Professional Documents
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Gross Profit - Margin Ratio
Gross Profit - Margin Ratio
Financial Leverage
It indicates the amount of debt a company
uses to finance its operations relative to its
equity. A high Financial Leverage # indicates Return on (Equity) - (Assets) Lower(2)
that a company has a significant amount more
debt relative to equity; this can increase
potential returns but also chance of default.
DECIMALS
Current Ratio
Measures the Ability Company's ability to
pay off short term liabilities. Indicates Short
Term Liquidity, and ability to meet current 𝑇𝑜𝑡𝑎𝑙 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
Higher
obligations. Having a high Current Ratio can 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
display an inefficient use of funds. For
startups in a growth phase this is expected to
be low.
Receivables Ratio
Indicates how fast and efficiently a company 𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠
can collect payment from customers of items 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 (𝑌𝑒𝑎𝑡 1) + (𝑌𝑒𝑎𝑟 2) Higher
2
sold to them on credit. If it is very high this
would indicate they might be overly stringent.
Times Interest Earned Ratio (TIE) 𝑃𝑟𝑜𝑓𝑖𝑡 + 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
Indicates a company's ability to meet its 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 Higher
interest payments on debt obligations.
Table A
Table B
BOND QUESTION #1
On January 1, 2014 Company A negotiated a 5-year bond with a maturity value of $600,000. The bond will pay
interest at a rate of 6.0% per annum payable June 30th and December 31st of each year. When the bond was
NOTE: Present value tables can be found at the back of this exam (second last page)
a) To calculate the principal payment you must first multiply the maturity value by the Present Value. To
determine the present value you must find the matching column in TABLE A,
- where % = (Market Rate or Bond Yield%)/Annual Periods, and Periods = (Years * Annual Periods).
- In this case it will be 4%,10 Periods.
b) To calculate interest you must multiply the maturity value by the Present Value of Annuity (Table B),
the Interest Rate, and the 1/Yearly Periods.
- where % = (Market Rate or Bond Yield%)/Annual Periods, and Periods = (Years * Annual Periods).
- In this case it will be 4%,10 Periods.
c) To then calculate the proceeds from when the bond was received, add them together
6
Interest = 600, 000 × 12
× 0. 06 × 8. 1109 = $145, 996
Cash 551,356.20
The interest expense is the semi-annual charge which represents the cost of borrowing associated with the bond (aka
promised the dividends to bond holders). Next you must update the discount on bond payable to represent the change
between the updated face value (which has decreased) of the bond and its issue price. Credit cash to reflect the
payment of interest directly from the given account.
Interest Exp ((Issue Price + Credited DOBP * Market R8% * 6/12) 22,216
(551,356 + 4,054) * 8% * 6/12
This journal entry represents the same effect as the preceding, however the Interest Expense will increase the calculated
sum compounding all preceding credits of discount on bond payable. The Cash amount should never change between
entries.
3. Using the effective interest rate mathond, prepare journal entires at June 30th and December 31st for 2014
The effective interest rate method is a way of amortising the bond discount or premium over the life of the bond based on the
effective interest rate. The method involves calculating the present value of the bond's cash flows at the time of issuance, and
then allocating the interest expense and discount or premium to each period based on the effective interest rate. Use the
table to record all changes to entires in the journal entires above.
Date Face Value Bond Premium Interest Interest Paid Bond Premium Carrying
Start Expense Ending Value Ending
A bond is considered to be a premium when the price is higher than or par to face value; It is a discount for the
opposite. The face value of this bond is $100,000, to calculate the price:
6
Interest = 100, 000 × 12
× 0. 1 × 8. 5302 = $42, 651
Since the sale price, $117,061, is higher than the face value of $100,000 the bond is being sold at a premium. By
issuing the bond at a premium can provide additional funds to a company which need them. However, doing so means
that the interest expense can be awfully high and hurt later profits.
2. Prepare the journal entry to record the issuance of the bonds, and the next 3 subsequent dates.
April 1
Cash 117,061
The premium on Bond Payable represents the difference between Sale Price and face value. With each ongoing
payment the company will have to slowly pay off the additional amount.
Sept 30
Interest Expense ((Issue Price * Market R8% * 6/12) 3,511
(117,061* 6% * 6/12)
The discount on bond payable represents the difference between Interest expense and the cash
Dec 31
Interest Exp ((Issue Price - Credited DOBP) * Market R8% * 3/12) 1733
(117,061 - 1,488)* 6% * 3/12)
Since they record end of year journal entries you must adjust for the year end, which is only 3 months.
Mar 31
Interest Expense 1733
Since the previous was split between the current payment, the math was already done and you can simply rewrite it.
Now at the end of the term asked you should calculate the Current Value of the Bond:
April 1: 177,061
Sept 30 Prem Amort: (1488)
Sept 30 Current Value: 115572
Financing Activities
Cash Flow #2
Cash Flows From Operating Activities
Financing Activities
** Note, you do not need to include the cost of purchasing equipment for Cash Flows, since it was purchased with
shares which is a cost with cash.
Comprehensive Question:
Cash 30,000
To make it easier to track, you should record both transactions under the same date header, but split their respective
debit and credit transactions to be in-line with each other. If you are getting a specific supply/equipment you should
record it as such, as is the cash with Horses.
Cash 14,400
BESI is renting a farm, and paid upfront. To account for this you would debit Prepaid Expense of the account, and pay
the amount with cash.
July 1st Supplies (Hay) 6,000
Cash 6,000
Even though the lessons are happing over the span of a year you would debit cash for the full amount, and unearned
revenue for the same amount. With each subsequent month you would debit unearned revenue the same equal amount
(1/12 of unearned revenue), and credit real revenue the same amount. This is done to ensure accounting principles are
met, and to track revenue as earned.
Record the expense of using the supplies, and then credit the supplies to indicate the loss in the account.
Calculation is: Depreciation = ((Initial Cost - Residual Value)/Useful Life) * Years Used,
Land $ 1,400,000
Building $ 2,160,000
Equipment $ 440,000
Cash $ 1,500,000
Cash $ 2,687,500