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Chapter 13: Q4P (page 658)

(Debt Investments) Presented below is information from a bond investment amortization schedule with

related fair values provided. These bonds are classified as available-for-sale.

12/31/17 12/31/18 12/31/19

Amortized cost \(491,150 \)519,442 \(550,000

Fair value 497,000 509,000 550,000

Instructions

(a) Indicate whether the bonds were purchased at a discount or a premium.

(b) Prepare the adjusting entry to record the bonds at fair value on December 31, 2017. The Fair Value Adjustment account

has a debit balance of \)1,000 before adjustment.

(c) Prepare the adjusting entry to record the bonds at fair value on December 31, 2018.

Short Answer

Expert verified

Fair value adjustment debited and Unrealized holding gain credited with $6,850. unrealized holding loss debited and fair value adjustment credited with $10,442.

Step by step solution

01

Step 1:Purchase of bond

After studying the amortization cost of the bonds, it is concluded that the amortized cost of the bonds increases every. The increase in the amortization cost of every year indicated that the bonds were purchased at a discount.

02

Entry for the fair value adjustment

Date

Particular

Debit

Credit

December 31, 2017

Fair value adjustment

$6,850

Unrealized holding- income

$6,850

(Being entry of the fair value adjustment)

03

Entry for the fair value adjustment

Date

Particular

Debit

Credit

December 31, 2018

Unrealized holding- loss

$10,442

Fair value adjustment

$10,442

(Being entry of the fair value adjustment)

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Most popular questions from this chapter

Ramirez Company has a held-for-collection investment in the 6%, 20-year bonds of Soto Company. The investment was originally purchased for \(1,200,000 in 2016. Early in 2017, Ramirez recorded an impairment of \)300,000 on the Soto investment, due to Soto’s financial distress. In 2018, Soto returned to profitability and the Soto investment was no longer impaired. What entry does Ramirez make in 2018 under (a) GAAP and (b) IFRS?

(Equity Method) Parent Co. invested $1,000,000 in Sub Co. for 25% of its outstanding stock. Sub Co. pays out

40% of net income in dividends each year.

Instructions

Use the information in the following T-account for the investment in Sub to answer the following questions.

Investment in Sub Co.

1,000,000

110,000

44,000

(a) How much was Parent Co.’s share of Sub Co.’s net income for the year?

(b) What was Sub Co.’s total net income for the year?

(c) What were Sub Co.’s total dividends for the year?

(d) How much was Parent Co.’s share of Sub Co.’s dividends for the year?

Use the information from IFRS17-10 but assume the shares were purchased to meet a non-trading regulatory requirements. Prepare Fairbanks' journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment.

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What evidence is necessary to demonstrate the ability to consummate the refinancing of short-term debt?
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