Midterm Exam Solutions

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AFM 391 Winter 2011
Intermediate Financial Accounting 2
University of Waterloo
Midterm Exam Solutions
Professor Khim Kelly

Part A

1) B
2) C
3) A
4) D
5) C
6) B

Part B
1) D
$4,000,000 (IFRS is applicable because Street is listed on TSE, no agreement was in place at year end).

2) C
PV of $8,000,000 at 5% for 15 years.

3)D$540,000 – $435,000 = $105,000
($600,000 + $72,000) – $540,000 = $132,000.

4)A

5)C= $2.70.

6)B
$4,800 fair value less $500 recorded cost = $4,300 gain.

7)B

Part C: Long-Term Bonds (19pts)
On April 1, 2010, BGL Ltd. issued $600,000, 9% bonds (dated January 1, 2010) for $645,442, including accrued interest. Interest is payable annually on January 1, and the bonds mature on January 1, 2020. On July 1, 2012, BGL retired $180,000 of the bonds at 102 plus accrued interest. BGL uses straight-line amortization of any bond discount or bond premium.

Required
1 pt if ALL the dates of journal entries in parts a and b are correct (a) Record the journal entries for the issuance of the long-term bonds, and the interest expense and amortization of bond discount or premium at year end (i.e., Dec 31, 2010). (9 pts)

April 1, 2010
Cash(0.5) 645,442 (1)
Bonds Payable (0.5) 631,942 (1)
Interest Expense ($600,000 × 9% × 3/12) (0.5)13,500 (1)

Dec 31, 2010
Dr Interest expense (0.5)51,543 (1)
Dr Bonds payable (31942/117 * 9) (0.5)2457 (1)
Cr Interest payable (0.5)54,000 (1)

Alternative answer 1
April 1, 2010
Cash(0.5) 645,442 (1)
Bonds Payable (0.5) 631,942 (1)
Interest Payable ($600,000 × 9% × 3/12) (0.5)13,500 (1)

Dec 31, 2010
Dr Interest expense (0.5)38,043 (0.5)
Dr Interest payable (0.5)13,500 (0.5)
Dr Bonds payable (31942/117 *9) (0.5)2457 (0.5)
Cr Cash (0.5)54,000 (1)

Alternative answer 2
April 1, 2010
Cash(0.5) 645,442 (1)
Premium on bonds payable (0.25)31,942 (0.5)
Bonds Payable (0.25) 600.,000 (0.5)
Interest Expense ($600,000 × 9% × 3/12) (0.5)13,500 (1)

Dec 31, 2010
Dr Interest expense (0.5)51,543 (1)
Dr Premium on bonds payable (31942/117 *9) (0.5)2457 (1)
Cr Cash (0.5)54,000 (1)
Alternative answer 3
April 1, 2010
Cash(0.5) 645,442 (1)
Premium on bonds payable (0.25)31,942 (0.5)
Bonds Payable (0.25) 600.,000 (0.5)
Interest Payable ($600,000 × 9% × 3/12) (0.5)13,500 (1)

Dec 31, 2010
Dr Interest expense (0.5)38,043 (0.5)
Dr Interest payable (0.5)13,500 (0.5)
Dr Premium on bonds payable (31942/117 *9) (0.5)2457 (0.5)
Cr Cash (0.5)54,000 (1)

(b) Record the journal entries for the retirement of $180,000 of the bonds on July 1, 2012. Hint: When the bonds are retired, you have to first record any discount/premium amortization and interest expense up to the date of retirement, and then determine if there is a gain/loss on redemption of the bonds. (9 pts)

Jul 1, 2012
Interest Expense (0.5)7,609 (1)
Bonds Payable ($31,942 × .3 × 6/117) (0.5) 491 (1)
Cash ($180,000 × 9% × 6/12) (0.5)8,100 (1)

Bonds Payable (0.5)187,371 (1)
Cash (0.5) 183,600 (1)
Gain on Redemption of Bonds (0.5)3,771 (1)

(Unamortized Premium $31,942 × .3 × 90/117 = $7,371)

Alternative answer if Premium on Bonds payable account is used in part (a) Jul 1, 2012
Interest Expense (0.5)7,609 (1)
Premium on Bonds Payable ($31,942 × .3 × 6/117) (0.5) 491 (1)
Cash ($180,000 × 9% × 6/12) (0.5)8,100 (1)

Bonds Payable (0.25)180.000 (0.5)
Premium on bonds payable (0.25)7,371 (0.5)
Cash (0.5) 183,600 (1)
Gain on Redemption of Bonds (0.5)3,771 (1)...
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