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Chapter 12: 5BE (page 610)

Hendricks Corporation purchased trading investment bonds for \(50,000 at par. On December 31, Hendricks received an annual interest of \)2,000, and the fair value of the bonds was $47,400. Prepare Hendricks’ journal entries for (a) the purchase of the investment, (b) the interest received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.)

Short Answer

Expert verified
  1. The amount debited to debt investment is $50,000.
  2. The amount of rent received is $2,000.
  3. The unrealized holding income is $2,600.

Step by step solution

01

Definition of the fair value adjustment

It is the process in which the book value and purchase price are adjusted.

02

Journal entry of the purchase of the investment

Date

Description

Debit

Credit

A.

Debt Investment

$50,000

Cash

$50,000

Being entry to record the purchase of bonds

03

Journal entry for the interest received

Date

Description

Debit

Credit

B

Cash

$2,000

Interest Revenue

$2,000

Being entry of rent received

04

Adjustment entry for the fair value

Date

Description

Debit

Credit

C

Unrealized holding loss- Income

$2,600

Fair value adjustment

$2,600

Being year-end adjustment entry of fair value

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Most popular questions from this chapter

Question: Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for intangible assets.

What is the fair value option?

Taylor Swift Corporation purchases a patent from Salmon Company on January 1, 2017, for $54,000. The patent has a remaining legal life of 16 years. Taylor Swift feels the patent will be useful for 10 years. Prepare Taylor Swift’s journal entries to record the purchase of the patent and 2017 amortization.

Use the information provided in IFRS12-8. Assume that the recoverable amount of the division is estimated to be \(750,000. Prepare Waters’ journal entry, if necessary, to record an impairment of the goodwill.

Waters Corporation purchased Johnson Company 3 years ago and at that time recorded goodwill of \)400,000. The Johnson Division’s net assets, including the goodwill, have a carrying amount of \(800,000. The recoverable amount of the division is estimated to be \)1,000,000. Prepare Waters’ journal entry, if necessary, to record impairment of the goodwill.

Question: Treasure Land Corporation incurred the following costs in 2017.

Cost of laboratory research aimed at the discovery of new knowledge

\(120,000

Cost of testing in search for product alternatives

100,000

Cost of engineering activity required to advance the design of a product to the manufacturing stage

210,000

Prototype testing subsequent to meeting economic viability

75,000

\)505,000

Prepare the necessary 2017 journal entry(ies) for Treasure Land.

See all solutions

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