Faculty: Rkb

Semester: Summer’20
Act 320
MID TERM Exam
Time: 4 pm to 7 pm
Date: December 18, 2020
Rules of exam:
1. It’s a 3 hours exam. You MUST NOT submit your exam answers papers after 10
pm. Any later submission will result a 40% deduction.
2. Any form of cheating, duplication, copy/paste from website/book/other students
will result 0 (ZERO) for the students involved with it. I will not ask for any
explanation from you if I suspect any sort of plagiarism.
3. You can either use MS Word, MS excel or pen/paper. For pen/paper answer script,
you will have to make a PDF file while uploading.
Faculty: Rkb
Semester: Summer’20
Question 1 (Marks 20)

On July 1, Donkey purchased $45,000 of inventory, terms 5/10, n/30. Donkey paid freight
costs of $3,200. On July 3, Donkey returned damaged goods and received $6,000 back. On
July 9, Donkey paid 60% for the goods and the rest was paid on September 5. 1% Penalty
charge on outstanding amount was applied for making late payment. What is the net
benefit Donkey has availed? If Donkey gets an offer of 4% return on $45,000 from another
investment, should they accept the offer or should they purchase the inventory at 5/10,
n/30 terms?

Solution:
July 1 Purchase, Dr 45,000
Accounts Payable, Cr 45,000

July 1 Freight-in 3,200

Cash 3,200

July 3 Accounts Payable 6,000

Purchase Return 6,000

July 9 Accounts Payable 23,400

Cash 22,230
Purchase Discounts 1,170

Sep 5 Accounts Payable 15,600

Penalty 156
Cash 15,756

Therefore, total cash paid by Donkey is = 22,230+15756+3200 = 41,186

Net benefit Donkey has availed = 3,814

With 4% return Offer : 150

With inventory purchase Offer: 2250
Hence, they should purchase the inventory at 5/10, n/30 terms.
Faculty: Rkb
Semester: Summer’20
Question 2 (Marks 20)

Fokir Corporation issued 12-year bonds on January 1, 2014, 100,000 semiannual bonds at 98
PAR. Costs associated with the bond issuance were $90,000. Fokir uses the straight-line
method for amortization. Prepare the journal entry for December 31, 2014.

Answer:

January 1, 2014

Dr. Cash (100,000*98%) 98,000

Dr. Discount on Bonds Payable (100,000*2%) 2,000

Cr. Bond Payable 100,000

December 31, 2014

Dr. Bond Issue expense 9,000

Cr. Unamortized Bond Issue costs (90,000*1/10) 9,000

Faculty: Rkb
Semester: Summer’20
Question 3 (Marks 20)

XYZ company has sold a good worth $120,000 with a COGS of $90,000 in 2017. It was an
installment sale and they collected cash $115,000 at the end of each year. XYZ was not sure
about the rest $5,000 and thus, recorded them as bad debt in 2019.

Instructions
1. How much should be the installment amount for each year? Assume market interest
rate was 10% in 2017.
2. How much interest XYZ will be earning in 3 years?

Question 4 (Marks 15)

Make the following journal entry:

1. On January 1, 2015, Donkey Company acquired 56,000 shares (26% of Fool Company
common stock) at a cost of $15 a share.

Fair Value:
Dr Fool Company Shares 840,000
Cr Cash 840,000

Equity Method:
Dr Investment in Fool Company 840,000
Cr Cash 840,000

2. At December 31, 2015, the 56,000 shares of Fool Company have a fair value (market
price) of $12 a share.

Fair Value:
Dr Unrealized Loss 168,000
Cr Fool Company 168,000

Equity Method:
No entry

3. On November 20, 2015, Fool Company announced and paid a cash dividend of
$230,000.

Fair value:
Dr Cash 59,800
Cr Dividend Revenue 59,800
Faculty: Rkb
Semester: Summer’20
Equity Method:
Dr Cash 59,800
Cr Investment in Fool Company 59,800

Question 5 (Marks 25)

You have the option to either issue a bond or to purchase the bond in July 1, 2020. The bond
is a held to maturity security, face value is BDT 3,000,000, semi-annual 5 years bond with a
coupon rate 11%. Note that, the market interest rate has been dropped to 9% and deposit
interest rate to 6% from April 1, 2020. COVID 19 hit Bangladesh from March 8, 2020 and the
situation is likely to be tougher in the future. Bangladesh Bank and Government have
modified some policies to boost up the business and economy.

Considering the ongoing issue and the upcoming economic/pandemic factor, explain your
best position for the bond, i.e., should you purchase the bond and become a bond holder
OR should you issue a bond and become a bond issuer. You decision will be based on your
financial benefit from the bond purchase/issue.

Some information about the bond issuing company (Pre COVID 19):
Total Asset = BDT 50 cr (40% is current and the rest is noncurrent; 25% of current asset is
cash)
Total Liability = BDT 20 cr (60% is current and 40% is long term)
Total equity = BDT 30 cr (Equity has only three items: Paid up capital, Additional paid up
capital and Retained earnings)