Accounting 311 example questions

1.	In May of 2010, Raymond Financial Services became involved in a tax dispute with the IRS. On December 31, 2010, the tax attorney for Raymond indicated that an unfavorable outcome to the dispute was reasonably possible. The additional taxes were estimated to be $770,000 but could be as high as $1,170,000. Raymond should have reported the following accrued liability amount on its issued balance sheet dated December 31, 2010:
A)	$ 0.
B)	$ 770,000.
C)	$ 900,000.
D)	$1,170,000.

2.	Nutramint Inc. started operations on January 1, 2015. In 2015, Nutramint's sales were $15 million and its warranty expenditures were $125,000. Its warranty expense is calculated as 1% of sales. What was the balance in the warranty liability account as of December 31, 2015?
A)	$ 1,250.
B)	$ 25,000.
C)	$125,000.
D)	$150,000.

3.	Bond X and bond Y are issued by the same company on the same day. Each bond has a maturity value of $100,000 and each pays interest at 10%. The current market rate of interest is 10%. Bond X matures in 5 years while bond Y matures in 10 years. Which of the following is correct?
A)	Both bonds will sell for the same amount.
B)	Both bonds will sell for more than $100,000.
C)	Bond X will sell for more than bond Y.
D)	Bond Y will sell for more than bond X.

MSG Corporation has $1,000,000 of 10-year, 6% bonds outstanding on December 31, 2009. The bonds have 3 years remaining to maturity. Assume interest is paid at the end of each month. The unamortized premium remaining on these bonds was $60,000. MSG uses straight-line amortization, so the unamortized premium would be $40,000 on December 31, 2010, provided none of the bonds had been retired before that day.

4.	On May 1, 2010, $100,000 of the bonds were retired at 112. How much, and what type of gain or loss, results from the retirement?
A)	$6,667 nonoperating loss
B)	$6,667 operating loss
C)	$6,667 nonoperating gain
D)	$6,667 operating gain

Federal Semiconductors issued 11% bonds, dated January 1, with a face amount of $100 million on January 1, 2013. The 20-year bonds sold for $92.477 million and mature in 2032. For bonds of similar risk and maturity the market yield was 12%. Interest is paid annually on December 31. Federal uses the effective interest method, and elected to report these bonds at their fair value. On December 31, 2013, the fair value of the bonds was $92.050 million (OTC market).

Prepare the journal entry for the first interest payment on December 31, 2013.

Assume that Federal has already recorded its 2014 interest payment and the fair value of the bonds on December 31, 2014 had dropped to $91.200 million. Calculate the PV of the remaining payments (CV of B/P) as of December 31, 2014 and prepare the journal entry to adjust the bonds to their fair value for presentation on the December 31, 2014 balance sheet.

CV of B/P, 1/1/2013 $92,477,000

2013 disc amortization __________

CV of B/P, 12/31/2013 - $92,050,000 (MV) = (FVadj balance)

2014 disc amortization __________

CV of B/P, 12/31/2014 - (MV) = (FVadj balance)

( FVadj bal)

12/31/2014 Journal entry: _________________________________________________

___________________________________________________

On January 1, 2010, Slug Corporation issued $6 million of 8%, 9-year convertible bonds at 102. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of common stock. Fuzz Company bought the entire issue as an investment. Slug Corporation uses U.S. GAAP and Fuzz Company uses IFRS; however, both companies use the straight-line method for any discount/premium amortization.

If Slug also issued $12 million of 8%, 9-year nonconvertible bonds at 96 on that same January 1, 2010, then what economic $$ value did investor Fuzz put on the conversion option of the $6 million convertible bond issue mentioned earlier?

On July 1, 2013 3 years after acquiring the convertible bonds Fuzz converted all of them into common stock, when the market price per share of Slug was $32. The book value of Slugs debt at the time of conversion is $6,073,333 while the market value of the issued shares is $7,680,000. Complete Slugs journal entry at conversion assuming it uses the book value approach.