Accounting Study Guide For Finals
Accounting Study Guide For Finals
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1) Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $190 million of 8% bonds, dated January 1, on January 1, 2013. Management intends to have the investment available for sale when circumstances warrant. When the company purchased the bonds, management elected to account for them under the fair value option. For bonds of similar risk and maturity the market yield was 10%. The price paid for the bonds was $169 million. Interest is received semiannually on June 30 and December 31. Due to changing market conditions, the fair value of the bonds at December 31, 2013, was $180 million.
- a) Prepare the journal entry to record Fuzzy Monkey’s investment on January 1, 2013.
- b) Prepare the journal entry by Fuzzy Monkey to record interest on June 30, 2013 (at the effective rate).
- c) Prepare the journal entries by Fuzzy Monkey to record interest on December 31, 2013 (at the effective rate).
- d) At what amount will Fuzzy Monkey report its investment in the December 31, 2013, balance sheet?
- e) Prepare a journal entry necessary to record the fair value adjustment.
- f) How would Fuzzy Monkey’s 2013 statement of cash flows be affected by this investment assuming Fuzzy prepares a direct method statement of cash flows?
Operating cash flow total? Investing cash flow total?
2) On January 2, 2013, Miller Properties paid $28 million for 1 million shares of Marlon Company’s 6 million outstanding common shares. Miller’s CEO became a member of Marlon’s board of directors during the first quarter of 2013.
|The carrying amount of Marlon’s net assets was $117 million. Miller estimated the fair value of those net assets to be the same except for a patent valued at $36 million above cost. The remaining amortization period for the patent is 10 years.|
|Marlon reported earnings of $54 million and paid dividends of $6 million during 2013. On December 31, 2013, Marlon’s common stock was trading on the NYSE at $27.5 per share.|
- a) Income statement total?
- b) Balance sheet total?
- c) Operating cash flow total? Investing cash flow total?
3) Transit Airlines provides regional jet service in the Mid-South. The following is information on liabilities of Transit at December 31, 2013. Transit’s fiscal year ends on December 31. Its annual financial statements are issued in April.
|1.||Transit has outstanding 6.6% bonds with a face amount of $75 million. The bonds mature on July 31, 2022. Bondholders have the option of calling (demanding payment on) the bonds on July 31, 2014, at a redemption price of $75 million. Market conditions are such that the call option is not expected to be exercised.|
|2.||A $25 million 8% bank loan is payable on October 31, 2019. The bank has the right to demand payment after any fiscal year-end in which Transit’s ratio of current assets to current liabilities falls below a contractual minimum of 1.9 to 1 and remains so for 6 months. That ratio was 1.75 on December 31, 2013, due primarily to an intentional temporary decline in parts inventories. Normal inventory levels will be reestablished during the sixth week of 2014.|
|3.||Transit management intended to refinance $40 million of 4% notes that mature in May of 2014. In late February 2014, prior to the issuance of the 2013 financial statements, Transit negotiated a line of credit with a commercial bank for up to $35 million any time during 2014. Any borrowings will mature two years from the date of borrowing.|
|4.||Transit is involved in a lawsuit resulting from a dispute with a food caterer. On February 13, 2014, judgment was rendered against Transit in the amount of $59 million plus interest, a total of $60 million. Transit plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company.|
How should the 6.6% bonds be classified by Transit among liabilities in its balance sheet as current or long term and total amount?
How should the 8% bank loan be classified by Transit among liabilities in its balance sheet as current or long term and total amount?
How should the 4% notes be classified by Transit among liabilities in its balance sheet as current or long term and totals for both?
Calculate the total current liabilities, total long-term liabilities, and total liabilities of a classified balance sheet for Transit Airlines at December 31, 2013. Transit’s accounts payable and accruals were $44 million.
4) McWherter Instruments sold $450 million of 10% bonds, dated January 1, on January 1, 2013. The bonds mature on December 31, 2032 (20 years). For bonds of similar risk and maturity, the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Blanton Technologies, Inc., purchased $450,000 of the bonds as a long-term investment.
- a) Determine the price of the bonds issued on January 1, 2013.
- b) Prepare the journal entries to record their issuance by McWherter and Blanton’s investment on January 1, 2013.
- c) Prepare the journal entries by McWherter and Blanton to record interest on June 30, 2013 (at the effective rate)
- d) Prepare the journal entries by McWherter and Blanton to record interest on December 31, 2013 (at the effective rate).
5) At the beginning of 2013, VHF Industries acquired a machine with a fair market value of $9,947,400 by issuing a three-year, noninterest-bearing note in the face amount of $12 million. The note is payable in three annual installments of $4 million at the end of each year.
- a) What is the effective rate of interest implicit in the agreement?
- b) Prepare the journal entry to record the purchase of the machine.
- c) Prepare the journal entry to record the first installment payment at December 31, 2013.
- d) Prepare the journal entry to record the second installment payment at December 31, 2014.
- e) Suppose the market value of the machine was unknown at the time of purchase, but the market rate of interest for notes of similar risk was 9%. Prepare the journal entry to record the purchase of the machine.
6) The long-term liability section of Twin Digital Corporation’s balance sheet as of December 31, 2012, included 14% bonds having a face amount of $20 million and a remaining discount of $1 million. Disclosure notes indicate the bonds were issued to yield 16%.
|Interest expense is recorded at the effective interest rate and paid on January 1 and July 1 of each year. On July 1, 2013, Twin Digital retired the bonds at 103 ($20.6 million) before their scheduled maturity.|
- a) Prepare the journal entry by Twin Digital to record the semiannual interest on July 1, 2013.
- b) Prepare the journal entry by Twin Digital to record the redemption of the bonds on July 1, 2013.