6) The investment in bonds will be initially recorded at what amount?
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- On January 1, 2019, Brewster Company issued 2,000 of its 5-year, 1,000 face value, 11% bonds dated January 1 at an effective annual interest rate (yield) of 9%. Brewster uses the effective interest method of amortization. On December 31, 2023, Brewster extinguished the 2,000 bonds early through acquisition in the open market for 1,980,000. On July 1, 2022, Brewster issued 5,000 of its 6-year, 1,000 face value, 10% convertible bonds dated July 1 at an effective annual interest rate (yield) of 12%. The bonds are convertible at the option of the investor into Brewsters common stock at a ratio of 10 shares of common stock for each bond. Brewster uses the effective interest method of amortization. On July 1, 2023, an investor in Brewsters convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Brewsters common stock, which had a market value of 105 per share at the date of the conversion. Required: 1. Using the information about Brewster, answer the following questions: a. Were the 11% bonds issued at par, at a discount, or at a premium? Why? b. Is the amount of interest expense for the 11% bonds using the effective interest method of amortization higher in the first or second year of the life of the bond issue? Why? 2. Using the information about Brewster, explain the following: a. How is a gain or loss on early extinguishment of debt determined? Does the early extinguishment of the 11% bonds result in a gain or loss? Why? b. How does Brewster report the early extinguishment of the 11% bonds on the 2023 income statement? 3. Based on the information provided about Brewster, answer the following questions: a. Does recording the conversion of the 10% convertible bonds into common stock under the book value method affect net income? What is the rationale for the book value method? b. Does recording the conversion of the 10% convertible bonds into common stock under the market value method affect net income? What is the rationale for the market value method?Mills Company had five convertible securities outstanding during all of 2019. It paid the appropriate interest (and amortized any related premium or discount using the straight-line method) and dividends on each security during 2019. Each convertible security is described in the following table. The corporate income tax rate is 30%. Required: 1. Prepare a schedule that lists the impact of the assumed conversion of each convertible security on diluted earnings per share. 2. Prepare a ranking of the order in which the securities would be included in the diluted earnings per share computations.Parilo Company acquired 170,000 of Makofske Co., 5% bonds on May 1, 2016, at their face amount. Interest is paid semiannually on May 1 and November 1. On November 1, 2016, Parilo Company sold 50,000 of the bonds for 96. Journalize entries to record the following: a. The initial acquisition of the bonds on May 1. b. The semiannual interest received on November 1. c. The sale of the bonds on November 1. d. The accrual of 1,000 interest on December 31, 2016.
- Refer to the information in RE13-5. Assume that on June 30, Aggie received interest on the Smith Corporation bonds. Prepare the June 30 journal entries to record the receipt of the interest. On April 30, 2019, Aggie Corporation purchased Smith Corporation 10%, 5-years bonds with a face value of 12,000 at par plus four months of accrued interest. Prepare the April 30 journal entry to record the purchase of these available-for-sale securities.Waseca Company had 5 convertible securities outstanding during all of 2019. It paid the appropriate interest (and amortized any related premium or discount using the straight line method) and dividends on each security during 2019. Each of the convertible securities is described in the following table: Additional data: Net income for 2019 totaled 119,460. The weighted average number of common shares outstanding during 2019 was 40,000 shares. No share options or warrants arc outstanding. The effective corporate income tax rate is 30%. Required: 1. Prepare a schedule that lists the impact of the assumed conversion of each convertible security on diluted earnings per share. 2. Prepare a ranking of the order in which each of the convertible securities should be included in diluted earnings per share. 3. Compute basic earnings per share. 4. Compute diluted earnings per share. 5. Indicate the amount(s) of the earnings per share that Waseca would report on its 2019 income statement.On January 1, 2015, when the prevailing effective rate on similar instruments was at 7%, INC Company acquired USD3,000,000, 10-year bonds of GHI Company. Transaction costs of USD243,114.27 were incurred in the purchase, resulting to a new effective interest rate of 6%. The bonds will be accounted as a financial asset at fair value through other comprehensive income and will pay interest of 9% every June 30 and December 31. Hence, the investments in bonds of INC Company will be initially recorded at what amount?
