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# Accounting Analysis and Interest Rates

See attached file for full problem description.

1. On January 1, 2007, a company issued \$12 million face amount of 20-year, 14% stated rate bonds when market interest rates were 16%. The bonds pay interest semiannually each June 30 and December 31 and mature December 31, 2026.
a. calculate the proceeds (issue price) of the companies bonds on January 1, 2007, assuming that the bonds were sold to provide a market rate of return to the investor.
b. assume instead that the proceeds were \$12,400,000. Use the horizontal model (or write journal entry) to record the payment of semiannual interest and the related premium amortization on June 30, 2007, assuming that the premium of 400,000 is amortized on a straight line basis.
c. If the premium in b. were amortized using the compound interest method, would interest expense for the year ended December 31, 2007, be more than, less than, or equal to the interest expense reported using the straight-line method of premium amortization and why?
d. what causes the stated rate to be different from the market rate, and why is the difference likely to be much less than depicted in this problem (a.).
2. Enter the transaction letter in the first column and show the effect (if any) of each of the following transactions on each financial statement category by entering a plus (+) or minus (-) sign and the amount in the appropriate column (don't show items that affect net income in the retained earnings column) (the transactions occurred in the same chronological sequence listed below).
a. Sold 2,600 shares of \$10 par value preferred stock at \$12.50 per share
b. Declared annual cash dividend of \$3.20 per share on common stock. (9,200 shares of common stock were issued and outstanding throughout the year)
c. Issued 3,200 shares of \$10 par value preferred stock in exchange for a building when the market price of preferred stock was \$14 per share
d. Purchased 150 shares of preferred stock for the treasury at a price of \$16 per share
e. Sold 70 shares of preferred stock held in treasury (see d) for \$17 per share
f. Declared and issued a 15% stock dividend on the \$1 par value common stock when the market price per share was \$45
Transaction/
Assets Noncurrent
Assets Current
Liabilities Noncurrent
Liabilities Owners'
Equity Net
Income
a.
b.
c.
d.
e.
f.

3. Accounting records for company, year ended December 31, 2007
Accounts payable....................................................................................................................\$170,000
Extraordinary gain from lawsuit settlement, net of tax expense of \$56,000................\$208,000
Research and development expenses....................................................................................\$74,000
Loss from discounted operations net of tax savings of \$10,000........................................\$32,000
Provision for income taxes.....................................................................................................\$148,000
Net sales................................................................................................................................\$1,158,000
Interest expense......................................................................................................................\$128,000
Net cash provided by operations..........................................................................................\$296,000
Cost of goods sold...................................................................................................................\$544,000
a. Calculate the operating income for the year ended December 31, 2007
b. Calculate the company's net income for 2007

#### Solution Preview

1. On January 1, 2007, a company issued \$12 million face amount of 20-year, 14% stated rate bonds when market interest rates were 16%. The bonds pay interest semiannually each June 30 and December 31 and mature December 31, 2026.

a. calculate the proceeds (issue price) of the companies bonds on January 1, 2007, assuming

d. Purchased 150 shares of preferred stock for the treasury at a price of \$16 per share
This will reduce cash and reduce equity

e. Sold 70 shares of preferred stock held in treasury (see d) for \$17 per share
This will increase cash and increase equity

f. Declared and issued a 15% stock dividend on the \$1 par value common stock when the market price per share was \$45
A stock dividend will only change the figures between retained earnings and paid in capital. There will be no change in ...

#### Solution Summary

The solution has three questions - 1. Bond proceeds and amortization. 2. Effect of transactions on assets, liabilities and equity and 3. Calculation of operating income and net income

\$2.19