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Midterm

Mid-term Exam (2014 Winter, Solutions).docx

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Department
Accounting
Course
ACCTG415
Professor
Jason Lee
Semester
Winter

Description
ACCTG 415 Solutions for Mid-term Exam (Winter 2014) Question 1 (14 marks) A 5 marks The issue price of bonds 5,000,000 1 1 = 5 + 400,000× {0.10×(1− 5)} (1+0.10) (1+0.10) = $4,620,921 July 1, 2013 Cash 4,620,921 Bonds payable 4,620,921 B 1) 2 marks Net proceeds from the bond issue = 4,620,921 ̶ 106,262 = $4,514,659 July 1, 2013 Cash 4,514,659 Bonds payable 4,514,659 B 2) 3 marks December 31, 2013 Interest expense (= 10.6% × 4,514,659 × 6/12) 239,277 Interest payable (8%× 5,000,000 × 6/12) 200,000 Bonds payable (239,277 ̶ 200,000) 39,277 Note: The bond issue costs, in effect, increased the discount and the effective interest rate. Thus, the discount of $485,431 9 will be amortized at 10.6% over 5 years. 1 B 3) 4 marks June 30, 2014 Interest expense (= 10.6% × 4,514,659 × 6/12) 239,277 Interest payable 200,000 Cash 400,000 Bonds payable (239,277 ̶ 200,000) 39,277 2 Question 2 (22 marks) A 8 marks Akerlof paid $21 million for 1 million common shares of Yellen Inc. On January 15, 2014, the investment in common shares of Yellen had the carrying value of $36 million but their fair value was $33 million. January 15, 2014 1. To revalue the investment in Yellen Inc.: Holding loss on Yellen (36,000,000 ̶ 33,000,000) 3,000,000 Investment in Yellen 3,000,000 2. To record the declaration of the property dividend: Retained earnings (or Property dividend declared) 33,000,000 Property dividend payable 33,000,000 3. To recognize the unrealized gain of $12 million (= 33 million ̶ 21 million): Holding gain on Yellen 12,000,000 Gain on Yellen 12,000,000 Note: This journal entry can be made at any time prior to the distribution of the property dividend. January 30, 2014 To record the distribution of the property dividend: Property dividend payable 33,000,000 Investment in Yellen 33,000,000 3 4 B 14 marks February 1, 2014 Retained earnings 3,660,000 Preferred dividends payable (3 × 420,000) 1,260,000 Common dividends payable (3,660,000 ̶ 1,260,000) 2,400,000 February 28, 2014 Preferred dividends payable 1,260,000 Common dividends payable 2,400,000 Cash 3,660,000 May 10, 2014 The average issue price of preferred shares is 21,000,000 ÷ 420,000 = $50. Preferred shares (50 × 120,000) 6,000,000 Contributed surplus – preferred shares 360,000 Retained earnings (6,480,000 ̶ 6,000,000 ̶ 360,000) 120,000 Cash (54 × 120,000) 6,480,000 May 28, 2014 The average issue price of common shares is 64,000,000 ÷ 2,000,000 = $32. Common shares (32 × 300,000) 9,600,000 Cash (29 × 300,000) 8,700,000 Contributed surplus – common shares 900,000 August 15, 2014 After the retirement of 300,000 common shares on May 28, the company had 1,700,000 common 5 shares outstanding. Thus, a 10% stock dividend would increase the number of common shares outstanding by 170,000. Retained earnings (26 × 170,000) 4,420,000 Common shares 4,420,000 6 Question 3 (19 marks) A 6 marks Issue price of the bonds= 1.05 × 10,000,000 = $10,500,000 Annual interest payment = 5% × 10,000,000 = $500,000 Interest liability 1 × 1− 1 = 500,000× {0.08 ( 1+0.08 ))} = $2,603,185 Incremental value of = 10,500,000 ̶ 2,603,185 conversion rights = $7,896,815 January 1, 2014 Cash 10,500,000 Interest liability 2,603,185 Contributed surplus – Convertible bonds 7,896,815 B 3 marks December 31, 2014 Interest expense (8% × 2,603,185) 208,255 Interest liability (500,000 ̶ 104,127) 291,745 Cash 500,000 C 2 marks December 31, 2020 7 Contributed surplus – Convertible bond
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