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Chapter 14: 5IFRS (page 718)

Lady Gaga Co. recently made an investment in the bonds issued by Chili Peppers Inc. Lady Gaga’s business model for this investment is to profit from trading in response to changes in market interest rates. How should this investment be classified by Lady Gaga? Explain.

Short Answer

Expert verified

Given investment is classified as a trading security.

Step by step solution

01

Definition of trading securities

Trading securities are held for less than one year and sold when the price goes up.

02

Classification of investment

The given investment is classified as trading because the primary purpose is to earn profit by selling this investment. Hence, this investment is classified as Trading. Also, the valuation of this investment is done based on fair value.

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Most popular questions from this chapter

Celine Dion company issued $600,000 of 10%, 20- year bonds on January 1, 2017, at 102. Interest is payable semiannually on July 1 and January 1. Dion company uses the straight-line method of amortization for bond premium or discount.

Instructions:

Prepare the journal entries to record the following.

  1. The issuance of the bonds.
  2. The payment of interest and the related amortization on July 1, 2017.
  3. The accrual of interest and the related amortization on December 31, 2017.

In each of the following independent cases, the company closes its books on December 31.

1. Sanford Co. sells \(500,000 of 10% bonds on March 1, 2017. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2020. The bonds yield 12%. Give entries through December 31, 2018.

2. Titania Co. sells \)400,000 of 12% bonds on June 1, 2017. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2021. The bonds yield 10%. On October 1, 2018, Titania buys back \(120,000 worth of bonds for \)126,000 (includes accrued interest). Give entries through December 1, 2019.

Instructions

For the two cases prepare all of the relevant journal entries from the time of sale until the date indicated. Use the effective-interest method for discount and premium amortization (construct amortization tables where applicable). Amortize premium or discount on interest dates and at year-end. (Assume that no reversing entries were made.)

Differentiate between a fixed-rate mortgage and a variable-rate mortgage.

On January 1, 2017, Henderson Corporation redeemed \(500,00 of bonds at 99. At the time of redemption, the unamortized premium was \)15,000. Prepare the corporation’s journal entry to record the reacquisition of the bonds.

What is done to record properly a transaction involving the issuance of a non-interest -bearing long-term note in exchange for property?
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