63. Tyson Construction Inc.
Use the information provided for Tyson Construction Inc. to answer the following question(s) using the
effective interest method.
On January 2, 2012, Tyson Construction Inc. issued $1,000,000, 10-year bonds for $1,135,915. The bonds pay
interest on June 30 and December 31. The stated rate is 10% and the market rate is 8%.
Refer to the information provided for Tyson Construction Inc. What amount besides the interest payment
would Tyson repay its bondholders on the maturity date?
64. Flounder Inc.
Use the information provided for Flounder Inc. to answer the question(s) using the effective interest method.
On January 1, 2012, Flounder Inc. issued $800,000, 10-year, 9% bonds for $662,356. The bonds pay interest on
June 30 and December 31. The market rate is 12%.
Refer to the information provided for Flounder Inc. The interest expense on the bonds at June 30, 2012, is:
65. Flounder Inc.
Use the information provided for Flounder Inc. to answer the question(s) using the effective interest method.
On January 1, 2012, Flounder Inc. issued $800,000, 10-year, 9% bonds for $662,356. The bonds pay interest on
June 30 and December 31. The market rate is 12%.
Refer to the information provided for Flounder Inc. The interest payment on June 30, 2012, is:
66. Flounder Inc.
Use the information provided for Flounder Inc. to answer the question(s) using the effective interest method.
On January 1, 2012, Flounder Inc. issued $800,000, 10-year, 9% bonds for $662,356. The bonds pay interest on
June 30 and December 31. The market rate is 12%.
Refer to the information provided for Flounder Inc. What is the carrying value of the bonds after the first
interest payment is made on June 30, 2012?
67. Flounder Inc.
Use the information provided for Flounder Inc. to answer the question(s) using the effective interest method.
On January 1, 2012, Flounder Inc. issued $800,000, 10-year, 9% bonds for $662,356. The bonds pay interest on
June 30 and December 31. The market rate is 12%.
Refer to the information provided for Flounder Inc. What is the carrying value of the bonds at the end of the
68. With the effective interest method of amortization, the amortization of a bond discount results in a(n):
69. With the effective interest method of amortization, the amortization of a bond premium results in a(n)
70. On January 2, 2012, Golden Corporation sold $800,000 of bonds for $785,000. The bonds will mature in 10
years and pay interest annually on December 31. Golden properly recorded the payment of interest and
amortization of the discount using the effective interest method. Which of the following statements is true about
the carrying value of the bonds and/or the unamortized discount at the end of 2012?
71. Creative Products Company
The following question(s) are based on items that might appear on the balance sheet of a company like the
Creative Products Company. Identify how each item would be most likely classified on its balance sheet.
Refer to the information provided for Creative Products Company. Premium on Bonds Payable will appear as:
72. Creative Products Company
The following question(s) are based on items that might appear on the balance sheet of a company like the
Creative Products Company. Identify how each item would be most likely classified on its balance sheet.
Refer to the information provided for Creative Products Company. Current portion of long-term debt will
appear as a:
73. On January 1, 2012, Upgrade Co. issued $1,000,000 of 10 percent bonds at face value. These bonds are due
in five years with interest payable annually on December 31.
Required:
A)
Provide the journal entry necessary to recognize the interest expense on December 31, 2012-2016.
B)
Provide the journal entry to record the repayment of the loan principal on December 31, 2016.
74. On January 1, 2012, Investor Corporation issued $10,000,000, 10-year, 5% bonds at 85. Interest payments
are made annually.
Required:
A)
Give the journal entry to record the issuance of the bonds on January 1, 2012.
B)
Give the journal entry necessary to recognize the interest expense for 2012 under the straight-line amortization method.
C)
Give the journal entry to record the repayment of the loan principal on December 31, 2021.
