Acct 3040, Spring 2016-Ace Corporation’s debt instruments are described on each of the 5 separate

Case/Simulation #3, Acct 3040, Spring 2016

Directions:
1) Reminder: THIS IS A CASE/SIMULATION ASSIGNMENT. DO NOT DISCUSS THIS ASSIGNMENT
WITH ANYONE OTHER THAN DR.CHENG!!
2) Ace Corporation’s debt instruments are described on each of the 5 separate "Debt" sheets.
You are required to complete all 5 "Debt" sheets AND THEN summarize your analysis in the
"Debt Summary" sheet in this workbook. Pay careful attention to the instructions on each
sheet.
3) The 12/31/13 balance sheet and the income statement for the year-ended 12/31/13
provided for you on the "Balance Sheets & Income Stmt" sheet are correct in accordance
with US GAAP and provide you with check figures for the 12/31/13 carrying value of debt
and interest expense for the year ended 12/31/13. This sheet is protected so that you cannot
make changes to it. You do not have any requirements on this sheet.
4) You must prepare a complete statement of cash flows for the year-ended 12/31/13 on the
Stmt of Cash Flows sheet in this workbook. Instructions and additional information you
need are included on this sheet in the workbook.
5) Your Excel file must be submitted through the Assignments function
in Blackboard. Assignments submitted in any other way earn a score of zero.
6) This assignment is due by 11:00 pm on Wed. 3/9/16. Zero points for late submissions.
7) Name the project file you submit as follows: LastnameCS3. For
example, my file name would be ChengCS3.

Name:
Enter Your Name Here!
Debt 1
Requirement 1: Enter your name in cell B1.
ACCOUNTING PERIOD DETAILS:
Ace’s fiscal year ends on December 31st every year.
Ace prepares accrual adjusting entries semi-annually, on June 30th and Dec. 31st each year.
Ace applies US GAAP for all of its debt instruments and does not use the fair value option.
CONTRACT DETAILS FOR DEBT 1:
Ace Corp. issued bonds with face value of $250,000 on July 1, 2009.
These bonds mature on June 30, 2013 and have a stated interest rate of 8%.
These bonds require semi-annual coupon payments on Dec. 31 and June 30 each year.
Ace received $250,000 as original principal on 7/1/09 when these bonds were issued.
Ace paid $8,000 of bond issue costs on 7/1/09 related to these bonds.
Requirement 2: Fill in the boxes below for these bonds.
Market (effective) interest rate for these bonds on 7/1/09:

per period

Semi-annual annuity payment amount required:

Requirement 3: Prepare the entries that Ace would have prepared for these bonds
on the dates below. If no entry is required, state so.
Don’t forget to account for bond issue costs.
Date
6/30/2013

Account

Debit

Credit

12/31/2013

Requirement 4: Go to the Debt Summary sheet in this workbook and complete the cells for Debt 1.

Debt 2
Enter Your Name Here!
ACCOUNTING PERIOD DETAILS:
Ace’s fiscal year ends on December 31st every year.
Ace prepares accrual adjusting entries semi-annually, on June 30th and Dec. 31st each year.
Ace applies US GAAP for all of its debt instruments and does not use the fair value option.
CONTRACT DETAILS FOR DEBT 2:
Ace Corp. issued bonds with face value of $500,000 on January 1, 2013.
These bonds mature on December 31, 2018 and have a stated interest rate of 10%.
These bonds require semi-annual coupon payments on June 30 and Dec. 31 each year.
The market interest rate for these bonds on 1/1/13 was 8.9%.
Ace paid $24,000 of bond issue costs on 1/1/13 related to these bonds.
Requirement 1: Fill in the boxes below for these bonds.
Face value =
Semi-annual annuity payment amount required =
Number of periods (n) =
Market interest rate per period =
Cash proceeds (original principal) borrowed on 1/1/13 =

Requirement 2: Prepare the entries that Ace would have prepared for these bonds
on the dates below. If no entry is required, state so.
Don’t forget to account for bond issue costs.
Date
1/1/2013

Account

Debit

Credit

6/30/2013

12/31/2013

Requirement 3: Go to the Debt Summary sheet in this workbook and complete the cells for Debt 2.

