Intermediate Accounting II (ACCT 342/542)

Winter, 2014
Exam 2 Solutions
Question 1

(1) The proceeds from issuing $5,000,000 of bonds on January 1, 2014, with annual cash interest
payments (first payment due December 31, 2014) and due in 10 years (December 31, 2023). The
bonds have a yield rate 6% and a coupon rate of 8%.

PV ? = 5,747,896
FV 5,000,000 (maturity value)
N 40 = 10*4
I 1.5 = 6/4
pmt 100,000 = 5,000,000*.08*3/12
type end

PV ? = 5,736,009
FV 5,000,000 (maturity value)
N 10
I 6
pmt 400,000 = 5,000,000*.08
type end

(2) The proceeds from issuing $900,000 of serial bonds on January 1, 2014 with annual cash
interest payments (first payment due on December 31, 2014). The bonds have a yield rate 9% and a
coupon rate of 7%. $300,000 of the bonds mature on December 31, 2017, four years from the date
of issue. Another $300,000 of the bonds mature on December 31, 2018, five years from the date of
issue. The final $300,000 of the bonds mature on December 31, 2019, six years from the date of
issue.

PV ? = 280,562 PV ? = 276,662 PV ? = 273,084 280,562

FV 300,000 FV 300,000 FV 300,000 + 276,662
N 4 N 5 N 6 + 273,084
I 9 I 9 I 9 830,308
pmt 21,000 pmt 21,000 pmt 21,000
type end type end type end

(3) The maturity value of a six year bond issue. The bonds call for semi-annual interest payments of
$400,000. When the bonds were issued on January 1, 2014, the yield rate was 10%. The coupon
rate is 8%.

cash interest payment = maturity value * coupon rate

400,000 = maturity value * .08 * 6/12
400,000 = maturity value *.04
400,000 / .04 = maturity value = 10,000,000
Question 2 On January 1, 2014, Alex, Inc., issued 7% coupon bonds with a total maturity value of
$600,000 for $651,954. Interest is payable annually on December 31, and the bonds are issued to yield
5%. These are five year bonds, with a maturity date of December 31, 2018.

1. Prepare a bond amortization table.

Proceeds 651,954
Maturity 600,000
Total # pmts 5
Yield rate 0.05
Coupon rate 0.07
Payment 42,000

Date Tot Pmt Interest Amort Balance

01/01/14 651,954
12/31/14 42,000 32,598 9,402 642,552
12/31/15 42,000 32,128 9,872 632,680
12/31/16 42,000 31,634 10,366 622,314
12/31/17 42,000 31,116 10,884 611,430
12/31/18 42,000 30,570 11,430 600,000

2. Prepare journal entries for 2014 (year 1) and 2015 (year 2).

1/1/14 Cash 651,954

Bonds payable 651,954

12/31/14 Interest expense 32,598

Bonds payable 9,402
Cash 42,000

12/31/15 Interest expense 32,128

Bonds payable 9,872
Cash 42,000

Total Current Long-term Operating Non-op Operating Investing Financing

Liability Liability Liability Income Income Activities Activities Activities

2014 642,552 40,000 602,552 0 –32,598 –42,000 0 651,954

2015 632,680 40,000 592,680 0 –32,128 –42,000 0

2016 622,314 40,000 582,314 0 –31,634 –42,000 0

2017 611,430 611,430 0 0 –31,116 –42,000 0

2018 0 0 0 0 –30,570 –42,000 0 –600,000

Computations:
2014 TL 642,552 = 12/31/14 loan balance
2014 CL 40,000 = PV of 2015 cash interest payment of 42,000
2014 LtL 602,552 = TL ! CL
2014 Op Inc = 0, because interest expense goes in non op income
2014 NonOp Inc = Interest expense
2014 OA = cash interest payment –40,000 (negative because it is a payment out)
2014 FI = amount borrowed +651,954 (positive because it is a receipt of cash)

Question 3 Bonds issued with assistance of investment banker The Cesar Company issues bonds on
January 1, 2014, priced to yield 9%. The bonds have a maturity value of $5,000,000, and call for annual
interest payments of 10% on December 31 of each year, starting on December 31, 2014. These are five
year bonds, maturing on December 31, 2018. After selling the bonds to the investing public, the
investment banker withholds 17% of the gross proceeds as its fee (forwarding 83% of the proceeds to
Cesar).

1. Compute the net proceeds to Cesar (after deducting investment banker fee) from the bond issue.

2 Prepare Cesar’s bond amortization table that will assist in the accounting for the bond issue. Be
sure to designate which interest rate is used for which purpose. Round all amounts to dollars.

Bond proceeds (PV) 5,194,483 883,062 4,311,421 <--Corp proceeds

Maturity value (FV) 5,000,000 IB fee 5,000,000
Years 5 5
Periods / year 1 1
Total periods (N) 5 5
Yield rate (I) 9.000000% 14.012655% <--new rate
Coupon rate 10.000000% 10.000000%
Payment (FV*coup rate) 500,000 500000
Bond Pay
Date Cash pmt Interest Amort. Balance
01/01/14 4,311,421
12/31/14 500,000 604,145 104,145 4,415,566
12/31/15 500,000 618,738 118,738 4,534,304
12/31/16 500,000 635,376 135,376 4,669,680
12/31/17 500,000 654,346 154,346 4,824,026
12/31/18 500,000 675,974 175,974 5,000,000
Question 4 Bond year … fiscal year. On October 1, 2014, Devon issued five year bonds with a maturity
value of $6,000,000 for $5,753,988. The bonds pay 6% interest each October 1 (starting October 1,
2015), and were sold to yield 7%. Devon’s fiscal year ends on December 31.

