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Finance and accounting questions

1. Notes payable—discount basis On August 1, 2013, Colombo Co.'s treasurer signed a note promising to pay $120,000 on December 31, 2013. The proceeds of the note were $114,000.

Required:
a. Calculate the discount rate used by the lender.
b. Calculate the effective interest rate (APR) on the loan.
c. Use the horizontal model (or write the journal entry) to show the effects of
d. Signing the note and the receipt of the cash proceeds on August 1, 2013.
e. Recording interest expense for the month of September.
f. Repaying the note on December 31, 2013.

2. Other accrued liabilities—warranties Prist Co. had not provided a warranty on its products, but competitive pressures forced management to add this feature at the beginning of 2013. Based on an analysis of customer complaints made over the past two years, the cost of a warranty program was estimated at 0.3% of sales. During 2013, sales totaled $3,450,000. Actual costs of servicing products under warranty totaled $9,700.

Required:
a. Use the horizontal model (or a T-account of the Estimated Warranty Liability) to show the effect of having the warranty program during 2013.
b. What type of accrual adjustment should be made at the end of 2013?
c. Describe how the amount of the accrual adjustment could be determined.

3.Bonds payable—record issuance and discount amortization Coley Co. issued $15 million face amount of 9%, 10-year bonds on June 1, 2013. The bonds pay interest on an annual basis on May 31 each year.

Required:
a. Assume the market interest rates were slightly higher than 9% when the bonds were sold. Would the proceeds from the bond issue have been more than, less than, or equal to the face amount? Explain.
b. Assume that the proceeds were $14,820,000. Use the horizontal model to show the effect of issuing the bonds.
c. Calculate the interest expense that Coley Co. will show with respect to these bonds in its income statement for the fiscal year ended September 30, 2013, assuming that the discount of $180,000 is amortized on a straight-line basis.

4. Bonds payable—calculate market value On March 1, 2008, Matt purchased $189,000 of Lawson Co.'s 8%, 20-year bonds at face value. Lawson Co. has paid the annual interest due on the bonds regularly. On March 1, 2013, market interest rates had risen to 12%, and Matt is considering selling the bonds.

Required: Using the present value tables in Chapter 6, calculate the market value of Matt's bonds on March 1, 2013. Note: Tables are at the end of the Document

5. Unearned revenues—subscription fees Evans Ltd. publishes a monthly newsletter for retail marketing managers and requires its subscribers to pay $75 in advance for a one-year subscription. During the month of September 2013, Evans Ltd. sold 200 one-year subscriptions and received payments in advance from all new subscribers. Only 120 of the new subscribers paid their fees in time to receive the September newsletter; the other subscriptions began with the October newsletter.

Required:
a. Use the horizontal model (or write the journal entries) to record the effects of the following items:
1. Subscription fees received in advance during September 2013.
2. Subscription revenue earned during September 2013.
b. Calculate the amount of subscription revenue earned by Evans Ltd. during the year ended December 31, 2013, for these 200 subscriptions.
Optional continuation of Problem 7.26—lifetime subscriptions offer (Note: This is an analytical assignment involving the use of present value tables and accounting estimates. Only the first sentence in Problem 7.26 applies to this continuation of the problem.) Evans Ltd. is now considering the possibility of offering a lifetime membership option to its subscribers. Under this proposal, subscribers could receive the monthly newsletter throughout their lives by paying a flat fee of $900. The one-year subscription rate of $75 would continue to apply to new and existing subscribers who choose to subscribe on an annual basis. Assume that the average age of Evans Ltd.'s current subscribers is 38 and their average life expectancy is 78 years. Evans Ltd.'s average interest rate on long-term debt is 12%.
c. Using the information given, determine whether it would be profitable for Evans Ltd. to sell lifetime subscriptions. (Hint: Calculate the present value of a lifetime membership for an average subscriber using the appropriate table in Chapter 6.) Note: Tables are at the end of the Document
d. What additional factors should Evans Ltd. consider in determining whether to offer a lifetime membership option? Explain your answer as specifically as possible.

6.Bonds payable—callable Hurley Co. has outstanding $30 million face amount of 15% bonds that were issued on January 1, 2001, for $29,250,000. The 20-year bonds mature on December 31, 2020, and are callable at 102 (that is, they can be paid off at any time by paying the bondholders 102% of the face amount).

Required:
a. Under what circumstances would Hurley Co. managers consider calling the bonds?
b. Assume that the bonds are called on December 31, 2013. Use the horizontal model (or write the journal entry) to show the effect of the retirement of the bonds. ( Hint: Calculate the amount paid to bondholders; then determine how much of the bond discount would have been amortized prior

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1.
Notes payable—discount basis On August 1, 2013, Colombo Co.'s treasurer signed a note promising to pay $120,000 on December 31, 2013. The proceeds of the note were $114,000.
Required:
a. Calculate the discount rate used by the lender.
Discount Rate = (120000-114000)/114000 = 5.26%

b. Calculate the effective interest rate (APR) on the loan.
(discount is for 5 months)
APR = 5.26%*12/5 = 12.62%
c. Use the horizontal model (or write the journal entry) to show the effects of
1. Signing the note and the receipt of the cash proceeds on August 1, 2013.
Debit Cash $114,000
Debit Prepaid Interest Expenses $6,000
Credit Notes Payable $120,000
2. Recording interest expense for the month of September.
Debit Interest Expenses $1,2000
Credit Prepaid Interest Expenses $1,200
3. Repaying the note on December 31, 2013.
Debit Notes Payable $120,000
Credit Cash $120,000

2.
Other accrued liabilities—warranties Prist Co. had not provided a warranty on its products, but competitive pressures forced management to add this feature at the beginning of 2013. Based on an analysis of customer complaints made over the past two years, the cost of a warranty program was estimated at 0.3% of sales. During 2013, sales totaled $3,450,000. Actual costs of servicing products under warranty totaled $9,700.
Required:
a. Use the horizontal model (or a T-account of the Estimated Warranty Liability) to show the effect of having the warranty program during 2013.

First we create provision for warranty for 2013
Debit Warranties 2013 Exp. $10,350 (3450000*.3%)
Credit Provision for Warranties 2013 $10,350

Then, to record the actual cost

Debit Provision for Warranties 2013 $9,700
Credit Cash $9,700

b. What type of accrual adjustment should be made at the end of 2013?
No adjustment is needed for year 2013 (for balance of $ 650) as a lot of product sold during 2013 will be still under warranties. For actual cost the entry is passed above.

c. Describe how the amount of the accrual adjustment could be determined.
The difference between the actual cost & estimated provision for warranty ...

Solution Summary

The expert examines finance and accounting questions. The proceeds of the notes are given.

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