Debt 3
Enter Your Name Here!
ACCOUNTING PERIOD DETAILS:
Ace’s fiscal year ends on December 31st every year.
Ace prepares accrual adjusting entries semi-annually, on June 30th and Dec. 31st each year.
Ace applies US GAAP for all of its debt instruments and does not use the fair value option.
CONTRACT DETAILS FOR DEBT 3:
Ace Corp. issued bonds with face value of $300,000 on July 1, 2013.
These bonds mature on June 30, 2016 and have a stated interest rate of 4%.
These bonds require semi-annual coupon payments on Dec. 31 and June 30 each year.
Ace received $261,316 as original principal on 7/1/13 when these bonds were issued.
Ace’s bond issue costs were immaterial for these bonds.
Requirement 1: Fill in the boxes below for these bonds.
Face value =
Semi-annual annuity payment amount required =
Number of periods (n) =
Market interest rate per period =
Cash proceeds (original principal) borrowed on 7/1/13 =

Requirement 2: Prepare the entries that Ace would have prepared for these bonds
on the dates below. If no entry is required, state so.
Date
7/1/2013

Account

Debit

Credit

12/31/2013

Requirement 3: Go to the Debt Summary sheet in this workbook and complete the cells for Debt 3.

Debt 4
Enter Your Name Here!
ACCOUNTING PERIOD DETAILS:
Ace’s fiscal year ends on December 31st every year.
Ace prepares accrual adjusting entries semi-annually, on June 30th and Dec. 31st each year.
Ace applies US GAAP for all of its debt instruments and does not use the fair value option.
CONTRACT DETAILS FOR DEBT 4:
On 1/1/13, Ace decided to purchase equipment with a fair market value of $350,000.
Ace financed this purchase with the vendor by issuing a loan payable.
The loan payable has a face value of $492,243 because that’s the amount that Ace
is required to pay the vendor on the maturity date of December 31, 2016.
No other payments are required on this loan.
Requirement 1: Fill in the boxes below for these bonds.
Annual annuity payment amount required =

ZERO

Number of periods (n) =
(NOTE: Even though Ace prepares semi-annual
AJEs, this loan requires annual compounding.)
Market interest rate per period =
Original carrying value of this NON-CASH LOAN =

Requirement 2: Prepare the entries that Ace would have prepared for this loan
on the dates below. If no entry is required, state so.
You must ignore depreciation AJEs for the equipment purchased by this loan.
Date
1/1/2013

Account

Debit

Credit

6/30/2013

12/31/2013

Requirement 3: Go to the Debt Summary sheet in this workbook and complete the cells for Debt 4.

Debt 5
Enter Your Name Here!
ACCOUNTING PERIOD DETAILS:
Ace’s fiscal year ends on December 31st every year.
Ace prepares accrual adjusting entries semi-annually, on June 30th and Dec. 31st each year.
Ace applies US GAAP for all of its debt instruments and does not use the fair value option.
CONTRACT DETAILS FOR DEBT 5:
On 1/1/13, Ace decided to purchase equipment by issuing an installment loan
directly to the equipment vendor (NON-CASH LOAN). This loan has a face value of
$1,115,966, a stated interest rate of 5%, and a maturity date of 12/31/17.
Based on these contract terms, the annual payment due each 12/31 is $257,760
Upon further investigation, you have determined that the appropriate market
interest rate for this loan is 9.1% on 1/1/13.
REMEMBER: You cannot change the contractual terms of this loan, but you need to
properly account for the SUBSTANCE of this loan.
Requirement 1: Fill in the boxes below for these bonds.
Lump-sum payment due on the maturity date =
(Remember that this is a regular installment loan.)
Annual annuity payment amount required =
(Remember that this is based on the contract terms.)
Number of periods (n) =
(NOTE: Even though Ace prepares semi-annual
AJEs, this loan requires annual compounding.)
Market interest rate per period =

ZERO
$257,760

Original carrying value of this NON-CASH LOAN =

Requirement 2: Prepare the entries that Ace would have prepared for this loan
on the dates below. If no entry is required, state so.
You must ignore depreciation AJEs for the equipment purchased by this loan.
Date
1/1/2013

Account

Debit

Credit

6/30/2013

12/31/2013

Requirement 3: Go to the Debt Summary sheet in this workbook and complete the cells for Debt 5.

