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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

What is meant by “accounting symmetry” between the entries recorded by the debtor and creditor in a troubled-debt restructuring involving a modification of terms? In what ways is the accounting for troubled-debt restructurings non-symmetrical?

(Debtor/Creditor Entries for Continuation of Troubled Debt) Daniel Perkins is the sole shareholder of Perkins Inc., which is currently under protection of the U.S. bankruptcy court. As a “debtor in possession,” he has negotiated the following revised loan agreement with United Bank. Perkins Inc.’s \(600,000, 12%, 10-year note was refinanced with a \)600,000, 5%, 10-year note.

Instructions

(a) What is the accounting nature of this transaction?

(b) Prepare the journal entry to record this refinancing:

(1) On the books of Perkins Inc.

(2) On the books of United Bank.

(c) Discuss whether generally accepted accounting principles provide the proper information useful to managers and investors in this situation.

On December 31, 2017, Hyasaki Corporation has the following account balance:

Bonds payable, due January 1, 2026 \(2,000,000

Discount on bonds payable \) 88,000

Interest payable $ 80,000

Show how the above accounts should be presented on the December 31, 2017, balance sheet, including the proper classifications.

E14-15 (L01,2) (Entries for Redemption and Issuance of Bonds) Jason Day Company had bonds outstanding with a maturity value of \(300,000. On April 30, 2017, when these bonds had an unamortized discount of \)10,000, they were called in at 104. To pay for these bonds, Day had issued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 103 (face value $300,000).

Instructions

Ignoring interest, compute the gain or loss, and record this refunding transaction. (AICPA adapted)

(a) In a troubled-debt situation, why might the creditor grant concessions to the debtor?
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