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Name: Michelle J. Sabit Section Code: B6 Date: 02/24/2024

1. This document contains sample solutions to exercises involving the calculation of present and future values of bonds, interest expense, lease accounting, and other financial concepts. 2. For the first problem set, the solutions calculate the present value of principal and interest payments on bonds, as well as the effective interest rate over 3 years. 3. For the second problem set, the solutions determine the net investment in a finance lease, profit on sale of the lease, accounting for lease payments and interest expense over time. 4. The document provides example calculations and journal entries to demonstrate various accounting principles for fixed income instruments, investments, and lease accounting.

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21 views3 pages

Name: Michelle J. Sabit Section Code: B6 Date: 02/24/2024

1. This document contains sample solutions to exercises involving the calculation of present and future values of bonds, interest expense, lease accounting, and other financial concepts. 2. For the first problem set, the solutions calculate the present value of principal and interest payments on bonds, as well as the effective interest rate over 3 years. 3. For the second problem set, the solutions determine the net investment in a finance lease, profit on sale of the lease, accounting for lease payments and interest expense over time. 4. The document provides example calculations and journal entries to demonstrate various accounting principles for fixed income instruments, investments, and lease accounting.

Uploaded by

sabit.michelle0903
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Name: Michelle J.

Sabit
Section Code: B6
Date: 02/24/2024

Exercises:
Answer items #1 to #6 based on the following data:

1. D. 4,620,820
Solution:
PV of Principal (5,000,000 × 0.6209) 3,104,500
PV of interest (5,000,000 × 8% × 3.7908) 1,516,320
Total 4,620,820

2. A. 4,682,902
3. C. 468,290
Solution:
Date Nominal Interest Effective Discount Carrying
(8%) Interest (10%) Amortization Amount
1/1/2018 4,620,820
12/31/2018 400,000 462,082 62,082 4,682,902
12/31/2019 400,000 468,290 68,290 4,751,192

4. A. 652,149
Solution:
Carrying value of bonds converted [(2M/5M) × 4,751, 192 1,900,477
Less: Par value of shares issued [(2M/1,000) × 8= 16,000) × 100 1,600,000
Share premium 300,477

Bonds payable 2,000,000


Paid in capital from bond conversion privilege (879,180 × 2/5) 351,672
Bond discount (2,000,000 – 1,900,477) 99,523
Share capital 1,600,000
Share premium (351,672 + 300,477) 652,149

5. D (199,523)
Solution:
Retirement of bonds without conversion privilege (2,000,000× 105) 2,100,000
Carrying value of bonds converted 1,900,477
Loss on retirement of bonds (199,523)

Bonds payable 2,000,000


Loss on early retirement of bonds 199,523
Paid in capital from bond conversion privilege (879,180 × 2/5) 351,672
Bond discount (2,000,000 – 1,900,477) 99,523
Cash 2,100,000
Share premium from unexercised conversion privilege 351,672

6. B. 285,072
Solution:
Carrying amount, 12/31/2019 4,751,192
Multiply by: 3/5
Total 2,850,715
Multiply by: Interest rate 10%
Interest expense, 12/31/2020 285,072

Answer items #7 to #11 based on the following data:

7. B. 3,389,748
Solution:
Gross investment in the lease:
Minimum lease payments (440,000 × 18) 7,920,000
Unguaranteed residual value 800,000 8,720,000
Net investment in the lease:
PV of minimum lease payments (440K × 11.4773) 5,050,012
PV of unguaranteed residual value (800K× 0.3503) 280,240 5,330,252
Total unearned interest income 3,389,748

8. A. 1,330,252
Solution:
Sales (present value of MLP) 5,050,012
Less: Cost of sales (4,000,000- 280,240) 3,719,760
Profit on sale 1,330,252

9. B. 4,446,613
Solution:
Finance lease liability 5,050,012
Less: Lease payment, 1/1/2020 440,000
Balance, 1/1/2020 4,610,012
Less: Principal payment on 7/1/2020:
Total payment 440,000
Applicable to interest (4,610,013×12%×6/12) 276,601 163,399
Balance, 12/31/2020 4,446,613
The lease shall be accounted for as finance lease because the present value of the
minimum lease payments amount to substantially all of the fair value of the leased asset
at the inception of the lease. (5,050,013/5,330,250= 95%)

10. A. 356,798
Solution:
Principal payment due, 1/1/2021:
Total payment 440,000
Applicable to interest (4,446,613×12%×6/12) 266,797 173,203
Principal payment due, 7/1/2021
Total payment 440,000
Applicable to interest
[(4,446,613- 173,203) ×12%] × 6/12 256,405 183,595
Current portion of finance lease liability, 12/31/2020 356,798

11. C. 543,398
Solution:
1/1/2020 to 6/30/2020 (4,610,012 × 12% × 6/12) 276,601
7/1/2020 to 12/31/2020 (4,446,613 × 12% × 6/12) 266,797
Total interest expense 543,398

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