A)
Cash
8,500,000
Bonds Payable
10,000,000
Discount on Bonds Payable
150,000
Cash
500,000
Cash
10,000,000
Cash
100,000
Cash
1,000,000
75. On January 1, 2012, Lead Inc. issues $10,000,000, five-year, 9 percent bonds at 98. The discount at the time
of sales is $200,000. Interest is paid semiannually on June 30, and December 31.
Required:
A)
Provide the journal entry to record the issuance of the bonds on January 1, 2012.
B)
Provide the journal entry to recognize the interest expense on June 30 and December 31, 2012-2016 using straight-line amortization.
C)
Give the journal entry to record the repayment of the loan principal on December 31, 2016.
76. State Corporation
Below is a note on Disclosure of Leases for the State Corporation.
The State Corporation leases office, warehouse and showroom space, retail stores and office equipment under
operating leases, which expire no later than 2027. The Corporation normalizes fixed escalations in rental
expense under its operating leases. Minimum annual rentals under non-cancelable operating leases, excluding
operating cost escalations and contingent rental amounts based upon retail sales, are payable as follows:
Fiscal year ending March 31,
2013
$10,051,000
2014
11,121,000
2015
10,161,000
2016
9,063,000
2017
8,814,000
Thereafter
46,681,000
A)
January 1, 2012
Cash
9,800,000
Discount on Bonds Payable
200,000
Bonds Payable
10,000,000
B)
June 30/Dec. 31
Interest Expense
470,000
2012 – 2016
Cash
450,000
Discount on Bonds Payable
20,000
(Discount = $200,000 / 10 periods)
C)
December 31, 2016
Bonds Payable
10,000,000
Cash
10,000,000
Rent expense was $12,551,000; $8,911,000; and $5,768,000 for the years ended March 31, 2012, 2011, and 2010, respectively.
Refer to the information provided for State Corporation. What are the two types of leases that a company can have? Describe each briefly.
77. State Corporation
Below is a note on Disclosure of Leases for the State Corporation.
The State Corporation leases office, warehouse and showroom space, retail stores and office equipment under
operating leases, which expire no later than 2027. The Corporation normalizes fixed escalations in rental
expense under its operating leases. Minimum annual rentals under non-cancelable operating leases, excluding
operating cost escalations and contingent rental amounts based upon retail sales, are payable as follows:
Fiscal year ending March 31,
2013
$10,051,000
2014
11,121,000
2015
10,161,000
2016
9,063,000
2017
8,814,000
Thereafter
46,681,000
Rent expense was $12,551,000; $8,911,000; and $5,768,000 for the years ended March 31, 2012, 2011, and 2010, respectively.
Refer to the information provided for State Corporation. Does the note disclosure show evidence of the two types of leases?
78. On January 1, 2012, Hawkeye Corporation issued $5,000,000 of 8% bonds, due in five years with interest
payable annually on December 31. The market rate is 9 percent. Calculate the present value (market value) of
the bonds.
79. Use the following selected financial information to compare these two companies at December 31, 2012,
and to answer the questions that follow.
Sweet Co.
Sour Co.
Cash
$ 1,100
$ 300
Short-term investments
100
900
Accounts and notes receivable
11,700
12,400
Inventories
1,200
1,000
Prepaid expenses
1,400
600
Total current assets
15,500
15,200
Total current liabilities
5,000
4,000
Long-term liabilities
12,300
12,000
Stockholders’ equity
5,300
7,300
Compute the current ratios for the two companies.
Current Ratio:
Sweet:
$15,500 (Current assets) / 5,000 (Current liabilities) = 3.10
Sour:
$15,200 (Current assets) / 4,000 (Current liabilities) = 3.80
Principal = $5,000,000 ´ .6499 present value of single sum =
$3,249,500
Present (market) value of the bonds =
$4,805,380
80. Rusty Furniture Company
Selected data from the comparative financial statements for Rusty Furniture Company are provided below.
