2210 - Group Quiz 4 - WCNet



Accounting 2210 Zeigler: Spring 2015 - Group Quiz #4 of 4 (Chp 10, 11)

Due Thursday, April 30th (30 Points + 5pts EC)

Circle Class Period: 4:00 6:00 Group Number: ______

Full Names:___________________________________________________

Use the following fact pattern for questions #1 and #2

Van Tress & Li, Inc. can borrow up to $50,000 on its bank “line of credit”. The company agreed to pay

interest monthly at 2 percent above prime rate. Funds are borrowed or repaid on the first day of each month.

|Month |Amounts Borrowed or (Repaid) | Prime Rate |

| | | |

|Jan. | $15,000 |6 percent |

|Feb. |$ (5,000) |5 percent |

|March |$30,000 |4 percent |

_____ 1. The correct amount of interest expense for the month of March would be:

a. $225.00 b. $200.00 c. $133.33 d. $100.00 e. $ -0-

_____ 2. The correct journal entry to record the March interest paid (only) would include:

a. a debit to cash

b. a debit to “Credit Line Payable”

c. a credit to interest expense

d. a credit to interest revenue

e. None of the above represents a correct journal entry component.

Use the information below to complete questions 3-6.

On January 1, 2015 Diver, Inc. borrowed $162,000 cash from Falcon Bank by issuing a five-

year 8% installment note. The principal and interest are to be repaid by making annual payments

beginning December 31, 2015. The annual payment required to pay off the loan, as calculated

by using a factor from a particular “Present Value” table, was determined to be $40,574.

_____ 3. The amount of principal repayment included in the December 31, 2015 payment is: 

a.  $12,960.

b.  $27,614.

c.  $37,329.

d. $40,574.

_____ 4. The net effect of the above December 31, 2015 transaction on the borrower’s Balance Sheet would:

a. Increase Liabilities

b. Decrease Stockholder’s Equity

c. Increase Assets

d. All of the above would occur.

_____ 5. How much of the Year 2 payment would represent interest expense?

a. $10,751 b. $12,960 c. $27,614 d. $29,823 e. $40,574

6. Referring to the “Business Applications” discussion on pg 776 of our text (Appendix “F”), show the

single calculation required to determine the above $40,574 annual payment needed to fully amortize

(i.e. pay-off) this loan over five years. Which table did you use to complete this calculation?

Use the following Trial Balance for Schock & Habeed, Inc. to answer questions 7 & 8:

Note: This material is covered specifically on pg 416 (Chp 8 intro) and on pages 492-495 (in Chp 9).

Students are responsible for these specific Chp 9 pages of our textbook.

|Schock & Habeed, Inc. |

|Trial Balance |

|December 31st |

|Cash |300 | |

|Accounts receivable |1,000 | |

|Inventory |1,300 | |

|Prepaid Rent (expires next month) |200 | |

|Office equipment, net of Acc/Depr |4,400 | |

|Land |10,000 | |

|Unearned revenue | |400 |

|Accounts payable | |500 |

|Interest payable | |100 |

|Note payable (due in 5 years) | |2,900 |

|Common stock | |13,000 |

|Retained earnings | |300 |

|Totals |17,200 |17,200 |

_____ 7. What are the company’s “Current Assets” at December 31st? (Note See pg 416 & 493)

a. $2,600 b. $2,800 c. $7,300 d. $8,200 e. $17,200

_____ 8. What is the company’s “Current Ratio” at December 31st? (Note: See Chp 9 pg 492-495 discussion)

a. 2.43 to 1 b. 2.80 to 1 c. 3.11 to 1 d. 7.20 to 1 e. 17.2 to 1

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Bowerman & Pytlak, Inc. had the following Balance Sheet on January 1, 2015:

[pic]

_____ 9. On January 2, 2015, the company recorded the following single transaction:

[pic]

Recording this one transaction would: (Note: See Chp 9 pg 492-495 discussion)

a. Decrease the current ratio to “2 to 1” (or 2.0)

b. Maintain the current ratio of “3 to 1” (or 3.0)

c. Increase the current ratio to “4 to 1” (or 4.0)

d. Increase the current ratio to “5 to 1” (or 5.0)

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____ 10. Hopkirk (H) Company and Shaffer (S) Company each began operations on January 1, 2015. They are competitors in the same industry and each began operations with identical assets, liabilities, and stockholder’s equity. During the year, each earned the same amount of revenue and incurred the same expenses, other than depreciation expense. Shaffer uses the straight-line depreciation method and Hopkirk uses the Double-Declining Balance method for all long-term assets. Due to the differing depreciation methods, which of the following statements is correct for the year?

a. Hopkirk's “Current Ratio” will be higher than Shaffer's at year-end.

b. Hopkirk will report a higher net income than Shaffer for the year.

c. Shaffer’s balance sheet at year-end will report higher total net assets than Hopkirk.

