bonds were issued at par and pay interest on June 30 and December 31 of each year. By December 31, 20X5, the market rate of interest had increased, and Clear Water was able to reacquire and retire the bonds for $97,500, plus accrued interest.

Prepare the journal entry to record the interest payment and bond retirement on December 31, 20X5.

B-13.12

Worksheet B-13.12


GENERAL JOURNAL
Date	Accounts	Debit	Credit
31-Dec



31-Dec

B-13.12

B-13.13

Jacob Joseph has identified five different companies in which he is interested in investing, based upon their products and prospects. However, Jacob is concerned about a general economic downturn and desires to invest in companies with the lowest debt exposure. Following is a list of the data for the five potential investments. Jacob has compiled the data and has ranked the companies based upon total debt. He has requested your help in evaluating the risk profiles for each company.
To complete your evaluation, you need to know that each company faces an income tax rate that is equivalent to 30% of income before taxes (which also means that net income is 70% of income before taxes). In addition, assume that each company incurs an average interest cost that is 8% of total debt.
		Total Assets	Total Liabilities	Net Income
	A	$ 10,000,000	$ 1,000,000	$ 200,000
	B	20,000,000	3,000,000	1,000,000
	C	6,000,000	4,000,000	250,000
	D	15,000,000	6,000,000	1,600,000
	E	30,000,000	22,000,000	4,000,000


(a)	Calculate the debt to total asset ratio, and reorder the list from least risky to most risky, based upon that ratio.
(b)	Calculate the debt to equity ratio, and reorder the list from least risky to most risky, based upon that ratio.
(c)	Calculate the times interest earned ratio, and reorder the list from least risky to most risky, based upon that ratio.
(d)	Do the ratios suggest that risk is a function of total debt, or other factors? Do all the ratios produce the same signals?

B-13.13

Worksheet B-13.13

(a)
	Total Assets	Total Liabilities	Total Debt/ Total Assets





(b)
	Total Assets	Total Liabilities	Total Equity (Assets - Liabilities)	Total Debt/ Total Equity





(c)
	Net Income	Income Before Tax (Net income/ 70%)	Interest Expense (Total Liabilities X 8%)	Income Before Tax and Interest	Income Before Interest and Tax/ Interest

B-13.13

B-13.14

Mike Davis Company entered into two lease agreements. One lease was for office space and the other was for office equipment.
The office space lease is not a capital lease. It is an operating lease because the risks and rewards of owning the property remain with the lessor (owner of the property). The lease agreement is for 5 years and provides for monthly payments of $2,500. These rent payments are charged to rent expense as incurred. No liability is recorded for the lease contract.
The office equipment lease is a capital lease. This lease is also for 5 years. Payments at the end of each month are $2,500, and their present value at the inception of the lease is $112,388. The interest rate implicit in the lease is 1% per month.
(a)	Prepare the journal entry needed to record a payment under the office space lease.
(b)	Prepare the initial journal entry to record the office equipment lease.
(c)	Prepare the journal entries necessary to record the first and second payments under the office equipment lease.
(d)	Assuming straight-line depreciation over 60 months, prepare the journal entry to record monthly depreciation of the office equipment.
(e)	How would the financial reporting differ for the office space versus the office equipment?

B-13.14

Worksheet B-13.14

(a)(b)(c)(d)
	GENERAL JOURNAL
	Date	Accounts	Debit	Credit
	(a)



	(b)



	(c)









	(d)





(e)

B-13.14

I-13.03

On January 1, 20X2, Paisley Corporation issued $2,000,000 face amount of 6% bonds. These bonds are dated January 1, and mature in 6 years, with semiannual interest payments. The market rate of interest at the time of issue was 5%, and the bonds priced at $2,102,578. Paisley uses the effective-interest method of amortization.
(a)		Prepare a 6-year amortization table for Paisley's bonds.
(b)		Prepare 20X2's entries for these bonds; specifically, the initial bond issuance, the June 30 interest payment, and the December 31 interest payment.
(c)		Demonstrate the appropriate balance sheet presentation for the bonds, as of December 31, 20X4.

I-13.03

Worksheet I-13.03

(a)

(b)

GENERAL JOURNAL

Date

Accounts

Debit

Credit

Period Ending

Beginning of Period Net Book Value of Bonds Payable

Interest Expense (Net Book Value X 5% X 6/12)

Amount of Payment

Premium Amortization (payment minus expense)

End of Period Net Book Value (beginning balance less amortization)

1-Jan

6-30-X2

$ 2,102,578

12-31-X2

6-30-X3

12-31-X3

6-30-X4

30-Jun

12-31-X4

6-30-X5

12-31-X5

6-30-X6

12-31-X6

31-Dec

6-30-X7

12-31-X7

(c)

Bonds payable

$ -

Plus: Unamortized premium on bonds payable

$ -

I-13.03(a)

I-13.03(b)(c)

I-13.04

On January 1, 20X3, Daisy Corporation issued $5,000,000 face amount of 6% bonds. These bonds are dated January 1, and mature in 5 years, with semiannual interest payments. The market rate of interest at the time of issue was 7%, and the bonds priced at $4,792,085. Daisy uses the effective-interest method of amortization.
(a)		Prepare a 5-year amortization table for Daisy's bonds.
(b)		Prepare 20X3's entries for these bonds; specifically, the initial bond issuance, the June 30 interest payment, and the December 31 interest payment.
(c)		Demonstrate the appropriate balance sheet presentation for the bonds, as of December 31, 20X5.

I-13.04

Worksheet I-13.04

(a)

(b)

GENERAL JOURNAL

Date

Accounts

Debit

Credit

Period Ending

Beginning of Period Net Book Value of Bonds Payable

Interest Expense (Net Book Value X 7% X 6/12)

Amount of Payment

Discount Amortization (expense minus payment)

End of Period Net Book Value (beginning balance plus amortization)

1-Jan

6-30-X3

$ 4,792,085

12-31-X3

6-30-X4

12-31-X4

6-30-X5

30-Jun

12-31-X5

6-30-X6

12-31-X6

6-30-X7

12-31-X7

31-Dec

(c)

Bonds payable

$ -

Less: Unamortized discount on bonds payable

$ -

I-13.04(a)

I-13.04(b)(c)