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    Lab Solutions - Chapter 5 and 7

    Uploaded by

    Abdullah alhamaad
    This document contains 14 problems related to accounting for investments, bonds, loans, and accounts receivable. Problem 10 provides the most detail, outlining how to value bonds that were issued at a premium. It explains that the issuer will make semi-annual interest payments at 11% over 15 years, then repay the $3 million face value. Given a market rate of 10%, the bonds should be valued at $3.23 million, above face value since the stated rate is higher than market. Problem 14 calculates bad debt expense for a company using the balance sheet method, increasing the allowance account by $3,141 based on the desired ending balance.

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    © All Rights Reserved
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    Lab Solutions - Chapter 5 and 7

    Uploaded by

    Abdullah alhamaad
    36 views5 pages
    This document contains 14 problems related to accounting for investments, bonds, loans, and accounts receivable. Problem 10 provides the most detail, outlining how to value bonds that were issued at a premium. It explains that the issuer will make semi-annual interest payments at 11% over 15 years, then repay the $3 million face value. Given a market rate of 10%, the bonds should be valued at $3.23 million, above face value since the stated rate is higher than market. Problem 14 calculates bad debt expense for a company using the balance sheet method, increasing the allowance account by $3,141 based on the desired ending balance.

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    Financial Accounting

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    This document contains 14 problems related to accounting for investments, bonds, loans, and accounts receivable. Problem 10 provides the most detail, outlining how to value bonds that were issued at a premium. It explains that the issuer will make semi-annual interest payments at 11% over 15 years, then repay the $3 million face value. Given a market rate of 10%, the bonds should be valued at $3.23 million, above face value since the stated rate is higher than market. Problem 14 calculates bad debt expense for a company using the balance sheet method, increasing the allowance account by $3,141 based on the desired ending balance.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    36 views5 pages

    Lab Solutions - Chapter 5 and 7

    Uploaded by

    Abdullah alhamaad
    This document contains 14 problems related to accounting for investments, bonds, loans, and accounts receivable. Problem 10 provides the most detail, outlining how to value bonds that were issued at a premium. It explains that the issuer will make semi-annual interest payments at 11% over 15 years, then repay the $3 million face value. Given a market rate of 10%, the bonds should be valued at $3.23 million, above face value since the stated rate is higher than market. Problem 14 calculates bad debt expense for a company using the balance sheet method, increasing the allowance account by $3,141 based on the desired ending balance.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 5

    AC 310 Lab Problems - Chapters 5 and 7

    1. Cindy Johnson invested $1,000 in a savings account for three years paying 10% interest compounded
    quarterly. How much will she have in three years?
    PV = 1,000

    n = 3 years * 4 qtrs = 12 periods

    I = 10%/ 4= 2.5% per period

    FV = 1,345

    2. Chris Spear invested $15,000 today in a fund that earns 8% compounded annually. To what amount will the
    investment grow in 3 years?
    PV = 15,000

    n = 3 years

    I = 8%

    FV = 18,896

    3. Chris Spear invested $15,000 today in a fund that earns 8% compounded semiannually. To what amount
    will the investment grow in 3 years?
    PV= 15,000

    I = 4% (8%/2 semi-annual)

    N = 6 (3years x 2 payments)

    FV = $18,980

    4. What is the future value of 20 periodic payments of $5,000 each made at the beginning of each period and
    compounded at 8%?
    pmt: 5,000

    n: 20
    i: 8%
    Solve for FV: 247,115 (rounded)

    5. What is the present value of $2,500 to be received at the beginning of each of 30 periods, discounted
    at 10% compound interest?
    pmt: 2,500
    n: 30
    i: 10%

    Solve for PV: 25,924 (rounded)

    1
    AC 310 Lab Problems - Chapters 5 and 7

    6. What is the future value of 15 deposits of $2,000 each made at the beginning of each period and
    compounded at 10%?
    pmt: 2,000
    n: 15

    i: 10%

    Solve for FV: 69,899 (rounded)

    7. What is the present value of six (6) receipts of $3,000 each received at the beginning of each period,
    discounted at 9% compounded interest?
    pmt: 3,000
    n: 6

    i: 9%

    Solve for PV: 14,669 (rounded)

