Questions

Exercise 1

The charts of accounts is added below. Use only these accounts in your answers. Please skip a line between the different journal entries.
The Board of Fossil Group, Texas (FGT), decided to a bond issue. On April 1, 2007 Fossil Group issued eight-year term, unsecured, convertible bonds with a face value of €30,000,000. In total 60,000 bonds of €500 were issued. The face interest rate is 5 per cent per year. Interest is payable semi-annually on March 31 and September 30. The bonds were issued for €32,029,500 implying a market interest rate of 4 per cent.
The effective interest method is used to amortize the premium at which the bonds were issued. Fossil’s accounting year ends on December 31. Please round off your answers to whole Euros.

Charts of accounts exercise 1

Account payable
Accounts receivable
Additional Paid-In Capital, Common Stock
Additional Paid-In Capital, Treasury Stock
Bonds Payable
Cash
Common Stock
Convertible Bonds Payable
Dividends
Dividends Payable
Dividends Receivable
Income Summary
Income Tax
Income Expense
Interest Payable
Interest Receivable
Interest Revenues
Retained Earnings
Treasury Stock
Unamortized Bond Discount
Unamortized Bond Premium

Question A

Prepare the journal entries to record:

1. The issue of the bond on April 1, 2007.
2. The first payment of the interest and the amortization of the premium on September 30, 2007.
3. The accrual of interest and the amortization of the premium on December 31, 2007.
4. The second payment of the interest and the amortization of the premium on March 31, 2008..

Question B

Calculate the carrying amount or book value at which the bonds are reported in Fossil’s
balance sheet on March 31, 2015.

Question C

Calculate the total amount that is reported as interest expense (with respect to these bonds)
in Fossil’s Income Statement for the year ending December 31, 2007.

Question D

Calculate the carrying amount or book value at which the bonds are reported in Fossil’s
balance sheet on December 31, 2007.

Question E

Calculate the interest expense over the first quarter of the year 2008.

Question F

Calculate the carrying amount or book value of the bonds on March 31, 2008.
On April 1, 2008 the bondholders present all the bonds for conversion into common shares.
The common shares have a par value of €100 each. Each set of ten bonds, each with a face
value of € 500, can be converted into 7 shares.

Question G

Prepare the journal entry to record the conversion of the bonds into common shares. Please
use only the accounts as presented on the charts of accounts at the end of the exam.

Question H

What are the main advantages of issuing common stock over issuing long term debt (i.e
bonds)? Mention two advantages.

Exercise 2

Little Bikes is a trading company specialized in buying and selling miniature bicycle models.
The financial year starts on January 1 and ends on December 31. Little Bikes’ beginning
balance sheet (in euros) on January 1, 2014, is shown below:

In the footnotes, the following information is available:

The interest percentage of the long term debt is 6% per year. The interest will be paid twice a year, on March 1, and September 1. The long term debt will be repaid in 10 years, in equal amounts, on March 1. The first repayment took place on March 1, 2014.

All purchases and sales are on credit.

Accounts receivable trade (net) consists of the following items:
Accounts receivable trade (gross)               100,000
Allowance for uncollectible accounts          (12,000)
Accounts receivable trade (net)                   88,000

Little Bikes uses the percentage of net sales method to estimate the allowance for uncollectible accounts. The percentage used is 2.5%. During 2014, one customer went bankrupt. The value of his bill was € 4,000.

The par value of a share is € 100. On January 1, 2014, there were 600 shares in treasury stock. Half of these treasury shares were sold on July 23, 2014 for € 42,000.

A dividend of 10% of common stock was declared on July 12, 2014. The date of payment is
August 1, 2014.

A truck with a purchase price of € 24,000 and a carrying value of € 12,000 was sold with a
gain of € 2,000.

Gross sales during 2014 are € 850,000. During the year, total sales discounts are € 50,000.

The table below gives an overview of all cash receipts and cash expenditures during 2014 (in
euros).

On December 31, 2014, the amounts of the following balance sheet items are given:

Building                                                    1,450,000
Trucks                                                           94,000
Trade inventory Accounts                             320,000
payable trade                                              110,000
Accounts receivable trade (gross)                 134,000
Salaries payable                                              5,000

Question A

Complete the overview of cash receipts and expenditures during 2014 and determine the
amount of cash on December 31, 2014.

Question B

Calculate the uncollectible accounts expense over the year 2014 and the ending balance for
the allowance for uncollectible accounts on December 31, 2014.

Question C

Calculate the purchase of trade inventory over the year 2014.

Question D

Calculate the cost of goods sold over the year 2014.

Question E

Complete the income statement for 2014.

Question F

Complete the balance sheet on December 31, 2014.

Question G

Prepare the schedule of cash flows from operating activities according to the indirect method.

Answers

Exercise 1

Question A

Question B

€30,000,000 (or €0)

Question C

€640,590+ €319,200 = €959,790

Question D

(30,000,000 + 2,029,500) – (€109,410 + 55,800) = €31,864,290

Question E

€31,920,090 * 0.04 * 3/12 = €319,200

Question F

(30,000,000 + 2,029,500) – (€109,410 + 55,800 + 55,800) = €31,808,490

Question G

Question H

1. No repayment of the principal amount; with a favourable influence on liquidity.
2. Without the obligation to pay a fixed amount of interest; with a favourable influence on liquidity as well as on profitability

Cash payments of interest don’t depend on profitability; you always need to pay interest.
Cash payments of dividend will depend on profitability.

Exercise 2

Disposal of truck: 12,000 + 2,000 = 14,000

Interest paid: (6/12 * 6% * 800,000) + (6/12 * 6% * 720,000) = 45,600

Repayment of debt: 800,000 / 10 = 80,000

Dividends paid: 6,000 shares issued, 600 in treasury stock on Jan. 1. Treasury shares sold after dividend declared, so 5,400 * 100 * 10% = 54,000

Amount of cash on Dec. 31: 45,000 (beginning) + 818,000 – 709,600 = 153,400

Question B

Uncollectible accounts expense: 2,5% * 800,000 (net sales) = 20,000
Ending balance: beginning balance is 12,000 (credit). Write-off is 4,000. Addition is 20,000,
so ending balance is 28,000.

Question C

Accounts payable beginning + purchases – payments = accounts payable ending 140,000 + purchases - 450,000 = 110,000
Purchases = 420,000

Question D

Trade inventory beginning + purchases – cost of goods sold = trade inventory ending
360,000 + 420,000 - 460,000 = 320,000
Cost of goods sold = 460,000

Question E

Calculations
Salaries expense: salaries paid + change in salaries payable: payable has gone down, so part of previous period has been paid: 80,000 - (26,000 – 5,000) = 59,000

Depreciation building: difference between old (1,500,000) and new (1,450,000) balance sheet account: 50,000

Depreciation truck: difference between old (120,000) and new (94,000) balance sheet account, minus carrying value of sold truck: 26,000 – 12,000 = 14,000

Interest expense: (2/12 * 800,000 * 6%) + (10/12 * 720,000 * 6%) = 8,000 + 36,000 = 44,000.

Question F

Calculations
Accounts receivable trade (net): 134,000 - 28,000 = 106,000

Long term debt: 800,000 – 80,000 = 720,000

Interest payable: 4/12 * 6% * 720,000 = 14,400

Retained earnings: beginning + net income – dividends = 306,000 + 155,000 – 54,000 = 407,000

Treasury stock: 0,5 * 75,000 = 37,500

Paid in capital, treasury stock: 42,000 – 37,500 = 4,500

Question G