Question

Use the following information for the next 2 questions: Alpha issued bonds on January 1, 2011. It projects the following amortization schedule from issuance until maturity (“Effective Interest = Interest Expense”)

Date Cash Effective Interest Increase in Payment Balance 1/1/2011 6/30/2011 6,000 6,759 759 12/31/2011 6,000 6,786 786 6/30/2012 6,000 6,813 813 12/31/2012 6,842 842 6/30/2013 6,000 6,871 871 12/31/2013 6,000 6,902 902 6/30/2014 6,000 6,934 934 12/31/2014 6,000 6,966 966 Outstanding Balance 193,126 193,885 194,671 195,485 196,327 197,198 198,100 199,034 200,000 6,000

18. Expressed as an annual rate, what was the market rate of interest at the time the bonds were issued? (show calculation)

A. 0% (zero)
B. 6%
C. 7%
D. 10%

E. 12%

19. By what amount will these bonds affect Alpha’s net income for 2011? (ignore taxes)

(show calculation)

A. 0 (no effect)
B. decrease net income by 12,000
C. decrease net income by 13,545
D. decrease net income by 6,759

E. decrease net income by 6,000

20. Delta loaned $600 to another corporation on December 1, 2017 and received a 3-month, 8% interest-bearing note with a face value of $600. After the books are closed for 2017, how much (in dollars) will this loan and any related interest have affected Delta’s equity (ignore taxes)?

(show calculation)

21)Bob issues common stock with a par value of $700 in exchange for equipment. The common stock has a fair value of $2,800. What is the journal entry required to record this transaction?     

Answer 1

34 18) 35 36 37 Face value 200000 Annual Coupon Rate 6.00% Years to maturity 4.0 Payment Frequency 2 Price of Bond 193126 YTM 7% RATE(C36*C37,C35/c37*C34,-C38,C34) *C37 38 39 40 41 Answer C) 7% 42 43

52 19) 53 Interest expense for 2011 13545 (6759+6786) 54 Therefore, net income will be decreased by 13,545 55 56 Answer C) decrease net income by 13,545 57

61 20) As the loan has been given on December 1,2017 accrued Interest revenue will be calculated for only one month 62 63 64 Interest revenue (600*8%*1/12) 4 65 66 Delta's equity will be increased by $4 67

70 71 21) 72 73 Account Title & Explanation Debit Credit Equipment 2,800 Common Stock 700 Paid In Capital in excess of Par 2,100 (To record issue of common stock in exchange of equipment) 74 75 76 77 78