____ 11. If a bond sells at a “discount”, which of the following is true?

a. The market interest rate at the time of issue is less than the stated interest rate on the bond.

b. The market interest rate at the time of issue is the same as the stated interest rate on the bond.

c. The market interest rate at the time of issue is greater than the stated interest rate on the bond.

* The following information pertains to questions 12-17 *

On January 1, 2015, the firm of Barber & Shale, Inc. issued a $5,000 face value bond that sold at “90”. The bond had a five-year term, with a contract rate of 10 percent annual interest. The company used all of the cash proceeds from this bond issue to buy a parcel of non-depreciable land. The land was then sold at the end of the 5th year for $4,800 cash. Note: Review page 554 of our text. Further, no “market” interest rate is needed to address these questions.

____12. At issuance, the Carrying Value of the bond liability on January 1, 2015, would be:

a. $4,600.

b. $4,500.

c. $5,000.

d. $4,000.

____13.The amount of the cash interest payment required each year over the life of the bond would be:

a. $400.

b. $450.

c. $500.

d. $600.

____14. Assuming use of the “Effective Interest” Amortization method, the amount of interest expense reported on the income statement each year, over the life of the bond, would:

a. Be the same b. Not be the same

____15. On the firms books, the amount of the “Carrying Value” (aka: Present Value) associated with this bond issue liability would:

a. increase each year as a result of the amortization of the discount.

b. decrease each year as a result of the amortization of the discount.

c. remain the same each year.

d. always be equal to the face value of the bond payable.

____16. The carrying value of the bond liability on December 31, 2019 (just prior to bond payoff) would be:

a. $4,500.

b. $5,000.

c. $4,900.

d. $4,600.

____17. The cash sale of the land (this has nothing to do with the bond itself) on December 31, 2019, would:

a. increase net assets by $300.

b. increase stockholder’s equity by $4,800.

c. reduce net income by $300.

d. have no effect on retained earnings.

____18. The following information is from the accounting records of Wood & Devaudrevil, Inc:

2015 2014

Interest Expense $ 660,000 $ 480,000

EBIT (what does this term mean? – see pg 558) $3,300,000 $1,920,000

Based on the information provided, the company’s Times-Interest-Earned (TIE) ratio:

a. increased from 4 times to 5 times

b. decreased from 5 times to 4 times

c. increased from .25 times to .20 times

d. decreased from .25 times to .20 times

____19. XYZ, Inc. experienced an accounting event that affected its financial statements as shown below:

| |Assets |= |Liab. |+ |Equity | |

| |Carry Value (Present |Cash Interest |Interest |Current Period |Unamortized |Carry value (Present |

|Period |value) |Payment |Expense |Amortization |(unallocated) Premium |value) |

| |at beginning of period |(at contract rate |(at market rate of |(C vs D) |or |at end of |

| | |of___% |____% | |Discount |period |

|@Issue |*********** |********* |*********** |*********** | |********* |

|2016 | | | | | | |

|2017 | | | | | | |

|2018 | | | | | | |

|2019 | | | | | | |

|2020 | | | | | | |

|Totals |xxxxxxxxxxx | | | |xxxxxxxxxxx |xxxxxxxxxxx |

c) Prepare all necessary Journal Entries for Bee Gee Movie for the years 2016 & 2017.

|2016 Journal Entries (complete the 2 entries): |2017 Journal Entry (prepare the 1 entry required): |

|DR CR |DR CR |

|Cash | |

|Premium on Bonds Payable | |

|Bonds Payable 2,000,000 | |

| | |

| | |

|Interest Expense | |

|Premium on Bonds Payable | |

|Cash 140,000 | |

| | |

GQ#4 – OPTIONAL BONUS 2PT EC Question (timely submissions only):

IF, on January 1, 2019 (i.e. the beginning of period 4), the market rate is now 8%, what should these 7% Bee Gee bonds sell for should you (an investor) wish to buy them all from the current owner of the bonds?

In other words, what should these 7% bonds sell for (total price) at this point in time given the current 8% market rate of interest?

In more “other words”, what would you (the investor) be willing to pay for these bonds in order to earn an 8% return for the remainder of the bond term?

** Remember, the price of any bond is the present value of all remaining cash flows discounted at the market rate. **

2-PT PRICING ANSWER HERE: $_________________

* FOR ANY CREDIT, SHOW ALL PRICING COMPUTATIONS BELOW *

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