1. Prepare a bond amortization table.

Date Cash Interest Exp Amortization Balance of BP

10/1/2014 5,753,988
10/1/2015 360,000 402,779 42,779 5,796,767
10/1/2016 360,000 405,774 45,774 5,842,541
10/1/2017 360,000 408,978 48,978 5,891,519
10/1/2018 360,000 412,406 52,406 5,943,925
10/1/2019 360,000 416,075 56,075 6,000,000

2. Prepare journal entries for the following dates:

10/1/14 Cash 5,753,988

Bonds payable 5,753,988

12/31/14 Interest expense 100,695

Bonds payable 10,695
Interest payable 90,000

10/1/15 Interest payable 90,000

Interest expense 302,084
Bonds payable 32,084
Cash 360,000

12/31/15 Interest expense 101,444

Bonds payable 11,444
Interest payable 90,000

10/1/16 Interest payable 90,000

Interest expense 304,330
Bonds payable 34,330
Cash 360,000
3. How will the bonds will be reported on the financial statements for the years ended
December 31, 2014
December 31, 2015
December 31, 2016
December 31, 2017

Total Current Total Current Long-term

Liability Liability Liability Liability Liability
Oct 1 Oct 1 Dec 31 Dec 31 Dec 31

2014 5,753,988 336,449 5,854,683 342,337 5,512,346

2015 5,796,767 336,449 5,898,210 342,337 5,555,873

2016 5,842,541 336,449 5,944,785 342,337 5,602,445

2017 5,891,519 336,419 5,994,621 342,337 5,652,284

Operating Non-op Operating Investing Financing

Income Income Activities Activities Activities

2014 0 100,695 0 0 +5,753,988

2015 0 403,528 –360,000 0 0

2016 0 406,579 –360,000 0 0

2017 0 409,835 –360,000 0 0

2014 2015 2016 2017

402,779 3/12 100,695 9/12 302,084

405,774 3/12 101,444 9/12 304,330

408,978 3/12 102,245 9/12 306,733

412,406 3/12 103,102

105,695 403,528 406,579 409,835

Question 5 Assignment of Accounts Receivable. Specific customer accounts receivable totaling
$3,000,000 were assigned to Ethan Finance Company by Scott Retail, Inc. as collateral for a $2,000,000
loan. Customers continue to pay Scott Retail, and Scott Retail pays the finance company for charges,
interest and loan paydown. At the time of the loan, the Ethan Finance disburses to Scott Retail loan
amount less a four percent finance charge on the amount of the loan.

The journal entry or entries at the time of the loan for assigning the accounts receivable and the transfer of
cash.

Beg 1st mo Cash 1,920,000

Finance expense 80,000
Notes payable 2,000,000

During the first month, Scott Retail collected $500,000 on the assigned accounts. This amount is remitted
to the finance company for payment of one month’s interest (1.5% interest on the unpaid loan balance
from the start of the month) and principal paydown.

The journal entry or entries at the end of the first month recording Scott Retail’s cash collection and the
transfer of cash to Ethan Finance.

End 1st mo Cash 500,000

Accounts receivable 500,000

Notes payable 470,000

Interest expense 30,000
Cash 500,000

During the second month, Scott Retail collected $900,000 on the assigned accounts. This amount (could
be less if not all if needed to repay the remaining loan balance) is remitted to the finance company for
payment of one month’s interest (1.5% interest on the unpaid loan balance from the start of the month)
and principal paydown.

The journal entry or entries at the end of the second month recording Scott Retail’s cash collection and the
transfer of cash (if needed) to Ethan Finance.

End 2nd mo Cash 900,000

Accounts receivable 900,000

Notes payable 877,050

Interest expense 22,950
Cash 900,000
During the third month, Scott Retail collected $800,000 on the assigned accounts. This amount (could be
less, could be all if needed to repay the remaining loan balance) is remitted to the finance company for
payment of one month’s interest (1.5% interest on the unpaid loan balance from the start of the month)
and principal paydown.

The journal entry or entries at the end of the third month recording Scott Retail’s cash collection and the
transfer of cash (if needed) to Ethan Finance.

End 3rd mo Cash 800,000

Accounts receivable 800,000

Notes payable 652,950

Interest expense 9,794
Cash 662,744

During the fourth month, Scott Retail collected $800,000 on the assigned accounts. This amount (could
be less, could be all if needed to repay the remaining loan balance) is remitted to the finance company for
payment of one month’s interest (1.5% interest on the unpaid loan balance from the start of the month)
and principal paydown.

The journal entry or entries at the end of the fourth month recording Scott Retail’s cash collection and the
transfer of cash (if needed) to Ethan Finance.

End 4th mo Cash 800,000

Accounts receivable 800,000
Question 6 Factoring Accounts Receivable. On June 1, 2014, the Reggie Company factors (sells)
$300,000 of accounts receivable to a finance company on a with recourse basis. Reggie’s customers are
instructed to make payments to the finance company. The finance pays 82% of the accounts receivable to
Reggie. However, Reggie agrees to recompense the finance company in the future for any uncollectible
accounts, up to a maximum of $9,000. It is likely that Reggie will have to pay all $9,000.

1. Compute the amount of gain or loss that Reggie must recognize on the sale of the receivables.

Proceeds 246,000
Future payout –9,000
Net proceeds 237,000
less Book Value –300,000
loss –63,000

2. Write the journal entry that records for the sale of the receivables.

Cash 246,000
Loss 63,000
Due to factor 9,000
Accounts receivable 300,000

3. Write the journal entry for two months later when Reggie makes good on its recourse promise and
pays $9,000 to the finance company.

Due to factor 9,000

Cash 9,000