Name:
Debt Summary Sheet

Enter Your Name Here!

Each of the 5 Debt sheets that you have completed in this workbook requires you to
complete cells in this worksheet. Note that you must complete columns C through H for
each of the 5 debt instruments. Also note that the 12/31/13 Bonds and Loans Payable
amount in cell C17 needs to agree with the carrying amount reported on the 12/31/13
balance sheet and the total interest expense amount in cell D17 needs to agree with the
interest expense in the income statement for the year ended 12/31/13.

Debt Instrument
Debt 1
Debt 2
Debt 3
Debt 4
Debt 5
Totals
CHECK FIGURES:

Bonds and Loans Bonds and Loans Interest expense
Payable 12/31/12 Payable 12/31/13
recognized
Carrying Value
Carrying Value
during 2013

Cash borrowed
during 2013

Cash paid for
interest during
2013

Cash paid for
principal during
2013

Non-cash interest
expense
recognized
during 2013

250,000
0
0
0
0
250,000
2,003,279

190,575

36,909

Balance Sheets & Income Stmt
NOTE: You do not have any requirements on this sheet.
You will use these statements to help you prepare the Statement of
Cash Flows for the year ended 12/31/13.
Your 12/31/13 carrying value of debt instruments and your interest expense for
the year ended 12/31/13 should agree with the numbers in these financial statements.
Ace Corporation
Balance Sheets

Cash
Accounts receivable
Merchandise inventory
Office supplies
Prepaid bond issue costs
Property, plant, and equipment, net
Patent
Totals
Accounts payable
Rent payable
Income taxes payable
Bonds and loans payable
Common stock ($1000 par per share)
Additional paid-in capital
Retained earnings
Treasury stock
Totals

Ace Corporation
Income Statement
For the Year Ended 12/31/13
12/31/2013
755,704
375,000
665,000
24,000
20,000
2,270,000
550,000
4,659,704

12/31/2012
442,000
45,000
485,000
21,000
1,000
1,215,000
600,000
2,809,000

52,000
5,000
100,000
2,003,279
400,000
900,000
1,309,425
(110,000)
4,659,704

92,000
8,000
27,000
250,000
400,000
900,000
1,132,000
0
2,809,000

Sales revenue
Cost of goods sold
Gross profit
Operating expenses:
Salaries expense
Rent expense
Supplies expense
Patent amortization
Depreciation
Total operating expenses
Operating income
Other income (loss):
Interest revenue (expense)
Bond issue cost (expense)
Gains (losses) on sales of equipment
Other income (loss), net
Income before income taxes
Provision for income taxes
Net Income

4,280,000
2,670,000
1,610,000

270,000
5,000
69,000
50,000
210,000
604,000
1,006,000

(190,575)
(5,000)
(30,000)
(225,575)
780,425
200,000
580,425

Statement of Cash Flows

Enter Your Name Here!

Requirement: Complete the 2013 Statement of Cash Flows using the direct method for
Operating Cash Flows. Don’t forget any required disclosures!
Use the comparative balance sheets and 2013 income statement provided
along with additional information provided in Column E of this worksheet.
You must include the appropriate descriptive language in Column A for
the items you include in each section of the cash flows statement.

ADDITIONAL INFORMATION:
1) Ace paid $65,000 to purchase equipment.
2) Ace sold equipment with an original cost of
$440,000 and accumulated depreciation of $290,000
for $120,000 cash.
3) Ace declared and paid cash dividends.

Ace Corporation
Statement of Cash Flows
For the Year Ended 12/31/13

You must determine the dollar amount.
4) Ace purchased treasury stock for $110,000.

Cash flows from operating activities

Net cash provided (used) by operating activities
Cash flows from investing activities

Net cash provided (used) by investing activities
Cash flows from financing activities

Net cash provided (used) by financing activities
Net increase (decrease) in cash
Cash, January 1, 2013
Cash, December 31, 2013

Reconciliation of Net Income to Net Operating Cash Flows:

Supplemental Schedule of Noncash Investing and Financing Activities: