Accounting for Contingent Liabilities and Lease Transactions

The given assignment is a comprehensive set of questions that cover various topics in accounting, including contingent liabilities, lease transactions, bond issuance, and retirement. The first part deals with contingent liabilities, where the student is asked to identify the three ways of dealing with them and determine their value on the balance sheet. The next section covers lease transactions, where the student is required to calculate the present value of a vehicle purchased with cash and payments over five years. The following section discusses operating leases, where the student must satisfy four criteria to treat a lease as an operating lease. The final part deals with bond issuance and retirement, where the student is asked to determine whether a bond is a discount or premium bond, calculate semi-annual interest expense, and identify a gain or loss on the retirement of bonds.

Hult International Business School - London
– Individual Post Course Assignment
Course: Accounting EMBA 2017 / 2018
Lecturer: Alek Grzeszczak
Date: February 2018
Total Points: 160
Name:
Part 1 – SHORT QUESTIONS (74 points)
1- What is a deferred expense (give example) and how is it recorded/classified at the time
cash changes hands. What are the bookings (if any) afterwards ? (3 points)
At the end of the accounting period, adjustments need to be made to
several trial balance accounts. Hence,:
Deferred means …. Delayed until later and
A deferred Expense is defined as an asset, created when and expense is
paid but not yet incurred
Recording (“expansible”) Items as assets means ..delaying( deferring) the
recording of an expense until later.
- Since the economic benefits (from these assets) will expire
- Such assets accounts will have to be reduced causing and expense to be
recorded.
First Later
Deferred Expense Cash Paid Expense Recognized
1

Deferred Expense under rules of accrual accounting:
• Property, Equipment, Supplies are all recorded as assets (as they are
resources that will benefit the business going forward).
These assets will get used up at some point, the benefit will cease to exist.
Consequently, these assets will become a business expense.
• This leads to a deferred expense adjusting entry
Example (1)
A-Halfway through the year WW takes out a business
insurance coverage and (pre)pays $1,000 cash for it.
That will cover WW for the next twelve months.
Prepaid Insurance = Cash
Debit Credit Debit Credit
+ - + -
1,000 0 0 1,000
2

B- By the end of the year, half the insurance policy would
have expired. An adjusting entry for $500 must be
made in order to adjust the asset account.
• Insurance Expense (not originally on the trial
balance), will now appear there.
Insurance Expense = Prepaid Insurance
Debit Credit Debit Credit
+ - + -
500 0 0 500
Example (2)
A- The Office Supplies account on the trial balance indicates a balance of $2,000.
B- Inventory taken at the end of the year indicates that the cost of the
Office Supplies account still in possession is $1,500.
• $500 worth of Office Supplies have therefore been used up and have
become a period expense. Adjusting entry is required.
Supplies Expense = Office Supplies
Debit Credit Debit Credit
+ - + -
500 0 0 500
 Supplies Expense (not originally on the trial balance),will now appear on the trial balance
3

2. What is unearned revenue (give example) and how is it recorded/classified at the time cash
changes hands? What are the bookings (if any) afterwards ? (3 points)
At the end of the accounting period, adjustments need to be made to
several trial balance accounts. Hence,:
Deferred means …. Delayed until later and
Unearned revenue (Also known as differed income or deferred revenue) represents
received advance payments or revenue that is not yet collected. We can also say it is the
part of revenue which is received but not yet earned.
Recording (“revenue able”) Items as liabilities
means ..delaying( deferring) the recording of an expense until later.
- Since the economic benefits (from these liabilities) will arise
- Such liabilities accounts will have to be reduced causing and expense to
be recorded.
First Later
Deferred Revenue Cash Received Revenue Recognized
Deferred Revenue under rules of accrual accounting:
- Revenue can only be recorded when it has been earned, i.e. service has
been performed.
- Cash received as a prepayment gives rise to a liability (Unearned
Revenue).
- As work is later completed Revenue is (progressively) recognized and the
liability account is (progressively) eliminated.
• This leads to a deferred revenue adjusting entry.
4

Example :
A- On October 1st WW receives $1,200 advance payment from a customer for
consulting work to be performed (equally)over the next twelve months.
Cash = Unearned Revenue
Debit Credit Debit Credit
+ - _ +
1,200 0 0 1,200
B- By the end of the year, one quarter of the Unearned Revenue would become
earned. An adjusting entry for $300 must be made in order to adjust the
liability account .
Unearned Revenue = Revenue(s)
Debit Credit Debit Credit
- + _ +
300 0 0 300
• Revenues account will now increase .
5