Rusty Furniture Company
Balance Sheet Accounts
(all accounts have normal balances)
(in thousands)
December 31,
2012
2011
Accounts payable and accrued expenses
$ 3,141
$ 3,249
Accrued income taxes
1,037
1,056
Accumulated depreciation
2,016
2,028
Buildings
1,507
1,535
Cash and cash equivalents
1,648
1,737
Common stock
865
861
Containers
124
157
Current maturities of long-term debt
3
397
Deferred income taxes (long-term liability)
424
426
Goodwill and other intangible assets
547
668
Inventories
890
959
Land
19
183
Loans payable (short-term)
4,459
2,677
Long-term investments
8,549
6,501
Machinery & equipment
3,855
3,896
Marketable securities
159
106
Other long-term liabilities
991
1,001
Other fixed assets
1,580
1,087
Retained earnings
7,608
6,773
Trade accounts receivable
1,666
1,639
Rusty Furniture Company
Income Statement
Selected amounts
(in thousands)
2012
2011
Net sales
$18,813
$18,868
Interest expense (all paid with cash)
277
258
Income before income taxes
5,198
6,055
Income taxes
1,665
1,926
Net income
3,533
4,129
Rusty Furniture Company
Statement of Cash Flows
Selected amounts
(in thousands)
Year ended December 31,
2012
2011
Net cash provided by operating activities
$ 3,433
$ 4,033
Financing activities:
Cash dividends paid
(1,480)
(1,387)
Purchase of treasury stock
(1,563)
(1,262)
Issuance of debt
1,818
155
Repayment of long-term debt
(410)
(751)
81. Rusty Furniture Company
Selected data from the comparative financial statements for Rusty Furniture Company are provided below.
Rusty Furniture Company
Balance Sheet Accounts
(all accounts have normal balances)
(in thousands)
December 31,
2012
2011
Accounts payable and accrued expenses
$ 3,141
$ 3,249
Accrued income taxes
1,037
1,056
Accumulated depreciation
2,016
2,028
Buildings
1,507
1,535
Cash and cash equivalents
1,648
1,737
Common stock
865
861
Containers
124
157
Current maturities of long-term debt
3
397
Deferred income taxes (long-term liability)
424
426
Goodwill and other intangible assets
547
668
Inventories
890
959
Land
19
183
Loans payable (short-term)
4,459
2,677
Long-term investments
8,549
6,501
Machinery & equipment
3,855
3,896
Marketable securities
159
106
Other long-term liabilities
991
1,001
Other fixed assets
1,580
1,087
Retained earnings
7,608
6,773
Trade accounts receivable
1,666
1,639
Rusty Furniture Company
Income Statement
Selected amounts
(in thousands)
Year ended December
31,
2012
2011
Net sales
$18,813
$18,868
Interest expense (all paid with cash)
277
258
Income before income taxes
5,198
6,055
Income taxes
1,665
1,926
Net income
3,533
4,129
Rusty Furniture Company
Statement of Cash Flows
Selected amounts
(in thousands)
Year ended December 31,
2012
2011
Net cash provided by operating activities
$ 3,433
$ 4,033
Financing activities:
Cash dividends paid
(1,480)
(1,387)
Purchase of treasury stock
(1,563)
(1,262)
Issuance of debt
1,818
155
Repayment of long-term debt
(410)
(751)
Issuances of stock
302
150
Refer to the information provided for Rusty Furniture Company.
A)
The total liabilities at December 31, 2012, are (in thousands):
B)
The debt to assets ratio at December 31, 2012, is:
82. South Shore Company
The liabilities section of South Shore’s consolidated balance sheets is provided below.
South Shore Company
Consolidated Balance Sheets
(in millions)
December 31,
2012
2011
Current liabilities
Short-term borrowings
$ 250
$ 200
Accounts payable and other current liabilities
4,500
4,450
Income taxes payable
200
50
Total current liabilities
$4,950
$4,700
Long-term debt
$2,700
$3,000
Other long-term liabilities
3,800
3,950
Deferred income taxes
1,500
1,400
Refer to the information provided for South Shore Company. What are the total long-term liabilities for each of the two years presented?
