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Chapter 14: Q1P (page 718)

Question: (Debt Securities) Presented below is an amortization schedule related to Spangler Company’s 5-year, \(100,000

bond with a 7% interest rate and a 5% yield, purchased on December 31, 2015, for \)108,660.

Cash Interest Bond Premium Carrying Amount

Date Received Revenue Amortization of Bonds

12/31/15 \(108,660

12/31/16 \)7,000 \(5,433 \)1,567 107,093

12/31/17 7,000 5,354 1,646 105,447

12/31/18 7,000 5,272 1,728 103,719

12/31/19 7,000 5,186 1,814 101,905

12/31/20 7,000 5,095 1,905 100,000

The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end.

12/31/16 12/31/17 12/31/18 12/31/19 12/31/20

Amortized cost \(107,093 \)105,447 \(103,719 \)101,905 $100,000

Fair value 106,500 107,500 105,650 103,000 100,000

Instructions

(a) Prepare the journal entry to record the purchase of these bonds on December 31, 2015, assuming the bonds are classified

as held-to-maturity securities.

(b) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2016.

(c) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2018.

(d) Prepare the journal entry(ies) to record the purchase of these bonds, assuming they are classified as available for-

sale.

(e) Prepare the journal entry(ies) related to the available-for-sale bonds for 2016.

(f) Prepare the journal entry(ies) related to the available-for-sale bonds for 2018.

Short Answer

Expert verified

Answer:

Unrealized holding loss for 2016 is $593 and $719 for 2018. Debt investment debited and cash credited by $108,660. Cash debited by $7,000, interest revenue credited by $5,433 and debt investment credited by $1,567.

Step by step solution

01

Entry for the purchase of held-to-maturity securities

Date

Particulars

Debit

Credit

December 31, 2015

Debt Investment

$108,660

Cash

$108,660

(Being entry for the purchase of bond)

02

Entry related to interest revenue for December 31, 2016

Date

Particulars

Debit

Credit

December 31, 2016

Cash

$7,000

Interest Revenue

$5,433

Debt Investment

$1,567

(Being entry of interest revenue)

03

Entry related to interest revenue for December 31, 2018

Date

Particulars

Debit

Credit

December 31, 2018

Cash

$7,000

Interest Revenue

$5,272

Debt Investment

$1,728

(Being entry of interest revenue)

04

Entry related to purchasing of available-for-sale securities

Date

Particulars

Debit

Credit

December 31, 2015

Debt Investment

$108,660

Cash

$108,660

(Being entry for the purchase of bond)

05

Entry related to interest revenue and fair value adjustment for December 31, 2016 

Date

Particulars

Debit

Credit

December 31, 2016

Cash

$7,000

Interest Revenue

$5,433

Debt Investment

$1,567

(Being entry of interest revenue)

December 31, 2016

Unrealized holding Gain or loss- loss

$593

Fair value adjustment

$593

(Being entry for fair value adjustment)

06

Entry related to interest revenue and fair value adjustment for December 31, 2018

Date

Particulars

Debit

Credit

December 31, 2018

Cash

$7,000

Interest Revenue

$5,272

Debt Investment

$1,728

(Being entry of interest revenue)

December 31, 2018

Unrealized holding Gain or loss- loss

$719

Fair value adjustment

$719

(Being entry for fair value adjustment)

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Most popular questions from this chapter

Question: (Restructure of Note under Different Circumstances) Halvor Corporation is having financial difficulty and therefore has asked Frontenac National Bank to restructure its \(5 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value.

Instructions

The following are four independent situations. Prepare the journal entry that Halvor and Frontenac National Bank would make for each of these restructurings.

(a) Frontenac National Bank agrees to take an equity interest in Halvor by accepting common stock valued at \)3,700,000 in exchange for relinquishing its claim on this note. The common stock has a par value of \(1,700,000.

(b) Frontenac National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of \)3,250,000 and a fair value of \(4,000,000.

(c) Frontenac National Bank agrees to modify the terms of the note, indicating that Halvor does not have to pay any interest on the note over the 3-year period.

(d) Frontenac National Bank agrees to reduce the principal balance due to \)4,166,667 and require interest only in the second and third year at a rate of 10%.

On January 1, 2017, Nichols Company issued for \(1,085,800 its 20-year, 11% bonds that have a maturity value of \)1,000,000 and pay interest semiannually on January 1 and July 1. The following are three presentations of the long-term liability section of the balance sheet that might be used for these bonds at the issue date.

1

Bonds payable (maturing January 1, 2037)

\(1,000,000

Unamortized premium on bonds payable

85,800

Total bond liability

\)1,085,800

2

Bonds payable—principal (face value \(1,000,000 maturing January 1, 2037)

\) 142,050a

Bonds payable—interest (semiannual payment \(55,000)

943,750b

Total bond liability

\)1,085,800

3

Bonds payable—principal (maturing January 1, 2037)

\(1,000,000

Bonds payable—interest (\)55,000 per period for 40 periods)

2,200,000

Total bond liability

\(3,200,000

aThe present value of \)1,000,000 due at the end of 40 (6-month) periods at the yield rate of 5% per period

bThe present value of \(55,000 per period for 40 (6-month) periods at the yield rate of 5% per period.

Instructions

(a) Discuss the conceptual merit(s) of each of the date-of-issue balance sheet presentations shown above for these bonds.

(b) Explain why investors would pay \)1,085,800 for bonds that have a maturity value of only $1,000,000.

(c)Assuming that a discount rate is needed to compute the carrying value of the obligations arising from a bond issue at any date during the life of the bonds, discuss the conceptual merit(s) of using for this purpose: (1) The coupon or nominal rate. (2) The effective or yield rate at date of issue.

(d)If the obligations arising from these bonds are to be carried at their present value computed by means of the current market rate of interest, how would the bond valuation at dates subsequent to the date of the issue be affected by an increase or a decrease in the market rate of interest?

(Equity Securities Entries) On December 21, 2017, Bucky Katt Company provided you with the following information

regarding its equity investments.

December 31, 2017

Investments Cost Fair Value Unrealized Gain (Loss)

Clemson Corp. stock \(20,000 \)19,000 \((1,000)

Colorado Co. stock 10,000 9,000 (1,000)

Buffaloes Co. stock 20,000 20,600 600

Total of portfolio \)50,000 \(48,600 (1,400)

Previous fair value adjustment balance –0–

Fair value adjustment—Cr. \)(1,400)

During 2018, Colorado Co. stock was sold for \(9,400. The fair value of the stock on December 31, 2018, was Clemson Corp.

stock—\)19,100; Buffaloes Co. stock—$20,500. None of the equity investments result in significant influence.

Instructions

(a) Prepare the adjusting journal entry needed on December 31, 2017.

(b) Prepare the journal entry to record the sale of the Colorado Co. stock during 2018.

(c) Prepare the adjusting journal entry needed on December 31, 2018.

BE14-2 (L01) The Colson Company issued $300,000 of 10% bonds on January 1, 2017. The bonds are due January 1, 2022, with interest payable each July 1 and January 1. The bonds are issued at face value. Prepare Colson’s journal entries for (a) the January issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.

(Amortization Schedule—Straight-Line) Devon Harris Company sells 10% bonds having a maturity value of \(2,000,000 for \)1,855,816. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1.

Instructions

Set up a schedule of interest expense and discount amortization under the straight-line method. (Round answers to the nearest cent.)
See all solutions

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