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BUS201-Financial Accounting (U-Term) Chapter 10 Class Exercises 1. On May 1, Redhead Clothiers borrowed $90,000 on a 3-month note to provide cash during the slow season of the year. The interest rate on the note was 496. What was the total cost of financing? 2. Sago Company Ltd. publishes a monthly sports magazine, Home Cooking. Subscriptions to the magazine cost $30 per year. During November 2017, Sago sells 2,800 subscriptions for cash. Subscriptions begin with the December issue. Sago prepares financial statements quarterly and recognizes subscription revenue earned at the end of the quarter. The company uses the accounts Unearned Subscription Revenue and Subscription Revenue. The company has a December 31 year-end. How much revenue from the subscription has Sago earned by December 31?
3. Assume that the following are independent situations recently reported in Street Journal. the Wall General Electric (GE) 6% bonds, maturing lanuary 28, 2018, were issued at 111.12. 2, Boeing 6% bonds, maturing September 24, 2032, were issued at 99.08. Instructions (a) Were GE and Boeing bonds issued at a premium or a discount? (b) Explain how bonds, both paying the same contractual interest rate, could be issued at different prices (c) Perform transactional analysis for the issue of each of these two bonds, assuming each company issued $500,000 of bonds in total.
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Answer #1

1-

amount borrowed

90000

rate of interest

4%

period

3 months

total cost of financing

90000*4%*3/12

900

2-

amount in unearned subscription

2800*30

84000

revenue to be recognised in Dec 17 Year end

84000*1/12

7000

3-

GE bond is issued at premium because it is more than the par value

Boeing bond is issued at discount because its issue price is less than par value

b-

Many reasons are there for the different issue price of bond one of them is tha maturity period, it is less in case of GE bonds in comparison to Boeing Bonds. This difference is due to long maturity period

c-

date

explanation

debit

credit

1-

cash

555600

bonds payable

500000

premium on bonds payable

55600

2-

cash

495400

discount on bonds payable

4600

bonds payable

500000
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