midterm exam solution managerial accounting

Sheet3 Sheet2 Sheet1 CIS Midterm Managerial Accounting Exam 18 Feb 2010 Question 1 Company A Company B Financed by $100,000 equity $100,000 bonds Taxation Dividend - Interest Profit before tax and Interest $50,000 Net Income Taxable Income Tax dividends Retained Earnings B has $2000 more retained earnings due to tax saving on interest No tax saving on bond interest when: 1) company is making a loss 2) has borrowed so much to avail of tax saving that it cannot pay interest Question 2 Dr Cr Cash Bond Discount Bond Payable Yr 1 Interest Expense Yr 2 Yr 3 (I) Income Statement Balance sheet End yr 0 yr 1 yr 2 Bond discount Bond carrying value (II) Bond Premium Yr 4 yr 3 b) Loss on bond Call c) bond Discount Common Stock PIC Excess Par d) Bonds issues at discount if Interest rate on bond is less than interest on similar risk investments in the economy Bonds issues at premium if Interest rate on bond is more than interest rate differences, then bond discount increases interest expense over the bond life and bond premium decreases interest expense over the bond life. Question 3 See notes and book Question 4 Yr opening Balance Payment Repayment Closing As the origon of bond discount and premium is related to Journals Note Payable Yr 1 1 Yr 2 1 Yr 3 1 Balance Sheet End Current Liabilities: Notes Payable Long Term Liabilities Total Liabilities Question 5 Current Market Value of Jones Invest. 100000 stocks @$6 12000 stocks @$6 Current Market Value of Company stock dividend will issue 10000 more stocks, 1200 to Jones After Stock dividend Company has stocks Company Value still Stock Price Jones now has market price Jones Invest. no change But if increased stock liquidity increases stock price to $5.80 , for example, then her investment is now worth Company value is now 0.00 0.00 0.00 0.00 00000.00 00000.00 00000.00 000000.00 0.00 00000.00 00000.00 00000.00 0.00 0000.00 0.00 00000.00 00000.00 00000.00 000000.00 0.00 00000.00 00000.00 00000.00 00000.00 0.00 0.00 000.00 00000.00 00000.00 0.00 0000.00 0.00 0000.00 0.00 00.00 0.00 00.00 0.00 0000.00 0000.00 0.00 00.00 00.00 0.00 0000.00 0000.00 0.00 00.00 00.00 0.00 00000.00 00000.00 0000.00 0000.00 0000.00 00000.00 00000.00 00000.00 000.00 000.00 00.00 00000.00 00000.00 00000.00 00000.00 00000.00 0.00 0.00 000.00 00000.00 0.00 0000.00 0.00 0000.00 0.00 000.00 0.00 000.00 0.00 0000.00 0000.00 0.00 000.00 000.00 0.00 0000.00 0000.00 0.00 000.00 000.00 0.00 0000.00 0000.00 0.00 000.00 000.00 0.00 00000.00 00000.00 0000.00 0000.00 0000.00 0000.00 00000.00 00000.00 00000.00 00000.00 000.00 000.00 000.00 000.00 00000.00 00000.00 00000.00 00000.00 00000.00 000.00 0000.00 00000.00 00000.00 000.00 00000.00 00000.00 0.00 00000.00 00000.00 0000.00 0.00 00000.00 00000.00 0.00 00000.00 00000.00 0000.00 0.00 00000.00 00000.00 0.00 00000.00 00000.00 000.00 0.00 00000.00 -0.00 00000.00 00000.00 0.00 00000.00 0000.00 00000.00 00000.00 0000.00 00000.00 00000.00 000.00 00000.00 0.00 0.00 0.00 0000.00 0000.00 000.00 0.00 0.00 0.00 00000.00 00000.00 00000.00 00000.00 00000.00 00000.00 00000.00 00000.00 000000.00 000000.00 0.00 00000.00 0.00 000000.00 000000.00 0.00 00000.00 0.00 00000.00 00000.00 0.00 00000.00 000000.00 0.00 000000.00