a.
Introduction: Hedging is the strategy to manage the investment risk by taking the opposite position in the related assets such as shares, bonds, etc. Hedging involves derivatives such as options, futures, etc.Bond is an instrument issued by the companies to fulfil their need of large amount of borrowings. It is the instrument of indebtedness where issuer is obliged to pay the interest on it.
The
b.
Introduction: Hedging is the strategy to manage the investment risk by taking the opposite position in the related assets such as shares, bonds, etc. Hedging involves derivatives such as options, futures, etc.Bond is an instrument issued by the companies to fulfil their need of large amount of borrowings. It is the instrument of indebtedness where issuer is obliged to pay the interest on it.
The Journal entry to record change in intrinsic value and time value of put option as well as change in value of securities at sale.
c.
Introduction: Hedging is the strategy to manage the investment risk by taking the opposite position in the related assets such as shares, bonds, etc. Hedging involves derivatives such as options, futures, etc.Bond is an instrument issued by the companies to fulfil their need of large amount of borrowings. It is the instrument of indebtedness where issuer is obliged to pay the interest on it.
The Journal entry to record the exercise of put option and sale of securities held at sale.
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Advanced Financial Accounting
- On December 31, 2021, Kona purchased debt securities as trading securities. Pertinent data are as follows:\\n Fair Value\\nSecurity Cost At 12/31/22\\nA $225,000 $215,000\\nB 200,000 210,000\\nC 230,000 210,000\\nOn December 31, 2022, Kona transferred its investment in security C from trading to available‐for‐sale\\nbecause Kona intends to retain security C as a long‐term investment. What total amount of gain or loss on\\nits securities should be included in Kona's income statement for the year ended December 31, 2022?arrow_forwardS&L Financial buys and sells securities that it typically classifies as available-for-sale. On December 27, 2018,S&L purchased Coca-Cola bonds at par for $875,000 and sold the bonds on January 3, 2019, for $880,000. AtDecember 31, the bonds had a fair value of $873,000. When it purchased the Coca-Cola bonds, S&L Financialdecided to elect the fair value option for this investment. What pretax amounts did S&L include in its 2018 and2019 net income as a result of this investment (ignoring interest)?arrow_forwardLexington Co. has the following securities outstanding on December 31, 2020 (its first year of operations). Cost Fair Value Greenspan Corp. stock $20,000 $19,000 Summerset Company stock 9,500 8,800 Tinkers Company stock 20,000 20,600 $49,500 $48,400 During 2021, Summerset Company stock was sold for $9,200, the difference between the $9,200 and the “fair value” of $8,800 being recorded as a “Gain on Sale of Investments.” The market price of the stock on December 31, 2021, was Greenspan Corp. stock $19,900; Tinkers Company stock $20,500. Instructions a. What justification is there for valuing equity securities at fair value and reporting the unrealized gain or loss as part of net income? b. How should Lexington Co. report this information in its financial statements at December 31, 2020? Explain. c. Did Lexington Co. properly account for the sale of the Summerset Company stock? Explain. d. Are there any additional entries necessary for…arrow_forward
- This is a variation of E12–1 focusing on the fair value option.]Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July1, 2018. Company management has the positive intent and ability to hold the bonds until maturity, but when thebonds were acquired Tanner-UNF decided to elect the fair value option for accounting for its investment. Themarket interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $200 million for thebonds. The company will receive interest semiannually on June 30 and December 31. As a result of changingmarket conditions, the fair value of the bonds at December 31, 2018, was $210 million.Required:1. Would this investment be classified on Tanner-UNF’s balance sheet as held-to-maturity securities, tradingsecurities, available-for-sale securities, significant-influence investments, or other? Explain.2. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2018.3.…arrow_forwardThis problem is a variation of P 12–3, modified to cause the investment to be accounted for under the fair value option.]Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $80 million of 8% bonds, dated January 1, on January 1, 2018. Management intends to have the investment available for sale when circumstanceswarrant. When the company purchased the bonds, management elected to account for them under the fair valueoption. For bonds of similar risk and maturity the market yield was 10%. The price paid for the bonds was $66million. Interest is received semiannually on June 30 and December 31. Due to changing market conditions, thefair value of the bonds at December 31, 2018, was $70 million.Required:1. Prepare the journal entry to record Fuzzy Monkey’s investment on January 1, 2018.2. Prepare the journal entry by Fuzzy Monkey to record interest on June 30, 2018 (at the effective rate).3. Prepare the journal entries by Fuzzy Monkey to record interest on December 31,…arrow_forwardOn August 31, 2002, Rubics Company purchased the following equity securities and irrevocably elected to measure them at fair value through other comprehensive income: Fair Value Security Cost December 31, 2002 ₱ 96,000 ₱ 84,000 152,000 158,000 162,000 146,000 On December 31, 2002, Rubics reclassified its investment in security F from fair value through other comprehensive income to held for trading securities. What total amount of loss on reclassification should be included in Rubics' income statement for the year ended December 31, 2002? 0 b. 16,000 c. 22,000 d. 28,000arrow_forward