3. What is the sequence of a full accounting cycle ? List all steps. (4 points)
Accounting cycle is the process of recording and processing the accounting events of a
company. The series of steps begin when a transaction occurs and ends when the
transaction is recorded in the financial statements. The Accounting Cycle is the process
followed by entities to analyse and record transactions. Adjust the records at the end of the
period . Prepare the financial statement and carry forward the balances for the next
accounting period.
During the Period
1. Analyze Transactions.
2. Record Journal entries in the general journal
3. Post amounts to the general ledger
At the End of the Period
4. Prepare Trial Balance
5. Adjust revenues and expenses ( record in journal and post to leger)
6. Prepare financial Statements and books of accounts.
7. Close revenues, expenses, gains, and losses to retained Earnings ( Record in
journal and Post to ledger)
6
Start of New Period
End of Period

4. On July 1, 2017, Johnson Company paid $2,400 for a four-year insurance policy with the
insurance coverage beginning on that date. As of December 31, 2017, what are the
(related) account balances (list the accounts and amounts, Debits or Credits) after
adjusting entries have been made? (3 points)
Insurance Expense A/C Dr $300
To Prepaid insurance $300
Prepaid Amount $ 2,400
Period 4 years (48)months
As prepaid amount get used up, the amount will be recorded as asset and adjusting entry
is required to recognize the expense( Debit Insurance Expense) and reduce the used
asset(credit prepaid expense)
Balance = $2,400/48=$300 per month( Insurance expires at$300/month)
1st July ,2017 to Dec 31st ,2017 =(6 months) current year x$50= $300 Insurance Expense
5. On October 1, 2017, Smith Company borrowed $200,000 on a one-year, 6% (annual rate)
note payable. The principal and interest will be paid on September 30, 2018. As of
December 31, 2017, what are the (related) account balances (list the accounts and
amounts, Debits or Credits) after adjusting entries have been made? (3 points)
Cash Debit $200,000
Note payable Credit $200,000
Interest Expense Debit $3,000
Interest Payable Credit $3,000
Noe payable =$200,000
Interest on one year ,6%
7

Due September 30,2018
Adjusting Entry as of Oct 1st to December 31,2017 =($200,000 (6%)x(3/12)= $3,000
Prepare the journal entry for September 30, 2018. (4 points)
Debit and credit the accounts affected
30/09/18 Interest Expense Debit $9000
Interest Payable Credit $9000
30/09/18 Interest Payable Debit $12000
Cash Credit $12000
8

6. Panmar Inc. is preparing a statement of stockholders' equity for 2016. On January 1, 2016,
Panmar started the year with a $200,000 credit balance in its retained earnings account.
During 2016, the company earned net income of $140,000. Panmar declared dividends of
$80,000 and paid $50,000 of those dividends. Also, the company received cash of
$100,000 for additional shares of common stock issued and then paid $30,000 to
repurchase shares of common stock.
What is the balance in retained earnings on December 31, 2016? (3 points)
Balance Retained Earning on /December 31,2016 =$260,000
7. On December 31, 2016, Krug Company reported total liabilities of $110,000 prior to the
following adjusting entries:
Depreciation expense: $31,000.
Accrued service revenues: $29,000.
Accrued expenses: $12,000.
Used insurance: $9,000; the insurance was initially recorded as prepaid.
Rent revenue earned: $7,000; the rent was initially prepaid by the tenant and credited to
unearned rent revenue.
How much are Krug's total liabilities after adjusting entries? (3 points)
Total Liabilities with adjusting entries = (total Labilities +Accrued Expenses)reduced by the
Unearned revenue =$(110,000+$12,000)- $7,000 as deferred revenue adjustment
Total liabilities after adjusting entries =$(110,000+12,000)-$7000 = $115,000
9
Retained Earnings
Opening
Balance
200000
Income 140000
Cash
Dividend
-50000
Share
Repurchase
-30000
Closing
Balance
260000

8. What are the 4 sub accounts of Shareholder’s Equity account (for a corporation) (4 points)
1. Capital investments made into the business (recorded in Common
Stock account);
2. Capital withdrawals made from the business (recorded in Drawings
account);
3. Net Income/ Loss; recorded in Retained earnings;
4. Cash dividend; recorded in Retained earnings;
Shareholder’s Equity Accounts
(1)
Common Stock
(2)
Dividends
(3)
Retained
Earnings
(4)
Drawings
10

