Cole, Inc., which owes Henry Co. $600,000 in notes payable with accrued interest of $54,000, is in financial difficulty

Cole, Inc., which owes Henry Co. $600,000 in notes payable with accrued interest of $54,000, is in financial difficulty. To settle the debt, Henry agrees to accept from Cole equipment with a fair value of $570,000, an original cost of $840,000, and accumulated depreciation of $195,000.

Instructions
(a) Compute the gain or loss to Cole on the settlement of the debt.
(b) Compute the gain or loss to Cole on the transfer of the equipment.
(c) Prepare the journal entry on Cole's books to record the settlement of this debt.
(d) Prepare the journal entry on Henry's books to record the settlement of the receivable.

Click here for the solution: Cole, Inc., which owes Henry Co. $600,000 in notes payable with accrued interest of $54,000, is in financial difficulty

(Various Time Value Situations) Using the appropriate interest table, provide the solution to each of the following four questions by computing the unknowns

P6-2 (Various Time Value Situations) Using the appropriate interest table, provide the solution to each of the following four questions by computing the unknowns.

(a) What is the amount of the payments that Ned Winslow must make at the end of each of 8 years to accumulate a fund of $90,000 by the end of the eighth year, if the fund earns 8% interest, compounded annually?

(b) Robert Hitchcock is 40 years old today and he wishes to accumulate $500,000 by his sixty-fifth birthday so he can retire to his summer place on Lake Hopatcong. He wishes to accumulate this amount by making equal deposits on his fortieth through his sixty-fourth birthdays. What annual deposit must Robert make if the fund will earn 12% interest compounded annually?

(c) Diane Ross has $20,000 to invest today at 9% to pay a debt of $47,347. How many years will it take her to accumulate enough to liquidate the debt?

(d) Cindy Houston has a $27,600 debt that she wishes to repay 4 years from today; she has $19,553 that she intends to invest for the 4 years. What rate of interest will she need to earn annually in order to accumulate enough to pay the debt?

Click here for the solution: (Various Time Value Situations) Using the appropriate interest table, provide the solution to each of the following four questions by computing the unknowns

On May 1, 2010, Kirmer Corp. purchased $450,000 of 12% bonds, interest payable on January 1 and July 1, for $422,800 plus accrued interest

On May 1, 2010, Kirmer Corp. purchased $450,000 of 12% bonds, interest payable on January 1 and July 1, for $422,800 plus accrued interest. The bonds mature on January 1, 2016.  Amortization is recorded when interest is received by the straight-line method (by months and rounded to the nearest dollar). (Assume bonds are available for sale.)

Instructions
(a) Prepare the entry for May 1, 2010.
(b) The bonds are sold on August 1, 2011 for $425,000 plus accrued interest. Prepare all entries required to properly record the sale.

Click here for the solution: On May 1, 2010, Kirmer Corp. purchased $450,000 of 12% bonds, interest payable on January 1 and July 1, for $422,800 plus accrued interest

Jennings Co. has earnings after interest but before taxes of $3,000

Jennings Co. has earnings after interest but before taxes of $3,000. The Company's times interest earned ratio is 7.00. Calculate the company's interest charges.

Click here for the solution: Jennings Co. has earnings after interest but before taxes of $3,000

Mildred Corp. owes D. Taylor Corp. a 10-year, 10% note in the amount of $110,000 plus $11,000 of accrued interest

P14-15 (Debtor/Creditor Entries for Continuation of Troubled Debt with New Effective Interest) Mildred Corp. owes D. Taylor Corp. a 10-year, 10% note in the amount of $110,000 plus $11,000 of accrued interest. The note is due today, December 31, 2007. Because Mildred Corp. is in financial trouble, D. Taylor Corp. agrees to forgive the accrued interest, $10,000 of the principal, and to extend the maturity date to December 31, 2010. Interest at 10% of revised principal will continue to be due on 12/31 each year.

