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# Quiz #1 (2013 Winter, Solutions).docx

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School
University of Alberta
Department
Accounting
Course
ACCTG415
Professor
Jason Lee
Semester
Winter

Description
Quiz #1 (Winter 2013, Solutions) Question 1 (10 marks) A. 4 marks 40,000,000 PV of \$40,000,000 = (1+7 )0 = \$5,254,685 To record the asset retirement obligation: January 1, 2013 Maniwaki Mine 5,254,685 Asset retirement obligation 5,254,685 B. 3 marks Interest expense = effective interest rate × carrying value ofARO = 7% × \$5,254,685 = \$367,828 This is the discount amortized in 2013. To record this amortization: December 31, 2013 Interest expense 367,828 Asset retirement obligation - Maniwaki Mine 367,828 1 C. 3 marks December 31, 2032 Asset retirement obligation 40,000,000 Cash 38,000,000 Gain on the settlement ofARO 2,000,000 2 Question 2 (10 marks) A. 5 marks Annual interest payment = 9% × 40,000,000 = \$3,600,000 Issue price of the bonds 40,000,000 1 × 1− 1 10 = (1+0.07)0 + 3,600,000× {0.07 ( (1+0.07) )} = \$45,618,865 The issue price is higher than the face value. Thus, the bonds are issued at a premium, which will be amortized over 10 years. To record the bond issuance: January 1, 2013 Cash 45,618,865 Bonds payable 45,618,865 B. 3 marks December 31, 2013 Interest expense (7% × 45,618,865) 3,193,321 Bonds payable (3,600,000 – 3,193,321) 406,679 Cash 3,600,000 C. 3 marks Redemption price = 1.15 × 40,000,000 = 46,000,
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