ACC Week 2 Assignment 2 Chapter 9 All exercises and problems come from Financial Accounting by Ingram and Albright, 6th edition. (2007). E9-3 For each of the following independent situations, determine : (a) whether the bonds sold at face (maturity) value, at a premium 9more than face value), or at a discount (less than face value) , and (b) whether interest expense recognized each year for the bonds was less than, equal to, or greater than the amount of interest paid on the bonds. (a) Bonds with stated rate of 8% were sold to yield an effective rate of 9%. (b) Bonds with a state rate of 12% were sold to yield an effective rate of 9%. (c) Bonds with a state rate of 9% were sold to yield an effective rate of 9%. E9-10 For each of the situations that follow, determine whether a liability should be reported on the balance sheet. If a liability should be reported, suggest an account name and indicate whether it should be reported as a current liability or as a long term liability, If no liability should be reported, indicated why. (a) The last installment payment on a three year note payable is due next month. (b) Specialized production machinery has been acquired under a capital lease. (c) A $14 million lawsuit has been filed by a customer who claims injury from one of the company’s products. (d) The labor service of employees has been consumed but not paid for yet. Payment is not anticipated until the next regular payday in two weeks. (e) A 20 year issue of bonds has been outstanding for 19 years and is expected to be repaid in cash at its maturity date. (f) The company has signed a contract promising to buy $600,000 worth of merchandise during the coming year. E9-17 Fast Start Corporation manufactures automobiles ignitions. Selected portions of the company’s recent financial statements are given on the following page. (a) What was Fast Start’s total contributed capital at the year end? (b) How many shares of common stock were outstanding at year end? (c) What dollar amount of treasury stock did Fast Start hold at year end? (d) What dollar amount of treasury stock did Fast Start repurchase during the year? How much common stock did the company issue? (e) What was the amount of dividends paid during the year? (f) How much cash flow came from financing activities associated with shareholder’s equity during the current year, excluding the effect of net income? What were the sources of that cash flow? (g) How much net income came from financing activities associated with stockholder’s equity during the current year? P 9-3 Sky King Company sold $9 million of four year, 8% dentures on July 1, 2007. The bond sold to yield a real rate of 7%. Interest is paid annually on June 30. (a) Determine price of the bonds. (b) Prepare an amortization schedule for the bonds. (c) Using the format presented in this chapter, record entry to the accounting system that is necessary to recognize interest on the bonds at June 30, 2008. (d) Assume the bonds had been sold to yield real rate of 9%. At what price would they have sold? P 9-5 Ethan Jones is an investment broker. Recently he contacted potential investors and offered to sell them bonds that were paying an 8% annual rate of interest. He noted that the bonds were paying as much higher return than other investments and that similar bonds were selling at a real rate of 6% interest. The bonds had a 10 year maturity and paid interest but later were concerned to learn that the maturity value of $1,000 per bond was considerably less than the $1.350.00 they had paid for each bond. 9-7Careful Electric Company is planning to purchase equipment for one of its generating plants Dealer a has offered to sell the equipment at a total cost 2 million including installation this dealer reqires a 6% return and is willing to spread the payments over a 10-year period payment are to be made at the end of the year in equal installments Dealer B is asking 1.8 million for the same equipment and charge an additional 50,000 for installation when equipment is delivered. Payments can be spread over 10 years with equal installment, made at the end of each year. this dealer requires an 8% return.Required: Compared the price of the bonds sold by Ethan to bonds yielding real rate of 6%. What was the approximate real rate of return earned by the investors? Did they have a right to be concerned about their investments? Do you see any ethical problems with Ethan’s sales pitch? P 9-9 Garcia Orchards & Processing Company has been taking bids for three new tractors. Goldbaum Equipment has made an offer to sell a qualifying model for $41,000 each. In addition, Goldbaum has offered to finance the transaction through a capital lease over the expected 15-year life of the tractors with no money down. No mention of the size of the required year-end lease payments has been made yet, but Garcia knows that Goldbaum will expect a 9% return on the lease arrangement. If Garcia accepts this option: A. What will be the size of each annual year-end lease payment? B. What amount will Garcia capitalize on its balance sheet for the tractors and for the lease obligation? What does this amount represent? C. Using a format to record the entry to set up the lease on Garcia's books. D. What total amount will Garcia pay over the life of the lease for financing? You do not need toYou do not need to prepare an amortization table. E. Using a format to record the entry necessary when Garcia makes the first lease payment. F. When the second year's lease payment is recorded, will the amount of interest expense be larger or smaller than that for the first year? Explain. P9-12 Below is shown the stockholders' equity section of Tulip Company's balance sheet at December 31, 2007. Common stock, $2 par value, 5,400,000 shares authorized, 2, 200,000 shares issued and outstanding $ 4,400,000 Paid- in capital in excess of par value 30,800,000 Retained earnings ; 46,000,000 Total stockholders' equity &n bsp; 81,200,000 All of the following occurred in year 2005 and were properly recorded. 1. The company purchased 30,000 shares of its own stock at $21 per share on January 2. 2. The company purchased 20,000 shares of the Sumo Corporation at $6 per share on February 14. 3. The company declared and issued a 10% stock dividend on March 2. The fair market value of the stock at that time was $25 per share. 4. The company declared and paid a cash dividend of $0.40 on its common stick on July 21. 5. The company reported a net loss of $5,200,000 on December 31. A. Prepare the stockholders' equity section as of December 31, 2008 after all the events described above have been properly accounted for. B. Describe the effects on the financing section of the year 2008 statement of cash flows. P9-19 Determine if a liability should be recorded in each of the following cases involving the Soft-Ear manufacturing Company, If there is no liability, explain how the item should be recorded. A. The company guarantees to repair or replace any of its products that are defective. B. The company estimates that some customer will not pay for merchandise purchased on credit. C. The company obtains an asset and signs a lease that extends for one-third of the useful life D. The company is being investigated for potential pollution problems by the Environmental Protection Agency. The company engineers believe it is likely that the company will be held responsible for an expensive cleanup activity. E. The company has issued bonds that are maturing at the end of the current month. F. The company is being sued by unhappy customer. The case has not yet come to court. G. The company has declared a 20% stock divided. H. The company has declared a $0.25 cash divided to be paid on all outstanding shares. I. The preferred stock is cumulative and dividends have not been paid for three years. J. The company has a noncontrolling interest of 3%. K. The company bonds outstanding that are convertible into common stock. The company’s accountants believe that bond holders are likely to convert their bonds because the company has performed exceptionally well this year.L. Stock options have been issued to the company executives. The options have not yet been exercised.
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