ACCT 3040

ACCT 3040,
Quiz 2 – 10 Points available
Name
Problem 1: On January 1, 2013, Queen Corporation issued 12-year, 6% bonds payable with a
face value of $10 million. The bonds require semi-annual coupon payments on June 30 and
December 31 every year.
1) Fill in the blanks below to show the amounts and timing for contractual future cash flows
for these bonds.
a) Lump-sum payment due at maturity (FV) =
b) Amount of each semi-annual coupon payment (pmt) =
c) Number of compounding periods from issue date to maturity =
d) Total cash outflows required by these bonds =
2) For this question, fill in the blanks below with the value of Queen’s bonds on 1/1/13. The
value represents the cash proceeds that Queen would receive when issuing these bonds.
a) (Annual) Market interest rate = 5%
$
b) (Annual) Market interest rate = 8.3%
$
c) Quoted market price = 92
$
3) For this question, assume that Queen issued these bonds on 1/1/13 in exchange for cash
of $8,899,162. For the journal entries, you may choose to use a companion account or
not.
a) Did Queen issue these bonds at par, premium, or discount?
b) What was the market interest rate PER PERIOD on 1/1/13?
c) Prepare Queen’s journal entry to recognize the issuance of these bonds on 1/1/13.
d) Prepare Queen’s journal entry to recognize the coupon payment on 6/30/13.
e) Explain in words how you calculated the interest expense amount in your 6/30/13
journal entry.
Problem 2: On January 1, 2013, VHF Industries acquired a machine and financed the purchase
price of this acquisition by issuing a 4-year loan to the vendor. The face value of the loan is
$8,000,000. The loan requires VHF to make 4 annual installment payments of $2,100,990; each
payment is due December 31 starting on December 31, 2013. VHF chose to finance this
purchase using the non-cash loan, but VHF could have purchased the machine for a cash price of
$6,074,700. VHF must use the effective interest method to account for this loan in accordance
with GAAP.
Requirement 1: Based on the contract (form) information for this non-cash loan, what is the
stated interest rate (show your calculation details)?
Requirement 2: State whether substance equals form or substance differs from form. Then
provide an explanation to support your answer.
Requirement 3: Prepare VHF’s journal entry to record the acquisition of this machine on 1/1/13.
VHF does not use any discount or premium accounts in its chart of accounts.
Requirement 4: Determine the implicit market rate that VHF must use to recognize interest
expense for this non-cash loan.
Case/Simulation #3, Acct 3040
Assignment points available = 25 points
Directions:
1) Reminder: THIS IS A CASE/SIMULATION ASSIGNMENT. DO NOT DISCUSS THIS ASSIGNMENT
WITH ANYONE OTHER THAN DR.CHENG!!
2) Ace Corporation’s debt instruments are described on each of the 5 separate “Debt” sheets.
You are required to complete all 5 “Debt” sheets AND THEN summarize your analysis in the
“Debt Summary” sheet in this workbook. Pay careful attention to the instructions on each
sheet.
3) The 12/31/16 balance sheet and the income statement for the year-ended 12/31/16
provided for you on the “Balance Sheets & Income Stmt” sheet are correct in accordance
with US GAAP and provide you with check figures for the 12/31/16 carrying value of debt
and interest expense for the year ended 12/31/16. This sheet is protected so that you cannot
make changes to it. You do not have any requirements on this sheet.
4) You must prepare a complete statement of cash flows for the year-ended 12/31/16 on the
Stmt of Cash Flows sheet in this workbook. Instructions and additional information you
need are included on this sheet in the workbook.
5) Your Excel file must be submitted through Canvas.
Assignments submitted in any other way earn a score of zero.
6) Name the project file you submit as follows: LastnameCS3. For
example, my file name would be ChengCS3.
C:\Users\cloudconvert\server\files\tasks\cc11c4e3-fdc1-43c4-bef0-ad99b32a021d-e4662c79-2d71-47ae-97992e1e713d07d3\56375f6a37443a251279070fe43d3c71
Directions
Name:
Enter Your Name Here!
Debt 1
Requirement 1: Enter your name in cell B1.
ACCOUNTING PERIOD DETAILS:
Ace’s fiscal year ends on December 31st every year.
Ace prepares accrual adjusting entries semi-annually, on June 30th and Dec. 31st each year.
Ace applies US GAAP for all of its debt instruments and does not use the fair value option.
CONTRACT DETAILS FOR DEBT 1:
Ace Corp. issued bonds with face value of $250,000 on July 1, 2012.
These bonds mature on June 30, 2016 and have a stated interest rate of 8%.
These bonds require semi-annual coupon payments on Dec. 31 and June 30 each year.
Ace received $250,000 as original principal on 7/1/12 when these bonds were issued.
Requirement 2: Fill in the boxes below for these bonds.
Market (effective) interest rate for these bonds on 7/1/12:
per period
Semi-annual annuity payment amount required:
Requirement 3: Prepare the entries that Ace would have prepared for these bonds
on the dates below. If no entry is required, state so.