- On September 1, 2022, when the prevailing market rate on similar instruments was at 5%, ABC Corporation acquired P5,000,000 bonds from R Company. The bonds will be accounted as a financial asset at fair value through other comprehensive income. The bonds pay interest of 6% every March 1 and September 1 and will mature on September 1, 2027. The fair value of the bonds ( dirty price) at year end are presented below: Dec 31, 2022 107 Dec. 31,2023 105 Dec 31, 2024 103 Dec 31, 2025 104 Dec 31, 2026 101 a. what is the amount of adjustment to the unrealized gain or loss-other comprehensive income account to update the fair value of the investment on December 31, 2023? ( debit or credit?) b. prepare the journal entry to record the receipt of interest on march 1, 2024 c. what is the carrying value of the investment in bonds on december 31, 2024? d. If bonds with face value of P2,000,000 were sold at fair value on Decembe 31, 2025, ( after updating the…On January 1, 2022, BTS Company purchased 3,000, P1,000 face value term bons with a stated rate of 10% as at amortized cost. The bonds pay interest annually on December 31 and will be redeemed entirely by the issuer on December 31, 2025. The bond investment was purchased for P2,819,100 at an effective rate of 12%.On December 31, 2023, the entity changes business model for managing its financial assets and this investment as reclassified as debt investments at fair value through profit or loss. On this date, the bonds are quoted at 101. What is the carrying value of the debt investment on December 31, 2023 prior to reclassification?Lydio Company purchased P4,000,000 face value, 10%, 3-year Milo Co. bonds on January 1, 2021 whenthe prevailing market rate of interest was at 12%. Interests are collectible every December 31. Three-fourths of the Milo Co. bonds were sold on July 31, 2022 at total proceeds of P3,500,000. Yield rate at December 31, 2021 and 2022, respectively were 8% and 14%. Assuming that the company’s business model has an objective of holding the debt securities to collect contractual cash flows, what is the realizedgain on sale of Milo Co. bonds?QUESTION 1. Assuming that the company’s business model has an objective of holding the debt securities to collect contractual cash flows and to sell, how much is the interest income in its statement of comprehensive income for the period ending December 31, 2022?QUESTION 2. Assuming that the company’s business model has no objective of holding the debt securities to collect contractual cash flows, the investment is reported in the statement of financial…
- On January 1, 2020, CullumberCorporation purchased 335 of the $1,000 face value, 6%, 10-year bonds of Walters Inc. The bonds mature on January 1, 2030, and pay interest annually beginning January 1, 2021. Cullumber purchased the bonds to yield 11%. How much did Cullumber pay for the bonds? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) Cullumber must pay for the bonds $enter a dollar amountOn Jan. 1, 2018, ABC acquired P5,000,000 face value bonds as aninvestment that will provide contractual cashflows. On acquisitiondate, it had a fair value of P5,400,000, transaction cost of P10,020,nominal interest rate of 9% payable every Jan. 1, a term of 5 years,and an effective interest rate of 7%. The bonds were valued asfollows: Date Fair Value Date Fair ValueDec. 31, 2018 5,300,000 Dec. 31, 2021 5,100,000Dec. 31, 2019 5,150,000 Dec. 31, 2022 5,050,000Dec. 31, 2020 5,200,000 Dec. 31, 2023 5,000,000 If on Dec. 15, 2021, there was change in the purpose ofholding the asset to trading only and it qualifies forreclassification, what is the journal entry for transfer theinvestment to the new account?On January 1, 2020 Chicken Wings Company purchased P3,000,000, 8% bonds of Fried Chicken Corporation for an amount that yields 10%. Interest is payable every June 30 and December 31 of the year. The bonds will mature on December 31, 2024. The business model of the entity is to collect the contractual cash flows which represent sole payment of principal and interest. On April 1, 2022, to pay maturing obligations, Chicken Wings Company sold P1,000,000 face value bonds for total proceeds of 104. Additionally, Fried Chicken Corporation is currently financially distressed and after paying the amount due on December 31, 2022 was unable to meet the original terms of the contract. Fried Chicken Corporation arrange for negotiation by lowering the interest rate from 8% to 4% for the remaining terms.How much is the total (net) impact in the profit or loss of the bond transactions for the year 2022?