Assume the following present value factors for 3 periods.
21/4% 23/8% 21/2% 25/8% 23/4% 3%
Single sum .93543 .93201 .92859 .92521 .92184 .91514
Ordinary annuity of 1 2.86989 2.86295 2.85602 2.84913 2.84226 2.82861

Instructions
(a) Compute the new effective interest rate for Mildred Corp. following restructure. (Hint: Find the interest rate that establishes approximately $121,000 as the present value of the total future cash flows.)
(b) Prepare a schedule of debt reduction and interest expense for the years 2007 through 2010.
(c) Compute the gain or loss for D. Taylor Corp. and prepare a schedule of receivable reduction and interest revenue for the years 2007 through 2010.
(d) Prepare all the necessary journal entries on the books of Mildred Corp. for the years 2007, 2008, and 2009.
(e) Prepare all the necessary journal entries on the books of D. Taylor Corp. for the years 2007, 2008, and 2009.


Click here for the solution: Mildred Corp. owes D. Taylor Corp. a 10-year, 10% note in the amount of $110,000 plus $11,000 of accrued interest

Tinikits, Inc. is the manufacturer of miniature models, especially of automobiles with historical interest

Tinikits, Inc. is the manufacturer of miniature models, especially of automobiles with historical interest. The company is developing new standard costs. Trent Roswell suggests that the new standards for materials should not include any waste for liquid plastics that spill out of the molds. "After all," he says, "we're trying to be a world class company. When we build in waste, we tell the workers it's okay to waste some." Betty Farrell, another manager, disagrees. "If we don't allow for some normal human error," she says, "we'll have a mighty unhappy work force. Also, I think that these kinds of perfection standards exploit the workers. I certainly wouldn't want to be held up to perfection every day—what could I do but fail?"



The argument continued. Finally, the standards were prepared. All standards were prepared according to normal expected performance, except that for materials, an ideal standard was used. Betty, still maintaining the unfairness of the system, refused to hold her workers accountable for materials quantity variances.

Do you think it's fair to use ideal standards to evaluate a department or workers ? Is it unethical for Betty to refuse to support the standards? Explain.


Click here for the solution: Tinikits, Inc. is the manufacturer of miniature models, especially of automobiles with historical interest

Ken paid the following amounts for interest during 2010

Ken paid the following amounts for interest during 2010:

Qualified interest on home mortgage $4,700
Auto loan interest 850
“Points" on the mortgage for acquisition of his 300 personal residence
Service charges on his checking account 40
Mastercard interest 300

Calculate Ken's itemized deduction for interest on Schedule A.


Click here for the solution: Ken paid the following amounts for interest during 2010

Interest is said to drive the stock market

Interest is said to drive the stock market. But interest is paid on bonds and loans, while stocks pay dividends, never interest. It would seem that interest has nothing to do with the stock market. Explain this apparent contradiction.


Click here for the solution: Interest is said to drive the stock market

Denise contributes the following assets to a partnership in exchange for a 25% partnership interest

48. Denise contributes the following assets to a partnership in exchange for a 25% partnership interest:

FMV Basis
Cash $20,000 20,000
Office equipment 12,000 5,000
Auto 20,000 6,000

What is Denise’s beginning basis in her partnership interest?


Click here for the solution: Denise contributes the following assets to a partnership in exchange for a 25% partnership interest

On June 1 of the current year, Patti contributes equipment with a $45,000 basis and a $35,000 FMV in exchange for a partnership interest

49. On June 1 of the current year, Patti contributes equipment with a $45,000 basis and a $35,000 FMV in exchange for a partnership interest. She purchased the equipment three years ago.

a. What is Patti’s basis in her partnership interest?
b. What is Patti’s holding period of her partnership interest?
c. What is the basis of the equipment in the hands of the partnership?
d. What is the holding period of the equipment in the hands of the partnership?
e. How will the partnership depreciate the equipment in the year of contribution?


Click here for the solution: On June 1 of the current year, Patti contributes equipment with a $45,000 basis and a $35,000 FMV in exchange for a partnership interest

On March 31, 2007, Hanson Corporation sold $5,000,000 of its 8%, 10-year bonds for $4,807,500 including accrued interest

On March 31, 2007, Hanson Corporation sold $5,000,000 of its 8%, 10-year bonds for $4,807,500 including accrued interest. The bonds were dated January 1, 2007. Interest is paid semiannually on January 1 and July 1. On April 1, 2011, Hanson purchased 1/2 of the bonds on the open market at 99 plus accrued interest and canceled them. Hanson uses the straight-line method for amortization of bond premiums and discounts.

