Finance and Accounting: Practice Problems

Pages: 15 (4694 words) Published: December 17, 2010
AIS 301 Final Exam Review Note: This hand-out is designed to provide additional review materials for your exam. The practice problems included are not all inclusive and this should be reviewed in conjunction with your practice exam, coursepacket materials and homework problems. Chapter 14 1. On January 1, 2007, Ann Rosen loaned \$45,078 to Joe Grant. A zero-interest-bearing note (face amount, \$60,000) was exchanged solely for cash; no other rights or privileges were exchanged. The note is to be repaid on December 31, 2009. The prevailing rate of interest for a loan of this type is 10%. The present value of \$60,000 at 10% for three years is \$45,078. What amount of interest income should Ms. Rosen recognize in 2007? a. \$4,508. b. \$6,000. c. \$18,000. d. \$13,524. 2. A company issues \$20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2007. Interest is paid on June 30 and December 31. The proceeds from the bonds are \$19,604,145. Using effective-interest amortization, how much interest expense will be recognized in 2007? a. \$780,000 b. \$1,560,000 c. \$1,568,498 d. \$1,568,332 3. Carr Corporation retires its \$100,000 face value bonds at 105 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is \$103,745. The entry to record the redemption will include a a. credit of \$3,745 to Loss on Bond Redemption. b. debit of \$3,745 to Premium on Bonds Payable. c. credit of \$1,255 to Gain on Bond Redemption. d. debit of \$5,000 to Premium on Bonds Payable. DR Bonds Payable 100,000 DR Premium 3,745 DR Loss 1,255 CR Cash 105,000 4. The printing costs and legal fees associated with the issuance of bonds should a. be expensed when incurred. b. be reported as a deduction from the face amount of bonds payable. c. be accumulated in a deferred charge account and amortized over the life of the bonds. d. not be reported as an expense until the period the bonds mature or are retired.

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5. The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as a. an adjustment to the cost basis of the asset obtained by the debt issue. b. an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument. c. an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt. d. a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption as an other expense on the income statement. 6. A corporation called an outstanding bond obligation four years before maturity. At that time there was an unamortized discount of \$300,000. To extinguish this debt, the company had to pay a call premium of \$100,000. Ignoring income tax considerations, how should these amounts be treated for accounting purposes? a. Amortize \$400,000 over four years. b. Charge \$400,000 to a loss in the year of extinguishment. c. Charge \$100,000 to a loss in the year of extinguishment and amortize \$300,000 over four years. d. Either amortize \$400,000 over four years or charge \$400,000 to a loss immediately, whichever management selects. 7. On June 1, 2006, Janson Bottle Company sold \$400,000 in long-term bonds for \$351,040. The bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under the effective-interest method. Instructions (a) Construct a bond amortization table for this problem to indicate the amount of interest expense and discount amortization at each May 31. Include only the first four years. Make sure all columns and rows are properly labeled. (Round to the nearest dollar.) (b) The sales price of \$351,040 was determined from present value tables. Specifically explain how one would determine the price using present value...