Kolton Company closes its books on its July 31 year-end. The company does not ma
ID: 2444550 • Letter: K
Question
Kolton Company closes its books on its July 31 year-end. The company does not make entries to accrue for interest except at its year-end. On June 30, the Notes Receivable account balance is $24,400. Notes Receivable include the following.
Date
Maker
Face Value
Term
Maturity Date
Interest Rate
During July, the following transactions were completed.
Received payment in full from Manning Co. on the amount due
a. Journalize the July transactions and the July 31 adjusting entry for accrued interest receivable. (Interest is computed using 360 days; omit cost of goods sold entries.)
b. Enter the balances at July 1 in the receivable accounts and the post the entries to all of the receivable accounts. (Post entries in the order of journal entries posted in the previous part.)
c. Show the balance sheet presentations of the receivable accounts at July 31.
Date
Maker
Face Value
Term
Maturity Date
Interest Rate
April 21 Booth Inc. $4,000 90 days July 20 7% May 25 Manning Co. 7,200 60 days July 24 13% June 30 ANF Corp. 13,200 6 months December 31 7%Explanation / Answer
These can be solved using the Capital Asset Pricing Model (CAPM):
E(r) = RFR + Beta(Rm - RFR)
where:
E(r) = expected return (or required return)
RFR = Risk Free Rate
Rm = Return on the market
note: (Rm - RFR) is also known as the "market risk premium"
Set up your equations, and solve...
1. Total invested = 75k, weight of A = 50/75 = 0.6667, weight of B = 25/75 = 0.3333
for A: E(r) = 0.04 + 1.5(0.02) = 0.07
for B: E(r) = 0.04 + 0.9(0.02) = 0.058
E(Portfolio r) = 0.6667(0.07) + 0.3333(0.058) = 0.066 or 6.6%
2. Total invested: 9k + (100 * $10) = 10k...(call pre-ATT portfolio: PortA, post-ATT portfolio: PortB)
weight of PortA in PortB = 9/10 = 0.90
weight of ATT in Port B = 1/10 = 0.10
E(RportB) = 0.90(0.12) + 0.10(0.20) = 0.128, or 12.8%
Beta Port B = 0.9 (1.2) + 0.10(2.0) = 1.28
3. 0.15 = RFR + 2.0(0.10 - RFR), thus RFR = 0.05 or 5%
Not sure here if the question means the new return on average stock is 40% (10% + 30%) OR
0.10 +(0.10 * .30) = 0.13...I'll assume this last one...sub in 0.13 for the Rm...
E(r) = 0.05 + 2.0(0.13 - 0.05) = 0.21 or 21%, so the CHANGE is 0.21 - 0.15 = 0.06 or 6% additional return. The percentage change is 0.06 / 0.15 = 0.40 or, 40% more return than previously (it's a little unclear exactly which %age they're looking for here)
4. First solve for Rm using the Partridge data...
0.13 = 0.06 + 1.4(Rm - 0.06)
0.07 = 1.4(Rm - 0.06)
0.154 = 1.4Rm
Rm = 0.11
sub in for Cleaver E(r) = 0.06 + 0.8(0.11 - 0.06) = 0.10, or 10%...
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