Question

Fuller Food Company distributes coupons which may be presented (on or before a stated expiration date) to grocers. The grocers are reimbursed when they send the coupons to Fuller. In Fuller's experience, 50% of such coupons are redeemed, and generally one month elapses between the date a grocer receives a coupon from a consumer and the date Fuller receives it. During 2012 Fuller issued two separate series of coupons as follows:


Issue On Total Value Consumer Expiration Date Amount Disbursed as of 12/31/12
1/1/12 $720,000 6/30/13 $300,000
7/1/12 500,000 12/31/12 190,000

1. The December 31, 2012 balance sheet should indicate a liability for unredeemed coupons of:

a. $730,000
b. $60,000
c. $124,000
d. $120,000
e. $365,000

2. Case Corporation issues $100,000, 10%, five-year bonds at 94. The total interest expense over the life of the bonds is:

a. $56,000
b. $44,000
c. $50,000
d. $54,000
e. $46,000

Answer 1

Answer:

1. c.$124,000

2. e.$46,000

Explanation:

The Fuller company has issued two bonds with separate coupons. The liability for unredeemed bond at December 31, 2012 is $124,000.

The value of bond when issued is $720,000

Value of bond at expiration date is $300,000

720,000 / 300,000 = 2.4

2.4 * 190,000 = 456,000 / 3.67 years

= $124,000

Case corporation has issued bond with value 94 issued at par with 10% coupon rate.

Using the amortization bond table we get $46,000.

$(100000 / 94 ) * 10% = 106.38 * 5 years

= 5,319.20 * 8.64 amortizing rate

= $46,000