    8. Addico Corporation’s earnings per share were $2 for the year ending 12/31/2019. The company’s
    growth rate for the last five years has been 11% per year. If that growth rate is maintained, how long
    would it take the company’s earnings per share to double?
    i: 11%
    pv: -2

    fv: 4

    Solve for N: 6.64 (so about 6 and a half years)

    9. Susie wants to buy her first house for $220,000. She is making a down payment of $30,000 and
    financing the rest. The loan is a 30-year mortgage with a 7% interest rate. What will Susie’s monthly
    payments be on this mortgage?
    N: 360 (30 years * 12 months)
    i: .5833% (7% / 12 months)
    pv: -190,000

    Solve for PMT: 1,264

    2
    AC 310 Lab Problems - Chapters 5 and 7

    10. Moore Inc. manufactures cycling equipment. Recently, the company has requested construction of a new
    plant to meet the increasing demand for the company’s bikes. After a careful evaluation of the request, the
    board of directors has decided to raise funds for the new plant by issuing $3,000,000 of $1,000 11% term
    corporate bonds on March 1, 2013, due on March 1, 2028, with interest payable each March 1 and
    September 1. At the time of issuance, the market interest rate for similar financial instruments is 10%.
    Determine the sales price of the bonds.
    Bond Overview:
    When a company issues bonds, it is borrowing money from multiple sources instead of going to
    the bank and borrowing the full amount. Moore will pay bondholders interest during the time the
    money is borrowed, then Moore will repay the face amount on the maturity date. For this
    problem, Moore could go to the bank for $3,000,000. Instead, they are going to borrow $1,000
    from 3,000 people ($3,000,000 / $1,000 bond = 3,000).

    Break down the different parts of the problem:

    Interest will be paid to bondholders based on the stated rate of 11%. Each time Moore pays
    interest, they will pay 5.5% * $3,000,000 = $165,000. Since we are making semi-annual payments,
    we take the annual rate of 11% and divide it by 2. This is the payment used to value the bonds.
    PMT

    Payments will be made twice a year for 15 years. So there will be 30 total interest payments. N

    When the bonds come due, Moore will repay the face amount of $3,000,000. FV

    When the bonds are valued, we use the market rate. Since the market rate is 10%, we will divide
    this in half since we are making semi-annual interest payments. 5% will be the I.

    N: 30
    I: 5
    PMT: 165,000
    FV: 3,000,000
    PV: 3,230,586 – this is the price of the bond

    Since the sales price of the bond is higher than the face amount of 3,000,000, the bond is issued at
    a premium. Moore is paying an interest rate of 11% that is higher than the market rate of 10%.

    11. Explain the differences between the direct write off method and the allowance method of recording
    accounts receivable.
    Direct write off method: write off accounts once you determine they are not collectible
    Allowance method: record bad debt expense as you go

    3
    AC 310 Lab Problems - Chapters 5 and 7

    12. Describe the balance sheet method for estimating uncollectible accounts.
    Use the ending balance in accounts receivable to determine the amount that should be in the allowance
    account. This is what we do when we review an AR aging schedule.

    13. Describe the income statement method for estimating uncollectible accounts.
    Record bad debt expense as a percentage of each sale.
    Most companies use a combination of the income statement method and the balance sheet method. You
    can accrue bad debt expense using the income statement method as each month. Then at the end of the
    quarter/year, you can adjust the allowance based on the aging schedule.

    14.
    What is the total amount owed to Datema as of September 30, 2020?
    $89,863
    How much does Datema expect to collect from customers as of September 30, 2020?
    $71,222
    How would Accounts Receivable be presented on the September 30, 2020 balance sheet?

    Accounts Receivable (net of $18,641 allowance for uncollectible accounts) . . . . . $71,222

    Datema records bad debt expense at the end of each quarter when financial statements are prepared. If the June
    30, 2020 balance in Allowance for Uncollectible Accounts was $15,500, what amount of bad debt expense
    would be recorded for the third quarter?

    Beginning Allowance: 15,500


    Bad Debt Expense 3,141
    Desired Ending Balance: 18,641

    This assumes that there are no uncollectible accounts written off during the third quarter.

    Review the journal entry to record bad debt expense

    Bad Debt Expense 3,141


    Allowance for Uncollectible Accounts 3,141

    4
    AC 310 Lab Problems - Chapters 5 and 7

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