Sample for Mid Term 1 Exam
Stan Ross Department of Accountancy Zicklin School of Business, Baruch College
ACCOUNTING 3100 – Financial Accounting 2
Fall 2013 – Sample Mid Term 1 Exam
Instructor: Prof. Donal Byard Last Name:_______________________ Office: VC 12-264 First Name: ______________________ Phone: (646) 312-3187 Last 4 Digits of SSN:_______________ E-mail: donal_byard@https://www.360docs.net/doc/f317987238.html,
For the multiple choice questions, circle your choice of answer on the exam paper. For the discussion question and the numerical problem questions, provide your answers in the spaces provided on this exam. For numerical problems you must show all your supporting calculations/explanations, where appropriate. All supporting calculations and schedules must be legible and in good form. Be neat with your answers.
You must honor Baruch College’s standards regarding integrity, honesty, and cheating at all times; sharing of information during this exam in any form is strictly forbidden. Any breach of these standards will be dealt with in accordance with Baruch College’s Code of Academic Integrity. Please note:
- Pace yourself according to the points per problem and time available.
- You are not allowed to ask questions during the exam. If you feel that there is not enough
information provided, make the appropriate assumptions regarding the problem and note these assumptions on your exam. This will be taken into account when grading. - Programmable calculators with text memory capability are not permitted; - You are not permitted to use a cell phone in any capacity during an exam; - You must return the entire exam book when you are complete;
HONOR CODE
BY SIGNING YOUR NAME BELOW, YOU ARE ACKNOWLEDGING YOUR COMPLIANCE WITH THE BARUCH COLLEGE CODE OF ACADEMIC INTEGRITY AND ALL POLICIES RELATED TO IT AS DISCUSSED IN THE COURSE SYLLABUS.
___________________________________________
Signature
Marking Schedule for Instructor’s use only:
Questions Potential Marks Actual
Marks
Question 1 Lessee Accounting for a Capital Lease 100 Question 2 Troubled Debt Restructuring for a Borrower 100 Question 3 Issuing Bonds with Detachable Warranties 100
Total 300
Question 1 – Lessee Entries, Capital Lease with Executory Costs and Unguaranteed Residual Value On January 1, 2008, Kimberly-Clark Corp. Signed a 10-year noncencelable lease agreement to lease a storage building from Sheffield Storage Company. The following information pertains to this lease agreement:
1)The agreement requires equal annual rental payments of $72,000 beginning on January 1,
2008.
2)The fair value of the building on January 1, 2008, is $440,000.
3)The building has an estimated economic life of 12 years, with an unguaranteed residual value
of $10,000. Kimberly-Clark depreciates similar buildings using the straight-line method.
4)The lease is non renewable. At the termination of lease, the buildignreverts to the lessor.
5)Kimberly-Clark’s incremental borrowing rate is 12%. The lessor’s implicit rate not known to
Kimberly-Clark.
6)The yearly rental payment includes $2,470.51 in executory costs related to taxes on the
property.
Requirement
Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2008 and 2009. Kimberly-Clark’s corporate year end is December 31.
Question 2 – Troubled Debt Restructuring for a Borrower
At January 1, 2006, NCI Industries, Inc., was indebted to First Federal Bank under a $240,000, 10% unsecured note. The note was signed January 1, 2002, and was due December 31, 2007. Annual interest was last paid on December 31, 2004. NCI was experiencing severe financial difficulties and negotiated a restructuring of the terms of the debt agreement. First Federal agreed to reduce last year’s interest and the remaining two years’ interest payments to $11,555 each and delay all payments until December 31, 2007, the maturity date.
Requirement
Prepare the journal entries by NCI Industries, Inc., necessitated by the restructuring of the debt at: (1) January 1, 2006; (2) December 31, 2006; and (3) December 31, 2007.
Question 3 - Issuing Bonds with Detachable Warranties
On August 1, 2004, United Corporation issued $10 million of 8% convertible bonds at 105. The bonds mature in 20 years. Each $1,000 bond was issued with 20 detachable stock warrants, each of which entitled the bondholder to purchase, for $50, one share of United $5 par common stock. World Company purchased 10% of the bond issue. On August 1, 2004, the market value per share for United stock was $56 and the market value of each warrant was $6. In March 2007, when United common stock had a market price of $70 per share and the unamortized premium balance was $300,000, World exercised the warrants it held.