9. What is the difference between a permanent account (which are these ?) and a temporary
account (which are these ?) (4 points)
A- TEMPORARY (NOMINAL) (These Accounts MUST be closed at the end of financial
year).
a. All Revenue Accounts
b. All Expense Accounts
c. Dividends
- Accounts That MUST be closed at the End of each fiscal year (They DO NOT carry any
balance into the next financial year) or we can say they have no closing balance.
o All Income statements Accounts (revenue ,expenses) As well as the dividends or
owner’s drawing accounts
o Temporary accounts are kept for the duration of the fiscal year and are closed at
the end of the fiscal year.
- Temporary accounts are closed by transferring their balances into Retained Earnings
account (one of two subdivisions of the permanent Shareholder’s Equity account).
- Temporary accounts are the account that are found on the income statement.
B- PERMANENT (Real)( These Accounts are NOT closed as their balance is carried
forward to next financial year)
a. All Assets Accounts
b. All Liability Accounts
c. Stockholders’ Equity
Accounts that remain open (do not close at the end of the fiscal year).
o All balance sheet accounts (asset accounts, liability accounts, owner's equity
account) except for the dividends or owner's drawing accounts.
o Their closing balance is carried forward to the next financial year as opening
balances
11

10. What is a contra account ? Give examples of a contra asset, contra liability and contra
revenue accounts (5 points)
Contra Accounts are Accounts that are directly linked to anther account ,but with a opposite
balance .
A Contra Account can also be defined as an account that is an offset to, or reduction of, the
primary account.
For Property and Equipment ,the contra account for the total cost used to date is called
Accumulated Deprecation
Here are several examples of contra accounts, as they would be presented
in the balance sheet:
Accounts receivable $1,000,000
Less: allowance for doubtful accounts (50,000)
Net accounts receivable $950,000
Inventory $2,500,000
Less: Reserve for obsolete inventory (80,000)
Net inventory $2,420,000
12

Fixed assets 10,000,000
Less: Accumulated depreciation (8,500,000)
Net fixed assets $1,500,000
11. Starting with Net Income, “build” a standard cash flow statement, show segmentation ? (5
points)
ABC Company
Statement of Cash Flows
For the Year Ended December 31, 2017
A: Cash Flow from Operating Activities:
Cash received from customers $ 146,000
Cash paid for expenses (81,000)
Cash paid to suppliers (47,500)
Cash inflow from operating activities: $ 17,500
B: Cash Flow from Investing Activities:
Cash paid to acquire additional equipment (20,300)
Cash outflow from investing activities: (20,300)
C: Cash Flow from Financing Activities:
Cash received from investment of owner $ 10,000
Cash received from bank loan $ 50,000
Cash paid for bank loan – partial payment (27,000)
Cash paid to owner – withdrawal (20,000)
Cash inflow from investing activities $ 13,000
Net Increase (Decrease) in Cash for the Year (A+B+C) $ 10,200
Add: Cash – January 1, 2017 $ 10,800
13

Cash – December 31, 2017 $ 21,000
14

12. What is the key difference between perpetual and periodic inventory accounting system?
(3 points)
Key differences between Perpetual and Periodic inventory accounting Systems
BASIS FOR
COMPARISON
PERPETUAL
INVENTORY SYSTEM
PERIODIC
INVENTORY SYSTEM
Meaning The inventory system
which traces every single
movement of inventory,
as and when they arise is
known as Perpetual
Inventory System.
The Periodic Inventory
System is an inventory
record method whereby,
the inventory records
are updated at periodic
intervals.
Basis Book Records Physical Verification
Updates Continuously At the end of the
accounting period.
Information
about
Inventory and Cost of
sales
Inventory and Cost of
goods sold
Balancing
Figure
Inventory Cost of Goods Sold
Possibility of
Inventory
Control
Yes No
Effect on
business
operation
This method does not
influence the business
operation.
Under this system, the
business operations
need to be stopped
during valuation.
15