Don’t forget to account for bond issue costs.
Date
6/30/2016
Account
Debit
Credit
12/31/2016
Requirement 4: Go to the Debt Summary sheet in this workbook and complete the cells for Debt 1.
56375f6a37443a251279070fe43d3c71
Debt1
Debt 2
Enter Your Name Here!
ACCOUNTING PERIOD DETAILS:
Ace’s fiscal year ends on December 31st every year.
Ace prepares accrual adjusting entries semi-annually, on June 30th and Dec. 31st each year.
Ace applies US GAAP for all of its debt instruments and does not use the fair value option.
CONTRACT DETAILS FOR DEBT 2:
Ace Corp. issued bonds with face value of $500,000 on January 1, 2016.
These bonds mature on December 31, 2021 and have a stated interest rate of 10%.
These bonds require semi-annual coupon payments on June 30 and Dec. 31 each year.
The market interest rate for these bonds on 1/1/16 was 8.9%.
Ace paid $24,000 of bond issue costs on 1/1/16 related to these bonds.
Requirement 1: Fill in the boxes below for these bonds.
Face value =
Semi-annual annuity payment amount required =
Number of periods (n) =
Effective interest rate per period=
Cash proceeds borrowed on 1/1/16 =
Requirement 2: Prepare the entries that Ace would have prepared for these bonds
on the dates below. If no entry is required, state so.
Don’t forget to account for bond issue costs.
Date
1/1/2016
Account
Debit
Credit
6/30/2016
12/31/2016
Requirement 3: Go to the Debt Summary sheet in this workbook and complete the cells for Debt 2.
56375f6a37443a251279070fe43d3c71
Debt2
Debt 3
Enter Your Name Here!
ACCOUNTING PERIOD DETAILS:
Ace’s fiscal year ends on December 31st every year.
Ace prepares accrual adjusting entries semi-annually, on June 30th and Dec. 31st each year.
Ace applies US GAAP for all of its debt instruments and does not use the fair value option.
CONTRACT DETAILS FOR DEBT 3:
Ace Corp. issued bonds with face value of $300,000 on July 1, 2016.
These bonds mature on June 30, 2019 and have a stated interest rate of 4%.
These bonds require semi-annual coupon payments on Dec. 31 and June 30 each year.
Ace received $261,316 as original principal on 7/1/16 when these bonds were issued.
Ace’s bond issue costs were immaterial for these bonds.
Requirement 1: Fill in the boxes below for these bonds.
Face value =
Semi-annual annuity payment amount required =
Number of periods (n) =
Market interest rate per period =
Cash proceeds (original principal) borrowed on 7/1/16 =
Requirement 2: Prepare the entries that Ace would have prepared for these bonds
on the dates below. If no entry is required, state so.
Date
7/1/2016
Account
Debit
Credit
12/31/2016
Requirement 3: Go to the Debt Summary sheet in this workbook and complete the cells for Debt 3.
56375f6a37443a251279070fe43d3c71
Debt3
Debt 4
Enter Your Name Here!
ACCOUNTING PERIOD DETAILS:
Ace’s fiscal year ends on December 31st every year.
Ace prepares accrual adjusting entries semi-annually, on June 30th and Dec. 31st each year.
Ace applies US GAAP for all of its debt instruments and does not use the fair value option.
CONTRACT DETAILS FOR DEBT 4:
On 1/1/16, Ace decided to purchase equipment with a fair market value of $350,000.
Ace financed this purchase with the vendor by issuing a loan payable.
The loan payable has a face value of $492,243 because that’s the amount that Ace
is required to pay the vendor on the maturity date of December 31, 2019.
No other payments are required on this loan.
Requirement 1: Fill in the boxes below for these bonds.
Annual annuity payment amount required =
Number of periods (n) =
(NOTE: Even though Ace prepares semi-annual
AJEs, this loan requires annual compounding.)
Market interest rate per period =
Original carrying value of this NON-CASH LOAN =
Requirement 2: Prepare the entries that Ace would have prepared for this loan
on the dates below. If no entry is required, state so.
You must ignore depreciation AJEs for the equipment purchased by this loan.
Date
1/1/2016
Account
Debit
Credit
6/30/2016
12/31/2016
Requirement 3: Go to the Debt Summary sheet in this workbook and complete the cells for Debt 4.
56375f6a37443a251279070fe43d3c71
Debt4
Debt 5
Enter Your Name Here!
ACCOUNTING PERIOD DETAILS:
Ace’s fiscal year ends on December 31st every year.
Ace prepares accrual adjusting entries semi-annually, on June 30th and Dec. 31st each year.
Ace applies US GAAP for all of its debt instruments and does not use the fair value option.
CONTRACT DETAILS FOR DEBT 5:
On 1/1/16, Ace decided to purchase equipment by issuing an installment loan
directly to the equipment vendor (NON-CASH LOAN). This loan has a face value of
$1,115,966, a stated interest rate of 5%, and a maturity date of 12/31/20
Based on these contract terms, the annual payment due each 12/31 is $257,760
Upon further investigation, you have determined that the appropriate market
interest rate for this loan is 9.1% on 1/1/16.