Requirement
1) Prepare the journal entries on August 1, 2004, to record the issuance of the bonds by United.
2) Prepare the journal entries for United in March 2007 to record the exercise of the warrants.
Answer Key
Question 1 [100 points]
Capitalized amount of the lease:
Yearly payment $72,000.00 Executory costs 2,470.51 Minimum annual lease payment $69,529.49
Present value of minimum lease payments
$69,529.49 X 6.32825 = $440,000.00
1/1/08 Leased Building Under Capital
Leases ................................................... 440,000.00
Lease Liability ........................................ 440,000.00
1/1/08 Executory Costs—Property Taxes ............. 2,470.51
Lease Liability ....................................... 69,529.49
Cash ...................................................... 72,000.00
12/31/08 Depreciation Expense ................................ 44,000.00
Accumulated Depreciation—Capital Leases 44,000.00
($440,000 ÷ 10)
12/31/08 Interest Expense (See Schedule 1) ........... 44,456.46
Interest Payable ............................... 44,456.46
1/1/09 Executory Costs—Property Taxes ............. 2,470.51
Interest Payable ......................................... 44,456.46
Lease Liability ............................................ 25,073.03
Cash ....................................... 72,000.00
12/31/06 Depreciation Expense ................................ 44,000.00
Accumulated Depreciation— Capital Leases 44,000.00
12/31/06 Interest Expense ........................................ 41,447.70
Interest Payable ..................................... 41,447.70
Kimberly-Clark
Corp.
Lease Amortization Schedule (Lessee)
Date Annual Payment Less
Executory Costs
Interest (12%) on
Liability
Reduction of
Lease Liability Lease Liability
1/1/05 $440,000.00 1/1/05 $69,529.49 $ 0 $69,529.49
370,470.51
1/1/06 69,529.49 44,456.46 25,073.03
345,397.48
1/1/07 69,529.49 41,447.70 28,081.79
317,315.69
Question 2 [100 points]
Analysis:Carrying amount: $240,000 + (10% x $240,000) = $264,000
Future payments: ($11,555 x 3) + $240,000 = (274,665)
Interest $ 10,665
The discount rate that “equates” the present value of the debt ($264,000) and its future value ($274,665)
is the effective rate of interest:
$264,000 ÷ $274,665 = .961 – the Table 2 value for n = 2, i = ?
In row 2 of Table 2, the value .961 is in the 2% column. So, this is the new effective interest rate. A
financial calculator will produce the same rate.
To simplify the record keeping, it may be desirable to combine the two debt accounts – the note and the
accrued interest – into a single account:
1. January1, 2006
Accrued interest payable (10% x $240,000) .................................. 24,000
Note payable (original debt) .......................................................... 240,000
Note payable (present carrying amount) ................................... 264,000
2. December 31, 2006
Interest expense (2% x $264,000) .................................................. 5,280
Note payable .............................................................................. 5,280
[Unpaid interest is accrued at the effective rate times the carrying amount of the debt.]
3. December 31, 2007
Interest expense (2% x [$264,000 + 5,280]) ............................. 5,385*
Note payable ......................................................................... 5,385 *rounded
After adding accrued interest for each year, the balance of the note account is equal to the amount scheduled to be paid at maturity.
Note payable ($264,000 + 5,280 + 5,385) ..................................... 274,665
Cash ([$11,555 x 3] + $240,000) .............................................. 274,665
Question 3 [100 points]
August 1, 2004
$10m)
10,500,000
x
(1.05
DR:
Cash
DR: Discount on bonds 700,000
payable 10,000,000
CR:
Bonds
CR: Paid-in-capital – stock warrants 1,200,000
($6 x 20 x [$10m/$1,000])
March 2007
DR: Cash (10% x 10,000 bonds x 20 x $50) 1,000,000
DR: Paid-in-capital – stock warrants 120,000
stock
100,000 Common
CR:
of
par 1,020,000
excess
in
CR:
Paid-in-capital