Quiz 2

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University of Nebraska, Omaha *

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Accounting

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Apr 3, 2024

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ACCT 3040, Quiz 2 – 10 Points available Name Problem 1: On January 1, 2013, Queen Corporation issued 12-year, 6% bonds payable with a face value of $10 million. The bonds require semi-annual coupon payments on June 30 and December 31 every year. 1) Fill in the blanks below to show the amounts and timing for contractual future cash flows for these bonds. a) Lump-sum payment due at maturity (FV) = 10,000,000 b) Amount of each semi-annual coupon payment (pmt) = 300,000 c) Number of compounding periods from issue date to maturity = 24 d) Total cash outflows required by these bonds = 10,000,000+(24*300,000)= 17,200,000 2) For this question, fill in the blanks below with the value of Queen’s bonds on 1/1/13. The value represents the cash proceeds that Queen would receive when issuing these bonds. a) (Annual) Market interest rate = 5% $10,894,249 b) (Annual) Market interest rate = 8.3% $ 8,273,220 c) Quoted market price = 92 10,000,000*92 $9,200,000 3) For this question, assume that Queen issued these bonds on 1/1/13 in exchange for cash of $8,899,162. For the journal entries, you may choose to use a companion account or not. a) Did Queen issue these bonds at par, premium, or discount? Discount b) What was the market interest rate PER PERIOD on 1/1/13? 3.7% c) Prepare Queen’s journal entry to recognize the issuance of these bonds on 1/1/13. Dr. Cash 8,899,162 Cr. Bonds Payable 8,899,162 d) Prepare Queen’s journal entry to recognize the coupon payment on 6/30/13. Dr. Interest Expense 329,162 Cr. Bonds payable 29,269 Cr. Cash 300,000

e) Explain in words how you calculated the interest expense amount in your 6/30/13 journal entry. Take the market interest rate 3.7% times the carrying value of the bonds payable 8,899,162 at the beginning of this period Problem 2: On January 1, 2013, VHF Industries acquired a machine and financed the purchase price of this acquisition by issuing a 4-year loan to the vendor. The face value of the loan is $8,000,000. The loan requires VHF to make 4 annual installment payments of $2,100,990; each payment is due December 31 starting on December 31, 2013. VHF chose to finance this purchase using the non-cash loan, but VHF could have purchased the machine for a cash price of $6,074,700. VHF must use the effective interest method to account for this loan in accordance with GAAP. Requirement 1: Based on the contract (form) information for this non-cash loan, what is the stated interest rate (show your calculation details)? PV= 8,000,000 FV= 0 N= 4 PMT= 2,100,990 I/Y = 2% Requirement 2: State whether substance equals form or substance differs from form. Then provide an explanation to support your answer. Since the face value is different substance do not equally form from the cash price substance hence the market and mentioned rate are not equal 2% vs 14.38 Requirement 3: Prepare VHF’s journal entry to record the acquisition of this machine on 1/1/13. VHF does not use any discount or premium accounts in its chart of accounts. Dr. Machinery 6,074,700 Cr. Loan Payable 6,074,700

Requirement 4: Determine the implicit market rate that VHF must use to recognize interest expense for this non-cash loan. PV=6,074,700 FV= 0 N=4 PMT= 2,100,900 Market= 14.37%

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