2012:
$8,000 (in millions)
$2,700 (Long-term debt) + 3,800 (Other long-term debt) + 1,500 (Deferred income taxes) = $8,000
$3,000 (Long-term debt) + 3,950 (Other long-term debt) + 1,400 (Deferred income taxes) = $8,350
B)
Total liabilities = $10,055 (from Part A)
Total assets = $18,528
$10,055 (Total liabilities) / $18,528 (Total assets) = .5427
83. South Shore Company
The liabilities section of South Shore’s consolidated balance sheets is provided below.
South Shore Company
Consolidated Balance Sheets
(in millions)
December 31,
2012
2011
Current liabilities
Short-term borrowings
$ 250
$ 200
Accounts payable and other current liabilities
4,500
4,450
Income taxes payable
200
50
Total current liabilities
$4,950
$4,700
Long-term debt
$2,700
$3,000
Other long-term liabilities
3,800
3,950
Deferred income taxes
1,500
1,400
Refer to the information provided for South Shore Company. What would the horizontal analysis of long-term liabilities for 2012 show? Which
liability appears to have caused the greatest change?
2011 Long-term liabilities:
$8,350
2012 Long-term liabilities:
$8,000
[($8,000 – $8,350) / $8,350] ´ 100 = 4.19 or 4.2%. (Rounded)
84. South Shore Company
The liabilities section of South Shore’s consolidated balance sheets is provided below.
South Shore Company
Consolidated Balance Sheets
(in millions)
December 31,
2012
2011
Current liabilities
Short-term borrowings
$ 250
$ 200
Accounts payable and other current liabilities
4,500
4,450
Income taxes payable
200
50
Total current liabilities
$4,950
$4,700
Long-term debt
$2,700
$3,000
Other long-term liabilities
3,800
3,950
Deferred income taxes
1,500
1,400
Refer to the information provided for South Shore Company. Which long-term liability would also be listed in the short-term liability section?
Why?
85. A company issued 5-year bonds with a face value of $35,000,000 and a 7% annual stated rate of interest on
January 2, 2012. The issue price of the bond issue was $36,474,327 which reflected a 6% effective interest rate.
Interest payments are made annually.
Required:
A)
Give the journal entry to record the issuance of the bonds.
B)
Give the journal entry to record the recognition of interest expense at December 31, 2012. Any premium or discount should be
amortized using the effective interest rate method.
C)
Give the journal entry to record the interest paid to the bondholders on January 2, 2012.
D)
Give the journal entry to record the recognition of interest expense at December 31, 2013. Any premium or discount should be
amortized using the effective interest rate method.
86. Obligations that extend beyond one year are referred to as ____________________.
87. The amount of money the borrower agrees to repay at maturity of a bond is usually referred to as the
____________________.
88. If the market rate of interest is greater than the stated rate, then the bonds are issued at a(n)
____________________.
89. The ____________________ is the rate of return that investors in the bond markets demand for bonds of
similar risk.
Cash
36,474,327
Bonds Payable
35,000,000
Interest Expense
2,188,460
Premium on Bonds Payable
216,540
Interest Payable
2,450,000
Interest Expense
2,172,767
Premium on Bonds Payable
277,233
90. Discount on Bonds Payable is shown on the balance sheet as a(n) ____________________.
91. Under the ____________________ method of amortization, an equal amount of discount or premium is
amortized each time interest is paid.
92. ____________________ bonds may be retired by the issuing company before their specified due date.
93. A(n) ____________________ lease is recorded on the lessee’s balance sheet as an asset and related
liability.
94. Although operating leases are not recorded on the balance sheet by the lessee, they are disclosed in the
____________________.
95. An obligation that arises from an existing condition whose outcome is uncertain and whose resolution
depends on a future event is called a ____________________.
96. The current ratio is computed by dividing current assets by ____________________.