13. What is goodwill (in accounting) and how is it calculated? (3 points)
Goodwill is the excess of purchase price over the fair market value of a
company's identifiable assets and liabilities.
Or
Goodwill is a type of intangible, or nonphysical, asset a business records on its balance
sheet when it buys another company. This account represents the premium a business
pays for the acquired company’s intangible assets that can’t be specifically identified but
that add value to its business. Such assets might include brand recognition and customer
loyalty. Calculating goodwill is a complex process that requires your small business to
value an acquired company’s identifiable assets individually.
Example :
Assume your small business pays $2 million for a company that has $1.6 million in identifiable
assets and $200,000 in liabilities. The amount of net identifiable assets equals $1.4 million, or
$1.6 million minus $200,000. Goodwill equals $600,000, or $2 million minus $1.4 million. This
means you paid a $600,000 premium above the company’s net identifiable assets to acquire
its unidentifiable assets, which add to its earning power. You would report goodwill of $600,000
in the noncurrent assets section of your balance sheet.
16

14. List 4 instances when accounting under GAAP differs from accounting under IFRS. (4
points)
BASIS FOR
COMPARISON
GAAP IFRS
Acronym Generally Accepted
Accounting Principles
International Financial
Reporting Standard
Meaning A set of accounting
guidelines and
procedures, used by the
companies to prepare
their financial statements
is known as GAAP.
IFRS is the universal
business language
followed by the
companies while
reporting financial
statements.
Developed by Financial Accounting
Standard Board (FASB).
International
Accounting Standard
Board (IASB).
Based on Rules Principles
Inventory
valuation
FIFO, LIFO and Weighted
Average Method.
FIFO and Weighted
Average Method.
Development
cost
Treated as an expense Capitalized, only if
certain conditions are
satisfied.
Reversal of
Inventory
Prohibited Permissible, if specified
conditions are met.
17

15. Explain the difference between fixed costs and variable costs. (4 points)
Key Differences Between Fixed Cost and Variable Cost
BASIS FOR
COMPARISON FIXED COST VARIABLE COST
Meaning The cost which remains same,
regardless of the volume
produced, is known as fixed
cost.
The cost which
changes with the
change in output is
considered as a
variable cost.
Nature Time Related Volume Related
Incurred when Fixed costs are definite, they are
incurred whether the units are
produced or not.
Variable costs are
incurred only when
the units are
produced.
Unit Cost Fixed cost changes in unit, i.e.
as the units produced increases,
fixed cost per unit decreases
and vice versa, so the fixed cost
per unit is inversely proportional
to the output produced. Total
fixed cost does not vary as per
quantity produced.
Variable cost remains
same, per unit. Total
variable cost varies as
per the quantity of
goods produced.
Behaviours It remains constant for a given
period of time.
It changes with the
change in the output
level.
18

BASIS FOR
COMPARISON FIXED COST VARIABLE COST
Combination of Fixed Production Overhead,
Fixed Administration Overhead
and Fixed Selling and
Distribution Overhead.
Direct Material, Direct
Labour, Direct
Expenses, Variable
Production Overhead,
Variable Selling and
Distribution Overhead.
Examples Depreciation, Rent, Salary,
Insurance, Tax etc.
Material Consumed,
Wages, Commission
on Sales, Packing
Expenses, etc.
16. Mountain Indoors Co. mistakenly recorded purchases of inventory on account
received during the last week of December 2016 as purchases during January of
2017 (this is called a purchases cut-off error). Cameron uses a periodic inventory
system. Ending inventory however was correctly counted and reported each year.
Assuming that no correction was made in 2016 or 2017, indicate whether each of
the following financial statement amounts will be understated, overstated, or
correct, explain.
A. Retained Earnings for December 31, 2016. (2 points)
Understated, as the amount of purchases of inventory of January was recorded in
December.
B. Retained Earnings for December 31, 2017. (2 points)
Overstated as the amount of purchase which of January was recorded in December.
C. Net Income for 2016. (2 points)
Understated as the income was reduced with the amount of purchases.
D. Net Income for 2017. (2 points)
Overstated as the income was increased because the purchase of January was
mistakenly taken into account of the amount of purchases.
17. Boris B2B Inc. purchases its inventory from Johnson Supplies Inc. subject to the following
terms: 2/10, n/30. Boris is not exactly a “cash cow”, is short of cash and is therefore
debating whether it makes sense at all to take advantage of the discount (at the cost of
disbursing cash for these purchases 20 days earlier than otherwise it would be doing). If
19

