MGT 105
Winter 2024
Midterm 2
Question 1 (25 points)
On September 1, 2024, Boston Corporation issued 6-year bonds with a face value of $80,000,000 and a stated interest rate (coupon rate) of 8%, payable on November 30th, February 28th, May 31st, and August 31st. The bonds were sold to yield 12% (market rate). The bonds are to be accounted for under the effective interest method. Table values are:
Present value of 1 for 6 periods at 8% .63017
Present value of 1 for 6 periods at 12% .50663
Present value of 1 for 24 periods at 2% .62172
Present value of 1 for 24 periods at 3% .49193
Present value of an ordinary annuity of 1 for 6 periods at 8% 4.62288
Present value of an ordinary annuity of 1 for 6 periods at 12% 4.11141
Present value of an ordinary annuity of 1 for 24 periods at 2% 18.91393
Present value of an ordinary annuity of 1 for 24 periods at 3% 16.93554
Present value of annuity due of 1 for 6 periods at 8% 4.99271
Present value of annuity due of 1 for 6 periods at 12% 4.60478
Present value of annuity due of 1 for 24 periods at 2% 19.29220
Present value of annuity due of 1 for 24 periods at 3% 17.44361
Required
a. Prepare a detailed calculation of the present value of the bonds on September 1, 2024. You MUST include the relevant table factors in your calculation or you will receive zero points.
b. Calculate the index price of the bonds on September 1, 2024. Round to nearest dollar.
c. Prepare the journal entry to record the issuance of the bonds on September 1, 2024. Journal entry explanation/description is not required.
d. Construct a bond amortization table that continues through the first three interest payments. Make sure all columns and rows are properly labeled. Round to the nearest dollar.
e. Prepare the adjusting journal entry to be made on December 31, 2024, Boston’s fiscal year end. Round to the nearest dollar. Journal entry explanation/description is not required.
Question 2 (18 points)
The records for Tungsten Company show the following data for its fiscal year ending 12/31/2024:
· Gross profit on installment sales recorded on the books was $480,000. Gross profit from collections of installment receivables was $320,000.
· Life insurance premiums for policies covering company officers were $3,800.
· Machinery was acquired in January for $300,000. Straight-line depreciation over a ten-year life (no salvage value) is used. For tax purposes, MACRS depreciation is used, and Tungsten deducts 14% of cost for 2024.
· Interest received on tax-exempt Wisconsin State bonds was $9,000.
· The estimated warranty liability related to 2024 sales was $21,600. Repair costs under warranties during 2024 were $13,600. The remainder of repair costs will be incurred in 2025.
· In 2024, pretax financial income is $700,000 and the tax rate is 15%. The tax rate published for 2025 and beyond is 20%.
Required
a. Prepare a schedule starting with pretax financial income in 2024 and ending with taxable income in 2024. You must separate and label the permanent and temporary differences.
b. Prepare the journal entry on December 31, 2024 to record income taxes payable, income tax expense, and deferred income taxes. Journal entry explanation/description is not required.
c. Prepare the income tax expense section of the income statement for 2024, beginning with “Income before income taxes.”
Question 3 (7 points)
Nora Corporation reported the following pretax income (loss) and related tax rates during the years 2024-2027:
Pretax Income (Loss) Tax Rate
2024 $ 40,000 20%
2025 (160,000) 25%
2026 210,000 30%
2027 190,000 35%
Pretax financial income (loss) and taxable income (loss) were the same for all years since Nora began business. The tax rates from 2024-2027 were enacted in 2024. Nora’s fiscal year end is the calendar year end.
Required (Journal Entry Explanation/Description not required)
Prepare the journal entries for 2025, 2026, and 2027 to record income taxes payable (refundable), income tax expense (benefit), and the tax effects of any loss carryforward. Assume that Nora expects to realize the benefits of any loss carryforward in the year that immediately follows the loss year.
Question 4 (25 points)
House Corporation manufactures metal presses. On January 1, 2024, House leased a press to Lake Company under a six-year noncancelable lease agreement. The following information about the lease and the press is provided:
o The press has an alternative use for House.
o Equal annual payments of $120,175 that are due on January 1 each year provide House with an 8% return on net investment. The first payment is due at lease inception.
o Title does not automatically transfer to Lake at the end of the lease.
o The fair value of the press at lease inception is $600,000. The cost of the press to House is $540,000. The press has an expected useful life of nine years with no residual value.
o At the end of the lease, Lake may purchase the equipment at a fair market price.
o Collectability of the lease payments is probable. Lake pays any executory costs.
o The present value factor for an annuity due for 6 periods at 8% is 4.99272.
Required
a. Perform. and adequately document ALL 5 of the lease tests necessary to determine if House should account for the lease as a finance lease or an operating lease. Based on your work, conclude as to which lease type House’s lease represents.
b. Prepare a lease amortization schedule for House for the first three years (2024 – 2026).
c. Prepare ALL the necessary journal entries for the lessor for 2024 (assume the use of a perpetual inventory method). Journal entry descriptions are not required.
d. Prepare the journal entry for the lessor on 1/1/2025. Journal entry description not required.