(a) What was the amount of the gain or loss on retirement of the bonds?
(b) Prepare the journal entry needed at April 1, 2011 to record retirement of the bonds. Assume that interest and premium or discount amortization have been recorded through January 1, 2011. Record interest and amortization on only the bonds retired.
(c) Prepare the journal entry needed at July 1, 2011 to record interest and premium or discount amortization.


Click here for the solution: On March 31, 2007, Hanson Corporation sold $5,000,000 of its 8%, 10-year bonds for $4,807,500 including accrued interest

On October 1, 2010, Noller Company issued $3,000,000 par value, 10%, 10-year bonds dated July 1, 2010, with interest payable semiannually on January 1 and July 1

On October 1, 2010, Noller Company issued $3,000,000 par value, 10%, 10-year bonds dated July 1, 2010, with interest payable semiannually on January 1 and July 1. The bonds are issued at $3,406,500 (to yield 8%) plus accrued interest. The effective interest method is used.

(a) Prepare the journal entry at the date the bonds are issued.
(c) Prepare the entry for the interest payment on January 1, 2011.
(b) Prepare the adjusting entry at December 31, 2010, the end of the fiscal year.


Click here for the solution: On October 1, 2010, Noller Company issued $3,000,000 par value, 10%, 10-year bonds dated July 1, 2010, with interest payable semiannually on January 1 and July 1

E14-5 Assume the same information as in E14-4, except that Foreman Company uses the effective-interest method of amortization for bond premium or discount

E14-5 (Entries for Bond Transactions—Effective-Interest) Assume the same information as in E14-4, except that Foreman Company uses the effective-interest method of amortization for bond premium or discount. Assume an effective yield of 9.7705%.

Instructions
Prepare the journal entries to record the following. (Round to the nearest dollar.)
(a) The issuance of the bonds.
(b) The payment of interest and related amortization on July 1, 2011.
(c) The accrual of interest and the related amortization on December 31, 2011.

Click here for the solution: Assume the same information as in E14-4, except that Foreman Company uses the effective-interest method of amortization for bond premium or discount

As of January 1 of last year, Dylan’s outside basis and at-risk limitation for his 40% interest in the DEF Partnership were $60,000

As of January 1 of last year, Dylan’s outside basis and at-risk limitation for his 40% interest in the DEF Partnership were $60,000. Dylan and the partnership use the calendar year for tax purposes. The partnership incurred an operating loss of $200,000 for last year and a profit of $120,000 for the current year. Dylan is a material participant in the partnership.

a. How much loss, if any, may Dylan recognize for last year?
b. How much net reportable income must Dylan recognize for the current year?

Click here for the solution: As of January 1 of last year, Dylan’s outside basis and at-risk limitation for his 40% interest in the DEF Partnership were $60,000

In 2008, Adrianna contributed land with a basis of $16,000 and a fair market value of $25,000 to the A&I Partnership in exchange for a 25% interest in capital and profits

In 2008, Adrianna contributed land with a basis of $16,000 and a fair market value of $25,000 to the A&I Partnership in exchange for a 25% interest in capital and profits. In 2011, the partnership distributes this property to Isabel, also a 25% partner, in a no liquidating distribution. The fair market value has increased to $30,000 at the time the property is distributed. Isabel’s and Adrianna’s bases in their partnership interests are each $40,000 at the time of the distribution.

a. How much gain or loss, if any, does Adrianna recognize on the distribution to Isabel? What is Adrianna’s basis in her partnership interest following the distribution?
b. What is Isabel’s basis in the land she received in the distribution?
c. How much gain or loss, if any, does Isabel recognize on the distribution? What is Isabel’s basis in her partnership interest following the distribution?
d. How much gain or loss would Isabel recognize if she later sells the land for its $30,000 fair market value? Is this result equitable?
e. Would your answers to (a) and (b) change if Adrianna originally contributed the property to the partnership in 2000?