Boris could borrow money at 10% from a local bank to cover any cash shortfall … should it
take advantage of the discount offered by Johnson Supplies Inc. ? Explain. (8 points)
The discount that is if he repays the amount within 10 days then he will get a discount
of 2% on the amount of purchases. In this case he wants to repay he amount in 10
days then he need to borrow money @ 10% from bank and then he will be able to
repay the money and will get 2% discount. This is not at all in the favour of Boris as
he need to incur additional 8% cost for availing the 2% discount which is not at all
favourable. Hence Boris need not to opt for 10 days payment and will opt to pay the
amount after 30 days.
20

Part 2 - SALES JOURNAL ENTRIES (10 points)
On March 3, 2017, Gooddeal.com sold merchandise for $2,500, terms 2/10 n/30. Prepare the
journal entry. This merchandise originally cost $2,000. (2 points)
Debit and credit the accounts affected
Mar. 3 Accounts Receivable Debit 2500
Sales Credit 2500
Mar. 3 Cost of Goods Sold Debit 2000
Inventory Credit 2000
On March 6, 2017 the customer returned $1,250 (or one-half) of the merchandise that was
purchased back on March 3. Prepare the journal entry. (4 points)
Debit and credit the accounts affected
Mar. 6 Sales Return Debit 1250
Accounts Receivable Credit 1250
Mar. 6 Inventory Debit 1000
Cost of Goods Sold Credit 1000
The customer paid for the merchandise on March 8, 2017, taking advantage of the permitted
discount. Prepare the journal entry. (4 points)
Debit and credit the accounts affected
Mar. 8 Cash Debit 1225
Sales Discount Debit 25
Accounts Receivable Credit 1250
21

Part 3 – ASSETS (36 points)
1. Mariano Company has provided the following information:
Net sales, $480,000
COGS, $360,000
Net income, $24,000
Average total assets, $400,000
What is Mariano's asset turnover ratio? (4 points)
Asset turnover Ratio= Net Sales/ Average total Assets
= 480000/400000
=1.2
22

2. Huron has provided the following year-end balances:
Cash, $35,000
Patents, $7,900
Accounts receivable, $9,300
Property, plant, and equipment, $98,700
Prepaid insurance, $3,600
Accumulated depreciation, $10,000
Inventory, $37,000
Trademarks, $12,600
Goodwill, $11,000
How much are Huron's current assets ? (4 points)
Current assets= Cash+ Prepaid insurance+ Accounts Receivables+ Inventory
= 35000+9300+3600+37000
= $84900
3. manda Company purchased a computer that cost $10,000. It had an estimated useful life of
five years and a residual value of $1,000. The computer was depreciated by the straight-line
method and was sold at the end of the third year of use for $5,000 cash.
Was there a gain or loss on the sale ? (2 points)
There will be gain on the sale of the computer at the end of third year.
How much of a gain or loss should be recorded ? (4 points)
Cost= 10000
Salvage value= 1000
Useful life= 5
Depreciation = (10000-1000)/5
= 1800
Book Value of Asset at the end of third Year= 4600
Sale Value= 5000
Gain= 5000-4600
= 400
4. Warren Company plans to depreciate a new building using the double declining-balance
depreciation method. The building cost $800,000. The estimated residual value of the building
is $50,000 and it has an expected useful life of 25 years. Assuming the first year's
depreciation expense was recorded properly, what would be the amount of depreciation
expense for the second year ? (4 points)
Cost= 800000
Residual value= 50000
Useful Life= 25
Depreciation (By straight Line method) = (800000-50000)/25
= 30000
23

Rate of Depreciation =3.75%
Rate of depreciation as per double declining Method= 7.5%
Depreciation for first year= 800000*7.5%
= 60000
Depreciation for Second year= (800000-60000)*7.5%
= 55500
5. Carp Corporation has provided the following information for its most recent month of
operation: sales $16,000; ending inventory $4,000, purchases $8,000 and gross profit
$10,000.
How much was Carp's beginning inventory ? (4 points)
Sales= 16000
Closing Inventory= 4000
Purchases= 8000
Gross Profit= 10000
Opening Inventory= 16000+4000-8000-10000
= 2000
6. The January 31st, 2018, bank statement for Jenner Corporation and the January ledger
accounts for cash are summarized here:
BANK STATEMENT
Checks Deposits Balance
Balance, December 31st,
2017
$ 7,500
Deposits recorded during
January
$25,900 33,400
Checks cleared during
January
$25,400 8,000
NSF checks— Theresa Mai 370 7,630
Bank service charges 70 7,560
Balance, January 31st, 2018 7,560
Cash (A)
Dec. 31st 2017
Balance
7,500 January Checks
Written
28,900
January Deposits 28,100 Dec 31st 2018
24

