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Financial Accounting: Liabilities & Equities (FA3) Exam Review

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<strong>FA3</strong> <strong>Exam</strong> <strong>Review</strong> notes Barbara Wyntjes, CGA, MBA, B.Sc.<br />

a. FV = $1,000,000, i = 8/2 = 4%, n = 19, PMT = 50,000, PV of bond $ 1,131,295 (1)<br />

November 1, 2002<br />

(1/2) Cash...................................................................................... 1,131,295<br />

(1/2) Premium on bonds payable............................................................131,295<br />

(1/2) Bonds payable ........................................................................... 1,000,000<br />

(1/2) Bond issue costs ....................................................................... 36,000<br />

(1/2) Cash..................................................................................................36,000<br />

b. December 31, 2002<br />

(1/2) Interest expense ($1,131,295 × 8% × 2/12)..................................... 15,084<br />

(1/2) Premium on bonds payable ($16,667 – $15,084) ............................ 1,583<br />

(1/2) Accrued interest payable ($1,000,000 × 10% × 2/12) ........................... 16,667<br />

(1/2) Interest expense ..................................................................................... 632<br />

(1/2) Bond issue costs ($36,000 × 2/114) 1 ..........................................................632<br />

1 The 10-year bond will be outstanding for 114 months<br />

(10 years × 12 months, less 6 months in 2002 unissued).<br />

c. February 28, 2003<br />

(1/2) Interest expense ($1,131,295 × 8% × 2/12) × 50% ................. 7,542<br />

(1/2) Premium on bonds payable ($8,334 – $7,542).......................... 792<br />

(1/2) Accrued interest payable ($1,000,000 × 10% × 2/12) × 50%.................8,334<br />

(1/2) Interest expense ......................................................................................316<br />

(1/2) Bond issue costs ($36,000 × 2/114) × 50% .............................................. 316<br />

(1/2) Bonds payable ............................................................... 500,000<br />

(1/2) Accrued interest payable (16,667 × 50% + 8,334) ......... 16,667<br />

(1) Premium on bonds payable [($131,295 – $1,583) × 50% – $792].. 64,064<br />

(1) Gain on bond retirement ........................................................................36,696<br />

(1/2) Bond issue costs ($36,000 × 50% × 110 / 114) .....................................17,368*<br />

(1) Cash [($500,000 × 102%) + ($500,000 × 10% × 4/12)]...................... 526,667<br />

*(36,000 – 632) x 50% = 17,684 – 316 = 17,368<br />

Note: For part c), the entries for interest expense, accrued interest payable, and premium<br />

on bonds payable may be combined.<br />

7

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