REMEMBER: You cannot change the contractual terms of this loan, but you need to
properly account for the SUBSTANCE of this loan.
Requirement 1: Fill in the boxes below for these bonds.
Lump-sum payment due on the maturity date =
(Remember that this is a regular installment loan.)
Annual annuity payment amount required =
(Remember that this is based on the contract terms.)
Number of periods (n) =
(NOTE: Even though Ace prepares semi-annual
AJEs, this loan requires annual compounding.)
Market interest rate per period =
Original carrying value of this NON-CASH LOAN =
Requirement 2: Prepare the entries that Ace would have prepared for this loan
on the dates below. If no entry is required, state so.
You must ignore depreciation AJEs for the equipment purchased by this loan.
Date
1/1/2016
Account
Debit
Credit
6/30/2016
12/31/2016
Requirement 3: Go to the Debt Summary sheet in this workbook and complete the cells for Debt 5.
56375f6a37443a251279070fe43d3c71
Debt5
Name:
Debt Summary Sheet
Enter Your Name Here!
Each of the 5 Debt sheets that you have completed in this workbook requires you to
complete cells in this worksheet. Note that you must complete columns C through H for
each of the 5 debt instruments. Also note that the 12/31/16 Bonds and Loans Payable
amount in cell C17 needs to agree with the carrying amount reported on the 12/31/16
balance sheet and the total interest expense amount in cell D17 needs to agree with the
interest expense in the income statement for the year ended 12/31/16.
Debt Instrument
Debt 1
Debt 2
Debt 3
Debt 4
Debt 5
Totals
CHECK FIGURES:
56375f6a37443a251279070fe43d3c71
Bonds and
Loans Payable
12/31/15
Carrying Value
Bonds and
Loans Payable
12/31/16
Carrying Value
Interest expense
recognized
Cash borrowed
during 2016
during 2016
Cash paid for
interest during
2016
Non-cash
Cash paid for interest expense
principal during
recognized
2016
during 2016
250,000
0
0
0
0
250,000
1,982,465
193,761
762,464
156,852
416,908
36,909
Debt Summary
Balance Sheets & Income Stmt
NOTE: You do not have any requirements on this sheet.
You will use these statements to help you prepare the Statement of
Cash Flows for the year ended 12/31/16.
Your 12/31/16 carrying value of debt instruments and your interest expense for
the year ended 12/31/16 should agree with the numbers in these financial statements.
Ace Corporation
Balance Sheets
Ace Corporation
Income Statement
For the Year Ended 12/31/16
Cash
Accounts receivable
Merchandise inventory
Office supplies
Property, plant, and equipment, net
Patent
Totals
12/31/2016
755,704
375,000
665,000
24,000
2,270,000
550,000
4,639,704
12/31/2015
442,000
45,000
485,000
22,000
1,215,000
600,000
2,809,000
Accounts payable
Rent payable
Income taxes payable
Bonds and loans payable
Common stock ($1000 par per share)
Additional paid-in capital
Retained earnings
Treasury stock
Totals
52,000
5,000
100,000
1,982,465
400,000
900,000
1,310,239
(110,000)
4,639,704
92,000
8,000
27,000
250,000
400,000
900,000
1,132,000
0
2,809,000
Sales revenue
Cost of goods sold
Gross profit
Operating expenses:
Salaries expense
Rent expense
Supplies expense
Patent amortization
Depreciation
Total operating expenses
Operating income
Interest Revenure (Expense)
Gains (losses) on sales of equipment
Other income (loss), net
Income before income taxes
Provision for income taxes
Net Income
4,280,000
2,670,000
1,610,000
270,000
5,000
69,000
50,000
210,000
604,000
1,006,000
(193,761)
(30,000)
(223,761)
782,239
200,000
582,239
Statement of Cash Flows
Enter Your Name Here!
Requirement: Complete the 2016 Statement of Cash Flows using the direct method for
Operating Cash Flows. Don’t forget any required disclosures!
Use the comparative balance sheets and 2016 income statement provided
along with additional information provided in Column E of this worksheet.
You must include the appropriate descriptive language in Column A for
the items you include in each section of the cash flows statement.
ADDITIONAL INFORMATION:
1) Ace paid $65,000 to purchase equipment.
2) Ace sold equipment with an original cost of
$440,000 and accumulated depreciation of $290,000
for $120,000 cash.
3) Ace declared and paid cash dividends.
Ace Corporation
Statement of Cash Flows
For the Year Ended 12/31/16
You must determine the dollar amount.
4) Ace purchased treasury stock for $110,000.
Net increase (decrease) in cash
Cash, January 1, 2016
Cash, December 31, 2016
Reconciliation of Net Income to Net Operating Cash Flows:
Supplemental Schedule of Noncash Investing and Financing Activities:
56375f6a37443a251279070fe43d3c71
Stmt of Cash Flows