On January 1, 2018, Kelly Corporation acquired bonds with a face value of $500,000 for $483,841.79, a price that yields a 10% effective annual interest rate, pay interest on June 30 and December 31, and are due December 31, 2021, and are being held to maturity.

Required:

Prepare journal entries to record the purchase of the bonds and the first two interest receipts using the:

1.) straight line method of amortization

2.) effective interest method of amortization

A company issues a $10,000 bond with an interest rate of 4% per year. Interest is paid once per year, and it will mature in 5 years. Investors expect bonds of similar risk and maturity to pay interest of 7%: Show work

a.

Calculate the selling price of the bond. Round to two decimal places.

b. Record the journal entry that the company would record when this bond is issued

c. Record the journal entry for the first interest payment

1. A stock just paid a dividend of D₀ = $0.66. Dividend is expected to grow at a constant rate of 3.2%. The required rate of return is 15.7%. What is the current stock price?

2. XYZ stock is currently selling for $40.35 per share. The company just paid its first annual dividend of $4.08 a share. The firm plans to increase the dividend by 7 percent per year indefinitely. What is the expected return on XYZ stock?

Alicia (first time home buyer) is looking to buy one bed-room condo, and she needs your advice on the maximum price she can afford to offer for her condo purchase when she buys one. She plans to use her savings to pay for the down payment at 20% of purchase amount, and she will get a mortgage for the remaining.

The following info is available: • Mortgage interest rate: 2.40% compounded semi-annually (25-year mortgage amortization with fixed rate for 5 years with same monthly mortgage payment) • Alicia’s annual income is CAD 90,000. • Alicia qualifies for Gross Debt Ratio (GDS) of 35%, and with this GDS ratio she can afford CAD 2,250 for her monthly mortgage payment. •

Financial institutions use stress test rate of 4.94% to qualify for maximum mortgage loan one can borrow.

1. What maximum price Alicia can afford to offer for her condo purchase, assuming there is no stress test.

2. If Alicia buys a condo with her maximum amount calculated in 1, what would be the total interest for the first year?

3. Do you think stress test is helpful for Alicia? Explain.

During its first year of operations, Eastern Data Links Corporation entered into the following transactions relating to shareholders’ equity. The articles of incorporation authorized the issue of 10 million common shares, $1 par per share, and 1 million preferred shares, $50 par per share.

Prepare the appropriate journal entries to record each transaction. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)

Sold 2 million common shares, for $9 per share.

Issued 38,000 common shares to attorneys in exchange for legal services.

Sold 78,000 of its common shares and 5,500 preferred shares for a total of $1,030,000.

Issued 415,000 of its common shares in exchange for equipment for which the cash price was known to be $3,968,000

A company is negotiating loan terms with a bank. The company would like to purchase a property for $2.5 million. The property is projected to produce a first-year NOI of $180,000. Loan: The bank is willing to allow the loan to negatively amortize; however, the loan will need to be paid back at the end of the four-year period. Because of the risky nature of such loan, the bank will allow a 65 percent LTV loan on the property at the time of its purchase. It also requires a DCR in the first year of at 1.30. The contract (or the accrual) rate of interest on the loan is 12 percent. All loan payments are to be made monthly.

a. Show the loan amortization schedule for the next four years: Year 1, Year 2, Year 3 and Year 4, no months. Show and explain all calculations.

b. If the property value does not change, what will the loan-to-value ratio be at the end of the four-year period? Calculate. Show and explain all calculations.

c. Since the loan balance will be due in four years, let’s say the bank would like to make sure that the LTV at that time does not exceed 70 percent. To make this happen, how should the company counter-offer the asking price? Calculate the counter-offer price. Show and explain all calculations.

XYZ Company makes a lump-sum purchase of several assets on January 1 at a total cash price of $800,000. The estimated market values of the purchased assets are building, $536,250; land, $302,250; land improvements, $68,250; and four vehicles, $68,250.

1A. Allocate the lump-sum purchase price to the separate assets purchased.

1B. Prepare the journal entry to record the purchase.

Options for general journal: accumulated amortization, accumulated depletion, accumulated depreciation, amortization expense, building, cash, depletion expense, depreciation expense, equipment, gain on sale of equipment, goodwill, impairment loss, land, land improvements, leasehold improvements.

2. Compute the first-year depreciation expense on the building using the straight-line method, assuming a 15-year life and a $30,000 salvage value. Round answer to the nearest whole dollar.

3. Compute the first-year depreciation expense on the land improvements assuming a five-year life and double-declining-balance depreciation.

Consider the following stock information (price and number of shares outstanding):

1. Based on the information given, for a price-weighted index of the three stocks calculate:

1.1. the rate of return for the first period (t=0 to t=1). Interpret your answer.

1.2. the value of the divisor in the second period (t=1 to t=2). Assume that Stock G had a 4-1 split and stock Q has a 5-1 split, both during this period just before the market opens in t=2. Interpret your answer.

1.3. the rate of return for the second period (t=1 to t=2). Interpret your answer.

2. Based on the information given for the three stocks, calculate the first-period rates of return (from t=0 to t=1) on

2.1. a market-value-weighted index. Interpret your answer.

2.2. an equally-weighted index. Explain any differences with 1.1. and 2.1.

A monopolist in the natural gas ma rket can produce at a constan t average (and marginal) cost of AC = MC = $5 . It faces a market demand curve given by Q = 53 ? P . a. Find the profit-maximizing price and quantity for this monopolist. What are its profits? b. Suppose a second firm enters the market. Let Q 1 be the output of the first firm and Q 2 be the output of the second. Ma rket demand is now given by Q 1 + Q 2 = 53 ? P . Assuming that this second firm has the same costs as the first, write th e profits of each firm as functions of Q 1 and Q 2 . c. Suppose (as in the Cournot model) that each firm chooses its pr ofit-maximizing level of natural gas output based on the assumption that its competitor’ s output is fixed. Find each firm’s “reaction curve” (i.e., the rule that gives its desired output in terms of its competitor’s output). d. Calculate the Cournot equilibri um (i.e., the values of Q1 and Q 2 for which each firm is doing as well as it can given its competitor’s output). What ar e the resulting market price and profits of each firm?