Click here for the solution: In 2008, Adrianna contributed land with a basis of $16,000 and a fair market value of $25,000 to the A&I Partnership in exchange for a 25% interest in capital and profits

On January 1, 2011, Lowry Co. issued ten-year bonds with a face value of $5,000,000 and a stated interest rate of 8%, payable semiannually on June 30 and December 31

On January 1, 2011, Lowry Co. issued ten-year bonds with a face value of $5,000,000 and a stated interest rate of 8%, payable semiannually on June 30 and December 31. The bonds were sold to yield 10%. Table values are:

Present value of 1 for 10 periods at 8% 0.46319
Present value of 1 for 10 periods at 10% 0.38554
Present value of 1 for 20 periods at 4% 0.45639
Present value of 1 for 20 periods at 5% 0.37689
Present value of annuity for 10 periods at 8% 6.71008
Present value of annuity for 10 periods at 10% 6.14457
Present value of annuity for 20 periods at 4% 13.59033
Present value of annuity for 20 periods at 5% 12.46221

Instructions
(a) Calculate the issue price of the bonds.

Click here for the solution: On January 1, 2011, Lowry Co. issued ten-year bonds with a face value of $5,000,000 and a stated interest rate of 8%, payable semiannually on June 30 and December 31

In its 2010 income statement, Cohen Corp. reported depreciation of $1,110,000 and interest revenue on municipal obligations of $210,000

In its 2010 income statement, Cohen Corp. reported depreciation of $1,110,000 and interest revenue on municipal obligations of $210,000. Cohen reported depreciation of $1,650,000 on its 2010 income tax return. The difference in depreciation is the only temporary difference, and it will reverse equally over the next three years. Cohen's enacted income tax rates are 35% for 2010, 30% for 2011, and 25% for 2012 and 2013. What amount should be included in the deferred income tax liability in Hertz's December 31, 2010 balance sheet?

Click here for the solution: In its 2010 income statement, Cohen Corp. reported depreciation of $1,110,000 and interest revenue on municipal obligations of $210,000

Lyle O’Keefe invests $30,000 at 8% annual interest, leaving the money invested without withdrawing any of the interest for 8 years

E6-2 (Simple and Compound Interest Computations) Lyle O’Keefe invests $30,000 at 8% annual interest, leaving the money invested without withdrawing any of the interest for 8 years. At the end of the 8 years, Lyle withdrew the accumulated amount of money.

Instructions
(a) Compute the amount Lyle would withdraw assuming the investment earns simple interest.
(b) Compute the amount Lyle would withdraw assuming the investment earns interest compounded annually.
(c) Compute the amount Lyle would withdraw assuming the investment earns interest compounded semiannually.

Click here for the solution: Lyle O’Keefe invests $30,000 at 8% annual interest, leaving the money invested without withdrawing any of the interest for 8 years

Using the appropriate interest table, compute the present values of the

E6-5 (Computation of Present Value) Using the appropriate interest table, compute the present values of the following periodic amounts due at the end of the designated periods.
(a) $50,000 receivable at the end of each period for 8 periods compounded at 12%.
(b) $50,000 payments to be made at the end of each period for 16 periods at 9%.
(c) $50,000 payable at the end of the seventh, eighth, ninth, and tenth periods at 12%.

Click here for the solution: Using the appropriate interest table, compute the present values of the

The yields for Treasuries with differing maturities, including an estimate of the real rate of interest, on a recent day were as shown in the following table

E6–3 The yields for Treasuries with differing maturities, including an estimate of the real rate of interest, on a recent day were as shown in the following table:

Maturity Yield Real rate of interest
3 months 1.41% 0.80%
6 months 1.71 0.80
2 years 2.68 0.80
3 years 3.01 0.80
5 years 3.70 0.80
10 years 4.51 0.80
30 years 5.25 0.80

Use the information in the preceding table to calculate the inflation expectation for each maturity.

Click here for the solution: The yields for Treasuries with differing maturities, including an estimate of the real rate of interest, on a recent day were as shown in the following table