9. Which of the following best describes the accrual method of accounting for wa

Question

9. Which of the following best describes the accrual method of accounting for warranty
costs?
a. Expensed when paid.
b. Expensed when warranty claims are certain.
c. Expensed based on estimate in year of sale.
d. Expensed when incurred.

10. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years
from date of issue. If the bonds were issued at a premium, this indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.

11. Downing Company issues $5,000,000, 6%, 5-year bonds dated January 1, 2010 on January 1, 2010. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?

2.5% 3.0%   5.0% 6.0%

Present value of a single sum for 5 periods .88385 .86261 .78353 .74726

Present value of a single sum for 10 periods .78120 .74409   .61391 .55839

Present value of an annuity for 5 periods   4.64583 4.57971 4.3294   4.21236

Present value of an annuity for 10 periods   8.75206 8.53020 7.72173 7.36009

a. $5,000,000
b. $5,216,494
c. $5,218,809
d. $5,217,308

12. A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2010. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,145. Using effective-interest amortization, how much interest expense will be recognized in 2010?
a. $780,000
b. $1,560,000
c. $1,568,498
d. $1,568,332

Explanation / Answer

9. c. Expensed based on estimate in year of sale- describes the accrual method of accounting for warranty costs

10. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that B) the nominal rate of interest exceeded the market rate.

11. Bond = $500000

Coupon rate = 6%

Interest paid = semi-annually, interest rate = 3%

Yield = 5%, semi-annually = 2.5%

Time =5 year, semi-annually = 10 year

Proceeds of bond issue = interest * cumulative PVF + par value * PVF

= 150000 * 8.75206 + 5000000* 0.781198

=521800

ANSWER = C) 521809

12 interest rate= 8%, paid semiannually, interest rate for semiannual = 4%

Interest for 1st half period =19,604,145 * 0.04 = 784,165.80,

but only the coupon is actually paid out in cash, so the difference (784,165.80 - coupon($20m*0.078/2=) 780,000 = $4,165.80 <<this amount is then added to the carrying (book) value of the bonds...19,604,145 + 4,165.80 = $19,608,310.80

Interest expense will be recognized in 2010 = ($19,604,145 × .04) + ($19,608,310 × .04) = $1,568,498

answer = c) $1,568,498

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