- Beresford Incorporated purchased several investments in debt securities during 2023, its first year of operations. The following information pertains to these securities. The fluctuations in their fair values are not considered permanent. Held-to-Maturity Securities: Fair Value 12/31/2023 Fair Value 12/31/2024 Amortized Cost 12/31/2023 Amortized Cost 12/31/2024 ABC Company Bonds $ 375,000 $ 400,000 $ 367,500 $ 360,000 Trading Securities: Fair Value 12/31/2023 Fair Value 12/31/2024 Cost DEF Company Bonds $ 48,000 $ 59,500 $ 66,000 GEH Incorporated Bonds $ 47,000 $ 77,000 $ 39,000 IJK Incorporated Bonds $ 44,000 $ 38,500 $ 32,900 Available-for-Sale Securities: Fair Value 12/31/2023 Fair Value 12/31/2024 Cost LMN Company Bonds $ 130,500 $ 150,400 $ 140,000 What total unrealized holding gain would Beresford report in its 2024 income statement relative to its investments in bonds?arrow_forward(Fair Value Hedge) On November 3, 2007, S Co. invested $200,000 in 4,000 shares of the common stock of J Co. S classified this investment as available-for-sale. S Co. is considering making a more significant investment in J Co. at some point in the future but has decided to wait and see how the stock does over the next several quarters. To hedge against potential declines in the value of J stock during this period, S also purchased a put option on the Johnstone stock. Sprinkle paid an option premium of $600 for the put option, which gives S the option to sell 4,000 J shares at a strike price of $50 per share. The option expires on July 31, 2007. The following data are available with respect to the values of the J stock and the put option. Date Market Price of J Shares Time Value of Put Option December 31, 2006 $51 per share $375 March 31, 2007 54 per share 175 June 30, 2007 55 per share 40 A. Prepare the journal entries for S Co. for the following…arrow_forwardBeresford Inc. purchased several investments in debt securities during 2020, its first year of operations. The following information pertains to these securities. The fluctuations in their fair values are not considered permanent. Held-to-Maturity Securities: Fair Value 12/31/2020 Fair Value 12/31/2021 Amortized Cost 12/31/2020 Amortized Cost 12/31/2021 ABC Co. Bonds $ 375,000 $ 400,000 $ 367,500 $ 360,000 Trading Securities: Fair Value 12/31/2020 Fair Value 12/31/2021 Cost DEF Co. Bonds $ 48,000 $ 59,500 $ 66,000 GEH Inc. Bonds $ 47,000 $ 77,000 $ 39,000 IJK Inc. Bonds $ 44,000 $ 38,500 $ 32,900 Available-for-Sale Securities: Fair Value 12/31/2020 Fair Value 12/31/2021 Cost LMN Co. Bonds $ 130,500 $ 150,400 $ 140,000 What would be the balance in Beresford's accumulated other comprehensive income with respect to these investments in its 12/31/2021 balance sheet (ignore taxes)?arrow_forward
- S&L Financial buys and sells securities expecting to earn profits on short-term differences in price. On December 27, 2021, S&L purchased Coca-Cola bonds at par for $875,000 and sold the bonds on January 3, 2022, for $880,000. At December 31, the bonds had a fair value of $873,000. What pretax amounts did S&L include in its 2021 and 2022 net income as a result of this investment (ignoring interest)?arrow_forwardRecording and Reporting AFS Securities On December 31, 2020, Banff Company held an investment in Glacier Inc. bonds with an original cost of $9,200. The investment was classified as an available-for-sale security, had a fair value of $8,600 on December 31, 2020, and was the only investment in the available-for-sale security portfolio in 2020. In 2021, Banff sold the investment in Glacier Inc. bonds for $8,000. On December 31, 2021, assume that Banff Company has an $3,200 net unrealized holding gain on other available-for-sale securities purchased during 2021. a. Prepare the adjusting entry on December 31, 2020, to record the unrealized holding gain or loss on the Glacier Inc. bond investment. Date Account Name Dr. Cr. Dec. 31, 2020 b. Prepare the adjusting entry on December 31, 2021, to record the unrealized holding gain or loss on Banff’s available-for-sale portfolio. Date Account Name Dr. Cr. Dec. 31, 2021 c. Indicate the…arrow_forwardTanner-UNF Corporation acquired as a long-term investment $360 million of 8.0% bonds, dated July 1, on July 1, 2021. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 10% for bonds of similar risk and maturity. Tanner-UNF paid $330.0 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2021, was $340.0 million. Required:1. & 2. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate.3. At what amount will Tanner-UNF report its investment in the December 31, 2021, balance sheet?4. Suppose Moody’s bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2022, for $320.0 million. Prepare the journal entry to record the…arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning