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Chapter 13: Question 6Q (page 691)
How is present value related to the concept of a liability?
Interest included in payables and receivables, makes us consider future value at their current value. The present value of liability shows the debt, excluding the interest factor.
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Komissarov Company has a debt investments in the bonds issued by Keune Inc. The bonds were purchased at par
for \(400,000 and, at the end of 2017, have a remaining life of 3 years with annual interest payments at 10%, paid at the end of each year. This debt investment is classified as held-for-collection. Keune is facing a tough economical environment and informs all of its investors that it will be unable to make all payments according to the contractul terms. The controller of Komissarov has prepared the following revised expected cash flow forecast for this bond investment.
December 31, Expected cash flows
2018 \)35,000
2019 35,000
2020 385,000
Total cash flows $455,000
Instructions
(a) Determine the impairement loss for Komissarov at December31, 2017.
(b) Prepare the entry to record the impairement loss for Komissarov at Decembber 31, 2017.
(c) On January 15, 2018, Keune receives a major capiatl infusion from a private equity investor. It informs Komissarov that the bonds now will be paid according to the contractual terms. Briefly describe how the Komissarov would account for the bond investment in light of this new information.
Distinguish between a determinable current liability and a contingent liability. Give two examples of each type.
(Debt and Equity Investments) Cardinal Paz Corp. carries an account in its general ledger called Investments,which contained debits for investment purchases, and no credits, with the following descriptions.
Feb. 1, 2017 Sharapova Company common stock, \(100 par, 200 shares \) 37,400
April 1 U.S. government bonds, 11%, due April 1, 2027, interest payable
April 1 and October 1, 110 bonds of \(1,000 par each 110,000
July 1 McGrath Company 12% bonds, par \)50,000, dated March 1, 2017,
purchased at 104 plus accrued interest, interest payable
annually on March 1, due March 1, 2037, 54,000
(Round all computations to the nearest dollar.)
(a) Prepare entries necessary to classify the amounts into proper accounts, assuming that the debt securities are classified
as available-for-sale.
(b) Prepare the entry to record the accrued interest and the amortization of premium on December 31, 2017, using the
straight-line method.
(c) The fair values of the investments on December 31, 2017, were:
Sharapova Company common stock \( 31,800
U.S. government bonds 124,700
McGrath Company bonds 58,600
What entry or entries, if any, would you recommend be made?
(d) The U.S. government bonds were sold on July 1, 2018, for \)119,200 plus accrued interest. Give the proper entry.
Presented below are two independent cases related to available-for-sale debt investments.
Case 1 Case 2
Amortized cost \(40,000 \)100,000
Fair value 30,000 110,000
Expected credit losses 25,000 92,000
For each case, determine the amount of impairment loss, if any
(Fair Value Option) Presented below is selected information related to the financial instruments of
Dawson Company at December 31, 2017. This is Dawson Company’s first year of operations.
Carrying Fair Value
Amount (at December 31)
Investment in debt securities (intent is to hold to maturity) \( 40,000 \) 41,000
Investment in Chen Company stock 800,000 910,000
Bonds payable 220,000 195,000
Instructions
(a) Dawson elects to use the fair value option for these investments. Assuming that Dawson’s net income is $100,000 in2017 before reporting any securities gains or losses determine Dawson’s net income for 2017. Assume that the differencebetween the carrying value and fair value is due to credit deterioration.
(b) Record the journal entry, if any, necessary at December 31, 2017, to record the fair value option for the bonds payable
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