Balance
No outstanding checks and no deposits in transit were carried over from December; however,
there are deposits in transit and checks outstanding at the end of January.
a) Reconcile the bank account. (6 points)
Reconciliation Statement
Balance on 31 Dec 2018 7500
Deduct: NFC Checks 370
Deduct: Bank Service Charges 70
Adjusted/ Corrected balance 7060
25

b) Give any journal entries that should be made as the result of the bank reconciliation. (4
points)
Bank service Charges Debit 70
Cash Credit 70
c) What should the balance in the Cash account be after the reconciliation entries ? (2
points)
6630
d) What total amount of cash should the company report on the June 30 balance sheet ? (2
points)
6700
26

Part 4 – LIABILITIES (40 points)
1. The balance sheet for Colt Corp. provided the following summarized pretax data:
Year 2015 Year 2016
Deferred tax liability $376,000 $248,000
Tax expense as reported on the 2016 Income Statement was $493,000.
Calculate the amount of income taxes payable for 2016 ? (8 points)
DTL
Tax Expense
Op Bal. A $316,000 C=A-B 248,000=316,000-B = B=A-C =$128,000
Change B $128,000
2016 Bal. C $248,000
Tax Expense $493,000
D.T charge $128,000
Tax Payable $621,000
2. What are the three ways of dealing with (accounting for) contingent liabilities ? (4 points)
Contingent Liabilities  (1) (2) (3)
Features Probable Reasonably
Possible
Remote
Subject to Estimate Record as Liability Disclose in Note Disclosure not required
Not Subject to Estimate Disclose in Note Disclose in Note Disclosure not required
Chance of future event
or events occurrence
HIGH More than remote
but less than likely
Slight
27

3. Short Company purchased land by paying $10,000 cash on the purchase date and agreeing
to pay $10,000 for each of the next ten years beginning one-year from the purchase date.
Short's incremental borrowing rate is 10%. (4 points)
At what value is the land reported at on the balance sheet:
Debit Credit
Land 10000
Cash 10000
Incremental borrowing rate 10%
Present Value (PV) of all the cash flows
PV(10%,10,10,000,, 1)
PV = $67,590 +$10,000
Value of the land reported on the B/S = $77,590
28

4. Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and
agreeing to pay $3,000 every three months during the next five years. The first payment is
due three months after the purchase date. Rae's incremental borrowing rate is 12% (annual).
What is the value of the vehicle as reported on the balance sheet as of the purchase date ? (4
points)
Cost = $10000
Borrowing Rate= 12%
Value of vehicle as reported on the balance sheet date= 3000*14.877
= $44633
5. What four tests (list/explain them) must be satisfied if a lease is to treated as an operating
lease. (6 points)
The below criteria’s are specified by GAAP to distinguish between Operating and Capital
leases. However, an Operating lease does not meet any of the four criteria and does not
cause the recording of an asset and liability.
Companies often lease assets rather than purchase them for economic reasons and records
as rent expense.
 The Lease term is 75% or more of the asset’s expected economic life.
 Ownership of the asset is transferred to the lessee at the end of lease term.
 The lease contract permits the lessee to purchase the asset at a price that is lower than its fair
market value (Bargain).
 The present value of the lease payments is 90% or more of the fair market value of the asset
when the lease is signed.
29

6. On November 1, 2017, Davis Company issued $30,000 (face value), ten-year, 7% (annual)
bonds for $29,100. The bonds were dated November 1, 2017, and interest is payable each
November 1 and May 1.
Is it a discount bond or a premium bond ? (2 points)
It is a discount bond
How much is the semi-annual interest expense (when the straight-line discount/premium
amortization method – the only one we learned - is used) ? (4 points)
Semi-annual interest expense = 30000*7%/2
= 2100/2
= 1050
7. A corporation retired $200,000 of bonds, which have an unamortized premium of $8,000, by
purchasing them on the open market for $210,000.
Open market Value $210,000
Retired Value $200,000 +$2,000=$202,000
Was there a gain or a loss on the retirement of these bonds ? (2 points)
There was a Loss
How much was it ? (4 points)
Loss =$8,000
30

31